Finally putting to rest the rising disquietude regarding this subject, the Supreme Court of India (SCI) has, adopting a very simplistic and logical approach, made its pro-arbitration stand clear in its recent judgement in the matter of Sanjiv Prakash v. Seema Kukreja & Ors. (Order dated 6th April 2021 in Civil Appeal No. 975 of 2021) (“Sanjiv Prakash Judgement”).
Novation of a Contract
Section 62 of the Indian Contract Act, 1872 (“ICA”) governs the effect of novation of a contract. A contract is said to be novated if the parties to such contract agree to substitute a new contract for it, or to rescind or alter it. As per section 62 of ICA, in the event a contract is novated then the original contract need not be performed.
Anti Arbitration Suit
An anti arbitration suit is a proceeding filed by a party to a contract, before a Civil Court, seeking an injunction on either the initiation or continuation of arbitration proceedings in case of a dispute between parties to such contact. These suits seem to have been trending in the present decade before the Indian judiciary and the Courts have to been proactive in deciding them in rapidity. Grounds for such suits have been various including non-arbitrability of dispute, existence and validity of the arbitration agreement in view of: discharge, accord and satisfaction of the contract, settlement between the parties, rescission, novation and the like. We shall, for the purposes of this article, focus upon the ground of novation.
Postulation & theory
Over the years there have been various propositions presented before the Courts of India that an anti arbitration suit could be entertained on the ground that the contract containing the arbitration clause has been novated. As per these propositions, when a contract containing the arbitration clause is novated and substituted by another contract, the original contract need not be performed as per section 62 of the ICA. By that theory, the arbitration clause contained in the original contract also need not be performed and as such, the arbitration agreement under the original contract becomes inoperative. The Hon’ble Courts of India, in their cumulative wisdom, have predominantly taken a pro-arbitration stand on this subject. However, the ambiguity that remained was in the question as to who would decide whether or not novation has rendered the arbitration agreement inoperative.
Evaluations, tests and decisions
The foundation for decisions on this subject has been laid down by Subba Rao, J. in the decision of the SCI in Union of India v. Kishorilal Gupta and Brothers[1] (“Kishorilal Judgement”). Kishorilal Judgement has been followed by the SCI in Damodar Valley Corporation v. K.K Kar[2] (“Damodar Valley Judgement”). In these two decisions, the SCI held that if it is established that a contract containing an arbitration clause is replaced by way of novation, by another contract which did not contain an arbitration clause, the arbitration clause in the first contract would not apply. If there is no such novation, the earlier contract together with the arbitration clause will hold good. In Kishorilal Judgement it was laid down that, if the original contract was substituted by a new contract, the arbitration clause in the earlier contract would perish with that contract and could not be relied upon. Otherwise, it could be relied upon. Therefore, the test would be whether the contract containing the arbitration clause is substituted by way of novation, by another contract not containing an arbitration clause. These decisions were under the Arbitration and Conciliation Act, 1940 (“1940 Act”).
As we just saw, these decisions settled the issues regarding the tests to be conducted in such matters. However, there arose a question as to which judicial forum would have the jurisdiction to apply these tests. The Kompetenz Kompetenz principle of law states that the arbitral tribunal is competent to rule in its own jurisdiction. Does this mean that the arbitral tribunal will apply the test to the reference before it? The above two decisions seemed to indicate that the Civil Courts do possess the jurisdiction to apply these tests thereby bestowing the Civil Courts with the jurisdiction to entertain anti arbitration suits on the ground of non arbitrability of the dispute in view of novation of the original contract.
Post enactment of the Arbitration and Conciliation Act 1996 (“1996 Act”), and its multiple amendments, excessive interference of the Civil Courts seem to be frowned upon by the legislation as well as the judiciary. The SCI obsequious to its earlier decisions mentioned above, in SBP & Co. v. Patel Engineering Ltd.[3], Uttarakhand Purv Sainik Kalyan Nigam Limited v. Northern Coal Field Ltd.[4] Union of India & Ors. v. Master Construction Co.[5], Duro Felguera S.A. v. Gangavaram Port Limited[6] and National Insurance Co. v. Boghara Polyfab (P) Ltd.[7] reiterated that the Civil Court is required only to examine the existence of the arbitration agreement as the 1996 Act reinforces the Kompetenz Kompetenz principle which states that the arbitral tribunal. However, all these decisions did leave scope for an anti arbitration suit to be entertained as regards the existence or validity of the arbitration agreement in the event of novation of the contract containing the arbitration agreement.
Then came the 2019 amendment of the 1996 Act which proceeded to amend the 1996 Act to the extent of minimising the Civil Courts interference even as regards appointment of the arbitral tribunal.
The Final Reprieve
The SCI, finally after reviewing the decisions, statutes and amendments, has now decided in Sanjiv Prakash Judgement that the arbitral tribunal possess the jurisdiction to decide on the non arbitrability of the dispute even in cases of novation of the original contract. The crisp and clear approach of the SCI in this regard is reasoned with its following observations in the Sanjiv Prakash Judgement:
- Whether the original contract (containing the arbitration agreement) has been novated has to be determined after a detailed consideration of the clauses in both original and novated contracts;
- Detailed arguments on whether the original contract has or has not been novated cannot be possibly decided (by the Civil Court) in exercise of jurisdiction under a limited prima facie view as to whether an arbitration agreement exists between the parties;
- The Court cannot enter into a mini trial or elaborate review of the facts and the law which would usurp the jurisdiction of the arbitral tribunal;
- Kishorilal Judgement and Damodar Valley Judgement deals with novation in context of the 1940 Act which had a scheme completely different from the scheme set out in the 1996 Act.
This judgement has come as a welcome reprieve to the judiciary congested with such suits which cause hinderance in smooth functioning of a separate and distinct dispute resolution mechanism. However, a downside to this judgement is that it may shut the doors of Civil Courts for parties who are subjected to onerous arbitrations in cases where the arbitration agreements are no longer in existence due to novation of the original contract. In any case, no matter what you do, it is indeed difficult to be able to please everyone.
[1] AIR 1959 SC 1362
[2] AIR 1974 SC 158
[3] (2005) 8 SCC 618
[4] (2020) 2 SCC 455
[5] (2011) 12 SCC 349
[6] (2017) 9 SCC 729
[7] (2009) 1 SCC 267
