whether the MoU has been novated by the SHA dated 12.04.1996 requires a detailed consideration of the clauses of the two Agreements, together with the surrounding circumstances in which these Agreements were entered into, and a full consideration of the law on the subject.
REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 975 OF 2021
SANJIV PRAKASH …APPELLANT
VERSUS
SEEMA KUKREJA AND ORS. …RESPONDENTS
WITH
CIVIL APPEAL NO. 976 OF 2021
J U D G M E N T
R.F. Nariman, J
Civil Appeal No. 975 of 2021
1. This appeal arises out of the dismissal of a petition under Section 11
of the Arbitration and Conciliation Act, 1996 [“1996 Act”] filed before the
High Court of Delhi. The Appellant, Sanjiv Prakash, is a member of a family
which also consists of his sister, Seema Kukreja (Respondent No.1 herein),
his mother, Daya Prakash (Respondent No.2 herein), and his father, Prem
1
Prakash (Respondent No.3 herein). The Appellant and Respondents are
hereinafter collectively referred to as the “Prakash Family”.
2. The facts, briefly stated, are as follows:
2.1. A private company was incorporated on 09.12.1971 under the name
and style of Asian Films Laboratories Private Limited [“the company”] by
Prem Prakash, the entire amount of the paid-up capital being paid for by
him from his personal funds. He then distributed shares to his family
members without receiving any consideration for the same. On 06.03.1997,
the name of the company was altered to its present name – ANI Media
Private Limited.
2.2. Owing to the extensive efforts of Sanjiv Prakash at a global level,
Reuters Television Mauritius Limited (now Thomson Reuters Corporation), a
company incorporated in Mauritius [“Reuters”], approached him for a longterm equity investment and collaboration with the company on the condition
that he would play an active role in the management of the company.
2.3. Pursuant to this understanding, a Memorandum of Understanding
[“MoU”] was entered into sometime in 1996 between the four members of
the Prakash Family. The MoU recorded that Sanjiv Prakash, supported by
2
the guidance and vision of Prem Prakash, had been responsible for the
tremendous growth of the company. The paid-up share capital of the
company was held as follows:
Rupees Percentage
held
Prem Prakash 2,80,000 27.99%
Daya Prakash 2,40,000 24.01%
Sanjiv Prakash 3,00,000 30.00%
Seema Kukreja 1,80,000 18.00%
--------------- --------------
10,00,000 100.00%
The Prakash Family was to divest 49% of this shareholding in favour of
Reuters or its affiliates, subject to necessary permission of the authorities,
as follows:
“And whereas ANI for the past many years has been doing
considerable business with Reuters Television (Reuters). The
relationship between them has been close and cordial. In order
to strengthen the relationship and make optimum use of the
tremendous growth potential in the TV media sector, including to
cater to the ever expanding news video demands of Reuters in
its satellite transmissions to subscribers worldwide, it has been
found expedient by the existing members of the company to
divest 49% of their shareholding in favour of Reuters or its
affiliates subject to necessary permission of authorities. This
would cement the relationship built over the years between
Reuters and the company.”
The MoU went on to record:
3
“1. The Prakash family will divest its 49% shareholding as
under:
Prem Prakash 1372
Daya Prakash 1176
Sanjiv Prakash 1470
Seema Kukreja 882
________
4900
2. That Prakash family recognises the leadership provided by
S.P. and the role he has played in steering the company to new
heights with the name ANI which is respected internationally.
3. D.P. has been the Managing Director of the company from
the beginning and Prakash family recognises her role in
bringing the company to a very sound financial base as a result
of very ably handling the accounts and finances of the company.
She would continue to be Managing Director after Reuters’
participation in equity.
4. The Prakash family would continue to own 51% shareholding
in the company after Reuters becomes a 49% shareholder. As
they would continue to have the controlling interest it is the
intention and desire of the Prakash family members that their
actions and voting must be in a manner so as to act in
consensus and as one block.
5. S.P. would after divesting his about 15% share, continue to
hold 15% equity in the company. Reuters has made it clear that
they would like the management control of the company to vest
with S.P.
6. In view of the fact that S.P. has been able to get Reuters to
participate in Asian Films Laboratories Pvt. Ltd. The other
shareholders of the Prakash family namely P.P., D.P. and S.K.
agree to vote on all resolutions both in the directors and
shareholders meeting in the manner instructed by S.P. To this
effect, they are agreeable to cooperate and vote for amendment
in the Articles to reflect the following:
(a) Any resolution in Board to have either affirmative
vote of S.P. or his consent in writing to approve the
same.
4
(b) Disproportionate voting rights irrespective of the
number of the shares held by them as under:
Prem Prakash 1 vote
Daya Prakash 1 vote
Seema Kukreja 1 vote
Sanjiv Prakash 5097 votes
Reuters Television
Mauritius Limited 4900 votes.
7. This MoU shall be binding on all the heirs, successors and
assigns of P.P., D.P., S.P. and S.K. and they would act in the
manner stated in this MoU.
8. That in the event P.P. or D.P. desire to sell and or bequeath
his/her equity shares, the same shall be offered/bequeathed
only to S.P. or his heirs and successors. Similarly, in the event
of S.K. or her heirs/successors desire to sell their shares, the
same shall be sold only to S.P. or his successors. The
consideration paid shall be the net worth of shares on the last
balance sheet date determined by the auditors of the company.
xxx xxx xxx
11. This MoU embodies the entire understanding of the parties
as to its subject matter and shall not be amended except in
writing executed all the parties to the MoU.
12. All disputes, questions or differences etc., arising in
connection with this MoU shall be referred to a single arbitrator
in accordance with and subject to the provisions of the
Arbitration Act, 1940, or any other enactment or statutory
modification thereof for the time being in force.”
2.4. A Shareholders’ Agreement dated 12.04.1996 [“SHA”] was then
executed between the Prakash Family and Reuters. So far as is relevant,
the SHA referred to the Appellant and the Respondents collectively as the
5
“Prakash Family Shareholders”, and individually as a “Prakash Family
Shareholder”. It then set out the reason for entering into the SHA as follows:
“WHEREAS
(A) Pursuant to a share purchase agreement dated today
between the Prakash Family Shareholders and Reuters (the
Share Purchase Agreement), Reuters has agreed to purchase
4,900 Shares (as defined below) representing 49% of the
issued share capital of Asian Films Laboratories (Pvt.) Ltd. (the
Company). Following completion of the Share Purchase
Agreement, each of the Prakash Family Shareholders will hold
the numbers of Shares set opposite his or her name in schedule
3 hereto, with the aggregate number of Shares so held by the
Prakash Family Shareholders representing 51% of the issued
share capital of the Company.
(B) The Shareholders (as defined below) are entering into the
Agreement to set out the terms governing their relationship as
shareholders in the Company.”
In the definition section, “Artificial Deadlock” and “Management Deadlock”
were defined as follows:
“Artificial Deadlock means a Management Deadlock caused
by virtue of the Prakash Family Shareholders or Reuters (or any
appointee on the Board) voting against an issue or proposal in
circumstances where the approval of the same is required to
enable the Company to carry on the Business properly and
effectively in accordance with the then current approved
Business Plan and Budget;”
xxx xxx xxx
“Management Deadlock means a material management
dispute (not being an Artificial Deadlock) between any or all of
the Prakash Family Directors on the one hand and the Reuters
directors on the other hand relating to the affairs of the
Company which is not resolved within sixty (60) days of such
dispute being referred for settlement to the Reuters Managing
6
Director (as defined in clause 16.1) and the Chairman;”
The expression “Prakash Family Directors” was defined as follows:
“Prakash Family Directors means the directors of the
Company from time to time appointed by the Prakash Family
Shareholders in accordance with the Articles;”
The expression “Prakash Family Members or Interests” was defined as
follows:
“Prakash Family Members or Interests means each of the
Prakash Family Shareholders and each of their respective
fathers, mothers, sons, daughters, brothers and sisters (the
Prakash Family Relatives) and any company in which any such
relation or any Prakash Family Shareholder has a controlling
interest;”
“Reuters Directors” was defined as follows:
“Reuters Directors means the directors of the Company from
time to time appointed by Reuters in accordance with the
Articles;”
“Reuters Group” was defined as follows:
“Reuters Group means Reuters, its Holding Company and
such Holding Company’s Subsidiaries for the time being;”
Transfer of shares and pre-emption was dealt with in clause 4 read with
clauses 11, 12, and 14 and schedule 1 of the SHA.
Clause 7.2 is important and states as follows:
“7.2 Unless otherwise agreed by the Shareholders, the number
7
of Directors shall be seven (7) of whom, for so long as the
Percentage Interest of the Prakash Family Shareholders is in
aggregate equal to or greater than fifty point zero one per cent.
(50.01%), four (4) shall be Prakash Family Directors and three
(3) shall be Reuters Directors in accordance with the Articles. If
the Percentage Interest of the Prakash Family Shareholders
falls below such level, the number of Prakash Family Directors
and Reuters Directors shall be determined in accordance with
the Articles.”
The quorum for holding meetings was then set out in clause 7.12, and
matters requiring special majority were set out in clause 8.1.
Default events were set out in clause 11. Clause 11.2 is important and
states as follows:
“11.2 If a Default Event exists in relation to any of the
Shareholders (the Defaulting Shareholder), then the other
Shareholder(s) comprising, in the case of a Default Event
existing in relation to a Prakash Family Shareholder, Reuters
and, in the case of a Default Event existing in relation to
Reuters, the Prakash Family Shareholders (each of Reuters in
the first case and the Prakash Family Shareholders in the
second case being the Non-Defaulting Shareholder(s)) shall
have the right, subject to the prior right of the Defaulting
Shareholder to transfer its Shares as contemplated in
paragraph 8 of Schedule 1 (all as provided in clause 11.3), to
purchase or procure the purchase by a nominee or by a third
party of all (but not some only) of the Shares held by the
Defaulting Shareholder, provided that, in the case of a Default
Event comprising a material breach of the kind contemplated by
clause 11.1(c)(ii), the relevant breach has not been either cured
to the reasonable satisfaction of the Non-Defaulting
Shareholder(s) or waived by it or, as the case may be, others.”
8
Clause 12.1, under the heading “Changes in Circumstances: Illegality” then
provided as follows:
“12.1 Where the introduction, imposition or variation of any law
or any change in the interpretation or application of any law
makes it unlawful or impractical without breaching such law for
Reuters to continue to hold upto at least forty nine per cent.
(49%) of the issued ordinary share capital of the Company or to
carry out all or any of its obligations under this Agreement, upon
Reuters notifying the other Shareholders:
(a) Reuters shall be entitled to require the other
Shareholders to purchase its holding of Shares at a
price determined in accordance with clause 11.4, which
shall apply mutatis mutandis, and any such purchase
shall be made by the other Shareholders in the
proportions agreed between them or otherwise in the
proportion each such other Shareholders holding of
Shares bears to the aggregate number of Shares held
by all of such Shareholders;
(b) Any amounts loaned or made available to the
Company shall forthwith be repaid to Reuters; and
(c) Reuters shall upon the service of such notice cease
to be bound by the provisions hereof save for the
preceding provisions of this clause 12.”
The termination clause was set out as follows:
“14.1 This Agreement shall continue in full force and effect for
so long as both (i) any of the Prakash Family Shareholders and
(ii) any member of the Reuters Group hold any Shares. If, as a
result of any sale or disposal made in accordance with this
Agreement, either (i) none of the Prakash Family shareholders
or (ii) no member of the Reuters Group holds any Shares, then
this Agreement shall terminate and cease to be of any effect,
save that this shall not:
(a) relieve any Shareholder from any liability or
obligation in respect of any matters, undertakings or
9
conditions which shall not have been done, observed
or performed by any such Shareholder prior to such
termination;
(b) save for clause 14.2, affect the terms of any
agreement entered into between any Prakash Family
Shareholders and Reuters or any successor of either of
them holding Shares, to replace this Agreement; or
(c) affect the terms of clause 15 (confidentiality) of this
Agreement.”
The arbitration clause was set out in clause 16 which reads as follows:
“LEGAL DISPUTES
16.1 In the event of any dispute between the Shareholders
arising in connection with this Agreement (a legal dispute), they
shall use all reasonable endeavours to resolve the matter on an
amicable basis. If any Shareholder serves formal written notice
on any other Shareholder that a legal dispute has arisen and
the relevant Shareholders are unable to resolve the dispute
within a period of thirty (30) days from the service of such
notice, then the dispute shall be referred to the managing
director of the senior management company identified by
Reuters as having responsibility for India (the Reuters
Managing Director) and the Chairman of the Company. No
recourse to arbitration under this Agreement shall take place
unless and until such procedure has been followed.
ARBITRATION
16.2 If the Reuters Managing Director and the Chairman of the
Company shall have been unable to resolve any legal dispute
referred to them under clause 16.1 within thirty (30) days, that
dispute shall, at the request of any Shareholder, be referred to
and finally settled by arbitration under and in accordance with
the Rules of the London Court of International Arbitration by one
or more arbitrators appointed in accordance with those Rules.
The place of arbitration shall be London and the terms of this
clause 16.2 shall be governed by and construed in accordance
with English law. The language of the arbitration proceedings
shall be English.”
10
Clause 28, upon which a large part of the argument of both sides hinges, is
set out as follows:
“ENTIRE AGREEMENT
28.1 This Agreement, the Ancillary Agreements, and the Share
Purchase Agreement constitute the entire agreement and
understanding of the parties with respect to the subject matter
thereof and none of the parties has entered into this agreement
in reliance upon any representation, warranty or undertaking by
or on behalf of the other parties which is not expressly set out
herein or therein.
28.2 Without prejudice to the generality of clause 28.1, the
parties hereby agree that this Agreement supersedes any or all
prior agreements, understanding, arrangements, promises,
representations, warranties and/or contracts of any form or
nature whatsoever, whether oral or in writing and whether
explicit or implicit, which may have been entered into prior to the
date hereof between the parties, other than the Ancillary
Agreements and the Share Purchase Agreement.”
Clause 31 deals with governing law and jurisdiction and states as follows:
“31. This Agreement (save for clause 16.2, which shall be
governed by and construed in accordance with the laws of
England) is governed by and shall be construed in accordance
with the laws of India.”
2.5. On the same day, a Share Purchase Agreement dated 12.04.1996
[“SPA”] was entered into between the Prakash Family and Reuters. The
SPA also contained an arbitration clause similar to that contained in clause
16 of the SHA, and also contained an “entire agreement clause” in clause
11, which is similar to clause 28 of the SHA. On the same date, various
11
ancillary agreements were also entered into between the parties, referred to
in the SHA. These ancillary agreements are as follows:
(i) Agreement for the Assignment of Copyright dated
12.04.1996 between Prem Prakash, Asian Films
Laboratories Pvt. Ltd., and Reuters Television Mauritius Ltd.
(ii) Trade Clarification Agreement dated 12.04.1996 between
Asian Films Laboratories Pvt. Ltd., Reuters Television
Mauritius Ltd., and the partners of Ved & Co. (i.e., Prem
Prakash, Daya Prakash, Sanjiv Prakash, and Seema
Kukreja)
(iii) PIB Accreditation Agreement dated 12.04.1996 between
Asian Films Laboratories Pvt. Ltd., Reuters Television
Mauritius Ltd., and the partners of Ved & Co. (i.e., Prem
Prakash, Daya Prakash, Sanjiv Prakash, and Seema
Kukreja)
(iv) Facilities and Marketing Agreement dated 12.04.1996
between Asian Films Laboratories Pvt. Ltd. and Reuters
Television (England) Ltd.
(v) Service Agreement dated 12.04.1996 between Asian Films
Laboratories Pvt. Ltd. and Sanjiv Prakash
(vi) Deed of Tax Indemnity dated 12.04.1996 between Prem
Prakash, Daya Prakash, Sanjiv Prakash, Seema Kukreja,
Asian Films Laboratories Pvt. Ltd., and Reuters Television
Mauritius Ltd.
2.6. The Articles of Association of the company were amended on
14.05.1996 to reflect certain decisions that were taken in the MoU. Thus,
clause 11(f) was amended so as to read as follows:
“11. Transfer of Shares
xxx xxx xxx
(f) If the Continuing Shareholder(s) comprise Prakash Family
Shareholders and purchases are to be made by them under
12
Article 11(e), SP Shall have the right (but not the obligation) to
purchase all (but not some only) of the Seller’s Shares. If SP
shall fail to purchase all of the Seller’s Shares within the time
period set out in Article 11(e) the Shares subject to such
Purchases shall be acquired by each Prakash Family
Shareholder in the proportion such Shareholder’s holding of
Shares bears to the aggregate number of Shares held by all of
the Prakash Family Shareholders who have become bound to
make such purchases.”
Likewise, clause 11(i)(i) was inserted, in which it was stated:
“11. Transfer of Shares
xxx xxx xxx
(i) xxx xxx xxx
(i) SP shall have the right (but not the obligation) upon
serving notice in writing to each remaining Prakash
Family Shareholder to purchase all (but not some only)
of such Shares in preference to any other Prakash
Family shareholder;”
Clause 16(b) of the Articles of Association also incorporated clause 6(b) of
the MoU as follows:
“16. xxx xxx xxx
(b) If a poll is demanded in accordance with the provisions of
section 179 of the Companies Act 1956:
(i) SP shall so long as he holds Shares be able to vote
such number of Shares as is equal to the number of
Shares held by all the Prakash Family Shareholders
less the numbers of Prakash Family Shareholders
other than SP (the other Prakash Family
Shareholders). The remaining votes attributable to
Shares hold by Prakash Family Shareholders shall be
divided equally between the other Prakash Family
shareholders; and
13
(ii) The provisions of Article 16(b)(i) shall cease to be
valid and effective upon the occurrence of any of the
events in relation to SP.”
We are informed that this position continued up to the year 2012 after
which, by mutual agreement, the Articles of Association were again
amended so that the amendments incorporated in 1996 no longer
continued.
2.7. Divestment of 49% of the share capital took place as was set out in
the MoU as well as the SPA and the SHA, consequent upon which Daya
Prakash resigned as the Managing Director and Sanjiv Prakash took over
as the Managing Director of the company in 1996 itself.
2.8. Disputes between the parties arose when Prem Prakash decided to
transfer his shareholding to be held jointly between Sanjiv Prakash and
himself, and Daya Prakash did likewise to transfer her shareholding to be
held jointly between Seema Kukreja and herself. A notice invoking the
arbitration clause contained in the MoU was then served by Sanjiv Prakash
on 23.11.2019 upon the three Respondents, alleging that his pre-emptive
right to purchase Daya Prakash’s shares, as was set out in clause 8 of the
MoU, had been breached, as a result of which disputes had arisen between
the parties and Justice Deepak Verma (retired Judge of this Court), was
14
nominated to be the sole arbitrator. The reply filed by Seema Kukreja and
Daya Prakash, dated 20.12.2019, pointed out that the MoU ceased to exist
on and from the date of the SHA, i.e. 12.04.1996, which superseded the
aforesaid MoU and novated the same in view of clause 28.2 thereof.
Therefore, they denied that there was any arbitration clause between the
parties as the MoU itself had been superseded and did not exist after
12.04.1996. In view of this, Sanjiv Prakash moved the Delhi High Court
under Section 11 of the 1996 Act by a petition dated 06.01.2020. In the said
petition, an interim order was passed on 09.01.2020 as follows:
“All the parties agree to defer Agenda Nos. 4 and 8 circulated in
the notice dated 31st December, 2019 in the Board Meeting
scheduled to be held on 15th January, 2020 for a date beyond
the next date of hearing fixed in this matter.”
2.9. By the impugned judgment dated 22.10.2020, the Delhi High Court
set out what according to it was the issue that had to be decided in
paragraph 79 follows:
“79. In this petition, I am of the view, the initial issue which
arises for consideration is, whether at the stage of considering
the request of the petitioner for the appointment of an Arbitrator,
it is only the existence of an Arbitration Agreement that needs to
be seen, leaving it to the Arbitrator to decide the issue of validity
of the Agreement, including the plea of novation of MoU.”
15
After referring to both the MoU and the SHA, the learned Single Judge of
the Delhi High Court held:
“88. In so far as Clause 1.1 is concerned, the same defines
‘artificial deadlock’ as a management deadlock caused by virtue
of the Prakash Family Shareholders or Reuters voting against
an issue or proposal in circumstances where the approval of the
same is required for the functioning of the Company as per
approved plans. No doubt, Mr. Kathpalia, Mr. Nayar and Mr.
Sethi may be right in contending that there exist a
contemplation of groups viz. Prakash Family Members and
Reuters under the SHA, but the same is in a particular fact
situation of deadlock then the Prakash Family Members and
Reuters act as ‘blocks’, which does not mean that SHA does not
recognise Prakash Family Shareholders in their individual
capacity. More so, as per the opening paragraph, the term
‘parties’ envisages Prakash Family Shareholders both
individually as well as collectively.”
xxx xxx xxx
“90. A conjoint reading of the Clause 28.2 with the opening
paragraph of SHA therefore necessarily means that any kind of
agreement as detailed in Clause 28.2, ‘between the parties’
shall stand superseded as per Clause 28.2. So, it follows the
shareholders of Prakash Family having being individually
recognised 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 stands superseded. It is
not the case of the Ld. Counsel for the petitioner that the SHA
does not deal with inter-se rights of the members / shareholders
of the Prakash Family. The plea of Mr. Nayar that MoU was
entered by Prakash Family to define their family arrangement
before the Reuters came in by purchasing the shares and
hence cannot be overridden by the SHA is not appealing.
Nothing precluded the members of the Prakash Family to
include a stipulation in the SHA, that the SHA, shall not
supersede the MoU, as has been specially stated in Clause
28.2 with regard to ancillary agreements and share purchase
agreement. The plea of Mr. Nayar, that the present dispute
16
between the parties being in respect of shares in an Indian
company to be resolved by London Court of International
Arbitration as per English law, contracting out of Indian Law is
opposed to public policy is also not appealing as such an issue
doesn’t arise in these proceedings which have been filed by
invoking the MoU. Nor such a plea would revive the MoU, which
stands novated by the SHA.”
After then setting out Section 62 of the Indian Contract Act, 1872 [“Contract
Act”] and this Court’s judgments in Union of India v. Kishorilal Gupta &
Bros., (1960) 1 SCR 493 [“Kishorilal Gupta”], Damodar Valley
Corporation v. K.K. Kar, (1974) 1 SCC 141 [“Damodar Valley
Corporation”], and Young Achievers v. IMS Learning Resources (P)
Ltd., (2013) 10 SCC 535 [“Young Achievers”], the learned Single Judge
then concluded:
“98. It is clear from a reading of the above judgments that 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. That is to say, 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,
being Clause 12, having perished with the MoU, owing to
novation, the invocation of arbitration under the MoU is
belied/not justified.
99. In view of my conclusion above, the plea of doctrine of
‘kompetenz-kompetenz’ and the reliance placed on Section
11(6A) of the Act are untenable. I have also considered the
judgments relied upon by the counsels for the petitioners viz.
Duro Felguera S.A. [Duro Felguera, S.A. v. Gangavaram Port
17
Ltd., (2017) 9 SCC 729], Mayavati Trading Pvt. Ltd. [Mayavati
Trading (P) Ltd. v. Pradyuat Deb Burman, (2019) 8 SCC 714],
Zostel Hospitality [Zostel Hospitality Pvt. Ltd. v. Oravel Stays
Pvt. Ltd., Arb. Pet. 28/2018], Oriental Insurance Company
Ltd. [Oriental Insurance Company Ltd. v. Narbheram Power and
Steel Pvt. Ltd., (2018) 6 SCC 534], Vodafone [Vodafone
International Holdings BV v. Union of India, (2012) 6 SCC 613],
Uttarakhand Purv Sainik [Uttarakhand Purv Sainik Kalyan
Nigam Limited v. Northern Coal Field Ltd., (2020) 2 SCC 455],
Russell [Russell v. Northern Bank Development Corpn. Ltd.,
(1992) B.C.C. 578] and Anderson [Catherine Anderson v.
Ashwani Bhatia, (2019) 11 SCC 299], and the same are not
applicable to the case in hand.”
3. Shri K.V. Viswanathan, learned Senior Advocate appearing on behalf
of the Appellant, relied strongly upon the MoU between the Prakash Family
and stressed the fact that it was a family settlement or arrangement which
raised a special equity between the parties and could not be treated as a
mere contractual arrangement, having to be enforced in accordance with
several judgments of this Court. For this purpose, he relied strongly upon
the observations contained in paragraph 9 of Kale v. Deputy Director of
Consolidation, (1976) 3 SCC 119 [“Kale”], as followed in Reliance
Natural Resources Ltd. v. Reliance Industries Ltd., (2010) 7 SCC 1 (at
paragraphs 49 and 50). In particular, he relied upon the fact that it was the
Appellant who was responsible for the tremendous growth of the company,
and it is by his efforts that Reuters infused a huge amount of capital by
purchasing 49% of the share capital of the company. It is for this reason
18
that the MoU made it clear vide clause 8 that in case any of the three
Respondents wished to sell or bequeath their equity shares in the company,
their shares may be offered/sold/bequeathed only to the Appellant or to his
heirs and successors. The arbitration clause contained in the MoU would
therefore be applicable, the 1996 Act being the Act under which the
arbitration would have to be effected. He then read out various clauses of
the SHA and relied strongly upon clause 12.1(a), in which it was agreed that
if Reuters would have to divest any part of its shares in the company, it shall
be entitled to require the other shareholders to purchase its holding of
shares in such proportions as was “agreed between them or otherwise”,
thereby making it clear that the MoU between the Prakash Family was
expressly referred to and preserved by the aforesaid clause. He also
stressed upon the absurdity of disputes arising between members of a
family residing and working only in India to have to be referred to arbitration
in accordance with the rules of the London Court of International Arbitration,
which would be the result if the SHA were to supersede the MoU. He was
also at pains to point out that clause 28 of the SHA has to be read as a
whole, and clause 28.1 made it clear that the entire agreement and
understanding between the parties which was contained in the SHA, the
SPA, and the ancillary agreements was only “with respect to the subject
19
matter thereof”, the subject matter of these Agreements being the
relationship between the Prakash Family and Reuters, which was
completely different from the subject matter of the MoU, which was only
between the members of the Prakash Family, Reuters not being a party
thereto. For this purpose, he relied strongly upon the judgments contained
in Barclays Bank Plc v. Unicredit Bank Ag and Anor, [2014] EWCA Civ
302 (at paragraphs 27 and 28), The Federal Republic of Nigeria v. JP
Morgan Chase Bank, NA, [2019] EWHC 347 (Comm) (at paragraph 37),
and Kinsella and Anor v. Emasan AG and Anor, [2019] EWHC 3196 (Ch)
(at paragraphs 64 to 71). A reading of these judgments would, according to
the learned Senior Advocate, show that “entire agreement” clauses are to
be construed strictly, the idea being to obviate having to refer to
negotiations that had taken place between the parties pertaining to the
subject matter of the agreement before the agreement was formally entered
into. He then assailed the learned Single Judge’s judgment dated
22.10.2020, arguing that the impugned judgment, instead of following Duro
Felguera, S.A. v. Gangavaram Port Ltd., (2017) 9 SCC 729 [“Duro
Felguera”] and Mayavati Trading (P) Ltd. v. Pradyuat Deb Burman,
(2019) 8 SCC 714 [“Mayavati Trading”], was in the teeth of the principles
laid down in the aforesaid two judgments. He also argued that whether or
20
not novation had taken place is, at the very least, an arguable point of
considerable complexity which would depend upon a finding based upon
various clauses of the MoU and the SHA, when construed in accordance
with the surrounding circumstances. He also argued that what was missed
by the learned Single Judge was the fact that a family settlement had been
acted upon, resulting in an amendment of the Articles of Association of the
company soon after the MoU was entered into. He also relied upon three
recent judgments of this Court, which made it clear that unless an ex facie
case had been made out that no arbitration agreement existed between the
parties, a Section 11 court would be duty-bound to refer the parties to
arbitration and leave complex questions of fact and law relating to novation
of a contract under Section 62 of the Contract Act to be decided by an
arbitral tribunal.
4. Shri Mukul Rohatgi, learned Senior Advocate appearing on behalf of
Respondent No.3, supported the arguments of Shri Viswanathan. He
referred us to the MoU, the SPA, and the SHA, and strongly relied upon the
observations in Kale (supra) which were followed in Ravinder Kaur Grewal
v. Manjit Kaur, (2020) 9 SCC 706 (at paragraphs 25 to 28). He argued that
not only were the parties to the MoU different from those to the SHA, but
that the MoU itself contemplated that the Prakash Family would enter into a
21
separate agreement with Reuters so as to effectuate the purchase of 49%
shareholding in the company by Reuters, showing thereby that the MoU
and the Agreements entered into with Reuters were separate contracts.
5. Shri Avishkar Singhvi and Shri Manik Dogra, learned counsel
appearing on behalf of Respondents No. 1 and 2, relied heavily on the fact
that the MoU was superseded immediately, inasmuch as it no longer
existed after some of its material clauses were put into the Articles of
Association of the company on 14.05.1996. They also argued that the MoU
was never given effect to as Daya Prakash, who was the Managing Director
of the company, did not continue as such but handed over the management
to Sanjiv Prakash, who then became the Managing Director of the company
soon after the SHA was entered into. They then pointed out that, in any
case, after 2012, even this did not remain as the Articles of Association
were then amended with the consent of Sanjiv Prakash to no longer
incorporate what had earlier been contained in the Articles post the
amendment of 1996. They also pointed out that on the same day, i.e. on
05.10.2019, just as Prem Prakash sought to divest his shareholding in the
company to be jointly held by Sanjiv Prakash and himself, Daya Prakash
did likewise, and sought to divest her shareholding in the company to be
jointly held by Seema Kukreja and herself. The first reaction of Sanjiv
22
Prakash then was not to rely upon a novated MoU, but to take up the plea
that the document being unstamped, ought not to be taken in evidence. It is
only as an afterthought that clause 8 of the MoU was then relied upon. Both
the learned counsel strongly relied upon clause 11.2 of the SHA which
made it clear beyond doubt that the MoU stood superseded. They then
relied upon the judgments in Kishorilal Gupta (supra) (at paragraph 9),
Damodar Valley Corporation (supra) (at paragraphs 7 and 8), Young
Achievers (supra) (at paragraphs 5 and 8), Sasan Power Ltd. v. North
American Coal Corpn. (India) (P) Ltd., (2016) 10 SCC 813 (at paragraph
23), and Larsen & Toubro Ltd. v. Mohan Lal Harbans Lal Bhayana,
(2015) 2 SCC 461 (at paragraph 15) in favour of the proposition that the
MoU stood novated as a result of the SHA. They also relied upon V.B.
Rangaraj v. V.B. Gopalakrishnan, (1992) 1 SCC 160 (at paragraphs 1, 2,
7 and 8) and Pushpa Katoch v. Manu Maharani Hotels Ltd., 2005 SCC
OnLine Del 702 : (2005) 83 DRJ 246 (at paragraphs 5, 7 and 8), for the
proposition that the MoU would be unenforceable in law as any restriction
on transfer of shares of a private company, without incorporating the
aforesaid in its Articles, would be invalid as a result of which the Articles of
Association alone would have to be looked at. This being the case, the
arbitration clause contained in an agreement which is void obviously cannot
23
be looked at. They then referred to certain recent judgments of this Court
for the proposition that the present case being an open and shut one, the
learned Singe Judge of the Delhi High Court was right in dismissing the
Section 11 petition filed by the Appellant.
6. By virtue of the Arbitration and Conciliation (Amendment) Act, 2015
[“2015 Amendment Act”], by which Section 11(6A) was introduced, the
earlier position as to the scope of the powers of a court under Section 11,
while appointing an arbitrator, are now narrowed to viewing whether an
arbitration agreement exists between parties. In a gradual evolution of the
law on the subject, the judgments in Duro Felguera (supra) and Mayavati
Trading (supra) were explained in some detail in a three-Judge Bench
decision in Vidya Drolia v. Durga Trading Corporation, (2021) 2 SCC 1
[“Vidya Drolia”]. So far as the facts of the present case are concerned, it is
important to extract paragraphs 127 to 130 of Vidya Drolia (supra), which
deal with the judgments in Kishorilal Gupta (supra) and Damodar Valley
Corporation (supra), both of which have been heavily relied upon by the
learned Single Judge in the impugned judgment, as follows:
“127. An interesting and relevant exposition, when assertions
claiming repudiation, rescission or “accord and satisfaction” are
made by a party opposing reference, is to be found in Damodar
Valley Corpn. v. K.K. Kar [Damodar Valley Corpn. v. K.K. Kar,
(1974) 1 SCC 141], which had referred to an earlier judgment of
24
this Court in Union of India v. Kishorilal Gupta & Bros. [Union of
India v. Kishorilal Gupta & Bros., AIR 1959 SC 1362] to observe:
(Damodar Valley Corpn. case [Damodar Valley Corpn. v. K.K.
Kar, (1974) 1 SCC 141] , SCC pp. 147-48, para 11)
“11. After a review of the relevant case law, Subba
Rao, J., as he then was, speaking for the majority
enunciated the following principles: (Kishorilal Gupta &
Bros. case [Union of India v. Kishorilal Gupta & Bros.,
AIR 1959 SC 1362], AIR p. 1370, para 10)
‘(1) An arbitration clause is a collateral term of a
contract as distinguished from its substantive
terms; but nonetheless it is an integral part of it;
(2) however comprehensive the terms of an
arbitration clause may be, the existence of the
contract is a necessary condition for its operation;
it perishes with the contract; (3) the contract may
be non est in the sense that it never came legally
into existence or it was void ab initio; (4) though
the contract was validly executed, the parties
may put an end to it as if it had never existed and
substitute a new contract for it solely governing
their rights and liabilities thereunder; (5) in the
former case, if the original contract has no legal
existence, the arbitration clause also cannot
operate, for along with the original contract, it is
also void; in the latter case, as the original
contract is extinguished by the substituted one,
the arbitration clause of the original contract
perishes with it; and (6) between the two falls
many categories “of disputes in connection with a
contract, such as the question of repudiation,
frustration, breach, etc. In those cases it is the
performance of the contract that has come to an
end, but the contract is still in existence for
certain purposes in respect of disputes arising
under it or in connection with it. As the contract
subsists for certain purposes, the arbitration
clause operates in respect of these purposes.’
25
In those cases, as we have stated earlier, it is the
performance of the contract that has come to an end
but the contract is still in existence for certain purposes
in respect of disputes arising under it or in connection
with it. We think as the contract subsists for certain
purposes, the arbitration clause operates in respect of
these purposes.”
128. Reference in Damodar Valley Corpn. case [Damodar
Valley Corpn. v. K.K. Kar, (1974) 1 SCC 141] was also made to
the minority judgment of Sarkar, J. in Kishorilal Gupta & Bros.
[Union of India v. Kishorilal Gupta & Bros., AIR 1959 SC 1362]
to observe that he had only disagreed with the majority on the
effect of settlement on the arbitration clause, as he had held that
arbitration clause did survive to settle the dispute as to whether
there was or was not an “accord and satisfaction”. It was further
observed that this principle laid down by Sarkar, J. that “accord
and satisfaction” does not put an end to the arbitration clause,
was not disagreed to by the majority. On the other hand,
proposition (6) seems to be laying the weight on to the views of
Sarkar, J. These decisions were under the Arbitration Act, 1940.
The Arbitration Act specifically incorporates principles of
separation and competence-competence and empowers the
Arbitral Tribunal to rule on its own jurisdiction.
129. Principles of competence-competence have positive and
negative connotations. As a positive implication, the Arbitral
Tribunals are declared competent and authorised by law to rule
as to their jurisdiction and decide non-arbitrability questions. In
case of expressed negative effect, the statute would govern and
should be followed. Implied negative effect curtails and
constrains interference by the court at the referral stage by
necessary implication in order to allow the Arbitral Tribunal to
rule as to their jurisdiction and decide non-arbitrability
questions. As per the negative effect, courts at the referral stage
are not to decide on merits, except when permitted by the
legislation either expressly or by necessary implication, such
questions of non-arbitrability. Such prioritisation of the Arbitral
Tribunal over the courts can be partial and limited when the
legislation provides for some or restricted scrutiny at the “first
look” referral stage. We would, therefore, examine the principles
26
of competence-competence with reference to the legislation,
that is, the Arbitration Act.
130. Section 16(1) of the Arbitration Act accepts and empowers
the Arbitral Tribunal to rule on its own jurisdiction including a
ruling on the objections, with respect to all aspects of nonarbitrability including validity of the arbitration agreement. A
party opposing arbitration, as per sub-section (2), should raise
the objection to jurisdiction of the tribunal before the Arbitral
Tribunal, not later than the submission of statement of defence.
However, participation in the appointment procedure or
appointing an arbitrator would not preclude and prejudice any
party from raising an objection to the jurisdiction. Obviously, the
intent is to curtail delay and expedite appointment of the Arbitral
Tribunal. The clause also indirectly accepts that appointment of
an arbitrator is different from the issue and question of
jurisdiction and non-arbitrability. As per sub-section (3), any
objection that the Arbitral Tribunal is exceeding the scope of its
authority should be raised as soon as the matter arises.
However, the Arbitral Tribunal, as per sub-section (4), is
empowered to admit a plea regarding lack of jurisdiction beyond
the periods specified in sub-sections (2) and (3) if it considers
that the delay is justified. As per the mandate of sub-section (5)
when objections to the jurisdiction under sub-sections (2) and
(3) are rejected, the Arbitral Tribunal can continue with the
proceedings and pass the arbitration award. A party aggrieved
is at liberty to file an application for setting aside such arbitral
award under Section 34 of the Arbitration Act. Sub-section (3) to
Section 8 in specific terms permits an Arbitral Tribunal to
continue with the arbitration proceeding and make an award,
even when an application under sub-section (1) to Section 8 is
pending consideration of the court/forum. Therefore, pendency
of the judicial proceedings even before the court is not by itself
a bar for the Arbitral Tribunal to proceed and make an award.
Whether the court should stay arbitral proceedings or
appropriate deference by the Arbitral Tribunal are distinctly
different aspects and not for us to elaborate in the present
reference.”
27
Again, insofar as the facts of the present case are concerned, paragraph
148 of the aforesaid judgment is apposite and states as follows:
“148. Section 43(1) of the Arbitration Act states that the
Limitation Act, 1963 shall apply to arbitrations as it applies to
court proceedings. Sub-section (2) states that for the purposes
of the Arbitration Act and Limitation Act, arbitration shall be
deemed to have commenced on the date referred to in Section
21. Limitation law is procedural and normally disputes, being
factual, would be for the arbitrator to decide guided by the facts
found and the law applicable. The court at the referral stage can
interfere only when it is manifest that the claims are ex facie
time-barred and dead, or there is no subsisting dispute. All other
cases should be referred to the Arbitral Tribunal for decision on
merits. Similar would be the position in case of disputed “noclaim certificate” or defence on the plea of novation and “accord
and satisfaction”. As observed in Premium Nafta Products
Ltd. [Fili Shipping Co. Ltd. v. Premium Nafta Products Ltd., 2007
UKHL 40 : 2007 Bus LR 1719 (HL)], it is not to be expected that
commercial men while entering transactions inter se would
knowingly create a system which would require that the court
should first decide whether the contract should be rectified or
avoided or rescinded, as the case may be, and then if the
contract is held to be valid, it would require the arbitrator to
resolve the issues that have arisen.”
(emphasis supplied)
7. A recent judgment, Pravin Electricals Pvt. Ltd. v. Galaxy Infra and
Engineering Pvt. Ltd., 2021 SCC OnLine SC 190, referred in detail to
Vidya Drolia (supra) in paragraphs 15 to 18 as follows:
“15. Dealing with “prima facie” examination under Section 8, as
amended, the Court then held [Vidya Drolia v. Durga Trading
Corporation, (2021) 2 SCC 1]:
28
“134. Prima facie examination is not full review but a
primary first review to weed out manifestly and ex facie
non-existent and invalid arbitration agreements and
non-arbitrable disputes. The prima facie review at the
reference stage is to cut the deadwood and trim off the
side branches in straightforward cases where dismissal
is barefaced and pellucid and when on the facts and
law the litigation must stop at the first stage. Only when
the court is certain that no valid arbitration agreement
exists or the disputes/subject-matter are not arbitrable,
the application under Section 8 would be rejected. At
this stage, the court should not get lost in thickets and
decide debatable questions of facts. Referral
proceedings are preliminary and summary and not a
mini trial. This necessarily reflects on the nature of the
jurisdiction exercised by the court and in this context,
the observations of B.N. Srikrishna, J. of “plainly
arguable” case in Shin-Etsu Chemical Co. Ltd. [ShinEtsu Chemical Co. Ltd. v. Aksh Optifibre Ltd., (2005) 7
SCC 234] are of importance and relevance. Similar
views are expressed by this Court in Vimal Kishor
Shah [Vimal Kishor Shah v. Jayesh Dinesh Shah,
(2016) 8 SCC 788 : (2016) 4 SCC (Civ) 303] wherein
the test applied at the pre-arbitration stage was
whether there is a “good arguable case” for the
existence of an arbitration agreement.
16. The parameters of review under Sections 8 and 11 were
then laid down thus:
“138. In the Indian context, we would respectfully
adopt the three categories in Boghara Polyfab (P) Ltd.
[National Insurance Co. Ltd. v. Boghara Polyfab (P)
Ltd., (2009) 1 SCC 267 : (2009) 1 SCC (Civ) 117] The
first category of issues, namely, whether the party has
approached the appropriate High Court, whether there
is an arbitration agreement and whether the party who
has applied for reference is party to such agreement
would be subject to more thorough examination in
comparison to the second and third categories/issues
29
which are presumptively, save in exceptional cases, for
the arbitrator to decide. In the first category, we would
add and include the question or issue relating to
whether the cause of action relates to action in
personam or rem; whether the subject-matter of the
dispute affects third-party rights, have erga omnes
effect, requires centralised adjudication; whether the
subject-matter relates to inalienable sovereign and
public interest functions of the State; and whether the
subject-matter of dispute is expressly or by necessary
implication non-arbitrable as per mandatory statute(s).
Such questions arise rarely and, when they arise, are
on most occasions questions of law. On the other hand,
issues relating to contract formation, existence, validity
and non-arbitrability would be connected and
intertwined with the issues underlying the merits of the
respective disputes/claims. They would be factual and
disputed and for the Arbitral Tribunal to decide.
139. We would not like to be too prescriptive, albeit
observe that the court may for legitimate reasons, to
prevent wastage of public and private resources, can
exercise judicial discretion to conduct an intense yet
summary prima facie review while remaining conscious
that it is to assist the arbitration procedure and not
usurp jurisdiction of the Arbitral Tribunal. Undertaking a
detailed full review or a long-drawn review at the
referral stage would obstruct and cause delay
undermining the integrity and efficacy of arbitration as a
dispute resolution mechanism. Conversely, if the court
becomes too reluctant to intervene, it may undermine
effectiveness of both the arbitration and the court.
There are certain cases where the prima facie
examination may require a deeper consideration. The
court's challenge is to find the right amount of and the
context when it would examine the prima facie case or
30
exercise restraint. The legal order needs a right
balance between avoiding arbitration obstructing tactics
at referral stage and protecting parties from being
forced to arbitrate when the matter is clearly nonarbitrable. [Ozlem Susler, “The English Approach to
Competence-Competence” Pepperdine Dispute
Resolution Law Journal, 2013, Vol. 13.]
140. Accordingly, when it appears that prima facie
review would be inconclusive, or on consideration
inadequate as it requires detailed examination, the
matter should be left for final determination by the
Arbitral Tribunal selected by the parties by consent.
The underlying rationale being not to delay or defer and
to discourage parties from using referral proceeding as
a ruse to delay and obstruct. In such cases a full review
by the courts at this stage would encroach on the
jurisdiction of the Arbitral Tribunal and violate the
legislative scheme allocating jurisdiction between the
courts and the Arbitral Tribunal. Centralisation of
litigation with the Arbitral Tribunal as the primary and
first adjudicator is beneficent as it helps in quicker and
efficient resolution of disputes.”
17. The Court then examined the meaning of the expression
“existence” which occurs in Section 11(6A) and summed up its
discussion as follows:
“146. We now proceed to examine the question,
whether the word “existence” in Section 11 merely
refers to contract formation (whether there is an
arbitration agreement) and excludes the question of
enforcement (validity) and therefore the latter falls
outside the jurisdiction of the court at the referral stage.
On jurisprudentially and textualism it is possible to
differentiate between existence of an arbitration
agreement and validity of an arbitration agreement.
31
Such interpretation can draw support from the plain
meaning of the word “existence”. However, it is equally
possible, jurisprudentially and on contextualism, to hold
that an agreement has no existence if it is not
enforceable and not binding. Existence of an arbitration
agreement presupposes a valid agreement which
would be enforced by the court by relegating the
parties to arbitration. Legalistic and plain meaning
interpretation would be contrary to the contextual
background including the definition clause and would
result in unpalatable consequences. A reasonable and
just interpretation of “existence” requires understanding
the context, the purpose and the relevant legal norms
applicable for a binding and enforceable arbitration
agreement. An agreement evidenced in writing has no
meaning unless the parties can be compelled to adhere
and abide by the terms. A party cannot sue and claim
rights based on an unenforceable document. Thus,
there are good reasons to hold that an arbitration
agreement exists only when it is valid and legal. A void
and unenforceable understanding is no agreement to
do anything. Existence of an arbitration agreement
means an arbitration agreement that meets and
satisfies the statutory requirements of both the
Arbitration Act and the Contract Act and when it is
enforceable in law.
147. We would proceed to elaborate and give further
reasons:
147.1. In Garware Wall Ropes Ltd. [Garware Wall
Ropes Ltd. v. Coastal Marine Constructions & Engg.
Ltd., (2019) 9 SCC 209 : (2019) 4 SCC (Civ) 324], this
Court had examined the question of stamp duty in an
underlying contract with an arbitration clause and in the
context had drawn a distinction between the first and
second part of Section 7(2) of the Arbitration Act, albeit
32
the observations made and quoted above with
reference to “existence” and “validity” of the arbitration
agreement being apposite and extremely important, we
would repeat the same by reproducing para 29 thereof:
(SCC p. 238)
“29. This judgment in Hyundai Engg. Case
[United India Insurance Co. Ltd. v. Hyundai
Engg. & Construction Co. Ltd., (2018) 17 SCC
607 : (2019) 2 SCC (Civ) 530] is important in
that what was specifically under consideration
was an arbitration clause which would get
activated only if an insurer admits or accepts
liability. Since on facts it was found that the
insurer repudiated the claim, though an
arbitration clause did “exist”, so to speak, in the
policy, it would not exist in law, as was held in
that judgment, when one important fact is
introduced, namely, that the insurer has not
admitted or accepted liability. Likewise, in the
facts of the present case, it is clear that the
arbitration clause that is contained in the subcontract would not “exist” as a matter of law
until the sub-contract is duly stamped, as has
been held by us above. The argument that
Section 11(6-A) deals with “existence”, as
opposed to Section 8, Section 16 and Section
45, which deal with “validity” of an arbitration
agreement is answered by this Court's
understanding of the expression “existence”
in Hyundai Engg. case [United India Insurance
Co. Ltd. v. Hyundai Engg. & Construction Co.
Ltd., (2018) 17 SCC 607 : (2019) 2 SCC (Civ)
530] , as followed by us.”
Existence and validity are intertwined, and
arbitration agreement does not exist if it is illegal or
33
does not satisfy mandatory legal requirements. Invalid
agreement is no agreement.
147.2. The court at the reference stage exercises
judicial powers. “Examination”, as an ordinary
expression in common parlance, refers to an act of
looking or considering something carefully in order to
discover something (as per Cambridge Dictionary). It
requires the person to inspect closely, to test the
condition of, or to inquire into carefully (as per MerriamWebster Dictionary). It would be rather odd for the
court to hold and say that the arbitration agreement
exists, though ex facie and manifestly the arbitration
agreement is invalid in law and the dispute in question
is non-arbitrable. The court is not powerless and would
not act beyond jurisdiction, if it rejects an application for
reference, when the arbitration clause is admittedly or
without doubt is with a minor, lunatic or the only claim
seeks a probate of a will.
147.3. Most scholars and jurists accept and agree
that the existence and validity of an arbitration
agreement are the same. Even Stavros Brekoulakis
accepts that validity, in terms of substantive and formal
validity, are questions of contract and hence for the
court to examine.
147.4. Most jurisdictions accept and require prima
facie review by the court on non-arbitrability aspects at
the referral stage.
147.5. Sections 8 and 11 of the Arbitration Act are
complementary provisions as was held in Patel Engg.
Ltd. [SBP & Co. v. Patel Engg. Ltd., (2005) 8 SCC 618].
The object and purpose behind the two provisions is
identical to compel and force parties to abide by their
contractual understanding. This being so, the two
provisions should be read as laying down similar
standard and not as laying down different and separate
34
parameters. Section 11 does not prescribe any
standard of judicial review by the court for determining
whether an arbitration agreement is in existence.
Section 8 states that the judicial review at the stage of
reference is prima facie and not final. Prima facie
standard equally applies when the power of judicial
review is exercised by the court under Section 11 of the
Arbitration Act. Therefore, we can read the mandate of
valid arbitration agreement in Section 8 into mandate of
Section 11, that is, “existence of an arbitration
agreement”.
147.6. Exercise of power of prima facie judicial
review of existence as including validity is justified as a
court is the first forum that examines and decides the
request for the referral. Absolute “hands off” approach
would be counterproductive and harm arbitration, as an
alternative dispute resolution mechanism. Limited, yet
effective intervention is acceptable as it does not
obstruct but effectuates arbitration.
147.7. Exercise of the limited prima facie review
does not in any way interfere with the principle of
competence-competence and separation as to obstruct
arbitration proceedings but ensures that vexatious and
frivolous matters get over at the initial stage.
147.8. Exercise of prima facie power of judicial
review as to the validity of the arbitration agreement
would save costs and check harassment of objecting
parties when there is clearly no justification and a good
reason not to accept plea of non-arbitrability. In
Subrata Roy Sahara v. Union of India [Subrata Roy
Sahara v. Union of India, (2014) 8 SCC 470 : (2014) 4
SCC (Civ) 424 : (2014) 3 SCC (Cri) 712] , this Court
has observed: (SCC p. 642, para 191)
“191. The Indian judicial system is grossly
afflicted with frivolous litigation. Ways and
35
means need to be evolved to deter litigants from
their compulsive obsession towards senseless
and ill-considered claims. One needs to keep in
mind that in the process of litigation, there is an
innocent sufferer on the other side of every
irresponsible and senseless claim. He suffers
long-drawn anxious periods of nervousness and
restlessness, whilst the litigation is pending
without any fault on his part. He pays for the
litigation from out of his savings (or out of his
borrowings) worrying that the other side may
trick him into defeat for no fault of his. He
spends invaluable time briefing counsel and
preparing them for his claim. Time which he
should have spent at work, or with his family, is
lost, for no fault of his. Should a litigant not be
compensated for what he has lost for no fault?
The suggestion to the legislature is that a
litigant who has succeeded must be
compensated by the one who has lost. The
suggestion to the legislature is to formulate a
mechanism that anyone who initiates and
continues a litigation senselessly pays for the
same. It is suggested that the legislature should
consider the introduction of a “Code of
Compulsory Costs”.”
147.9. Even in Duro Felguera [Duro Felguera, S.A.
v. Gangavaram Port Ltd., (2017) 9 SCC 729 : (2017) 4
SCC (Civ) 764], Kurian Joseph, J., in para 52, had
referred to Section 7(5) and thereafter in para 53
referred to a judgment of this Court in M.R. Engineers
& Contractors (P) Ltd. v. Som Datt Builders Ltd. [M.R.
Engineers & Contractors (P) Ltd. v. Som Datt Builders
Ltd., (2009) 7 SCC 696 : (2009) 3 SCC (Civ) 271] to
observe that the analysis in the said case supports the
36
final conclusion that the memorandum of
understanding in the said case did not incorporate an
arbitration clause. Thereafter, reference was
specifically made to Patel Engg. Ltd. [SBP & Co. v.
Patel Engg. Ltd., (2005) 8 SCC 618] and Boghara
Polyfab (P) Ltd. [National Insurance Co. Ltd. v.
Boghara Polyfab (P) Ltd., (2009) 1 SCC 267 : (2009) 1
SCC (Civ) 117] to observe that the legislative policy is
essential to minimise court’s interference at the prearbitral stage and this was the intention of sub-section
(6) to Section 11 of the Arbitration Act. Para 48 in Duro
Felguera [Duro Felguera, S.A. v. Gangavaram Port
Ltd., (2017) 9 SCC 729 : (2017) 4 SCC (Civ) 764]
specifically states that the resolution has to exist in the
arbitration agreement, and it is for the court to see if the
agreement contains a clause which provides for
arbitration of disputes which have arisen between the
parties. Para 59 is more restrictive and requires the
court to see whether an arbitration agreement exists —
nothing more, nothing less. Read with the other
findings, it would be appropriate to read the two
paragraphs as laying down the legal ratio that the court
is required to see if the underlying contract contains an
arbitration clause for arbitration of the disputes which
have arisen between the parties — nothing more,
nothing less. Reference to decisions in Patel Engg.
Ltd. [SBP & Co. v. Patel Engg. Ltd., (2005) 8 SCC 618]
and Boghara Polyfab (P) Ltd. [National Insurance Co.
Ltd. v. Boghara Polyfab (P) Ltd., (2009) 1 SCC 267 :
(2009) 1 SCC (Civ) 117] was to highlight that at the
reference stage, post the amendments vide Act 3 of
2016, the court would not go into and finally decide
different aspects that were highlighted in the two
decisions.
37
147.10. In addition to Garware Wall Ropes Ltd.
case [Garware Wall Ropes Ltd. v. Coastal Marine
Constructions & Engg. Ltd., (2019) 9 SCC 209 : (2019)
4 SCC (Civ) 324] , this Court in Narbheram Power &
Steel (P) Ltd. [Oriental Insurance Co.
Ltd. v. Narbheram Power & Steel (P) Ltd., (2018) 6
SCC 534 : (2018) 3 SCC (Civ) 484] and Hyundai Engg.
& Construction Co. Ltd. [United India Insurance Co.
Ltd. v. Hyundai Engg. & Construction Co. Ltd., (2018)
17 SCC 607 : (2019) 2 SCC (Civ) 530] , both decisions
of three Judges, has rejected the application for
reference in the insurance contracts holding that the
claim was beyond and not covered by the arbitration
agreement. The Court felt that the legal position was
beyond doubt as the scope of the arbitration clause
was fully covered by the dictum in Vulcan Insurance
Co. Ltd. [Vulcan Insurance Co. Ltd. v. Maharaj Singh,
(1976) 1 SCC 943] Similarly, in PSA Mumbai
Investments Pte. Ltd. [PSA Mumbai Investments Pte.
Ltd. v. Jawaharlal Nehru Port Trust, (2018) 10 SCC 525
: (2019) 1 SCC (Civ) 1] , this Court at the referral stage
came to the conclusion that the arbitration clause
would not be applicable and govern the disputes.
Accordingly, the reference to the Arbitral Tribunal was
set aside leaving the respondent to pursue its claim
before an appropriate forum.
147.11. The interpretation appropriately balances
the allocation of the decision-making authority between
the court at the referral stage and the arbitrators'
primary jurisdiction to decide disputes on merits. The
court as the judicial forum of the first instance can
exercise prima facie test jurisdiction to screen and
knock down ex facie meritless, frivolous and dishonest
litigation. Limited jurisdiction of the courts ensures
38
expeditious, alacritous and efficient disposal when
required at the referral stage.”
18. The Bench finally concluded:
“153. Accordingly, we hold that the expression
“existence of an arbitration agreement” in Section 11 of
the Arbitration Act, would include aspect of validity of
an arbitration agreement, albeit the court at the referral
stage would apply the prima facie test on the basis of
principles set out in this judgment. In cases of
debatable and disputable facts, and good reasonable
arguable case, etc., the court would force the parties to
abide by the arbitration agreement as the Arbitral
Tribunal has primary jurisdiction and authority to decide
the disputes including the question of jurisdiction and
non-arbitrability.
154. Discussion under the heading “Who Decides
Arbitrability?” can be crystallised as under:
154.1. Ratio of the decision in Patel Engg. Ltd. [SBP
& Co. v. Patel Engg. Ltd., (2005) 8 SCC 618] on the
scope of judicial review by the court while deciding an
application under Sections 8 or 11 of the Arbitration
Act, post the amendments by Act 3 of 2016 (with
retrospective effect from 23-10-2015) and even post
the amendments vide Act 33 of 2019 (with effect from
9-8-2019), is no longer applicable.
154.2. Scope of judicial review and jurisdiction of the
court under Sections 8 and 11 of the Arbitration Act is
identical but extremely limited and restricted.
154.3. The general rule and principle, in view of the
legislative mandate clear from Act 3 of 2016 and Act 33
of 2019, and the principle of severability and
competence-competence, is that the Arbitral Tribunal is
the preferred first authority to determine and decide all
questions of non-arbitrability. The court has been
39
conferred power of “second look” on aspects of nonarbitrability post the award in terms of sub-clauses (i),
(ii) or (iv) of Section 34(2)(a) or sub-clause (i) of
Section 34(2)(b) of the Arbitration Act.
154.4. Rarely as a demurrer the court may interfere
at Section 8 or 11 stage when it is manifestly and ex
facie certain that the arbitration agreement is nonexistent, invalid or the disputes are non-arbitrable,
though the nature and facet of non-arbitrability would,
to some extent, determine the level and nature of
judicial scrutiny. The restricted and limited review is to
check and protect parties from being forced to arbitrate
when the matter is demonstrably “non-arbitrable” and
to cut off the deadwood. The court by default would
refer the matter when contentions relating to nonarbitrability are plainly arguable; when consideration in
summary proceedings would be insufficient and
inconclusive; when facts are contested; when the party
opposing arbitration adopts delaying tactics or impairs
conduct of arbitration proceedings. This is not the stage
for the court to enter into a mini trial or elaborate review
so as to usurp the jurisdiction of the Arbitral Tribunal
but to affirm and uphold integrity and efficacy of
arbitration as an alternative dispute resolution
mechanism.
155. Reference is, accordingly, answered.”
The Court then concluded, on the facts of that case, that it would be unsafe
to conclude one way or the other that an arbitration agreement exists
between the parties on a prima facie review of facts of that case, and that a
deeper consideration must be left to an arbitrator, who is to examine the
documentary and oral evidence and then arrive at a conclusion.
40
8. Likewise, in Bharat Sanchar Nigam Ltd. v. Nortel Networks India
Pvt. Ltd., 2021 SCC OnLine SC 207, another Division Bench of this Court
referred to Vidya Drolia (supra) and concluded:
“39. The upshot of the judgment in Vidya Drolia [Vidya Drolia v.
Durga Trading Corporation, (2021) 2 SCC 1] is affirmation of the
position of law expounded in Duro Felguera [Duro Felguera,
S.A. v. Gangavaram Port Ltd., (2017) 9 SCC 729] and Mayavati
Trading [Mayavati Trading (P) Ltd. v. Pradyuat Deb Burman,
(2019) 8 SCC 714], which continue to hold the field. It must be
understood clearly that Vidya Drolia [Vidya Drolia v. Durga
Trading Corporation, (2021) 2 SCC 1] has not resurrected the
pre-amendment position on the scope of power as held in SBP
& Co. v. Patel Engineering [SBP & Co. v. Patel Engg. Ltd.,
(2005) 8 SCC 618].
It is only in the very limited category of cases, where there
is not even a vestige of doubt that the claim is ex facie timebarred, or that the dispute is non-arbitrable, that the court may
decline to make the reference. However, if there is even the
slightest doubt, the rule is to refer the disputes to arbitration,
otherwise it would encroach upon what is essentially a matter to
be determined by the tribunal.”
9. Judged by the aforesaid tests, it is obvious that whether the MoU has
been novated by the SHA dated 12.04.1996 requires a detailed
consideration of the clauses of the two Agreements, together with the
surrounding circumstances in which these Agreements were entered into,
and a full consideration of the law on the subject. None of this can be done
given the limited jurisdiction of a court under Section 11 of the 1996 Act. As
has been held in paragraph 148 of Vidya Drolia (supra), detailed
41
arguments on whether an agreement which contains an arbitration clause
has or has not been novated cannot possibly be decided in exercise of a
limited prima facie review as to whether an arbitration agreement exists
between the parties. Also, this case does not fall within the category of
cases which ousts arbitration altogether, such as matters which are in rem
proceedings or cases which, without doubt, concern minors, lunatics or
other persons incompetent to contract. There is nothing vexatious or
frivolous in the plea taken by the Appellant. On the contrary, a Section 11
court would refer the matter when contentions relating to non-arbitrability
are plainly arguable, or when facts are contested. The court cannot, at this
stage, enter into a mini trial or elaborate review of the facts and law which
would usurp the jurisdiction of the arbitral tribunal.
10. The impugned judgment was wholly incorrect in deciding that the plea
of doctrine of kompetenz-kompetenz and reliance on Section 11(6A) of the
1996 Act, as expounded in Duro Felguera (supra) and Mayavati Trading
(supra) were not applicable to the case in hand. Apart from going into a
detailed consideration of the MoU and the SHA, which is exclusively within
the jurisdiction of the arbitral tribunal, the learned Single Judge, while
considering clause 28 of the SHA to arrive at the finding that any kind of
agreement as detailed in clause 28.2 between the parties shall stand
42
superseded, does not even refer to clause 28.1. No consideration has been
given to the separate and distinct subject matter of the MoU and the SHA.
Also, Kishorilal Gupta (supra) and Damodar Valley Corporation (supra)
are judgments which deal with novation in the context of the Arbitration Act,
1940, which had a scheme completely different from the scheme contained
in Section 16 read with Section 11(6A) of the 1996 Act.
11. For all these reasons, we set aside the judgment of the High Court
and refer the parties to the arbitration of a sole arbitrator, being Justice
Aftab Alam (retired Judge of this Court), who will decide the dispute
between the parties without reference to any observations made by this
Court, which are only prima facie in nature.
12. It is made clear that Agenda Nos. 4 and 8, circulated in the notice
dated 31.12.2019, for the Board Meeting scheduled to be held on
15.01.2020, will continue to remain deferred until the learned sole arbitrator
passes interim orders varying or setting aside this order, or until a final
Award is delivered, depending upon whether a party applies under Section
17 of 1996 Act. Civil Appeal No. 975 of 2021 is allowed in the aforesaid
terms.
43
Civil Appeal No. 976 of 2021
13. Consequently, in light of the directions in paragraphs 11 and 12
hereinabove, Civil Appeal No. 976 of 2021 is accordingly disposed of.
………………….......................J.
[ ROHINTON FALI NARIMAN ]
………………….......................J.
[ B.R. GAVAI ]
………………….......................J.
[ HRISHIKESH ROY ]
New Delhi;
April 06, 2021.
44
