The Hon’ble High Court of Delhi (“DHC”) has in its judgement dated October 22, 2020 (“Judgement”) in the matter of Sanjiv Prakash v. Seema Kukreja and Others [ARB. Pet. 4/2020], held that if the contract is superseded by another, the arbitration clause, being a component/part of the earlier contract, falls with it. In other words, if the original contract in entirety is put to an end, the arbitration clause, which is a part of it, also perishes along with it.

Facts
The Petitioner is the son of Respondent No. 2 (the mother) and Respondent No. 3 (the father), and Respondent No. 1 is his sister, collectively the Petitioner and Respondents are addressed as “Prakash Family Members/Prakash Family”. Asian Films Laboratories Private Limited was incorporated on December 09, 1971, by the Respondent No. 3 and the entire amount of the paidup capital was paid by him. He then distributed the shares to the family members. Subsequently, the name of the company was changed to ANI Media Private Limited on March 06, 1997 (“Company”). The Petitioner serves as the Managing Director and the Respondent No. 3 serves as the Chairman of the Company. The Company, in the year 1996, engaged in business relationship with Reuters Television Mauritius Limited, now named as Thomson Reuters Corporation Pte. Ltd. (“Reuters”). It was stated by the Petitioner that prior to the execution of the agreement with Reuters in 1996, an undated Memorandum of Understanding (“MoU”) was entered into between the Prakash Family Members which constituted a special arrangement on succession plan and management scheme between the Prakash Family Members qua the Company.

On April 12, 1996, the Prakash Family Members entered into a Shareholders Agreement (“SHA”) and a Share Purchase Agreement (“SPA”) with Reuters, by which Reuters acquired 49% shares of the Company from the Prakash Family Members, who subsequently held 51% shareholding in the Company. It was stated by the Petitioner that the MoU was binding on the Prakash Family Members inter-se, while SHA was binding as between the Petitioner and the Respondents collectively addressed as “Prakash Family Shareholders” and Reuters. It was stated by the Petitioner that subsequently, the terms of the MoU were included in the Articles of Association of the Company on May 14, 1996 (“Articles of 1996”) to recognize the special rights that were existing in the MoU. The Articles of 1996 continued to be operative till August 30, 2012, however, later the Company, due to regulatory concerns, adopted Articles of Association which did not reflect the special rights of any of the parties. The Company again adopted the Articles of 1996 on March 26, 2014, before adopting the Articles of Association as existed in the current form in September 2014.

In terms of the dispute between the parties it was stated by the Petitioner that the Respondent No. 3 was desirous of transferring his shares in the Company to the joint shareholding of himself and the Petitioner. In furtherance, on September 16, 2019, the Petitioner by his letter of lodgment to the Company, attached duly stamped and certified share transfer forms and original share certificate pertaining to the 4,28,100 shares. However, the Respondents No. 1 and 2 objected to the said transfer and also indicated a desire to have the shares of the Respondent No. 2 transferred to the joint names of Respondents No. 1 and 2, but the matter was deferred by the Board. On October 5, 2019, Respondent No. 3 moved a circular resolution for transfer of shares in consonance with the MoU. Subsequently a request was made by Respondent No. 2 on October 6, 2019 for transfer of 3,67,500 shares held by her to the joint shareholding of the Respondents No. 1 and 2. Correspondences were exchanged between Respondent No. 3, and Respondent No. 2 that the transfer request had not been properly made since the original stamped share transfer form and the original share certificates had not been lodged by Respondent No. 2. To this, Respondent No. 2 responded that she will produce the original share certificates at the time of transfer. In addition to the above, Respondent No. 3 and the Petitioner also sent e-mails reiterating that the proposal to transfer shares of Respondent No. 2 to the joint shareholding of the Respondents No. 1 and 2 was in breach of the terms of the MoU. To this, Respondent No. 2 responded that the MoU had been superseded. Thereafter, by e-mail dated October 12, 2019, the Respondents No. 1 and 2 assented to the transfer of the shares of the Respondent No.2 to the joint shareholding of the Respondents No. 1 and 2. Respondent No. 3 responded as the Chairman, stating that the circular resolution for the transfer of the shares of the Respondent No. 2 has not been initiated, and that the Company was still awaiting the original share certificates to be lodged in order to initiate the aforesaid transfer. Thereafter, Respondent No. 2 by e-mail dated November 11, 2019 marked to all directors, disputed the validity of the MoU and reiterated her demand of transferring the shares held by her to the joint shareholding of the Respondents No. 1 and 2.

Owing to the dispute arising out of and in relation to the MoU, the Petitioner invoked the arbitration clause as per MoU and issued a notice for invocation of arbitration dated November 23, 2019 (“Notice of Arbitration”) to the Respondents. The Respondent No. 3 by e-mail dated November 24, 2019, consented to the arbitrator nominated in Notice of Arbitration. However, Respondents No. 1 and 2 by their reply dated December 20, 2019 contended that the MoU has allegedly been superseded/invalidated by the SHA executed between Prakash Family Shareholders and Reuters and did not agree to the appointment of the arbitrator. Hence, this petition was filed under Section 11(5) of the Arbitration and Conciliation Act, 1996 (“1996 Act”), for appointment of a sole arbitrator under Section 11 of 1996 Act, for the purpose of adjudicating the disputes that have arisen between the parties under the MoU. It is worthy to note that the Respondent No. 3 filed a reply separately stating that the MoU is a valid and binding document as well supporting the stand taken by the Petitioner.

Issue
Whether on the contract/agreement being superseded or extinguished by a subsequent contract/agreement, the arbitration clause, being a component of the superseded contract/agreement stands superseded along with the terms of such superseded contract/agreement.

Arguments

Contentions raised by the Petitioner:

The Petitioner contended that the MoU has not been superseded on the following grounds:

• SHA and SPA executed was to govern the relationship between Reuters and the Prakash Family Shareholders. The inter-se relationship of Prakash Family Members was governed by the MoU. Also, the MoU has not been amended, nor have the parties entered into any other MoU, modifying the terms of the same, and that the Prakash Family Members never acted contrary to the MoU.
• The Respondent No. 3, being the Chairman of the Company and a signatory of the MoU, had time and again endorsed the MoU and its validity. Also, Respondents No. 1 and 2 had conceded to the fact that they do not dispute their signature to the MoU.
• The MoU was a separate and distinct agreement vis-à-vis the SHA and the SPA dated April 12, 1996. Further, the contention that the MoU was superseded by the SHA is ex-facie belied as the terms of the MoU were incorporated in the Articles of 1996, after executing SHA, which would not have been incorporated/amended if the MoU had been superseded.
• The Prakash Family Members have consciously entered into the MoU. Further, each benefited from the MoU and the partnership with Reuters, therefore were bound, and continued to be bound, inter-se by the terms of the MoU. Hence, they are estopped from claiming that the MoU is not valid.
• The request made by the Respondent No. 2 for transfer of shares held by her to the joint shareholding of Respondents No. 1 and 2 was not in consonance with the terms of the MoU, as the Petitioner would be entitled to the shares of the Respondents No. 1 and 2 as their successor.
• The SHA describes itself as an agreement executed between Prakash Family Members (as one group) and Reuters (as another group). Further, the SHA and MoU occupy and operate in different fields and govern completely different sets of rights of the respective parties thereto, and are executed between different sets of parties.

It was further submitted that, on a comprehensive reading of Sections 5, 11(6A) and 16 of the 1996 Act, and the principle of ‘kompetenz-kompetenz’ (Arbitrator’s ability to determine its own jurisdiction including ruling on any objections with respect to the validity or existence of the arbitration agreement), the question of the binding nature of the MoU is an issue that needs to be decided by the arbitral tribunal appointed as per the arbitration agreement contained in the MoU. The scope of enquiry under Section 11(6A) of the 1996 Act is only limited to the prima-facie question of satisfaction of the court as to the existence of the arbitration agreement and it is the arbitral tribunal which would decide any preliminary issues including the validity, the efficacy and the effect of the MoU. Further, the plea of Respondents No. 1 and 2 that the arbitration clause (Clause 16) under the SHA should have been invoked instead of arbitration clause under the MoU, was rebutted by stating that the tribunal constituted under the MoU would be well within its jurisdiction to decide whether the MoU is valid or has been superseded by the SHA, whereas a tribunal constituted under the SHA, even if it accepts the case of the Petitioner that the MoU is valid, will be without jurisdiction to enforce the same. Further, the Clause 16 under the SHA is intended for disputes between Reuters and the Prakash Family Shareholders and hence provides that the mediation would be between Reuters and Respondent No. 3.

Lastly, it was submitted that the SHA states that Reuters can transfer any of the shares held by it to a company which is a member of the Reuters Group and similarly Prakash Family can transfer any shares held by it to each other, this cannot be construed to mean that the Prakash Family Members cannot have a separate agreement to govern their rights inter-se. It was submitted that the SHA and MoU should be construed harmoniously.

Contentions raised by the Respondents No. 1 and 2:

There is no subsisting MoU. Therefore, the appointment of arbitrator under Section 11(5) of the 1996 Act was barred by law, as the Petitioner has relied on an invalid document to invoke arbitration. It was also stated by Respondents No. 1 and 2, without prejudice that no cause of action as per the MoU has accrued in favor of the Petitioner. Not once, the MoU terms were incorporated in the SHA and the Articles of Association. Therefore, the language of the Articles as it then stood, reflected the intention of the parties to be bound by terms set out in the Articles itself, both in respect of dealings inter-se Prakash Family and in respect of their dealings with Reuters. With respect to the alleged MoU, even Respondent No. 3 herein had sought opinion on the sanctity of the same way back in 2014, to be informed that the MoU was not a legal document owing to non-bearing of any signatures on the first three pages. The said MoU has no binding effect or legal sanctity as the same had never been shared or placed during any general body or board meeting except on September 17, 2019 hence, the Company did not acknowledge it and it cannot override the provisions of the Articles of Association and the SHA.

The SHA is the only valid and subsisting agreement amongst the Petitioner and the Respondents even with regard to their inter-se rights of shareholding in the Company. Further, Clause 28 of the SHA contains an entire agreement clause whereby parties to the SHA agreed that the SHA supersedes any and all prior agreements, explicit/implicit which may have been entered into prior to SHA between the parties, other than the ancillary agreements and the SPA. They also submitted that the SHA contains dispute resolution clause wherein, any dispute including the present dispute can only be arbitrated after following the procedure set forth in Clause 16 of the SHA. It was submitted that arbitration clause of the SHA, that is, Clause 16.2 stated that the seat of arbitration was London, and the proceedings envisaged being an international commercial arbitration, the Hon’ble Supreme Court was the court designate as per Section 11(9) of the 1996 Act, hence this Court did not have jurisdiction under Section 11(5) of the 1996 Act.

It was contended that the legal principle regarding the novation of contract states that an arbitration clause in an agreement cannot survive if the agreement containing the arbitration clause has been superseded/novated by a later agreement. Even if it is presumed that MoU was validly executed between the then shareholders of the Company, the then shareholders put an end to it as if it had never existed and substituted a new SHA for it. By relying on the definition clause in the SHA, it was submitted that Prakash Family Members means each of the Prakash Family Shareholders and shareholder means each of Prakash Family shareholder and Reuters. It was immaterial whether the dispute had been raised qua Reuters or among the other shareholders. The SHA had been executed by all the shareholders of the Prakash Family in their individual capacity and not by one person representing the family or block. The fact contended was that the dispute is between the individual shareholders of the Company with respect to the shares of the Company and not a family dispute as alleged by the Petitioner.

Further, issue of novation/supersession is not a preliminary issue and beyond the jurisdiction of the arbitrator under Section 16 of the 1996 Act as the arbitrator is not empowered to decide upon any issue if the appointment of the arbitrator itself was on the basis of a novated arbitration clause which had become void along with the original contract. Reliance was placed on Section 62 of the Indian Contract Act, 1872 (“ICA”) to contend that, when the main agreement is novated, rescinded or altered, it loses its validity and the arbitration agreement becomes void, as the principle is that, if the contract is superseded by another, the arbitration clause, being a component part of the earlier contract, falls with it. It was further submitted that an arbitrator under Section 16 of the 1996 Act, cannot adjudicate upon superseded arbitration agreement. Reliance was placed on the case of Garware Wall Ropes Limited v. Coastal Marine Construction and Marine Limited. [2019 (9) SCC 2019]. As per Section 11(6A) of the Arbitration and Conciliation Amendment Act, 2015, court’s scope of inquiry requires to determine the fundamental issue of novation/supersession which is important before declaring any arbitration agreement valid/existing.

Observations of the Delhi High Court

It was observed that the Petitioner may be right in contending that there exists a contemplation of groups, that is, Prakash Family Members and Reuters under the SHA as ‘blocks’. However, on reading of the opening paragraph, it was observed that the term ‘parties’ envisages Prakash Family Shareholders both individually as well as collectively. Therefore, on a conjoint reading of the Clause 28 with the opening paragraph of SHA, it was concluded that, any kind of agreement as per Clause 28, ‘between the parties’ stood superseded.

The contention of the Petitioner, that the terms of MoU were incorporated in the Articles of 1996 after the execution of the SHA, and hence MoU was not superseded, was observed to not be appealing on basis of the effect of Clause 28 of SHA, by which the MoU stood superseded. The DHC further analysed the implication assuming, if terms para materia to MoU had been incorporated in the Articles of 1996, it is only with view to make such terms part of the Articles of 1996 and it does not mean that MoU continued to be valid. It was observed by the DHC that nothing precluded Prakash Family to include a stipulation in the SHA, that the SHA shall not supersede the MoU, as had been specially stated in Clause 28 with regard to ancillary agreements and SPA. The DHC observed that under Section 62 of the ICA, it is trite law, that to attract the theory of novation there should be total substitution of the earlier contract and all the terms of the earlier contract should perish with it.

The judgement of the Supreme Court in Union of India v. Kishorilal Gupta [AIR 1959 SC 1362] was relied upon by the DHC to determine the issue of validity of the arbitration clause. Following is the relevant portion: “22. … So too, if the dispute is whether the contract is wholly superseded or not by a new contract between the parties, such a dispute must fall outside the arbitration clause, for, if it is superseded, the arbitration clause falls with it. ….”.

The case of Damodar Valley Corporation v. K.K Kar [AIR 1974 SC 158], was also relied upon, relevant portion reads as follows: “7. …..Where, therefore, the dispute between the parties is that the contract itself does not subsist … that dispute cannot be referred to the arbitration as the arbitration clause itself would perish if the averment is found to be valid. As the very jurisdiction of the arbitrator is dependent upon the existence of the arbitration clause under which he is appointed, the parties have no right to invoke a clause which perishes with the contract.” Therefore, referring to the precedents, the DHC observed that the law relating to the effect of novation of contract containing an arbitration agreement/clause is well-settled.

It was observed that, it could not be said that Clause 16 of the SHA was intended only for disputes between Reuters and Prakash Family asa block, as the said clause contemplates dispute between ‘shareholders’ who have been defined as individual shareholders of both Prakash Family and Reuters.

Decision of the Delhi High Court

The DHC held that, Prakash Family Shareholders having been individually recognized under the SHA as parties, the MoU, an agreement, as relied upon by the Petitioner, which governs the inter-se rights and obligations of the Prakash Family Members, stood superseded/novated. The DHC further held that if the contract is superseded by another, the arbitration clause, being a component/part of the earlier contract, falls with it. In other words, if the original contract in entirety is put to an end, the arbitration clause, which is a part of it, also perishes along with it. Hence, the arbitration clause of the MoU, having perished with the MoU, owing to novation, the invocation of arbitration under the MoU was held to be not justified.

In view of the conclusion stated above, the plea of doctrine of ‘kompetenz-kompetenz’ and the reliance placed on Section 11(6A) of the 1996 Act were held to be untenable. Hence, it was also held that the petition filed by the Petitioner invoking the MoU for appointment of arbitrator was not maintainable and thereby was dismissed.

Vaish Associates Advocates View:

The DHC in this judgement has highlighted the law on novation of contract, explained the effect of such novation of contract on the arbitration agreement/clause therein and thereby has laid the limits for invocation of arbitration clause. It has been clarified that the arbitration clause even though is independent of the main contract, perishes with it, if such a contract is novated/ superseded by the parties.

Party autonomy plays a major role to invoke and conduct arbitration, therefore, the arbitration agreement being a creation of an agreement may be destroyed by an agreement. If the parties have agreed to novate the contract they cannot be forced to enforce rights/obligations against their intent under the previous contract. Therefore, a party is restrained from invoking arbitration under an invalid contract.

For more information please write to Mr. Bomi Daruwala at [email protected]

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