Arbitration In IndiaArbitration Clause expires with the Novation of the Contract

The Delhi High Court in, the case B.L. Kashyap and Sons Ltd. V Mist Avenue Private Ltd. [O.M.P.(COMM) 190/2019] held that the scope of judicial interference in the Arbitral Award is very limited under Section 34 of the A&C Act and hence, if the Arbitral Award passes the test of plausibility, the interference is not required. It was also held that the Arbitration clause expires with the novation of the Contract.

FACTS

In 2014, B.L. Kashyap and Sons Ltd (hereinafter to as “the Petitioner”) entered into a contract for construction and civil work on the MIST project (hereinafter referred to as the “Contract”) with Mist Avenue Private Ltd (hereinafter the “the Respondent”).

On arising ofdisputes between the parties, it was settled mutually and recorded in a Memorandum of Understanding (hereinafter referred to as “MOU”) dated 08.10.2015. However, the MOU did not contain an arbitration clause. Hence, the dispute arose between the parties whether the arbitration agreement contained in the Contract would survive the MOU.

The dispute was referred to Arbitration, wherein Ld. Arbitrator had passed an award dated 07.01.2019 stating that the MOU constitutes the novation of the Contract and hence, the Arbitral Tribunal did not have the jurisdiction to entertain disputes under the arbitration clause contained in the Contract (hereinafter referred to as the “Impugned Award”). The Petitioner being aggrieved by the Impugned Award has filed the present Petition under Section 34 of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as the “A&C Act”).

ISSUES BEFORE THE DELHI HIGH COURT

1. Whether Memorandum of Understanding between the Appellant and the Respondent dated October 8, 2015 constitutes novation of the contract dated November 14, 2014?

CONTENTION OF THE PARTIES

The Petitioner contended that the interpretation of the Contracts in the Impugned Award is arbitrary and perverse. Furthermore, the claims were submitted under the Contract and not the MOU and hence, were correctly agitated by the way of arbitral proceedings.

It was also argued that even after the execution of the MOU, the Respondent continued issuing account bills under the Contract. Moreover, the Ld. The arbitrator had missed the conditional nature of the cancellation of the Contract.

It was further claimed that the Contract was not novated by MOU and hence, the arbitration clause survived even after the execution of MOU.

The Respondent contended that the Impugned Award has properly interpreted MOU and Contract and hence, does not require any judicial interference.

The Respondent relied on Nathani Steels Ltd. vs. Associated Constructions [1995 (Suppl) 3 SCC 324] and submitted that once a settlement is arrived in the MOU, the Petitioner cannot invoke the arbitration clause envisaged under the Contract.

DECISION AND FINDINGS

The Delhi High Court laid down certain principles and relied on Young Achievers v. IMS Learning Resources Pvt. Ltd. [(2013) 10 SCC 533] and held the judicial interference has a limited scope in the awards passed by Arbitral Tribunal. Moreover, the award passed by the Arbitral Tribunal has to be upheld the award which passes the plausibility test.

The Delhi High Court further dismissed the petition on the ground that the Impugned Award does not suffer any patent illegality  and further the court did not have the jurisdiction to entertain the present petition as the Impugned Award passes the test of plausibility.  It was also held that the observation of the Ld. Arbitrator that the MOU constituted a novation of Contract did not require any interference.

AMLEGALS REMARKS

The Delhi High Court has rightly observed that the arbitration clause expires from the novation of contract and hence, it cannot be presumed to be included unless expressly stated in the next agreement. It was also held that the scope of judicial intervention under Section 34 of the A&C Act has a limited scope and the courts cannot interfere if the Arbitral Award passes the plausibility test. Hence, the Court has upheld the concept of party autonomy and the minimal intervention of the judiciary, which lies at the heart of the legislation.

– Team AMLEGALS assisted by Mr. Pranshu Shandilya (Intern)