Disputed novation should usually be decided by the arbitral tribunal, not used to deny arbitration at referral stage.

At the Section 11 stage, the Court should focus on the existence of an arbitration agreement and the parties' connection with it, rather than finally deciding disputed issues such as novation, accord and satisfaction, or extinction of contractual rights. Where a plea that a later arrangement substituted the earlier contract is interwoven with contested facts and the merits of the commercial arrangement, it should ordinarily be left to the arbitral tribunal. On that reasoning, the refusal to appoint an arbitrator on the ground of novation was held unjustified, and the dispute was directed to proceed to arbitration, with all contentions kept open.

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Issues: Whether the High Court was justified in dismissing the application under Section 11(6) of the Arbitration and Conciliation Act, 1996 by recording a finding of novation of the share purchase agreement and thereby refusing reference to arbitration.

Analysis: At the stage of appointment of an arbitrator, the Court is concerned primarily with the existence of an arbitration agreement and the parties' connection with it, while disputed questions such as novation, accord and satisfaction, or extinction of contractual rights generally go to the merits and are ordinarily for the arbitral tribunal to decide. A plea that a later arrangement has substituted the earlier contract cannot be conclusively determined at the referral stage when it is interwoven with disputed facts and the substance of the parties' commercial arrangement. An arbitration clause is a collateral term of the contract, but it survives only so long as the underlying contract subsists; whether it has perished by a true novation is itself a matter requiring adjudication on the merits unless the case is clear on the face of the record.

Conclusion: The High Court was not justified in rejecting the application on the ground of novation. The issue had to be left to the arbitrator, and reference to arbitration ought to have been made.

Final Conclusion: The refusal to appoint an arbitrator was set aside and the dispute was directed to proceed before a sole arbitrator, with all contentions left open.

Ratio Decidendi: At the Section 11 stage, a disputed plea of novation or substitution of contract, when intertwined with the merits of the dispute, should ordinarily be left to the arbitral tribunal and cannot be finally decided by the Court to deny arbitration.

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