Court While Considering Application Seeking Appointment Of Arbitrator Cannot Go Into Question Of Novation Of Contract : Supreme Court

The Supreme Court reiterated that while considering an application seeking appointment of arbitration, the Court cannot go into question of novation of contract and merits of any claim involved in arbitration.

In this case, as the High Court dismissed the application filed under Section 11(6) of the Arbitration and Conciliation Act, 1996, the applicant approached the Apex Court in appeal. The applicant's contention was that the High Court's erred in concluding that the Share Purchase Agreement was novated and superseded by the Tripartite Agreement. The respondent contended that owing to novation of share purchase agreement, the arbitration clause no longer existed so as to resolve the dispute between the parties through arbitration.

Referring to various decisions including Vidya Drolia vs. Durga Trading Corporation (2021) 2 SCC 1, the bench noted the following principles:

1. First category of issues, namely, whether the party has approached the appropriate High Court, whether there is an arbitration agreement and whether the party who has applied for reference is party to such agreement would be subject to a more thorough examination in comparison to the second and third categories/issues which are presumptively, save in exceptional cases, for the arbitrator to decide.
2. In the first category, the question or issues are relating to whether the cause of action relates to action in personam or rem; whether the subject­matter of the dispute affects third­party rights, have erga omnes effect, requires centralised adjudication; whether the subject ­matter relates to inalienable sovereign and public interest functions or by necessary implication non­arbitrable as per mandatory statutes.
3. Issues relating to contract formation, existence, validity and non­ - arbitrability would be connected and intertwined with the issues underlying the merits of the respective disputes/claims. They would be factual and disputed and for the Arbitral Tribunal to decide.
4. The court at the referral stage can interfere only when it is manifest that the claims are ex facie time­barred and dead, or there is no subsisting dispute. In the context of issue of limitation period, it should be referred to the Arbitral Tribunal for decision on merits. Similar would be the position in case of disputed "no-­claim certificate" or defence on the plea of novation and "accord and satisfaction"

While allowing the appeal, the bench observed:

"We find that High Court was not right in dismissing the petition under Section 11(6) of the Act of 1996 filed by the appellant herein by giving a finding on novation of the Share Purchase Agreement between the parties as the said aspect would have a bearing on the merits of the controversy between the parties. Therefore, it must be left to the Arbitrator to decide on the said issue also."

The bench then appointed Justice R. Subhash Reddy, Former Judge, Supreme Court of India, as the sole Arbitrator to arbitrate the dispute between the parties.

Case details

Meenakshi Solar Power Pvt. Ltd. vs Abhyudaya Green Economic Zones Pvt. Ltd. | 2022 LiveLaw (SC) 988 | CA 8818 OF 2022 | 23 Nov 2022 | Justices BR Gavai and BV Nagarathna

For Petitioner(s) Mr. Yelamanchili Shiva Santosh Kumar, Adv. Mr. S.V.S. Chowdary, Adv. Mr. Aditya Bhat, Adv. Mr. Rudrajit Ghosh, Adv. Mr. Tarun Gupta, AOR Mr. Abhishek Sharma, Adv.

For Respondent(s) Mr. D.Narendra Naik, Adv. Mr. Talha Abdul Rahman, AOR Mr. M.Shaz Khan, Adv. Mr. Harsh Vardhan Kediya, Adv. Mr. Bilal Anwar Khan, Adv.

Headnotes

Arbitration and Conciliation Act, 1996 ; Section 11(6) - The court at the referral stage can interfere only when it is manifest that the claims are ex facie time­barred and dead, or there is no subsisting dispute. In the context of issue of limitation period, it should be referred to the Arbitral Tribunal for decision on merits. Similar would be the position in case of disputed "no-­claim certificate" or defence on the plea of novation and "accord and satisfaction" - Referred to Vidya Drolia vs. Durga Trading Corporation (2021) 2 SCC 1. (Para 17- 19)

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