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Courts cannot go into the Question of Novation of Contract while considering Application for Appointment of Arbitrator: Supreme Court

By - King Stubb & Kasiva on January 3, 2023

In case of a dispute between two contracting parties where the contract includes an arbitration clause for dispute resolution, an application may be filed under Section 11(6) of the Arbitration and Conciliation Act[1] for the appointment of an arbitrator. The Supreme Court, in the recent case of M/s. Meenakshi Solar Power Pvt. Ltd. v. M/s. Abhyudaya Green Economic Zones Pvt. Ltd. and Ors.[2], held that while considering the application of appointment of an arbitrator, the court cannot delve into the question of novation of contract.

Analyzing the Judgment

The parties, in this case, had entered into a Share Purchase Agreement (SPA) as per which the Appellant had agreed to purchase all equity and preference shares of the Respondent company by taking over all the loans of the company and paying the balance amount to the sellers. Later, following this, a Tripartite Agreement was entered into by the appellate through its affiliate, with the sellers and IFCI Venture Capital recording that the previous SPA was executed.

An addendum to the SPA was further signed. Later, disputes arose between the parties to the SPA and the Appellant filed an application under Section 9 of the Arbitration and Conciliation Act. Later, they invoked the arbitration clause in the SPA and had to file an application under Section 11(6) before the High Court, which was dismissed and hence the appeal.

The Respondent contended that due to the novation of the SPA, the arbitration clause did not exist anymore. The Supreme Court referred to the judgment of Vidya Droliav. Durga Trading Corporation[3] relies on the following principles:

  • Whether there is an arbitration agreement and if a more thorough examination of the party is required is for the arbitrator to decide, except in exceptional cases.
  • Issues of contract formation, existence, validity, non-arbitrability, etc. relate to the issues of merits of the disputes. They are factual and disputed and hence, must be decided by the Arbitral Tribunal.
  • At the referral stage, the court can only interfere when the claims are manifestly ex-fact barred by time or are dead or there is no subsisting dispute. Limitation period, defense on the plea of novation, etc. are all matters of merits to be decided by the Arbitral Tribunal.

Hence, the Court held that the High Court’s order dismissing the petition on the ground of novation was erroneous. Since this has a bearing on the merits of the case, it must be left to the arbitrator to decide.

[1] Section 11(6), Arbitration and Conciliation Act, 1996.

[2]M/s. Meenakshi Solar Power Pvt. Ltd. v. M/s. Abhyudaya Green Economic Zones Pvt. Ltd. and Ors., Civil Appeal No. 8818 OF 2022 (Arising out of SLP (Civil) No. 11570 of 2021).

[3]Vidya Drolia v. Durga Trading Corporation, (2021) 2 SCC 1.

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