Novation of Contract Renders the Arbitration Clause Under it Ineffective: Delhi High Court

A petition was filed by Sanjiv Prakash under Section 11(5) of the Arbitration and Conciliation Act, 1996 for the appointment of a sole arbitrator   

Facts of the case 

The Respondents in the case, Seema Kukreja & others were family members of the Petitioner. The parties had entered into a Memorandum of Understanding (MoU) in relation to their company, ANI Media Pvt Ltd. The MoU laid down the terms of a special arrangement between the family with respect to their shareholding, succession plan, management scheme etc. 

After this, the family members entered into a Shareholders Agreement (SHA) and a Share Purchase Agreement with Reuters. Through the agreement, Reuters acquired 49% shares in the company from the family. 

Years later, a dispute arose among the family members on transfer of shares and the Petitioner invoked the arbitration clause in the MoU. The Respondents stated that the MoU had been superseded and invalidated by the SHA. 

The Petitioner then petitioned the High Court for the appointment of an arbitrator.  

Petitioner’s submissions  

The Petitioner contended that the MoU was a valid and binding agreement and had to be differentiated from the SHA with Reuters. 

The Petitioner relied on Section 5 read with Section 11(6A) and Section 16 of the Arbitration Act and the principle of ‘kompetenz-kompetenz’ and 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. 

Respondent's submissions  

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. 

The Respondents also stated 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. 

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, it was argued. 

Petition for appointment of an arbitrator not maintainable: Delhi HC

The Court referred to Section 62 of the Contract Act and stated that to attract the theory of novation, there should be total substitution of the earlier contract and its terms and all the terms of the earlier contract should perish with it. 

As per the facts presented in the present case, any kind of agreement between the parties stands superseded, including the MoU. 

The Court relied on several Supreme Court judgments and 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, had perished with the MoU, owing to novation, the invocation of arbitration under the MoU is not justified. 

The Court dismissed the petition for appointment of an arbitrator by stating that it was not maintainable.