Thursday, August 29, 2013

Supreme Court on Novation and Arbitration clauses

A couple of days ago, we had pointed out a judgment of the Bombay High Court on separability. In that case, a MoU between the parties treated an earlier SPA as “null and void”. The SPA contained an arbitration clause, while the MoU did not. The Division Bench held, however, that the dispute between the parties (inter alia pertaining to validity of the MoU) was governed by the arbitration clause in the SPA, which was separable and was not washed away with the ‘cancellation’ of the SPA. The Supreme Court has considered the issue recently in separate proceedings: the judgment of the Supreme Court has been handed down a week after the High Court judgment. The Supreme Court has stated the law in the following terms:

"Learned counsel also submitted that arbitration clause is a collateral term in the contract, which relates to resolution of disputes and not performance and even if the performance of the contract comes to an end on account of repudiation, frustration of breach of contract, the arbitration agreement would survive for the purpose of resolution of disputes arising under or in connection with the contract… We are of the view that survival of the arbitration clause, as sought by the appellant in the agreements dated 01.04.2007 and 01.04.2010 has to be seen in the light of the terms and conditions of the new agreement dated 01.02.2011. An arbitration clause in an agreement cannot survive if the agreement containing arbitration clause has been superseded/novated by a later agreement… if the contract is superseded by another, the arbitration clause, being a component part of the earlier contract, falls with it. But where the dispute is whether such contract is void ab intio, the arbitration clause cannot operate on those disputes, for its operative force depends upon the existence of the contract and its validity…"

Perhaps, we have not yet seen the end of this issue. The decision of the Supreme Court in Young Achievers v. IMG is available on judis, and also here.


Badrinath Srinivasan said...

Essentially the Bombay High Court has held that the question as to whether the MoU superseded the SPA came under the second category as provided in Boghara Polyfab (keeping in mind Chloro Controls) and considering the issues involved, it would be appropriate if the tribunal decides it.

Renu Gupta said...

I think in the SC decision, the pertinent question is whether severable arbitration clause, survives (i) despite novation of the contract in which it is contained and (ii) despite not being expressly included in the novated contract.

Badrinath Srinivasan said...

There might not be a conflict between the two judgements. The question as to whether there was a novation which extinguished the previous arbitration agreement came within Category 2 as held in Boghara Polyfab (keeping in mind Chloro Controls)-discretion to the Designate decide the isssue. The Supreme Court found the issue to be straightforward while the Bombay High Court stated that it was appropriate for the tribunal to decide it. This it is not only a question of separability but also a question of competenz-competenz- The types of novation questions that can be allocated to the Designate and those which can be allocated to the arbitrator.