What’s new with Novation? A commentary on Sanjiv Prakash v. Seema Kukreja & Ors

A bench of three Supreme Court judges in the case of SanjivPrakash v. Seema Kukreja & Ors.,[1] recently ruled that the question of whether or not an agreement containing an arbitration clause had been innovated could not be decided by the courts at the Article 11 stage. The judgment is a step forward, as it clarifies the narrow scope judicial intervention at the pre-referral stage.

Substantive facts

The matter arises out of a memorandum of understanding signed between members of the Prakash family (i.e. the appellant and the respondents), who collectively held all of the shareholding in ANI Media Private Ltd. (“the society”). Soft among others provided that in the event that members of the Prakash family wish to sell / bequeath their shares, the same will be offered to the appellant. The MoU contained an arbitration clause, which provided for the resolution of disputes by a single arbitrator.

Subsequently, a shareholders agreement was signed between the Prakash family and Thomson Reuters Corporation, whereby the Prakash family sold 49% of the stake in ANI Media Pvt. Ltd. in favor of Thomson Reuters. The shareholders’ agreement also contained an arbitration clause. It further provided that the Agreement superseded all previous agreements between the parties.

On the same day, a share purchase agreement was signed between the Prakash family and Thomson Reuters, which contained an arbitration clause similar to that in the shareholders’ agreement.

The respondents (members of the Prakash family) decided to transfer their interest in the company to other family members except the appellant. This led the appellant to invoke the arbitration clause contained in the memorandum of understanding, declaring that he had the preferential subscription right to purchase the shares of the other members of the family.

Proceedings in the High Court

The appellant filed an u / S.11 claim of the Arbitration and Conciliation Act 1996 (“the 1996 Act”) in the High Court of Delhi[2], arguing that since the violation of the MoU, an arbitrable dispute arose between the parties, which had to be resolved by a sole arbitrator. On the other hand, the defendants argued that the memorandum of understanding had been replaced by the shareholders’ agreement and that it had therefore been innovated. It was argued that since the MoU did not exist after the signing of the contract with the shareholders, there was no arbitration agreement between the parties.

The High Court dismissed the Article 11 request and found that the invocation of the arbitration clause under the MoU was not justifiable, since the arbitration clause contained therein had perished due to the novation of the memorandum of understanding. The Court ruled that once the MoU has been replaced by the Shareholder Agreement, the arbitration clause contained in the MoU is also accompanied by it.

Procedure before the Supreme Court

In the ruling, the Supreme Court traced the evolution of the extent of power exercised by the courts at the Article 11 stage in the post 2015 regime. The bench composed of Justices RF Nariman, BR Gavai and Hrishikesh Roy a discussed the narrow scope of Article 11 and ruled that the question of the novation of an agreement cannot be decided by the courts in the exercise of the At first glance examination of the existence of an arbitration agreement between the parties.

The Court relied on the judgment Vidya Drolia v. Durga Trading Corporation,[3] in particular paragraph 148, in which it was held that at the pre-referral stage, the Court can only intervene when it is clear that the claims are ex facie prescribed and dead, or there is no remaining dispute. All other cases should be referred to the arbitral tribunal for a decision on the merits. This would also be the case in cases where a plea of ​​novation is raised.

We also relied on the judgment of the division bench in BSNL v. Nortel Networks India Pvt. Ltd.,[4] in which 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 ruled that the rule is to refer disputes to arbitration.

Follow the line of judgments in Vidya Drolia and BSNL v. Nortel, the Supreme Court ruled that determining whether the memorandum of understanding was innovated by the shareholders’ agreement would require a detailed examination of the agreements and the circumstances surrounding them. Such a determination could not be made at the Article 11 stage, given the narrowness of jurisdiction. Accordingly, the Court allowed the civil appeal and appointed Judge (retired) Aftab Alam to adjudicate the disputes between the parties.

Consequences of the judgment and its impact on Indian arbitration case law

The judgment in Sanjiv Prakash finds himself leading the discussion on the scope of judicial intervention at the pre-referral stage, in the post-2015 era. Prior to this judgment, the issue of the novation of an arbitration agreement was Union of India v. Kishori Lal,[6] in which the Court ruled that if a contract is replaced by another, the arbitration clause forming part of the previous contract is incumbent on it. In addition, in Damodar Valley Corporation v. KK Kar,[7] the Court considered that if the new contract did not contain an arbitration clause, the parties would not have the right to invoke the arbitration clause of the replaced contract.

In Sanjiv Prakash however, the Court distinguished the judgments in Kishori lal and Damodar Valley on the grounds that the judgments concerned novation in the context of the Arbitration Law of 1940 which had a regime completely different from that contained in Article 16 read with Article 11 (6A) of the Law of 1996.

The decision in Sanjiv Prakash therefore reflects the legislative intention of the post-2015 phase and confirms India’s position as a pro-arbitration jurisdiction.

Opinions are personal

The author is a lawyer at the Supreme Court of India

[1] Civil appeal n ° 975/2021, judgment of 06.04.2021: LL 2021 SC 198.
[4] 2021 SCC OnLine SC 207: LL 2021 SC 153.

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