Arbitration Clause Is Collateral Form Of Contract Distinguished From Substantive Terms But Is Integral Part Of It- SC Reiterates

The Bench of Justice BR Gavai and Justice BV Nagarathna referred to the decision of the Apex Court in the case of Damodar Valley Corporation vs. K.K. Kar (1974) 1 SCC 141, "An arbitration clause is a collateral term of a contract as distinguished from its substantive terms; but nonetheless it is an integral part of it."

The Court held that the High Court was not right in dismissing the Petition under Section 11(6) of the Arbitration and Conciliation Act, filed by the Appellant in the case 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.

While setting aside the impugned judgment of the High Court, the Court observed that it must be left to the Arbitrator to decide on the said issue.

In this case, the Appellant had entered into Share Purchase Agreement with Respondent Nos. 1 to 3 wherein Respondent Nos. 2 and 3 agreed to sell 100% ownership of Respondent No. 1 Company comprising all of its assets with continuity of the Power Purchase Agreement. Thereafter, disputes arose between the Appellant and Respondents, and the former filed an application before the Commercial Court under Section 9 of the Act 1996, seeking to restrain the Respondents from alienating their shares in the Company.

The Application was allowed by the Commercial Court and granted ad interim injunction.

The Appellant thereafter invoked the Arbitration clause in terms of the Share Purchase Agreement and called upon the Respondents to settle disputes through Arbitration. Upon receiving no response from the Respondents regarding the same, the Appellant invoked Section 11(6) of the 1996 Act which came to be dismissed by the High Court.

Aggrieved, the Appellant approached the Supreme Court.

Senior Counsel Meenakshi Arora appeared for the Appellant while Counsel D. Narendra Naik appeared for the Respondents before the Court.

The Counsel for the Respondent argued before the Court that the High Court was well within its jurisdiction in examining the existence of the Arbitration Agreement and by arriving at a conclusion that the Share Purchase Agreement was novated and superseded by the Tripartite Agreement.

Further, it was contended that owing to the novation of the share purchase agreement, the arbitration clause no longer existed so as to resolve the disputes between the parties through arbitration.

On the other hand, the plea of the Appellant was that there was no such novation of the share purchase agreement and the arbitration clause was very much available hence, the High Court ought to have referred the matter to arbitration.

The Bench placed reliance on Damodar Valley (supra) wherein it was observed-

Though the contract was validly executed, the parties may put an end to it as if it had never existed and substitute a new contract for it solely governing their rights and liabilities thereunder; in the former case, if the original contract has no legal existence, the arbitration clause also cannot operate, for along with the original contract, it is also void; in the latter case, as the original contract is extinguished by the substituted one, the arbitration clause of the original contract perishes with it.

The Court held, "Even if the performance of the contract has come to an end, the contract can still be in existence for certain purposes in respect of disputes arising under it or in connection with it."

The Court thus held that the High Court was not right in dismissing the Petition under Section 11(6) of the 1996 Act.

Accordingly, the Court allowed the appeal and set aside and quashed the impugned judgment of the High Court.

The Court appointed former Judge, Justice R. Subash Reddy as the sole arbitrator to arbitrate the dispute between the parties.

Cause Title - M/s. Meenakshi Solar Power Pvt. Ltd. v. M/s. Abhyudaya Green Economic Zones Pvt. Ltd. and Ors.