Arbitration Clause, Effect Of Novation; Can't Be Decided Under Section 11 Of A&C Act: Karnataka High Court

The Single Bench of Justice B. M. Shyam Prasad reiterated that where novation of the contract containing an arbitration clause is alleged, it is unsafe to conclude about the existence of an arbitration agreement at the stage of reference on a prima facie review of facts.

The first petitioner, M/s Jaganmayi Builders and Developers Private Limited, and the respondents entered into an MOU, containing an arbitration clause, for construction of a property. Thereafter, the parties, along with the second and the third petitioners, entered into a Supplemental Agreement.

After certain disputes arose between the parties, the petitioners invoked the arbitration clause and filed a petition under Section 11(6) of the A&C Act seeking appointment of an arbitrator before the Karnataka High Court.

The respondent Sumanth Reddy submitted before the High Court that the dispute between the parties pertained to the petitioners' claim to recover the amounts paid to the respondents, as acknowledged under the MOU and the Supplemental Agreement.

The respondent alleged that under the MOU, the agreement for development of the property was only between the first petitioner and the respondents, however, with the execution of the Supplemental Agreement, the onus of developing the property was taken over by the second and third petitioners, resulting in novation of the MOU. Thus, the respondent contended that the MOU between the parties stood novated with the execution of the Supplemental Agreement and therefore, the arbitration clause contained in the MOU would not survive.

Averring that the Supplemental Agreement does not contain any arbitration clause, the respondent argued that though the Supplemental Agreement contains a general reference to the terms of the MOU, however, such a general reference was not sufficient. The respondent argued that for the arbitration clause in the MOU to be read into the Supplemental Agreement, there must be a specific reference to such an arbitration clause and not a general reference to the terms of the MOU.

The petitioner- M/s Jaganmayi Builders, disputing the contention that the second and third petitioners have taken over the onus of developing the property independent of the first petitioner, contended that the MOU and the Supplemental Agreement are not separate agreements and that they both constitute one agreement. Therefore, the petitioners argued that the arbitration clause contained in the MOU subsisted and was binding on the parties. It further averred that the question whether the Supplemental Agreement novated the MOU, should be considered by the sole Arbitrator and not by the Court under Section 11 of the A&C Act.

The Court noted that the Supplemental Agreement between the parties provided that the terms of the Supplemental Agreement were in addition to the terms and conditions of the MOU and that, except the terms agreed under the Supplemental Agreement, there would be no changes in the MOU.

The bench referred to the decision of the Apex Court in Sanjiv Prakash versus Seema Kukreja and Ors. (2021), where the Supreme Court had ruled that where novation of the contract containing an arbitration clause is alleged, it would be unsafe to conclude about the existence of an arbitration agreement at the stage of reference on a prima facie review of facts, and that a deeper consideration must be left to the arbitral tribunal, who is required to arrive at a conclusion after examining the documentary and oral evidence.

The Court ruled that whether under a covenant the responsibility of the construction of the property was allocated to the third petitioner alone, to the complete exclusion of the other petitioners, and thus, the MOU containing the arbitration clause stood novated, would have to be examined in the background of the agreements entered into between the parties, including the MOU and the Supplemental Agreement.

The Court added that only after a detailed enquiry and a due opportunity was given to the parties to adduce evidence, any conclusive opinion on novation of the MOU by the Supplemental Agreement could be arrived at; hence, the said issue must be decided by the Arbitrator himself under Section 16 of the A&C Act.

"In the aforesaid circumstances, this Court must answer the question framed in the negative and opine that all questions relating to novation of the MOU with the execution of the Supplemental Agreement and the significance of reference to the terms of the MOU in Clause-13 of the Supplemental Agreement, which touch upon the jurisdiction of the sole Arbitrator to enter reference of the dispute, must be decided by the sole Arbitrator as required under Section 16 of the Arbitration Act. Therefore, this Court is of the considered view that the petition must be allowed appointing a sole Arbitrator to enter reference of the dispute between the petitioners and the respondents leaving all questions open to be decided in such proceedings.", the Court said.

The Court thus allowed the petition, appointed a sole Arbitrator and referred the parties to arbitration.

Case Title: Jaganmayi Builders and Developers Private Limited & Ors. versus Sumanth Reddy & Ors.

Citation: 2022 LiveLaw (Kar) 365

Dated: 09.09.2022 (Karnataka High Court, Bengaluru)

Counsel for the Petitioners: Mr. G.L. Vishwanath, Senior Advocate for Mr. Arun Pradesh E, Advocate

Counsel for the Respondent: Mr. S.K.V. Chalapathy, Senior Advocate for Mr. Siddhartha H M & Manjunath B, Advocates

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