Section 62 Contract Act| Novation Occurs When All Parties Agree To Replace Previous Contract And Not Just By Mere Revision In Offer: Calcutta HC

The Calcutta High Court has held that per Section 62 of the Indian Contract Act (Contract Act), a mere revision in the offer does not constitute a novation of contract as such novation only occurs when all parties agree to replace the previous contract with a new one.

The Court allowed the Application seeking appointment of Arbitration under Section 11 of the Arbitration and Conciliation Act, 1996 (Act).

Justice Moushumi Bhattacharya noted, “The argument is fallacious since novation or substitution under section 62 of the Contract Act, 1872 requires both or all of the parties to a contract to agree on substituting or novating the earlier contract with a fresh contract. In the present case, the respondent„s admitted case is that the earlier contract was allegedly novated / substituted by the petitioner by a second contract with a third party / Ramesh Agarwal. Therefore, the case sought to be made out of novation / substitution is contrary to the Act and accordingly rejected”.

Advocate Abhidipto Tarafdar appeared for the Petitioner, and Advocate Shailendra Jain appeared for the Respondent.

A disagreement arose between Mr. Rishabh Agarwal and the Respondent over a Techno-Commercial Offer (TCO) for a Pre-Engineered Building. The TCO contained an arbitration clause that specified the process for resolving disputes. According to the clause, disputes and differences would be resolved through arbitration with three arbitrators, two of whom would be selected by the parties involved in the contract. The Respondent provided the TCO to the Petitioner, and the parties subsequently entered into an Erection and Supply Contract, which incorporated the TCO. This was evidenced by the "Contract Documents" clause in the Supply Contract.

The Respondent promised to pay the outstanding balance claimed by the Petitioner under the Contract in full without deducting any amounts against compensation for the delay, provided the work was completed to the Respondent's satisfaction on a priority basis. The Petitioner sent several reminders for payment of their unpaid bills for the work done under the Contract. The Petitioner, aggrieved by the ignorance of the Respondents in paying outstanding bills, invoked the arbitration clause by issuing a notice under Section 21 of the Act, which the Respondents also ignored. An Application was filed before the Court under section 11 of the Act for the appointment of an Arbitrator.

The Court ascertained the issue:-

“whether the arbitration agreement contained in the Techno-Commercial Offer dated 11.7.2018 and incorporated in the Supply Contract entered into between the parties on 17.7.2018 was superseded by a fresh agreement entered into between the petitioner and one Ramesh Agarwal”.

The Court observed that there was no evidence to show that the earlier contract was not given effect. The emails from the Petitioner only contained an offer on revised terms for the work to be performed without stating any further details.

The Court noted that while dealing with an application under section 11 of the Act, it is not required to assess the merits of the dispute but only to determine whether there is an arbitration agreement between the parties and whether disputes related to that agreement exist between the parties. The Court held that the Respondent could not prove that there was no arbitration agreement between the parties.

“The issue involves construction of the terms of the TCO and any other subsequent contract which may have been executed and which is entirely within the domain of an arbitrator. The respondent has not been able to make out a case that no arbitration agreement exists between the parties. In fact according to the counsel appearing for the respondent, even the alleged later TCO contains an arbitration clause”, the Court noted.

The Court held that an arbitration agreement was present in both the TCO signed by the Parties. The Court further held that the parties have decided to appoint only one arbitrator despite the agreement prescribing three. Additionally, the Court rejected the Respondent’s contentions that the venue of the arbitration was Siliguri. The Court emphasized that Section 11 confers power only on the Supreme Court or the High Court for the appointment of arbitrators. Therefore, the Court held that the case falls under section 11(6) of the Act.

Accordingly, the Court allowed the Appeal and appointed an Arbitrator. 

Cause Title: Trilok Infracon (India) Private Limited v M/s. Hindustan Marketing Company

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