Can the court refer the dispute to arbitration even after the novation of the contract, which contained an arbitration clause?

The allegation of forgery is something that would be gone into at the stage of trial before the Sole Arbitrator. I am not persuaded by the contention of respondent no. 1 that there has been a novation which has rendered the above Arbitration Application incompetent. The contention that the arbitration clause being a component of the contract, superseded by another by a novation as contemplated in Young Achievers (supra) would not apply to

the present case since the signature of respondent no. 1 appears on the Retirement Deed of 4th September, 2006 which signature has not been denied. Therefore I am of the view that the decision of Young Achievers (supra) is of no assistance to respondent no.1. {Para 21}

22. It is also pertinent that I make reference to the admissions in the affidavit in reply of respondent no. 1 which in paragraph 25 admits that he has “left the firm” long back and that he was not aware of the working of the firm and hence could not comment on the same. This was obviously an incorrect statement since it is respondent no. 1 who was handling bank account at the material time. He also goes on to incorrectly deny that he has been paid any amount more than his dues since it is his own case that Summary Suit has been filed against Mahaveer Corporation in which the applicant is also a partner. The respondent no. 1 reiterates in paragraph 25 of his affidavit that his account in respect of profit and loss of the firm after taking into consideration all current and future benefits were made up and

settled in 2007 and then “ I retired me from J. P. Enterprises” * Although there is a denial of having overdrawn a sum of Rs.5.53 crores, the fact remains that this is an aspect that needs to be gone into in the arbitration. All other aspects in the affidavit in reply pertain to the merits of the case and which are not relevant at this stage of appointment of an Arbitrator. *(sic)

23. Prima facie I am satisfied that there is an Arbitration Agreement and the dispute will have to be referred to arbitration.

 IN THE HIGH COURT OF JUDICATURE AT BOMBAY

ORDINARY ORIGINAL CIVIL JURISDICTION

COMMERCIAL ARBITRATION APPLICATION NO.483 OF 2019

Praful A. Mehta Vs Nainesh M. Gandhi and 3 Ors.

CORAM : A. K. MENON, J.

DATED : 21st FEBRUARY, 2022

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When should arbitrator decide the issue of novation of contract?

Learned counsel for the plaintiff has pointed out that the plaintiff and the defendant at the time of execution of the Lease Deed and the Maintenance Agreement were family held companies. The family has exited from the plaintiff company sometimes in September 2018 and a new management has taken over charge of the plaintiff company. It is strongly urged that there is a novation of Agreement and the original Lease Deed and the Maintenance Agreement dated 21.02.2017 stand superseded and novated in view of the terms and conditions settled upon in the emails dated 26.09.2018 and 15.10.2018. In the novated contract, there is no arbitration agreement and hence, the present application is misplaced.

16. It undoubtedly follows that in the original lease deed and the maintenance agreement, the parties have agreed to settle their disputes through arbitration.

17. I may now look at the defence of the plaintiff to the present application. It has strongly been urged that on account of the subsequent novation of the contract through exchange of the emails dated 26.09.2018 and 15.10.2018, a new contract has come into being superseding the Lease Deed dated 21.02.2017 and the Maintenance Agreement of the same date.

21. As noted above, the submission of the plaintiff is that on account of these two communications exchanged between the parties, the old contract got novated and was substituted by a new contract which does not have an arbitration agreement.

22. In this context, reference may be had to Section 62 of the Contract Act which defines novation as follows:-

“62. Effect of novation, rescission, and alteration of contract.—If the parties to a contract agree to substitute a new contract for it, or to rescind or alter it, the original contract need not be performed.

23. In this context, reference may be had to the judgment of the Supreme Court in Lata Construction and Ors. vs. Dr.Rameshchandra Ramnikalal Shah and Anr., (2000) 1 SCC 586 where the Supreme Court held as follows:-

“9. We may, at this stage, refer to the provisions of Section 62 of the Indian Contract Act which provides as under: “62. If the parties to a contract agree to substitute a new contract for it, or to rescind or alter it, the original contract need not be performed.” This provision contains the principle of “novation” of contract. 10. One of the essential requirements of “novation”, as contemplated by Section 62, is that there should be complete substitution of a new contract in place of the old. It is in that situation that the original contract need not be performed. Substitution of a new contract in place of the old contract which would have the effect of rescinding or completely altering the terms of the original contract, has to be by agreement between the parties. A substituted contract should rescind or alter or extinguish the previous contract. But if the terms of the two contracts are inconsistent and they cannot stand together, the subsequent contract cannot be said to be in substitution of the earlier contract.”

24. Hence, a novation takes place only when there is a complete substitution of a new contract in place of the old. 

In the present case, in my opinion, as the facts noted above show, it cannot be prima facie said that there is a completely new contract and that the old registered Lease Deed dated 21.02.2017 read with the Maintenance Agreement of the same date have been novated and substituted by a completely new contract. The e-mail dated 15.10.2018 sent by the defendant merely agrees to reduction of rent. It does not specifically state that all the terms and conditions of the Lease Deed and the Maintenance Agreement stand superseded or novated. The issue would require deeper consideration and is best left to the arbitral tribunal to adjudicate upon.

IN THE HIGH COURT OF DELHI AT NEW DELHI 

 Pronounced on: 25.01.2021 

 CS(COMM) 377/2020 

KNOWLEDGE PODIUM SYSTEMS PVT. LTD. Vs S M PROFESSIONAL SERVICES PVT. LTD.

CORAM: HON'BLE MR. JUSTICE JAYANT NATH 

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