Author: Mahima, 5th Year student at School of Law, UPES, Dehradun.
Citation: 2021 SCC OnLine SC 282
Date of Judgment: April 6, 2021
Bench: R.F. Nariman, B.R. Gavai, Hrishikesh Roy
Original Copy: View
Issues in Question:
- Whether an arbitration agreement exists or not?
- Whether the jurisdiction of Courts under Section 11 of the Arbitration and Conciliation Act permits them to decide upon complex questions such as novation of contracts?
Background of the Case:
- A private company, Asian Films Laboratories Private Limited (presently known as ANI Media as altered on 6th March, 1997), was incorporated on 9th December, 1971 by Prem Prakash where he used his personal funds for paying the entire paid-up capital. He distributed the shares among his family members, although he didn’t receive any consideration for the same.
- Reuters Television Mauritius Limited (herein Reuters) approached Sanjiv Prakash (son of Prem Prakash) for long-term equity investment and partnership with the company, conditional to his active role in the management. Thereby, a Memorandum of Understanding was entered between the members of the Prakash Family, namely, Prem Prakash, Daya Prakash, Sanjiv Prakash and Seema Kukreja sometime in 1996 followed by a Shareholder’s Agreement executed between the Prakash family and the Reuters on 12th April, 1996.
- The MoU went on to record that the Prakash family would continue to own 51% shareholding in the company after Reuters became a 49% shareholder. The rationale behind executing the SHA was reckoned as pursuant to the share purchase agreement dated 12th April, 1996, between the Prakash Family Shareholders and Reuters.
- Disputes arose when Prem Prakash expressed his intentions of transferring his shareholding to be owned together by Sanjiv and himself and Daya likewise announced her decision to transfer her shareholding to be owned together by Seema Kukreja and herself. Sanjiv Prakash served a notice dated 23rd November, 2019, imploring the arbitration clause contained in the MoU contending that his pre-emptive right to purchase Daya Prakash’s shares as pledged under Clause 8 of the MoU was breached and Justice Deepak Verma (retired Judge) was appointed as the sole arbitrator.
- Seema Kukreja and Daya Prakash in their reply dated 20th December 2019 highlighted that the MoU ceased to exist from the date of execution of SHA i.e., 12th April, 1996, as the SHA supplanted the aforesaid MoU and novated the same under Clause 28.2. They denied the existence of any arbitration clause between the parties. In view of this reply, Sanjiv Prakash moved the Delhi High Court under Section 11 of the Arbitration and Conciliation Act, 1996.
- After the perusal of the SHA and the MoU, the Delhi High Court held that a conjoint reading of Clause 28.2 with the opening paragraph of SHA explains that any kind of agreement between the parties shall stand superseded and therefore, the MoU which governed the inter-se rights and obligations of the Prakash family stands superseded. The Court rejected the contention that the MoU defined the family arrangement and cannot be overridden as it opined that nothing precluded the Prakash family to include a stipulation in the SHA establishing the contrary. It also rejected the contention that resolution of the dispute contracting out of Indian Law, by London Court of International Arbitration as per English Law is contrary to public policy.
- After studying Section 62 of the Indian Contract Act, the High Court explained that an arbitration clause can exist and as well be destroyed by an agreement. It concluded that the invocation of arbitration under the MoU is untenable as the arbitration clause perished with the novation of the MoU.
- The Supreme Court observed that the Courts lack competency to affirm whether the MoU has been novated by the SHA or not owing to the limited jurisdiction granted to Courts under Section 11 of the 1996 Act, merely on prima facie review until the clauses of both the agreements undergo strict deliberation together with the circumjacent circumstances under which these agreements were entered into as per the law exclusively dedicated to this subject.
- It further observed that this case does not belong to the category which ousts arbitration entirely such as those cases which are in rem proceedings or those which concern minors, lunatics or people incompetent to contract in any other way and, therefore, the plea by appellant is not frivolous. A Section 11 Court is entitled to refer the matter when facts or non-arbitrability is contested as its involvement in a mini trial or elaborate review of the facts would usurp the jurisdiction of the arbitral tribunal.
- The Supreme Court, therefore, overruled the judgment of the Delhi High Court and referred the parties for arbitration under the sole arbitrator, Justice Aftab Alam for resolving the dispute between the parties undeterred by any observations made by the Court as they are merely prima facie in nature.
- This case is considered as a landmark case as it defines the extent of narrow scope of judicial intervention in an arbitration as it lays down that the Courts do not have appropriate jurisdiction to conclude or discuss inherently complex and important questions which will help in concluding the arbitration procedure and therefore, fall within the jurisdiction of the arbitral tribunals.
- This case reinstated the findings of Vidya Drolia v Durga Trading Corporation which explained that Section 11 does not stipulate any touchstone for judicial review by the court to determine the existence of an arbitration agreement. Correspondingly, Section 8 provides that judicial review at the stage of reference is prima facie and not final. This indicates that prima facie standard fairly applies when the power of judicial review is exercised by the Court under Section 11 of the 1996 Act.