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In Petition Under Sec. 11 of Arbitration Act, We Cannot Consider Question of Novation of Contract: Supreme Court

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In the judgement on 6 April 2021, the Supreme Court of India observed that in a petition filed under Section 11 of the Arbitration and Conciliation Act, the Court cannot address the issue of novation of a contract containing an arbitration clause.

Facts of the Case

In the present case, a private company was incorporated in the year 1971 by the father of the Appellant and later renamed as ANI Media Pvt Ltd. The shares of the company were distributed among the family members without any consideration. Because of the Appellant’s comprehensive efforts on a global scale, a company [Reuters] incorporated in Mauritius approached him for long-term equity investment and partnership on the condition that he would actively participate in the company’s management. Pursuant to this, an MOU was entered between the four members of the Appellant’s family in the year 1996. In MOU, it was mentioned that the Appellant in guidance of his father would be responsible for the growth of the company and his family had to divest 49% of the shareholding in the name of company Reuters subject to the necessary permissions of authorities.

In the year 1996, a shareholder agreement was also executed between the Petitioner and the Respondents. The same day, the Respondent and Petitioner also entered into the Share Purchase Agreement which was also having an arbitration clause and an “entire agreement clause” similar to one present in the Shareholder Agreement. The Article of Association was amended which remained till the year 2012 and then changed in such a way that the amendments earlier made were no longer continued. As a result of the divestiture of 49% of the company’s share capital, Daya Prakash resigned as Managing Director in 1996, and the Appellant took over as Managing Director in 1997.

Disputes arose between the parties when the Appellant’s father decided to transfer his shareholding to be held jointly by Appellant and himself, and Daya Prakash did the same between Seema Kukreja and herself. It was alleged that the pre-emptive right to buy Daya Prakash’s share was violated, causing the Appellant to supply the three Respondents with a notice invoking the arbitration clause. As a result, disagreements between the parties arose, and Justice Deepak Verma (retired judge of this Court) was appointed as the sole arbitrator. Later the Appellant filed a petition in the High Court under Section 11 of the Arbitration and Conciliation Act, which was dismissed and consequently, an appeal was filed in the Supreme Court.

Pleadings before the Court

It was submitted by the Learned Counsel on behalf of the Appellant that the MOU was a family settlement or agreement that created special equity between the parties and could not be regarded as a simple contractual arrangement and relied on the fact that the Appellant was responsible for the company’s enormous growth, and it was through his efforts that Reuters injected a large amount of capital by buying 49% of the company’s share capital. It was further argued that whether or not novation occurred was, at the very least, a debatable point of significant difficulty that would be determined by a finding based on different clauses of the MoU and the Shareholding Agreement, when construed in light of the circumstances. The fact that a family arrangement had been enforced resulting in an amendment to the Articles of Association immediately after the MoU was signed was also ignored by the learned Single Judge.

On the other hand, the learned counsel on behalf of the Respondent argued that the parties to the MoU were not only different from those to the Shareholding Agreement, but the MoU itself contemplated that the Prakash Family would engage in a separate agreement with Reuters to induce the purchase of Reuters’ 49% shareholding in the firm, demonstrating that the MoU and the Reuters Agreements were independent contracts.

Court’s Observation

The bench of the Supreme Court comprising  Justices RF Nariman, BR Gavai and Hrishikesh Roy observed that it was self-evident that deciding whether the MoU was novated by the Shareholding Agreement dated 12.04.1996 necessitates a thorough review of the provisions of the two agreements, as well as the sense in which they were signed, and a thorough examination of the law on the issue. Given a Court’s restricted authority under Section 11 of the 1996 Act, none of this can be accomplished. 

It was further observed that the earlier position as to the extent of a Court’s powers under Section 11 while nominating an arbitrator has been restricted by the Arbitration and Conciliation (Amendment) Act, 2015, under which Section 11(6A) was implemented.

Court’s Judgement

The Supreme Court in this case set aside the judgement of the High Court and directed the parties to go for the arbitration of the sole arbitrator who would further decide the dispute between the parties. 

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