Arbitration Clause In A Contract Perishes With Its Novation: Delhi High Court

The High Court of Delhi has held that an arbitration clause contained in an agreement would perish with its novation if the novated agreement does not contain any arbitration clause.

The bench of Justice Prateek Jalan held that the view taken by the arbitral tribunal regarding the non-arbitrability of the dispute due to the novation of the agreement that contained the arbitration clause is a plausible view based on the contractual interpretation of the terms of the agreement, therefore, does not call for any interference under Section 34 of the Act

The Court also held that an agreement novated by another agreement would not automatically review upon the failure of the fulfilment of the conditions of the new agreement unless expressly provided under the agreement.

Facts

The parties entered into an agreement dated a Construction Agreement in the year 2014. Clause 20 of the agreement provided for arbitration for the resolution of the dispute. Certain disputes arose between the parties related to payment under the agreement. Accordingly, the parties entered into a Memorandum of Understanding (MoU) dated 08.10.2014.

The MoU did not contain any arbitration clause. It provided for certain payments to be provided to the petitioner who would in return hand over the assets and consumables to the respondent. A dispute arose between the parties when the payment provided under the agreement was not made. Accordingly, the petitioner invoked the arbitration clause and the Court referred the parties to arbitration.

Before the tribunal, the petitioner filed its claim and the respondent taken a preliminary objection to the jurisdiction of the tribunal. Accordingly, the tribunal framed to preliminary issues. The tribunal allowed the objection taken by the respondent to its jurisdiction on the ground of non-existence of the arbitration agreement.

The tribunal held that the parties by executing the MoU expressly agreed to cancel the construction agreement which contained the arbitration clause and that MoU has no arbitration clause, therefore, the arbitration clause in the construction contract perished with its novation by MoU and recourse to it cannot be taken for any dispute arising under MoU.

Aggrieved thereby, the petitioner challenged the award under Section 34 of the Act.

Grounds of Objection

The petitioner challenged the award on the following grounds:

• Mere execution of the MoU would not make the original construction agreement non-existent as Clause 1 of MoU makes the termination of construction agreement subject to the fulfilment of the conditions of the MoU which includes the payment of the complete amount.
• The respondent did not fulfil the conditions of MoU as it failed to release the amount due to the petitioner as per MoU.
• There is a difference between a normal and a conditional novation as in the former, the arbitration clause in the agreement would perish with the novation of the agreement, however, in the latter case, the original agreement including the arbitration clause would stand terminated only upon the fulfilment of the condition provided therein.
• The non-fulfilment of the terms of MoU revived the original agreement and the arbitration clause was validly invoked.
• Reliance was place on the judgment of the Supreme Court in Union of India v. Kishorilal Gupta, AIR 1959 SC 1362 and Lata Construction v. Rameshchandra Ramniklal Shah, (2000) 1 SCC 586.

Analysis by the Court

The Court observed that the MoU expressly mentioned that it is being executed to cancel the construction agreement which contained the arbitration clause as well. The Court also observed that MoU did not contain any arbitration clause. It observed that though the agreement provided for certain amount to be paid to the petitioner, however, it did not mention that failure to pay would revive the construction contract.

The Court held that that by executing the MoU, the parties expressly agreed to terminate/cancel the original agreement and with its execution the original agreement stood novated. The Court relied on the judgment of the Supreme Court in Kishorilal Gupta (Supra) and Lata Construction (Supra) to hold that the arbitration clause in an agreement would perish with its novation.

The Court held that the view taken by the arbitral tribunal regarding the non-arbitrability of the dispute due to the novation of the agreement that contained the arbitration clause is a plausible view based on the contractual interpretation of the terms of the agreement, therefore, does not call for any interference under Section 34 of the Act

The Court also held that an agreement novated by another agreement would not automatically review upon the failure of the fulfilment of the conditions of the new agreement unless expressly provided under the agreement.

Accordingly, the Court dismissed the petition and upheld the award.

Case Title: B.L. Kashyap and Sons Ltd v. MIST Avenue Pvt. Ltd

Citation: 2023 LiveLaw (Del) 497

Date: 02.06.2023

Counsel for the Petitioner: Mr. Ashish Dholakia, Senior Advocate with Mr. Gautam Bajaj, Mr. Akash Panwar, Mr. Rohan Chawla & Mr. Arpit Singh, Advocates.

Counsel for the Respondent: Mr. Anil Kr. Airi, Senior Advocate with Mr. Ravi Krishan Chandna, Ms. Sadhana Sharma, Mr. Mudit Ruhella & Mr. Aman Dahiya, Advocates.

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