The Delhi High Court on October 22, 2020 held in the case of Sanjiv Prakash v. Seema Kukreja & Ors.[1] that when a contract is substituted, the arbitration clause which is a part of it perishes.
Background
The Petitioner filed the petition under Section 11(5) of the Arbitration and Conciliation Act, 1996 (the Act). According to the petition, the Company was incorporated on December 09, 1971 under the name of Asian Films Laboratories Pvt Ltd (now, ‘ANI Media Private Limited’). The shares were distributed to the family members (‘Prakash family’) who did not pay any consideration for the same. The Petitioner holds 15.3% shares and serves as the Managing Director of ANI (‘the Company’).
The Deal with Reuters
In 1996, Reuters approached the Petitioner for a long-term equity investment and collaboration in respect of the Company on the condition that the Petitioner would play an active role in the management of the Company. This deal would lead to substantial gains from Reuter’s acquisition of shares and a resultant increase in flow of business, prior to the execution of the agreements with Reuters in 1996, an MoU was entered into between Respondent nos. 1-3.
The MoU constituted a special arrangement between the family shareholders of the Company constituting a succession plan and management scheme for the Prakash family with the Company.
The MoU is a valid and binding agreement between the Prakash family members and it was only on the basis of the agreement reached in the MoU that the petitioner took forward and concluded a transaction with Reuters to the benefit of the Respondent nos. 1 and 2. It is further stated that once the inter-se arrangements/agreements between the Prakash Family members had been defined in the 1996 MoU, the MoU was acted upon and on April 12, 1996, the Prakash Family Members entered into a Shareholders Agreement (SHA) and a Share Purchase Agreement with Reuters, by which Reuters acquired 49% shares in the Company from the family.
The Issue
The issue arose over the transfer of shares between the family members. The Petitioner states that the MoU was a separate and distinct agreement vis-à-vis the SHA and the Share Purchase Agreement dated April 12, 1996. The MoU was binding on the members of the Prakash family while the SHA was binding as between the Family shareholders (individually) and Reuters. Subsequently, the terms of the MoU were included in the Articles of Association after the investment by Reuters to recognize and acknowledge the special rights that were existing in the MoU. The Articles continued to be operative till August 30, 2012. However, allegedly, on August 30, 2012, the Company due to regulatory concerns adopted Articles which did not reflect the special rights of any of the parties. The company once again adopted the Articles of 1996 on March 26, 2014, before adopting the Articles as it exists in the current form in September 2014.
The Respondent nos. 2 and 3 state that the legal principle regarding the novation of a contract which 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 is applicable in the instant case as 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.
Thus, it is alleged that the MoU relied upon by the petitioner was a shareholding agreement between the then shareholders and the same was superseded by SHA on induction of new shareholders to govern their relationship in the Company. Thereafter, no valid arbitration agreement exists between the petitioner and the respondents, the instant petition does not trigger the arbitration clause in any manner.
The judgment of Mayawati Trading Pvt Ltd v. Pradyut Deb Burman[2]was referred the scope of enquiry for this Court in an application filed under Section 11 of the Act is limited only to prima facie satisfaction of the existence of an arbitration agreement and it is the arbitral tribunal which would decide any preliminary issues including validity, the efficacy and the effect of the agreement.
Court
The court among others, delved into the judgement of the Supreme Court in Larsen and Toubro Ltd. v. Mohan Lal Harbans Lal Bhayana[3], which held that when the terms of the supplementary agreement changed the entire edifice of the principal arbitration agreement, there could be no arbitration between the parties for the claims raised by the appellant and an application filed under Section 11 would thus be misconceived.
Thus, the law relating to the effect of novation of contract containing an arbitration agreement/clause is well-settled. An arbitration agreement being a creation of an agreement may be destroyed by agreement. This means that if the contract is superseded by another, the arbitration clause, being a component/part of the earlier contract, falls with it or 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 is not justified.
The Court finally held that the petition by the petitioner invoking the MoU for appointment of arbitrator is not maintainable and is dismissed.
Conclusion
This case was relevant as it reiterated the question of substitution of a contract and its arbitration clause contained therein. Section 62 of the Contract Act states that if the parties to the contract agree to substitute a new contract for it or to rescind it or alter it, the original contract need not to be performed. Thus, in such a case where the original contract itself stands superseded, any or all provisions of the previous contract have no basis for enforcement.
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