Recently, the Delhi High Court held that the Arbitration Clause in a contract also perishes with its novation. The Court declined to interfere with the award passed by the arbitrator, which held that the parties cannot rely on the arbitration clause from the original contract if they had put an end to it as if it never existed and substituted a new contract to it.
What was the Factual Matrix of the Case?
The parties entered into a contract for civil and structural works for a project. The said contract contained an arbitration clause. Subsequently, disputes arose between parties which were resolved through a Memorandum of Understanding (‘MOU’), and eventually, certain disputes arose from the MOU, leading to the disputes being referred to arbitration. The MOU did not contain an arbitration clause; thus, the Arbitral Tribunal concluded that with the execution of the MoU, the erstwhile contract containing the arbitration clause stood novated, and thus, the Tribunal did not have the jurisdiction to entertain disputes under the arbitration clause contained in the erstwhile contract. Thereafter, the Petitioner approached the Court to set aside the award under Section 34 of the Arbitration and Conciliation Act, 1996 (“A&C Act”). The petitioner contended that since the respondent did not pay the sums payable under the MoU, it was entitled to claim its dues under the erstwhile Contract, which contained an arbitration clause.
Why did the Tribunal come to the conclusion that the MOU constituted novation of the erstwhile contract, which contained the Arbitration clause?
The Tribunal came to this conclusion based on the contents of the MOU. As per the Tribunal, the MOU contained sentences that expressed the intention of the parties to supersede the erstwhile contract—” and to cancel the above said “construction agreement” executed between them.”, “The parties herein agreed to cancel the “Construction agreement executed in November 2014 at Noida as aforementioned and new contract/agreement to be entered for cost plus basis.”
Additionally, the fact that the MOU moved the parties from an item-rate basis to a cost-plus basis was held by the Tribunal to imply their intention not to revive the erstwhile contract and to enter into a new agreement with different terms.
The Tribunal concluded that, even as per the claimant’s case that the MoU was not fully complied with due to pending payment from the respondent, it would not lead to a revival of the arbitration clause contained in the erstwhile contract. The Tribunal thus held that the fact that the MOU did not provide for the survival of the arbitration clause “unequivocally indicated that the parties had given up the terms of the old contract, including the arbitration clause.”
What were the contentions of the parties before the High Court?
- Petitioner –
The petitioner contended that the arbitrator’s interpretation of the contract was arbitrary and perverse, rendering the award manifestly illegal. The award, according to the petitioner, deprived it of its legal rights to approach arbitration for resolving the dispute under the erstwhile contract. - Respondent –
The respondent, on the other hand, submitted that the learned arbitrator’s interpretation of the erstwhile Contract and the MoU is correct and does not fall under the limited situations wherein the Court can interfere with an arbitral award under Section 34 of the A&CAct.
The Court’s Decision
The task placed before the Court was to determine if the arbitration clause survives a supervening agreement between the parties. The Court primarily refused to interfere because matters of contractual interpretation squarely fall within the jurisdiction of the arbitral tribunal; it did so, citing the judgement of the Supreme Court in Ssangyong Engg. & Construction Co. Ltd. v. NHAI. Additionally, Section 34 of the A&C Act allows Courts to interfere only if there is the presence of patent illegality in the award where the decision taken by the Tribunal is one that no reasonable person would take. It went on to lament the “disturbing trend” where courts set aside arbitral awards citing the need for intervention and thereafter dubbing the award to be vitiated due to either perversity or patent illegality.
The Court then expressed its agreement with the view taken by the Tribunal. It did so, repeating the rationale of the Tribunal, citing the use of words like “cancel” in reference to the erstwhile contract in the MOU and the lack of an express or implicit provision stating that the erstwhile contract would stand revived. Thus, the Court held that the Arbitration Clause in a contract stands perished with its novation and dismissed the appeal for interference filed by the Petitioner.
