The doctrine of severability dictates that the arbitration clause (arbitration agreement) is deemed to be separate or independent from the overarching contract. Therefore, even when a contract’s legality is challenged, the arbitration agreement remains unaffected. However, the novation of a contract, by way of a supplemental/amended agreement, raises an interesting question regarding the validity of the arbitration clause in the original agreement entered into between the parties, which resultantly stands amended or superseded. The issue about the extent to which the courts can intervene to determine this also requires judicial consideration.
Pertinently, Section 11 of the Arbitration and Conciliation Act, 1996 (“Act”) provides for the procedure of appointment of an arbitrator by the court, on a request by a party to an arbitration agreement, which also leads to the courts determining the validity or existence of an arbitration agreement. In several instances, the courts have ascertained if under Section 11 of the Act they are empowered to determine whether an arbitration clause, by way of an amended/supplemental agreement, stands novated or not.
Important Precedents
In order to holistically understand the jurisprudence of the court’s powers under Section 11 of the Act regarding the existence and validity of the arbitration agreement, it is essential to examine the judicial precedents (provided subsequently) established over the course of time.
In the landmark judgment of Vidya Drolia and Others v. Durga Trading Corporation,[1] the Supreme Court (“SC”) considered an appeal regarding the dismissal of a petition under Section 11 of the Act filed before the Delhi High Court (“DHC”). The DHC had opined that the Memorandum of Understanding (“MoU”), which contained the arbitration clause, had ceased to exist as the parties’ Shareholders’ Agreement had superseded it, therefore, novating the aforesaid MoU. Overturning the DHC’s decision, the SC allowed the appeal by observing that the correct approach for courts at the reference stage under Section 11 of the Act would be to restrict the examination of a given case to ‘a prima facie’ finding on whether the arbitration clause or agreement exists. The court, at the referral stage, can interfere only when it is manifest that the claims are time-barred and dead, and there are no subsisting disputes. However, whether the arbitration agreement also stands novated by a subsequent agreement is something that requires detailed consideration, which the arbitral tribunal needs to examine.
Similarly, in the Sanjiv Prakash v. Seema Kukreja and Others[2]case, the parties entered into an MoU containing an arbitration clause; however, this was novated/superseded by a Shareholders’ Agreement, which did not contain any arbitration clause. The SC, while dealing with a subject similar to that in Vidya Drolia (supra), which also dealt with a reference-stage arbitrability dispute, reiterated that the issue of the novation of a contract containing an arbitration clause could not be decided by a prima facie review of whether an arbitration clause existed in the contract between the parties. Therefore, the SC subsequently held that, at the referral stage, the courts could not enter into a mini trial or elaborate review of the facts and law, which would usurp the jurisdiction of the arbitral tribunal. Hence, it was observed that a deeper consideration must be left to the arbitral tribunal to arrive at a conclusion after examining both documentary and oral evidence.
In the judgment of Meenakshi Solar Power Pvt. Ltd. v. Abhyudaya Green Economic Zones Pvt. Ltd.[3], while referring to Vidya Drolia (supra), the SC observed that at the referral stage, the courts could interfere only when it was obvious that the claims were ex facie time-barred or there was no subsisting dispute. On other issues, including that of limitation period or disputed “no-claim certificate” or defence on the plea of novation and “accord and satisfaction”, the SC suggested reference to the arbitral tribunal for decision on merits.
As such, the courts have taken a consistent view when dealing with issues involving the supersession/novation of agreements and arbitration. The Karnataka High Court, in Jaganmayi Builders and Developers Private Limited & Ors. v. Sumanth Reddy & Ors.,[4] while deciding on whether the arbitration clause in the MoU subsists after the execution of a Supplemental Agreement, concluded that the arbitrator must decide all complex questions involving the novation of an agreement with the execution of a Supplemental Agreement and that the courts could not examine substitution or novation at the reference stage under Section 11 of the Act.
Also, in its recent judgment of B.L. Kashyap and Sons Ltd. v. Mist Avenue Private Ltd.[5], the DHC determined the survivability of the arbitration clause post novation of the contract. The matter was first placed before the arbitral tribunal and thereafter its decision was upheld by the DHC. It was held that the view taken by the arbitral tribunal that the arbitrability/non-arbitrability of the dispute due to the novation of the agreement containing the arbitration clause, has to be first determined by the arbitral tribunal, is a plausible view and, therefore, did not call for any interference. This implies that the arbitral tribunals are the first courts to consider issues related to contractual terms and their substitution. The courts’ role comes into play only when the decision of the arbitral tribunal is challenged.
Interestingly, in the WAPCOS Ltd. v. Salma Dam Joint Venture[6]case, the SC had reversed the order of the DHC by which it had made a default appointment of a sole arbitrator to settle disputes between the parties after the amendment of the agreement entered into between the parties. The SC observed that it is not open to the parties to later take recourse to arbitration when at the reference stage they, consciously and with full understanding, had executed an amendment agreement giving up all their claims and consented to the new arrangement specified in the said amendment agreement, stating that there would be no arbitration for the settlement of any claims by them in the future.
The DHC had taken a similar view in relation to the appointment of an arbitral tribunal, later confirmed by the SC in the appeal, in Ashiana Infrabuild LLP v. S.D. Bhalerao Constructions Pvt. Ltd.,[7] when dealing with the issue regarding the substitution of a Joint Venture Agreement with a Cancellation Agreement. It was contested that since the Joint Venture Agreement still existed, an arbitral tribunal could not be constituted at Delhi as per the terms of the Cancellation Agreement. The DHC took the view at the referral stage itself and concluded that on a plain reading of the Cancellation Agreement, it was noticeable that the commercial arrangement, as encapsulated in the Joint Venture Agreement, stood terminated and superseded by the Cancellation Agreement, as per the mutual agreement between the parties. Therefore, the parties should proceed in accordance with the superseded/novated agreement and the arbitral tribunal should be formed accordingly.
Conclusion
It is fairly established from the above stated cases that the courts can only take a prima facie view at the reference stage and should refrain from conclusively determining the existence or validity of the arbitration agreement when the issue requires a detailed examination. Consequently, when the disputed question regarding the novation of an arbitration agreement comes up, the same would not be determined by the courts at the referral stage as a detailed consideration is required, which can only be determined by an arbitral tribunal.
However, in certain instances, the courts, have exercised their jurisdiction at the reference stage under Section 11 of the Act to determine the existence or validity of the arbitration agreement. Basis the facts and circumstances of a case, the courts have shown discretion to proceed with the issues at the referral stage itself and have given a prima facie finding, which governs the existence or validity of an arbitration clause in an agreement.
Therefore, depending upon the facts and circumstances of the case at hand, whenever there is any involvement of preliminary or threshold issues, including questions regarding the validity of the arbitration clause pursuant to the novation of a contract, the same can be decided by an arbitral tribunal under the Act as well as by the courts at the stage of reference. However, the general rule, i.e., to refer the dispute to arbitration, if there is even a slightest doubt, so that the jurisdiction of the arbitral tribunal is not encroached upon, is something that requires further determination by the courts, for a strong precedent to be ultimately laid down.
For further information, please contact:
Shikha Tandon, Partner, Cyril Amarchand Mangaldas
shikha.tandon@cyrilshroff.com
[1] [2021] 2 SCC 1
[2] [2021] 9 SCC 732
[3] CA No. 88 of 2022 (Arising out of SLP (Civil) No. 11570 of 2021)
[4] CMP No. 449 of 2022
[5] 2023 SCC OnLine Del 3518
[6] (2020) 3 SCC 169
[7] 2021 SCC OnLine Del 3741
