Delhi High Court: In a case wherein a petition was filed under Section 34 of the Arbitration and Conciliation Act, 1996 (‘Act’), the petitioner seeks setting aside of an award by a sole arbitrator in disputes raised by the petitioner under an undated Construction Contract (‘2014 Contract’) entered into between the parties in 2014, a Single Judge Bench of Prateek Jalan, J.* opined that the arbitrator’s conclusion that the MoU constituted a novation of the 2014 Contract was unimpeachable within the limited jurisdiction of the Court under Section 34 of the Act. The Court held that impugned award only holds that the arbitration agreement in the 2014 Contract perished upon execution of the MoU and did not render any conclusive findings upon the rights and obligations of the parties under the MoU. Thus, the Court dismissed the petition and held that it did not find any grounds for interference with the impugned award under Section 34 of the Act.
The 2014 Contract was for civil and structural works for a project known as “MIST” situated Noida, Uttar Pradesh. The estimated value of the contract was Rs. 229 crores, which was to be executed on a Bill of Quantities (‘BOQ’)/item rate basis and it also contained an arbitration clause which stated that any dispute, difference, or question that was not resolved through joint discussions should be referred to the sole arbitrator to be appointed by the parties by mutual consent. There were certain disputes which arose between the parties, that were resolved mutually, and the terms were recorded in a Memorandum of Understanding (‘MoU’). Admittedly, the MoU did not contain an arbitration clause at all. The central dispute between the parties was as to whether the arbitration agreement contained in the 2014 Contract survived the execution of the MoU. The arbitrator concluded that the MoU constituted novation of the 2014 Contract and the Tribunal did not have the jurisdiction to entertain disputes under the arbitration clause contained in the 2014 Contract.
The petitioner submitted that the respondent did not pay the sums payable under the MoU, so it was entitled to claim its dues under the 2014 Contract. Thus, the petitioner invoked the arbitration clause contained in the 2014 Contract and the arbitrator was appointed pursuant to the Order passed by this Court under Section 11 of the Act. The arbitrator concluded that the MoU crystallized the liability of the respondent at Rs. 132 lakhs, subject to the petitioner handing over the assets and consumables to the respondent. The arbitrator noted that a sum of Rs. 67,86,200 was paid by the respondent to the petitioner and thus, concluded that, even upon the petitioner’s case that the MoU was not fully complied with, it would not lead to the conclusion that the arbitration clause contained in the 2014 Contract stood revived. The Arbitrator held that as the parties moved from a BOQ/item rate basis of payment in the 2014 Contract to a ‘cost plus’ basis in the MoU, therefore, there could be no question of ‘revival’ of the 2014 Contract, even if the MoU’s terms were breached.
Analysis, Law, and Decision
The Court referred to the decisions in Union of India v. Kishorilal Gupta, (1960) 1 SCR 493; Lata Construction v. Rameshchandra Ramniklal Shah (Dr.), (2000) 1 SCC 586; Nathani Steels Ltd. v. Associated Constructions, 1995 Supp (3) SCC 324 and Damodar Valley Corporation v. K.K. Kar, (1974) 1 SCC 141, which were relied on by both parties and thus, the Court opined that the following principles emerged from the judgments:
An arbitration clause contained in an agreement which was void ab initio could not be enforced as the contract itself never legally came into existence.
A validly executed contract could also be extinguished by a subsequent agreement between the parties.
If the original contract remained in existence, for the purposes of disputes in connection with issues of repudiation, frustration, breach, etc., the arbitration clause contained therein continues to operate for those purposes.
Where the new contract constituted a wholesale novation of the original contract, the arbitration clause would also stand extinguished by virtue of the new agreement.
The Court observed that the arbitrator had held as follows:
“Once there was a full and final settlement in respect of all the disputes, in relation to a matter covered under the arbitration clause in the contract, such disputes or differences did not remain to be an arbitrable dispute, and the arbitration clause could not be invoked. Though the original contract was validly executed, the parties decided to put an end to it as if it never existed and substituted a new contract with it, solely governing their rights and liabilities. In such a situation, the original contract was extinguished by the substituted one, the arbitration clause of the original one perishes with it.”
The Court relied on Ssangyong Engg. & Construction Co. Ltd. v. NHAI, (2019) 15 SCC 131; Delhi Airport Metro Express (P) Ltd. v. DMRC, (2022) 1 SCC 131; and UHL Power Co. Ltd. v. State of H.P., (2022) 4 SCC 116 and opined that “on questions of contractual interpretation, the findings of the Arbitral Tribunal, being the domestic tribunal of choice, were generally to be respected, unless they were found to be irrational or perverse, in the sense that the interpretation was so implausible that no reasonable person could have arrived at it”.
The Court noted that the arbitrator had placed an interpretation upon the terms of the MoU which the Court found to be plausible. The Court noted that Clause 1 of the MoU recorded the terms upon which the 2014 Contract “would stand fully satisfied towards both the parties”. However, the Court opined that this did not lead to an invariable conclusion that the 2014 Contract would stand revived if those terms were not fulfilled. The Court further noted that the last recital speaks of the parties’ decision to “to cancel the above said ‘construction agreement’”. The Court observed that Clause 1(C) of the MoU relied upon by the petitioner itself, referred to it as “the closed contract” and Clause 3 thereof incorporated an agreement between the parties to “cancel” the 2014 Contract, without reference to the conditions enumerated in Clause 1, albeit in contemplation of a new contract. Thus, the Court opined that there was no express or implicit provision that the 2014 Contract would stand revived due to any breach of the terms in Clause 1 of the MoU.
The Court opined that the arbitrator’s conclusion that the MoU constituted a novation of the 2014 Contract was unimpeachable within the limited jurisdiction of the Court under Section 34 of the Act. The Court held that impugned award only holds that the arbitration agreement in the 2014 Contract perished upon execution of the MoU and did not render any conclusive findings upon the rights and obligations of the parties under the MoU. Thus, the Court dismissed the petition and held that it did not find any grounds for interference with the impugned award under Section 34 of the Act.
[B.L. Kashyap and Sons Ltd. v. Mist Avenue (P) Ltd., 2023 SCC OnLine Del 3518, decided on 2-6-2023]
*Judgment authored by: Justice Prateek Jalan
Advocates who appeared in this case :
For the Petitioner: Ashish Dholakia, Senior Advocate; Gautam Bajaj, Akash Panwar, Rohan Chawla, Arpit Singh, Advocates;
For the Respondents: Anil Kr. Airi, Senior Advocate; Ravi Krishan Chandna, Sadhana Sharma, Mudit Ruhella, Aman Dahiya, Advocates.