Delhi High Court Allows Arbitration Clause in Family Settlement

Delhi High Court Allows Arbitration Clause in Family Settlement

According to a recent ruling by the Delhi High Court, if there is an arbitration agreement in place between the parties involved, the matter at hand should be referred to arbitration unless it falls under the exceptional circumstances of non-arbitrability.

Justice Jyoti Singh presided over the bench that reviewed an application filed under Section 8 of the Arbitration and Conciliation Act, 1996 (A&C Act) related to a case of Intellectual Property Rights (IPR) infringement.

The Court determined that there was a legally binding arbitration agreement between the parties that was included in the Memorandum of Family Settlement (MOFS). This agreement specifically governed the territorial rights of the parties to use the trademark "SUPERON". As a result, the plaintiff's claim of Intellectual Property rights (IPR) infringement was related to the covenants and terms that were included in the MOFS.

The bench found that there were no exceptional circumstances that would prevent arbitration from being used to resolve the matter, so it dismissed the lawsuit and referred the parties to arbitration.

The Court dismissed the argument that the Sale Deed, which was signed after the MOFS, granted exclusive jurisdiction to courts and therefore arbitration was not an option. The Court determined that the Sale Deed was an extension of the MOFS and the two agreements were interconnected and could not be separated. Therefore, it was evident that the parties had intentionally chosen arbitration as the preferred mode for resolving disputes related to the alleged breach of the MOFS terms.

Sanjay Mehra, who owns the SUPERON and VACPAC family of trademarks, trade dresses, and other Intellectual Property Rights (IPRs) in India, filed a lawsuit with the Delhi High Court. The suit sought a permanent injunction against the defendants, prohibiting them from using the SUPERON trademark or any other deceptively similar or identical marks in India. Mehra argued that he had acquired these rights through a Sale Deed after they were originally owned by Superon India.

According to Sanjay Mehra's argument, the Memorandum of Family Settlement and the Sale Deed that were signed between himself and the first defendant, Sharad Mehra, who were previously shareholders of Superon India, made him the sole owner of the Intellectual Property Rights related to the SUPERON and VAC-PAC trademarks within the territory of India. In contrast, the first defendant became the sole owner of these IPRs in territories outside India.

Sanjay Mehra further alleged that the first defendant had breached the Memorandum of Family Settlement and Sale Deed by introducing products in India that had trademarks that were deceptively similar to "SUPERON". This action, according to Mehra, constituted an infringement of his Intellectual Property Rights.

In response to the lawsuit, the first defendant, Sharad Mehra, filed an application under Sections 5 and 8 of the Arbitration and Conciliation Act (A&C Act). The application sought to refer the disputes to arbitration based on the presence of an arbitration clause in the MOFS.

The defendant claimed that the MOFS contained a clause for arbitration, which governed the process of dividing the business and facilitating the demerger of Superon India. The defendant argued that since Sanjay Mehra was a signatory to the MOFS, he was obligated to abide by its terms, including the arbitration clause.

In response to the defendant's application for arbitration, Sanjay Mehra argued that Superon India (Defendant No. 3) was not a signatory to the MOFS and was only a party to the Sale Deed. Therefore, the arbitration clause contained in the MOFS did not apply and could not bind the company. Mehra also claimed that the Sale Deed, which was signed in furtherance of the MOFS, superseded all previous agreements between the parties and conferred exclusive jurisdiction to the courts.

The High Court referred to a series of judgments and stated that in a Section 8 application, the court must limit its review of the arbitration agreement to determine if there is a prima facie case that the agreement exists and is not null and void, inoperative, or incapable of performance. Upon examining the facts of the case, the bench held that the disputes raised in the lawsuit were cantered entirely around the MOFS and Sale Deed, and the parties' understanding of them.

“From a meaningful and holistic reading of the plaint, it is luminously clear that Plaintiff is aggrieved by Defendants’ use of the mark SUPERON in a forbidden territory, contrary to the agreement between the parties,” Justice Jyoti Singh observed.

The Court further stated that the territorial rights claimed by the plaintiff originated from the MOFS, and therefore, any dispute related to these rights would be related to the MOFS and would require an understanding and interpretation of its terms. The court concluded that the plaintiff's dispute was related to the MOFS and "arose out of" or was "in connection with" it.

The Delhi High Court cited the MOFS and Sale Deed to conclude that the Sale Deed was not a standalone document but was executed in furtherance of the understanding between the parties, as reflected in the MOFS. The Court stated that the Sale Deed was executed to facilitate the implementation of the MOFS towards the division of the business of the company and for granting respective rights to the plaintiff and defendant no.1. The bench held that both agreements were inextricably linked and that the Sale Deed cannot be treated as a separate document or in supersession of the MOFS.

“In this view of the matter, even if the Sale Deed does not contain an arbitration clause and/or Defendant No.3 is not party to the MOFS makes no difference as the Sale Deed is integrally linked to the MOFS and the disputes raised in the suit cannot be resolved between the parties, without referring to both the documents. The rights, whose infraction is complained of by the Plaintiff, arise out of the covenants and mutual terms incorporated in the MOFS read with the Sale Deed,” the bench Justice Jyoti Singh said.

The High Court restated that the Sale Deed was executed to fulfil the MOFS and was in accordance with its provisions. As the two agreements were linked and could not be separated, arbitration was the intended and deliberate forum for resolving disputes between the parties related to the alleged breach of the covenants of the MOFS.

The Delhi High Court concluded that there was a valid arbitration agreement between the parties, which was incorporated in the MOFS and not contested by the plaintiff. The Court found no reason to discredit the defendant's request for arbitration and allowed the application, referring the parties to arbitration.