A Single Judge Bench of Justice V Kameswar Rao of Delhi High Court has held that Contract novation puts an end to an arbitration clause which is a part of it and observed,
“..if the contract is superseded by another, the arbitration clause, being a component/part of the earlier contract, falls with it or if the original contract in entirety is put to an end, the arbitration clause, which is a part of it, also perishes along with it.”,
The order was passed in a petition filed under Section 11(5) of the Arbitration and Conciliation Act, 1996 for the appointment of a sole arbitrator.
The Petitioner, Sanjiv Prakash and the Respondents, Seema Kukreja & others were family members, who had entered into a Memorandum of Understanding (MoU) in relation to their company, ANI Media Pvt Ltd.
The MoU constituted a special arrangement between the family with respect to their shareholding, succession plan, management scheme etc.
Eventually, the family members entered into a Shareholders Agreement (SHA) and a Share Purchase Agreement with Reuters, by which the latter acquired 49% shares in the company from the family.
Years later, a dispute arose among the family members on transfer of shares and the arbitration clause in the MoU was invoked by the Petitioner. The Respondents, however, replied that the MoU had been superseded and invalidated by the SHA. The Petitioner thus proceeded to move the High Court for the appointment of an arbitrator.
The Petitioner inter alia contended that the MoU was a valid and binding agreement inter- se the family members and had to be differentiated from the SHA with Reuters.
Relying on Section 5 read with Section 11(6A) and Section 16 of the Arbitration Act and the principle of ‘kompetenz-kompetenz’, the Petitioner submitted that question of the binding nature of the MoU was ultimately an issue that needed to be decided by the Arbitral Tribunal constituted in the MoU.
It is also stated that the scope of inquiry under Section 11 of the Act was only limited to the prima-facie question of satisfaction of the Court as to the existence of the arbitration agreement.
The Respondents, on the other hand, stated that the MoU was never acted upon by the Petitioner and no terms of the MoU were reflected in the Articles of Association or the SHA.
It was stated that even if it was to be presumed that MoU was validly executed, the SHA had put an end to it as if it had never existed.
The Respondents inter alia pleaded that the SHA was the only valid and subsisting agreement amongst the parties with regard to their inter-se rights of shareholding in ANI and thus, the arbitration had to begin in accordance with the SHA for contract novation.
It was further stated that the issue of novation/supersession was not a preliminary issue and was beyond the jurisdiction of the Arbitrator under Section 16 of the Act.
The Arbitrator under Section 16 was not empowered to decide upon any issue if the appointment itself was on the basis of a novated arbitration clause for contract novation, it was argued.
Referring to Section 62 of the Contract Act, the Court stated that to attract the theory of innovation for contract novation, there should be total substitution of the earlier contract for contract novation and its terms and all the terms of the earlier contract should perish with it.
As far as the present case for contract novation was concerned, the Court, after perusing the provisions of the SHA, observed that any kind of agreement between the parties for contract novation stood superseded, including the MoU.
Nothing precluded the family members to include a stipulation in the SHA to not supersede the MoU, the Court said.
Relying on several Supreme Court judgments, the Court remarked that the law relating to the effect of novation of contract containing an arbitration agreement/clause was well-settled.
It thus held,
An arbitration agreement being a creation of an agreement may be destroyed by agreement… Hence, the arbitration clause of the MoU, being Clause 12, having perished with the MoU, owing to contract novation, the invocation of arbitration under the MoU is belied/not justified.