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TMI Blog2021 (4) TMI 319X X X X Extracts X X X X X X X X Extracts X X X X ..... cs or other persons incompetent to contract. There is nothing vexatious or frivolous in the plea taken by the Appellant. Apart from going into a detailed consideration of the MoU and the SHA, which is exclusively within the jurisdiction of the arbitral tribunal, the learned Single Judge, while considering clause 28 of the SHA to arrive at the finding that any kind of agreement as detailed in clause 28.2 between the parties shall stand superseded, does not even refer to clause 28.1. No consideration has been given to the separate and distinct subject matter of the MoU and the SHA. The judgment of the High Court is set aside and matter referred to the parties to the arbitration of a sole arbitrator, being Justice Aftab Alam (retired Judge of this Court), who will decide the dispute between the parties without reference to any observations made by this Court, which are only prima facie in nature - appeal disposed off. X X X X Extracts X X X X X X X X Extracts X X X X ..... en close and cordial. In order to strengthen the relationship and make optimum use of the tremendous growth potential in the TV media sector, including to cater to the ever expanding news video demands of Reuters in its satellite transmissions to subscribers worldwide, it has been found expedient by the existing members of the company to divest 49% of their shareholding in favour of Reuters or its affiliates subject to necessary permission of authorities. This would cement the relationship built over the years between Reuters and the company." The MoU went on to record: "1. The Prakash family will divest its 49% shareholding as under: Prem Prakash 1372 Daya Prakash 1176 Sanjiv Prakash 1470 Seema Kukreja 882 4900 2. That Prakash family recognises the leadership provided by S.P. and the role he has played in steering the company to new heights with the name ANI which is respected internationally. 3. D.P. has been the Managing Director of the company from the beginning and Prakash family recognises her role in bringing the company to a very sound financial base as a result of very ably handling the accounts and finances of the company. She would continue to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... statutory modification thereof for the time being in force." 2.4. A Shareholders' Agreement dated 12.04.1996 ["SHA"] was then executed between the Prakash Family and Reuters. So far as is relevant, the SHA referred to the Appellant and the Respondents collectively as the "Prakash Family Shareholders", and individually as a "Prakash Family Shareholder". It then set out the reason for entering into the SHA as follows: "WHEREAS (A) Pursuant to a share purchase agreement dated today between the Prakash Family Shareholders and Reuters (the Share Purchase Agreement), Reuters has agreed to purchase 4,900 Shares (as defined below) representing 49% of the issued share capital of Asian Films Laboratories (Pvt.) Ltd. (the Company). Following completion of the Share Purchase Agreement, each of the Prakash Family Shareholders will hold the numbers of Shares set opposite his or her name in schedule 3 hereto, with the aggregate number of Shares so held by the Prakash Family Shareholders representing 51% of the issued share capital of the Company. (B) The Shareholders (as defined below) are entering into the Agreement to set out the terms governing their relationship as shareholders in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ordance with the Articles. If the Percentage Interest of the Prakash Family Shareholders falls below such level, the number of Prakash Family Directors and Reuters Directors shall be determined in accordance with the Articles." The quorum for holding meetings was then set out in clause 7.12, and matters requiring special majority were set out in clause 8.1. Default events were set out in clause 11. Clause 11.2 is important and states as follows: "11.2 If a Default Event exists in relation to any of the Shareholders (the Defaulting Shareholder), then the other Shareholder(s) comprising, in the case of a Default Event existing in relation to a Prakash Family Shareholder, Reuters and, in the case of a Default Event existing in relation to Reuters, the Prakash Family Shareholders (each of Reuters in the first case and the Prakash Family Shareholders in the second case being the Non-Defaulting Shareholder(s)) shall have the right, subject to the prior right of the Defaulting Shareholder to transfer its Shares as contemplated in paragraph 8 of Schedule 1 (all as provided in clause 11.3), to purchase or procure the purchase by a nominee or by a third party of all (but not some only) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... areholders and Reuters or any successor of either of them holding Shares, to replace this Agreement; or (c) affect the terms of clause 15 (confidentiality) of this Agreement." The arbitration clause was set out in clause 16 which reads as follows: "LEGAL DISPUTES 16.1 In the event of any dispute between the Shareholders arising in connection with this Agreement (a legal dispute), they shall use all reasonable endeavours to resolve the matter on an amicable basis. If any Shareholder serves formal written notice on any other Shareholder that a legal dispute has arisen and the relevant Shareholders are unable to resolve the dispute within a period of thirty (30) days from the service of such notice, then the dispute shall be referred to the managing director of the senior management company identified by Reuters as having responsibility for India (the Reuters Managing Director) and the Chairman of the Company. No recourse to arbitration under this Agreement shall take place unless and until such procedure has been followed. ARBITRATION 16.2 If the Reuters Managing Director and the Chairman of the Company shall have been unable to resolve any legal dispute referred to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... euters Television Mauritius Ltd. (ii) Trade Clarification Agreement dated 12.04.1996 between Asian Films Laboratories Pvt. Ltd., Reuters Television Mauritius Ltd., and the partners of Ved & Co. (i.e., Prem Prakash, Daya Prakash, Sanjiv Prakash, and Seema Kukreja) (iii) PIB Accreditation Agreement dated 12.04.1996 between Asian Films Laboratories Pvt. Ltd., Reuters Television Mauritius Ltd., and the partners of Ved & Co. (i.e., Prem Prakash, Daya Prakash, Sanjiv Prakash, and Seema Kukreja) (iv) Facilities and Marketing Agreement dated 12.04.1996 between Asian Films Laboratories Pvt. Ltd. and Reuters Television (England) Ltd. (v) Service Agreement dated 12.04.1996 between Asian Films Laboratories Pvt. Ltd. and Sanjiv Prakash (vi) Deed of Tax Indemnity dated 12.04.1996 between Prem Prakash, Daya Prakash, Sanjiv Prakash, Seema Kukreja, Asian Films Laboratories Pvt. Ltd., and Reuters Television Mauritius Ltd. 2.6. The Articles of Association of the company were amended on 14.05.1996 to reflect certain decisions that were taken in the MoU. Thus, clause 11(f) was amended so as to read as follows: "11. Transfer of Shares xxx xxx xxx (f) If the Continuing Shareholde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se 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 on 23.11.2019 upon the three Respondents, 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 (retired Judge of this Court), was nominated to be the sole arbitrator. The reply filed by Seema Kukreja and Daya Prakash, dated 20.12.2019, pointed out that the MoU ceased to exist on and from the date of the SHA, i.e. 12.04.1996, which superseded the aforesaid MoU and novated the same in view of clause 28.2 thereof. Therefore, they denied that there was any arbitration clause between the parties as the MoU itself had been superseded and did not exist after 12.04.1996. In view of this, Sanjiv Prakash moved the Delhi High Court under Section 11 of the 1996 Act by a petition dated 06.01.2020. In the said petition, an interim order was passed on 09.01.2020 as follows: "All the parties agree to defer Agenda Nos. 4 and 8 circulated in the notice dated 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efine their family arrangement before the Reuters came in by purchasing the shares and hence cannot be overridden by the SHA is not appealing. Nothing precluded the members of the Prakash Family to include a stipulation in the SHA, that the SHA, shall not supersede the MoU, as has been specially stated in Clause 28.2 with regard to ancillary agreements and share purchase agreement. The plea of Mr. Nayar, that the present dispute between the parties being in respect of shares in an Indian company to be resolved by London Court of International Arbitration as per English law, contracting out of Indian Law is opposed to public policy is also not appealing as such an issue doesn't arise in these proceedings which have been filed by invoking the MoU. Nor such a plea would revive the MoU, which stands novated by the SHA." After then setting out Section 62 of the Indian Contract Act, 1872 ["Contract Act"] and this Court's judgments in Union of India v. Kishorilal Gupta & Bros., (1960) 1 SCR 493 ["Kishorilal Gupta"], Damodar Valley Corporation v. K.K. Kar, (1974) 1 SCC 141 ["Damodar Valley Corporation"], and Young Achievers v. IMS Learning Resources (P) Ltd., (2013) 10 SCC 535 ["Young Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Natural Resources Ltd. v. Reliance Industries Ltd., (2010) 7 SCC 1 (at paragraphs 49 and 50). In particular, he relied upon the fact that it was the Appellant who was responsible for the tremendous growth of the company, and it is by his efforts that Reuters infused a huge amount of capital by purchasing 49% of the share capital of the company. It is for this reason that the MoU made it clear vide clause 8 that in case any of the three Respondents wished to sell or bequeath their equity shares in the company, their shares may be offered/sold/bequeathed only to the Appellant or to his heirs and successors. The arbitration clause contained in the MoU would therefore be applicable, the 1996 Act being the Act under which the arbitration would have to be effected. He then read out various clauses of the SHA and relied strongly upon clause 12.1(a), in which it was agreed that if Reuters would have to divest any part of its shares in the company, it shall be entitled to require the other shareholders to purchase its holding of shares in such proportions as was "agreed between them or otherwise", thereby making it clear that the MoU between the Prakash Family was expressly referred to and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n amendment of the Articles of Association of the company soon after the MoU was entered into. He also relied upon three recent judgments of this Court, which made it clear that unless an ex facie case had been made out that no arbitration agreement existed between the parties, a Section 11 court would be duty-bound to refer the parties to arbitration and leave complex questions of fact and law relating to novation of a contract under Section 62 of the Contract Act to be decided by an arbitral tribunal. 4. Shri Mukul Rohatgi, learned Senior Advocate appearing on behalf of Respondent No.3, supported the arguments of Shri Viswanathan. He referred us to the MoU, the SPA, and the SHA, and strongly relied upon the observations in Kale (supra) which were followed in Ravinder Kaur Grewal v. Manjit Kaur, (2020) 9 SCC 706 (at paragraphs 25 to 28). He argued that not only were the parties to the MoU different from those to the SHA, but that the MoU itself contemplated that the Prakash Family would enter into a separate agreement with Reuters so as to effectuate the purchase of 49% shareholding in the company by Reuters, showing thereby that the MoU and the Agreements entered into with Reute ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company, without incorporating the aforesaid in its Articles, would be invalid as a result of which the Articles of Association alone would have to be looked at. This being the case, the arbitration clause contained in an agreement which is void obviously cannot be looked at. They then referred to certain recent judgments of this Court for the proposition that the present case being an open and shut one, the learned Singe Judge of the Delhi High Court was right in dismissing the Section 11 petition filed by the Appellant. 6. By virtue of the Arbitration and Conciliation (Amendment) Act, 2015 ["2015 Amendment Act"], by which Section 11(6A) was introduced, the earlier position as to the scope of the powers of a court under Section 11, while appointing an arbitrator, are now narrowed to viewing whether an arbitration agreement exists between parties. In a gradual evolution of the law on the subject, the judgments in Duro Felguera (supra) and Mayavati Trading (supra) were explained in some detail in a three-Judge Bench decision in Vidya Drolia v. Durga Trading Corporation, (2021) 2 SCC 1 ["Vidya Drolia"]. So far as the facts of the present case are concerned, it is important to extra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it. As the contract subsists for certain purposes, the arbitration clause operates in respect of these purposes.' In those cases, as we have stated earlier, it is the performance of the contract that has come to an end but the contract is still in existence for certain purposes in respect of disputes arising under it or in connection with it. We think as the contract subsists for certain purposes, the arbitration clause operates in respect of these purposes." 128. Reference in Damodar Valley Corpn. case [Damodar Valley Corpn. v. K.K. Kar, (1974) 1 SCC 141] was also made to the minority judgment of Sarkar, J. in Kishorilal Gupta & Bros. [Union of India v. Kishorilal Gupta & Bros., AIR 1959 SC 1362] to observe that he had only disagreed with the majority on the effect of settlement on the arbitration clause, as he had held that arbitration clause did survive to settle the dispute as to whether there was or was not an "accord and satisfaction". It was further observed that this principle laid down by Sarkar, J. that "accord and satisfaction" does not put an end to the arbitration clause, was not disagreed to by the majority. On the other hand, proposition (6) seems to be laying ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al Tribunal, as per sub-section (4), is empowered to admit a plea regarding lack of jurisdiction beyond the periods specified in sub-sections (2) and (3) if it considers that the delay is justified. As per the mandate of sub-section (5) when objections to the jurisdiction under sub-sections (2) and (3) are rejected, the Arbitral Tribunal can continue with the proceedings and pass the arbitration award. A party aggrieved is at liberty to file an application for setting aside such arbitral award under Section 34 of the Arbitration Act. Sub-section (3) to Section 8 in specific terms permits an Arbitral Tribunal to continue with the arbitration proceeding and make an award, even when an application under sub-section (1) to Section 8 is pending consideration of the court/forum. Therefore, pendency of the judicial proceedings even before the court is not by itself a bar for the Arbitral Tribunal to proceed and make an award. Whether the court should stay arbitral proceedings or appropriate deference by the Arbitral Tribunal are distinctly different aspects and not for us to elaborate in the present reference." Again, insofar as the facts of the present case are concerned, paragraph 148 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be rejected. At this stage, the court should not get lost in thickets and decide debatable questions of facts. Referral proceedings are preliminary and summary and not a mini trial. This necessarily reflects on the nature of the jurisdiction exercised by the court and in this context, the observations of B.N. Srikrishna, J. of "plainly arguable" case in Shin-Etsu Chemical Co. Ltd. [Shin- Etsu Chemical Co. Ltd. v. Aksh Optifibre Ltd., (2005) 7 SCC 234] are of importance and relevance. Similar views are expressed by this Court in Vimal Kishor Shah [Vimal Kishor Shah v. Jayesh Dinesh Shah, (2016) 8 SCC 788 : (2016) 4 SCC (Civ) 303] wherein the test applied at the pre-arbitration stage was whether there is a "good arguable case" for the existence of an arbitration agreement. 16. The parameters of review under Sections 8 and 11 were then laid down thus: "138. In the Indian context, we would respectfully adopt the three categories in Boghara Polyfab (P) Ltd. [National Insurance Co. Ltd. v. Boghara Polyfab (P) Ltd., (2009) 1 SCC 267 : (2009) 1 SCC (Civ) 117] The first category of issues, namely, whether the party has approached the appropriate High Court, whether there is an arbitr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al, 2013, Vol. 13.] 140. Accordingly, when it appears that prima facie review would be inconclusive, or on consideration inadequate as it requires detailed examination, the matter should be left for final determination by the Arbitral Tribunal selected by the parties by consent. The underlying rationale being not to delay or defer and to discourage parties from using referral proceeding as a ruse to delay and obstruct. In such cases a full review by the courts at this stage would encroach on the jurisdiction of the Arbitral Tribunal and violate the legislative scheme allocating jurisdiction between the courts and the Arbitral Tribunal. Centralisation of litigation with the Arbitral Tribunal as the primary and first adjudicator is beneficent as it helps in quicker and efficient resolution of disputes." 17. The Court then examined the meaning of the expression "existence" which occurs in Section 11(6A) and summed up its discussion as follows: "146. We now proceed to examine the question, whether the word "existence" in Section 11 merely refers to contract formation (whether there is an arbitration agreement) and excludes the question of enforcement (validity) and therefore t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tant in that what was specifically under consideration was an arbitration clause which would get activated only if an insurer admits or accepts liability. Since on facts it was found that the insurer repudiated the claim, though an arbitration clause did "exist", so to speak, in the policy, it would not exist in law, as was held in that judgment, when one important fact is introduced, namely, that the insurer has not admitted or accepted liability. Likewise, in the facts of the present case, it is clear that the arbitration clause that is contained in the subcontract would not "exist" as a matter of law until the sub-contract is duly stamped, as has been held by us above. The argument that Section 11(6-A) deals with "existence", as opposed to Section 8, Section 16 and Section 45, which deal with "validity" of an arbitration agreement is answered by this Court's understanding of the expression "existence" in Hyundai Engg. case [United India Insurance Co. Ltd. v. Hyundai Engg. & Construction Co. Ltd., (2018) 17 SCC 607 : (2019) 2 SCC (Civ) 530] , as followed by us." Existence and validity are intertwined, and arbitration agreement does not exist if it is illegal or does not sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stified as a court is the first forum that examines and decides the request for the referral. Absolute "hands off" approach would be counterproductive and harm arbitration, as an alternative dispute resolution mechanism. Limited, yet effective intervention is acceptable as it does not obstruct but effectuates arbitration. 147.7. Exercise of the limited prima facie review does not in any way interfere with the principle of competence-competence and separation as to obstruct arbitration proceedings but ensures that vexatious and frivolous matters get over at the initial stage. 147.8. Exercise of prima facie power of judicial review as to the validity of the arbitration agreement would save costs and check harassment of objecting parties when there is clearly no justification and a good reason not to accept plea of non-arbitrability. In Subrata Roy Sahara v. Union of India [Subrata Roy Sahara v. Union of India, (2014) 8 SCC 470 : (2014) 4 SCC (Civ) 424 : (2014) 3 SCC (Cri) 712] , this Court has observed: (SCC p. 642, para 191) "191. The Indian judicial system is grossly afflicted with frivolous litigation. Ways and means need to be evolved to deter litigants from their compul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se which provides for arbitration of disputes which have arisen between the parties. Para 59 is more restrictive and requires the court to see whether an arbitration agreement exists - nothing more, nothing less. Read with the other findings, it would be appropriate to read the two paragraphs as laying down the legal ratio that the court is required to see if the underlying contract contains an arbitration clause for arbitration of the disputes which have arisen between the parties - nothing more, nothing less. Reference to decisions in Patel Engg. Ltd. [SBP & Co. v. Patel Engg. Ltd., (2005) 8 SCC 618] and Boghara Polyfab (P) Ltd. [National Insurance Co. Ltd. v. Boghara Polyfab (P) Ltd., (2009) 1 SCC 267 : (2009) 1 SCC (Civ) 117] was to highlight that at the reference stage, post the amendments vide Act 3 of 2016, the court would not go into and finally decide different aspects that were highlighted in the two decisions. 147.10. In addition to Garware Wall Ropes Ltd. case [Garware Wall Ropes Ltd. v. Coastal Marine Constructions & Engg. Ltd., (2019) 9 SCC 209 : (2019) 4 SCC (Civ) 324] , this Court in Narbheram Power & Steel (P) Ltd. [Oriental Insurance Co. Ltd. v. Narbheram Power ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l Engg. Ltd., (2005) 8 SCC 618] on the scope of judicial review by the court while deciding an application under Sections 8 or 11 of the Arbitration Act, post the amendments by Act 3 of 2016 (with retrospective effect from 23-10-2015) and even post the amendments vide Act 33 of 2019 (with effect from 9-8-2019), is no longer applicable. 154.2. Scope of judicial review and jurisdiction of the court under Sections 8 and 11 of the Arbitration Act is identical but extremely limited and restricted. 154.3. The general rule and principle, in view of the legislative mandate clear from Act 3 of 2016 and Act 33 of 2019, and the principle of severability and competence-competence, is that the Arbitral Tribunal is the preferred first authority to determine and decide all questions of non-arbitrability. The court has been conferred power of "second look" on aspects of nonarbitrability post the award in terms of sub-clauses (i), (ii) or (iv) of Section 34(2)(a) or sub-clause (i) of Section 34(2)(b) of the Arbitration Act. 154.4. Rarely as a demurrer the court may interfere at Section 8 or 11 stage when it is manifestly and ex facie certain that the arbitration agreement is nonexistent, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en the slightest doubt, the rule is to refer the disputes to arbitration, otherwise it would encroach upon what is essentially a matter to be determined by the tribunal." 9. Judged by the aforesaid tests, it is obvious that 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 a full consideration of the law on the subject. None of this can be done given the limited jurisdiction of a court under Section 11 of the 1996 Act. As has been held in paragraph 148 of Vidya Drolia (supra), detailed arguments on whether an agreement which contains an arbitration clause has or has not been novated cannot possibly be decided in exercise of a limited prima facie review as to whether an arbitration agreement exists between the parties. Also, this case does not fall within the category of cases which ousts arbitration altogether, such as matters which are in rem proceedings or cases which, without doubt, concern minors, lunatics or other persons incompetent to contract. There is nothing vexatious or frivolous in the plea take ..... X X X X Extracts X X X X X X X X Extracts X X X X
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