Arbitration Clause Is A Contract Within A Contract, It Does Not Sink With The Main Contract — Telangana High Court

Arbitration Clause Survives Even If Contract Is Dead” , Telangana High Court, through Justice K. Lakshman, delivered a significant judgment in Urbanwoods Realty LLP vs. Mrs. Uma Rastogi (Died) & Another, reaffirming the principle that an arbitration agreement survives the termination or expiry of the underlying contract. The Court was hearing an application filed under Section 11(5) & (6) of the Arbitration and Conciliation Act, 1996, seeking the appointment of an arbitrator in a dispute arising from a Memorandum of Understanding (MoU) and an Agreement of Sale for the joint development of land.

Rejecting the respondent’s objections based on termination of the contract, insufficient stamp duty, and the alleged non-mandatory nature of the arbitration clause, the Court made it abundantly clear that these were matters for the arbitral tribunal and not for the Court at the referral stage.

“Termination Of Main Contract Does Not Terminate Arbitration Clause — It Has An Independent Life”

The Telangana High Court, quoting the Supreme Court’s authoritative judgment in SBI General Insurance Co. Ltd. vs. Krish Spinning (2024 SCC OnLine SC 1754), emphatically observed:

“An arbitration clause is treated as an agreement independent of the other terms of the contract. Even if the contract is declared null and void, the arbitration clause survives.”

The Court stressed that whether the MoU and Agreement of Sale stood terminated due to efflux of time is a dispute itself and cannot nullify the arbitration clause.

“The doctrine of separability operates to ensure that the arbitration agreement stands on its own footing and cannot be extinguished merely because the main contract is said to have expired or been terminated.”

“Insufficient Stamping Cannot Derail Arbitration Proceedings — It Is A Curable Defect, Not A Roadblock At Section 11 Stage”

Dealing with the respondents' objection regarding the MoU and Agreement of Sale being insufficiently stamped, the Court squarely applied the 7-Judge Bench ruling of the Supreme Court in In Re: Interplay Between Arbitration Agreements and Stamp Act (2024) 6 SCC 1, declaring:

“The referral court under Section 11 is not required to examine whether the document is properly stamped. The issue of stamping does not go to the root of the arbitration agreement’s validity and is a matter solely within the jurisdiction of the arbitral tribunal.”

The Court extracted from the Supreme Court’s holding:

“Non-stamping or inadequate stamping is a curable defect. Agreements which are inadequately stamped are inadmissible in evidence but are not void or unenforceable per se. The arbitral tribunal alone has the jurisdiction to deal with stamping objections.”

“Use Of Word ‘May’ In Arbitration Clause Does Not Dilute Binding Intention When MoU And Sale Agreement Are Read Together”

A key contention raised was that the arbitration clause in the Agreement of Sale used the word ‘may’, implying arbitration was optional. The Court decisively rejected this argument, clarifying:

“The use of the word ‘may’ does not negate the binding character of the arbitration clause when read in the context of the entire transaction. The intention to arbitrate is unequivocal when both the MoU and the Agreement of Sale are read together.”

Citing the Supreme Court’s reasoning in Olympus Superstructures (P) Ltd. v. Meena Vijay Khetan (1999) 5 SCC 651), the Court ruled:

“Where agreements are interconnected and form part of one composite transaction, the arbitration clause in the principal MoU governs the entire dispute. The Agreement of Sale is merely ancillary. The parties’ intention to resolve disputes through arbitration is manifestly clear.”

“Referral Court Cannot Conduct Mini-Trials On Termination Or Non-Arbitrability — Only Duty Is To See Prima Facie Existence Of Arbitration Agreement”

The Court highlighted the limited jurisdiction of the referral court under Section 11 of the Arbitration Act, quoting the Supreme Court in Krish Spinning (2024 SCC OnLine SC 1754):

“The jurisdiction of the referral court is confined to a preliminary inquiry into the existence of an arbitration agreement. It cannot adjudicate whether the contract was terminated, whether disputes are arbitrable, or whether claims are frivolous. Those issues are within the sole domain of the arbitral tribunal.”

It further stressed:

“Tests like ‘eye of the needle’ or determining ‘ex-facie frivolity’ are antithetical to the current framework of arbitration law. The arbitral tribunal is the rightful forum to decide all such questions.”

Telangana High Court Strongly Upholds Arbitration Autonomy

The Telangana High Court concluded:

“Prima facie, a valid arbitration agreement exists between the parties. The issue of whether the MoU and Agreement of Sale stood terminated by efflux of time or any other reason cannot be decided by this Court. That dispute must be adjudicated by the arbitral tribunal.”

The Court therefore appointed Justice V.V.S. Rao (Retd.), former judge of the erstwhile High Court of Andhra Pradesh, as the sole arbitrator to adjudicate the disputes.

“All issues including termination, stamping, arbitrability, and the effect of the Indemnity Bond are left open to be decided by the arbitral tribunal.”

Final Observations Of The Court: Arbitration Is No Longer A Handmaiden To Litigation But A Robust Dispute Resolution Process Deserving Judicial Respect

This landmark ruling by the Telangana High Court sends a strong signal reaffirming India’s pro-arbitration stance and aligns perfectly with the latest jurisprudence laid down by the Supreme Court, ensuring minimal judicial interference and maximum respect for party autonomy in choosing arbitration.

Date of decision: 9th June 2025