2022 (11) TMI 1086 - SC - Indian Laws

Supreme Court corrects error in arbitration dismissal, emphasizes tribunal's role in Share Purchase Agreement novation

The Supreme Court found that the High Court erred in dismissing the application under Section 11(6) of the Arbitration and Conciliation Act, 1996, by ... Appointment of arbitrator - Novation of share purchase agreement - Non-existence of arbitration clause no longer existed so as to resolve the dispute between the parties through arbitration - Tripartite Agreement - HELD THAT:- The High Court was not right in dismissing the petition under Section 11(6) of the Act of 1996 filed by the appellant herein by giving a finding on novation of the Share Purchase Agreement between the parties as the said aspect would have a bearing on the merits of the controversy between the parties. Therefore, it must be left to the Arbitrator to decide on the said issue also. Hence, the impugned judgment and order passed by the High Court has to be set aside. Application allowed. Issues Involved:1. Whether the High Court erred in dismissing the application under Section 11(6) of the Arbitration and Conciliation Act, 1996.2. Whether the Share Purchase Agreement was novated by the Tripartite Agreement.3. Whether the arbitration clause in the Share Purchase Agreement remained valid.Detailed Analysis:Issue 1: High Court's Dismissal of the Application under Section 11(6) of the Act of 1996The appellant argued that the High Court erred in dismissing the application under Section 11(6) of the Act of 1996, failing to comprehend the limited judicial intervention required under this provision. The High Court ventured into examining complicated questions of facts and documents, which should have been left to the Arbitral Tribunal. The Supreme Court referenced the decision in National Insurance Co. Ltd. vs. Boghara Polyfab Pvt. Ltd. (2009) 1 SCC 267, which categorizes issues into three types for consideration under Section 11(6). The Court emphasized that the High Court should have limited its inquiry to whether there was an arbitration agreement and whether the parties were bound by it, leaving other issues to the Arbitral Tribunal.Issue 2: Novation of the Share Purchase Agreement by the Tripartite AgreementThe appellant contended that the High Court erred in finding implied or deemed novation of the Share Purchase Agreement by the Tripartite Agreement. They argued that the Tripartite Agreement was intended solely as a recovery mechanism for IFCI Venture Capital and did not substitute the Share Purchase Agreement. The respondents, however, claimed that the Share Purchase Agreement lapsed and was replaced by the Tripartite Agreement, which had different terms and conditions and did not include an arbitration clause. The Supreme Court noted that novation and the existence of the arbitration clause are intertwined issues that should be decided by the Arbitral Tribunal, not the High Court.Issue 3: Validity of the Arbitration Clause in the Share Purchase AgreementThe appellant maintained that the arbitration clause in the Share Purchase Agreement remained valid and enforceable. The respondents argued that the arbitration clause perished with the novation of the Share Purchase Agreement by the Tripartite Agreement. The Supreme Court referred to the principles in Damodar Valley Corporation vs. K.K. Kar (1974) 1 SCC 141, emphasizing that an arbitration clause is a collateral term of a contract and perishes with the contract unless the contract is still in existence for certain purposes. The Court concluded that the issue of whether the arbitration clause survived the alleged novation should be decided by the Arbitral Tribunal.Conclusion:The Supreme Court found that the High Court erred in dismissing the application under Section 11(6) of the Act of 1996 by making a finding on the novation of the Share Purchase Agreement. This issue should be left to the Arbitral Tribunal. Consequently, the Supreme Court set aside the High Court's judgment and appointed Hon. Sri Justice R. Subhash Reddy, Former Judge, Supreme Court of India, as the sole Arbitrator to resolve the dispute. All contentions of both sides are left open to be raised before the Arbitral Tribunal.