Del HC | When does ‘Novation’ under the Contract Act takes place? Read while HC examines the scope of S. 8 of Arbitration Act

Delhi High Court: Jayant Nath, J., while addressing the matter stressed upon the essentiality of Novation and Arbitration Agreement.

Factual Matrix

The present application was filed under Section 8 of the Arbitration and Conciliation Act, 1996 read with Order 7 Rule 11 CPC for rejection of the plaint and referring the parties to the arbitration.

Plaintiff sought for the recovery of Rs 2,58,24,648 being refund of the available interest-free refundable security deposit. A decree of mandatory injunction was also sought to handover the movable of the plaintiff which has been stated to be illegally detained by the defendant.

Facts leading to the present matter

Vide a Lease Deed, the defendant leased to the plaintiff the office premises in Dehradun with 22 parking slots for 9 years. Simultaneously a maintenance agreement was also executed between the parties which was co-terminus with the lease deed for payment of fit out and maintenance charges for the said premises.

As per the deed, there was a lock-in period from 01-01-2017 to 31-12-2022.

Fresh Agreement

Further, as per the plaintiff, a fresh agreement was arrived at between the parties in respect of use and occupation of the said premises and maintenance.

Hence plaintiff’s case was that the Lease Deed and Maintenance Agreement stood substituted/novated on account of the said Fresh Agreement.

Later, plaintiff initiated negotiations with the defendant for a reduction of rentals and maintenance, however, the defendant did not budge. In fact, the defendant illegally disconnected the electricity connection of the rented premises as a means to coerce the plaintiff to make payments.

Termination of Fresh Agreement

In March 2020 the plaintiff sent out a legal notice to the defendant terminating the Fresh Agreement. The said legal notice also sought a grant of access to the authorised representative of the plaintiff to remove the movable and the server. Hence, the present suit was filed.

Analysis, Law and Decision

Bench noted that in the original lease deed and the maintenance agreement, the parties agreed to settle their disputes through arbitration.

Counsel for the plaintiff 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 exited from the plaintiff company sometimes in September 2018 and new management took over charge of the plaintiff company. It was strongly urged that there was a novation of Agreement and the original Lease Deed and the Maintenance Agreement dated 21-02-2017 stood 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 was no arbitration agreement and hence, the present application is misplaced

Novation of Contract

Court observed that the correspondence exchanged between the parties on the basis of which it was pleaded by the plaintiff that there was a novation of a contract.

Now the question was, whether it could be said that on account of the exchange of the above-stated communication, the parties rescinded the old agreement being the registered Lease Deed and the Maintenance Agreement of the same and completely novated the contract.

In the above context, reference was made to Section 62 of the Contract Act:

“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.”

 Supreme Court’s decision in Lata Construction v. Dr Rameshchandra Ramnikalal Shah, (2000) 1 SCC 586 was also cited.

A Novation takes place only when there is a complete substitution of a new contract in place of the old.

 Bench further examined the scope of Section 8 of the Arbitration Act and referred to the Supreme Court decision in Vidya Drolia v. Durga Trading Corpn.,(2019) 20 SCC 406

 Bench noted that for rejection of a Section 8 application, a party has to make out a prima facie case of non-existence of valid arbitration agreement, by summarily portraying a strong case.  Court should refer the matter if the validity of the arbitration agreement cannot be determined on a prima facie basis.

Conclusion

High Court opined that in light of the facts and circumstances of the present case prima facie it could not be said that there was a completely new contract and the old registered lease deed read with Maintenance Agreement were novated and substituted by a completely new contract.

Defendant’s email did not specifically state that all the terms and conditions stood superseded or novated.

Hence, Court found that the present issue required deeper consideration and would be best left to the arbitral tribunal to adjudicate upon.

Court appointed Justice G.S. Sistani as the Sole Arbitrator to adjudicate the dispute between the parties. [Knowledge Podium Systems (P) Ltd. v. S.M. Professional Services (P) Ltd., 2021 SCC OnLine Del 136, decided on 25-01-2021]

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