What's New With Novation? A Comment On Sanjiv Prakash v. Seema Kukreja & Ors

Background Facts

The issue arose out of a Memorandum of Understanding executed between members of the Prakash family (i.e. the Appellant and the Respondents), who collectively held the entire share-holding of ANI Media Private Ltd. ("the Company"). The MoU inter alia provided that in the event any members of the Prakash family were desirous of selling / bequeathing their shares, the same shall be offered to the Appellant. The MoU contained an arbitration clause, which provided for resolution of disputes by a sole arbitrator.

Subsequently, a Share Holders Agreement was executed between the Prakash family and Thomson Reuters Corporation, whereby the Prakash family divested 49% share-holding of ANI Media Pvt. Ltd. in favour of Thomson Reuters. The Share Holders Agreement also contained an arbitration clause. It further provided that the Agreement was in supersession of all previous agreements between the parties.

On the same day, a Share Purchase Agreement was executed between the Prakash family and Thomson Reuters, which contained an arbitration clause similar to that in the Share Holders Agreement.

The Respondents (members of the Prakash family) decided to transfer their shareholding in the Company to other family members, excepting the Appellant. This led to the Appellant invoking the arbitration clause contained in the MoU, stating that he had the pre-emptive right to purchase the shares of the other members of the family.

Proceedings before the High Court

The Appellant filed an application u/S. 11 of the Arbitration & Conciliation Act, 1996 ("the 1996 Act") before the Delhi High Court^[2], contending that since the MoU was breached, an arbitrable dispute arose between the parties, which required to be adjudicated by a sole arbitrator. On the other hand, the Respondents contended that the MoU had been superseded by the Share Holders Agreement, and was therefore novated. It was submitted that since the MoU did not exist after the execution of the Share Holders Agreement, there was no arbitration agreement between the parties.

The High Court dismissed the application under Section 11, and held that the invocation of the arbitration clause under the MoU was not justifiable, since the arbitration clause therein had perished due to novation of the MoU. The Court held that once the MoU was superseded by the Share Holders Agreement, the arbitration clause contained in the MoU also falls with it.

Proceedings before the Supreme Court

In the judgment, the Supreme Court traced the evolution of the scope of power exercised by the Courts at the Section 11 stage in the post 2015 regime. The Bench comprising of the Justices R.F. Nariman, B.R. Gavai and Hrishikesh Roy discussed the narrow scope of Section 11, and held that the issue of novation of an agreement cannot be decided by the Courts in exercise of the limited prima facie review as to whether an arbitration agreement exists between the parties.

The Court placed reliance on the Judgment in Vidya Drolia v. Durga Trading Corporation,^[3] particularly paragraph 148, wherein it was held that at the pre-reference stage, the Court can only interfere when it is manifest that the claims are ex facie time-barred and dead, or there is no subsisting dispute. All other cases should be referred to the arbitral tribunal for decision on merits. This would also be the position in cases where a plea of novation is raised.

Reliance was also placed on the Judgment of the Division Bench in BSNL v. Nortel Networks India Pvt. Ltd.,^[4] wherein it was clarified that the judgment in Vidya Drolia had not resurrected the pre-amendment position in SBP & Co. v. Patel Engineering.^[5] In that case, the Court held that the rule is to refer the disputes to arbitration.

Following the line of judgments in Vidya Drolia and BSNL v. Nortel, the Supreme Court held that the determination whether the MoU had been novated by the Share Holders Agreement would require a detailed consideration of the Agreements, and surrounding circumstances. Such a determination could not be made at the Section 11 stage, given the narrow scope of jurisdiction. Accordingly, the Court allowed the Civil Appeal, and appointed (Retd.) Justice Aftab Alam to adjudicate the disputes between the parties.

Aftermath of the Judgment and its impact on Indian arbitration jurisprudence

The Judgment in Sanjiv Prakash finds itself steering the discussion on the scope of judicial intervention at the pre-reference stage, in the post 2015 era. Prior to this judgment, the issue with respect to novation of an arbitration agreement was found in Union of India v. Kishori Lal,^[6] wherein the Court held that if a contract is superseded by another, the arbitration clause being part of the earlier contract falls with it. Further, in Damodar Valley Corporation v. K.K. Kar,^[7] the Court held that if the new contract did not contain an arbitration clause, the parties would have no right to invoke the arbitration clause from the superseded contract.

In Sanjiv Prakash however, the Court distinguished the judgments in Kishori Lal and Damodar Valley on the ground that the judgments dealt with novation in the context of the Arbitration Act, 1940 which had a completely different scheme from that contained in Section 16 read with Section 11 (6A) of the 1996 Act.

The decision in Sanjiv Prakash therefore mirrors the legislative intent in the post 2015 phase, and cements the position of India as a pro-arbitration jurisdiction.

Views are personal

The Author is an Advocate at the Supreme Court of India

[1] Civil Appeal No. 975 / 2021, Judgment dated 06.04.2021 : LL 2021 SC 198.