Question Of Novation Of Contract Cannot Be Considered In A Petition Under Section 11 Arbitration Act: Supreme Court

The Supreme Court observed that the question of novation of contract containing an arbitration clause cannot be considered by the Court in a petition filed under Section 11 of the Arbitration and Conciliation Act.

Detailed arguments on whether an agreement which contains an arbitration clause has or has not been novated cannot possibly be decided in exercise of a limited prima facie review as to whether an arbitration agreement exists between the parties, the bench comprising Justices RF Nariman, BR Gavai and Hrishikesh Roy said.

The Court was considering an appeal against dismissal of a petition under Section 11 of the Act filed before the High Court of Delhi. The High Court was of the view that the memorandum of understanding [which contained the arbitration clause] ceased to exist on and from the date of the Shareholders' Agreement which superseded the aforesaid MoU and novated the same. 

Before the Apex Court, the appellant contended that a Section 11 court would be duty-bound to refer the parties to arbitration and leave complex questions of fact and law relating to novation of a contract under Section 62 of the Contract Act to be decided by an arbitral tribunal.

"It is obvious that whether the MoU has been novated by the SHA dated 12.04.1996 requires a detailed consideration of the clauses of the two Agreements, together with the surrounding circumstances in which these Agreements were entered into, and a full consideration of the law on the subject. None of this can be done given the limited jurisdiction of a court under Section 11 of the 1996 Act.", the bench said while agreeing with this contention.

The bench, to hold thus, extensively refers to the observations made in Vidya Drolia v. Durga Trading Corporation, (2021) 2 SCC 1 and other decisions on this subject.

The court said that a Section 11 court would refer the matter when contentions relating to non-arbitrability are plainly arguable, or when facts are contested. The court cannot, at this stage, enter into a mini trial or elaborate review of the facts and law which would usurp the jurisdiction of the arbitral tribunal, the bench said.

The bench also observed that Arbitration Act, 1940, had a scheme completely different from the scheme contained in Section 16 read with Section 11(6A) of the 1996 Act. 

"By virtue of the Arbitration and Conciliation (Amendment) Act, 2015 ["2015 Amendment Act"], by which Section 11(6A) was introduced, the earlier position as to the scope of the powers of a court under Section 11, while appointing an arbitrator, are now narrowed to viewing whether an arbitration agreement exists between parties.", the court added.

Holding thus, the bench refer the parties to the arbitration and appointed Justice Aftab Alam as sole arbitrator.

Case: Sanjiv Prakash Vs. Seema Kukreja
Coram: Justices RF Nariman, BR Gavai and Hrishikesh Roy
Counsel: Sr. Adv K.V. Viswanathan, Sr. Adv Mukul Rohatgi, Adv Avishkar Singhvi, Adv Manik Dogra
Citation: LL 2021 SC 198

Click here to Read/Download Judgment