Escrow Agreement Executed In Furtherance Of Share Transfer Agreement With Arbitration Clause Renders Disputes Arbitrable: Calcutta HC
The Calcutta High Court has held that where an escrow agreement is intrinsically linked to or executed in furtherance of a share transfer agreement containing an arbitration clause, disputes arising out of such escrow arrangement are also arbitrable, even if the escrow agreement does not independently contain any arbitration clause. A Division Bench comprising Justice Debangsu Basak...
The Calcutta High Court has held that where an escrow agreement is intrinsically linked to or executed in furtherance of a share transfer agreement containing an arbitration clause, disputes arising out of such escrow arrangement are also arbitrable, even if the escrow agreement does not independently contain any arbitration clause.
A Division Bench comprising Justice Debangsu Basak and Justice Md. Shabbar Rashidi observed while allowing an appeal filed by Asian Tea and Exports Limited (“Appellant”) and setting aside an order passed by the Single Judge which had refused to refer parties to arbitration.
Background:
The dispute arose from a share transfer agreement dated 12 September 2014, under which the plaintiffs agreed to sell their shareholding in a company to the defendant group.
The agreement contemplated an escrow mechanism pursuant to which an amount of Rs. 50 lakhs was deposited with escrow holders to secure contingent liabilities. A separate escrow agreement was also executed in furtherance of the share transfer agreement. While the share transfer agreement provided that the dispute shall be resolved through arbitration, the escrow agreement only stipulated that the disputes in implementation would be decided by the escrow holders subject to arbitration in terms of the share transfer agreement.
The plaintiffs later filed a civil suit seeking to withdraw the escrow amount contending that the contingency had not arisen. The Single judge declined to refer the dispute to arbitration, leading Asian Tea And Exports Limited to file the present appeal.
Asian Tea argued that the share transfer agreement and escrow agreement were inseparable and formed part of a single commercial transaction and that the arbitration agreement in the share transfer agreement stood incorporated into the escrow agreement by reference.
Findings:
The court referred to the Supreme Court's judgment in NBCC (India) Ltd. where the Apex Court while relying on M.R. Engineers & Contractors Pvt. Ltd held that a general reference to earlier contract is insufficient to incorporate an arbitration clause unless there is a specific reference indicating an intention to incorporate it. It further held that an arbitration clause is incorporated by reference only when the contract clearly refers to the document containing the arbitration clause, manifests intent to incorporate the clause and the clause is applicable and not repugnant, failing which disputes cannot be referred to arbitration by incorporation.
Agreeing with the contention of the appellant, the court observed that the share transfer agreement clearly contemplated the escrow agreement and the escrow agreement was executed solely to give effect to it. It further held that the two agreements were integrally connected and incapable of being read in isolation.
Based on the above, it held that the arbitration clause in the share transfer agreement satisfied the requirements for incorporation into the escrow agreement.
It held that “the share transfer agreement contemplated escrow. The second agreement being the escrow agreement, is an integral part of the share transfer agreement. Escrow agreement was created in order to give effect to the share transfer agreement. Arbitration agreement undoubtedly exists in the share transfer agreement and, therefore, in our view, share transfer agreement and the escrow agreement satisfied the parameters as enunciated in M. R. Engineers & Contractors (Supra) for us to hold, the arbitration agreement appearing in the share transfer agreement was incorporated in the escrow agreement.”
The court further observed that the suit was not based solely on the escrow account but it also included adjudication of rights and obligations under the share transfer agreement including whether the plaintiffs were entitled to refund of the escrow amount.
Accordingly, the court allowed the present appeal holding that the Single Judge erred in referring the matter to arbitration in terms of the share transfer agreement.
Case Title: Asian Tea And Exports Limited -Vs- Priyanka Gupta And Ors
Case Number: APOT/213/2025 IA No. GA/1/2025
Order Date: 17/12/2025
For the Appellant : Mr. Zeeshan Haque, Adv. Mr. Aishwarya Kr. Awasthi, Adv.
For the Respondent Nos. 5 & 6 : Ms. Sulagna Mukherjee, Adv. Mr. Yash Vardhan Deora, Adv.
For the Respondent Nos. 7 & 8 : Ms. Bhawna Tekriwal, Adv.