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Courts under Section 11 of the Arbitration and Conciliation Act cannot usurp the jurisdiction of the arbitral tribunal: Supreme Court of India

A Section 11 court would refer to the matter when contentions relating to non-arbitrability are plainly arguable, or when facts are contested. Civil courts cannot, at this stage, enter into a mini-trial or elaborate review of the facts and law that would usurp the jurisdiction of the arbitral tribunal. Detailed arguments on whether an agreement that contains an arbitration clause has or has not been novated cannot possibly be decided in the exercise of a limited prima facie review as to whether an arbitration agreement exists between the parties. This remarkable judgment was passed by the Supreme Court in the matter of SANJIV PRAKASH V SEEMA KUKREJA AND ORS. [CIVIL APPEAL NO. 975-976 OF 2021] by Honourable Justice Rohinton Fali Nariman, Justice B.R. Gavai, and Justice Hrishikesh Roy.

This appeal arose out of the dismissal of a petition under Section 11 of the Arbitration and Conciliation Act, 1996 filed before the High Court of Delhi. The Appellant, Sanjiv Prakash is the brother of Seema Kukreja the respondent.

The brief facts of the case are, a private company was incorporated under the name of Asian Films Laboratories Private Limited by Prem Prakash, the entire amount of the paid-up capital was paid by him from his personal funds. He then distributed shares to his family members without receiving any consideration for the same.

Reuters Television Mauritius Limited approached Sanjiv Prakash for a long-term equity investment and collaboration with the company on the condition that he would play an active role in the management of the company. Hence, a MoU was entered into sometime in 1996 between the four members of the Prakash Family. A Shareholders’ Agreement was then executed between the Prakash Family and Reuters.

Disputes between the parties arose when Prem Prakash decided to transfer his shareholding to be held jointly between Sanjiv Prakash and himself, and Daya Prakash did likewise to transfer her shareholding to be held jointly between Seema Kukreja and herself. A notice invoking the arbitration clause contained in the MoU was then served by Sanjiv Prakash, alleging that his pre-emptive right to purchase Daya Prakash’s shares, as was set out in clause 8 of the MoU, had been breached, as a result of which disputes had arisen between the parties and Justice Deepak Verma, was nominated to be the sole arbitrator.

However, in the reply, Seema Kukreja and Daya Prakash pointed out that the MoU ceased to exist from the date of the Shareholders’ Agreement since it superseded the MoU and novated the same in view of clause 28.2. Therefore, they denied that there was an arbitration clause between the parties as the MoU itself had been superseded.

The Delhi HC in its judgment held that if the contract is superseded by another, the arbitration clause, being a component/part of the earlier contract, falls with it or if the original contract in entirety is put to an end, the arbitration clause, which is a part of it, also perishes along with it.

Supreme Court while deliberating on the issue extensively discussed the law laid down in the recent judgment in Vidya Drolia v. Durga Trading Corporation,(2021) 2 SCC 1 wherein it was held that “under Section 11 of Act Court is not empowered to determine whether an arbitration agreement is in existence or not. In the said judgment it was held that for the Section 11 court to decide any matter, the existence of an arbitration agreement is mandatory. Whether or not an arbitration agreement exists, is a question to be decided by the Arbitral Tribunal.”

It was observed, “Whether the MoU has been novated by the SHA dated 12.04.1996 requires a detailed consideration of the clauses of the two Agreements, together with the surrounding circumstances in which these agreements were entered into, and full consideration of the law on the subjectNone of this can be done given the limited jurisdiction of a court under Section 11 of the 1996 Act. Detailed arguments on whether an agreement which contains an arbitration clause has or has not been novated cannot possibly be decided in the exercise of a limited prima facie review as to whether an arbitration agreement exists between the parties.”

Hence, SC set aside the judgment of the High Court and refer the parties to the arbitration of a sole arbitrator who will decide the dispute between the parties without reference to any observations made by this Court, which are only prima facie in nature.

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