Author: Edupulapati Akshay, Alliance University
To the Point
The Supreme Court ruling in Sanjiv Prakash v. Seema Kukreja & Ors., 06 April 2021, is a landmark judicial precedent in Indian corporate law and arbitration. The question was whether an arbitration dispute based on a family Memorandum of Understanding (“MoU”), followed by sophisticated shareholder and share purchase agreements (“SHA” and “SPA”), needed to be referred to arbitration in the light of complex allegations of novation and supersession of agreements. This landmark ruling not only reaffirms the doctrines of kompetenz-kompetenz (the jurisdiction of the arbitral tribunal to determine its jurisdiction) but also establishes a sound foundation for a restricted role of the court under Section 11 of the Arbitration and Conciliation Act, 1996.
The dispute arose in the Prakash family owners of a company renamed from Asian Films Laboratories Pvt Ltd to ANI Media Pvt Ltd when the appellant Sanjiv Prakash had recourse to an arbitration provision in the original MoU that gives people the chance to buy shares before they are sold.The respondents objected, claiming the MoU had been novated and superseded by the later SHA. The Delhi High Court dismissed Sanjiv Prakash’s petition, holding that the original arbitration clause had perished with novation. On appeal, the Supreme Court reversed the High Court, reiterating that the conclusion on novation and enforceability of the arbitration agreement is a question for the arbitral tribunal and not for the Section 11 court.
Abstract
The Supreme Court’s locker room-style explanation in Sanjiv Prakash v. Seema Kukreja & Ors. resolves doctrinal and practical issues surrounding novation of contracts and survivability of arbitration clauses in layered shareholding structures. Central to the controversy is the interaction between an antecedent family MoU and the eventual SHA/SPA with Reuters, including “entire agreement” and international arbitration terms. The parties claimed absolute novation and hence abrogation of the initial arbitration agreement in the MoU, whereas the appellant asserted co-existence and different subject-matters. The Supreme Court, drawing on Indian and foreign cases, held unequivocally that the issue is one of complex factual and legal matrix not suitable for summary judicial determination. Unless manifestly deadwood, such a dispute must be remitted to arbitration to be fully examined by the tribunal so appointed. The judgment brings Indian arbitration law in consonance with international best practices, reinforces special equity in family arrangements, and upholds firmly the arbitral tribunal’s gatekeeping role on issues of arbitrability.
Use of legal jargon
The case sets up the ground for some of the fundamental legal principles of arbitration and contract laws. Section 11 of the Arbitration and Conciliation Act grants court’s jurisdiction to appoint an arbitrator and give preliminary consideration to the question as to whether a valid arbitration agreement subsists between the parties. Novation, as per Section 62 of the Indian Contract Act, 1872, is the substitution of a new contract for the original contract whereby the original contract may stand terminated along with the concomitant arbitration clauses.
The doctrine of kompetenz-kompetenz under Section 16 of the Arbitration Act empowers the arbitral tribunal to decide upon its own jurisdiction, including whether the arbitration agreement is valid and what its extent is. The prima facie test—the low-threshold, initial test—is utilized by courts in order to determine if there is an arbitration agreement and, sometimes, if it is valid, and not to investigate intricate factual issues at this point.
Arbitration clauses have been viewed as collateral contract terms, i.e., distinct, enforceable contractual terms that are part of the underlying contract. Whole agreement clauses, which are frequently used in Shareholders’ Agreements (SHA), are used to replace any previous written or oral understandings, such as memoranda of understanding (MoUs), thereby making the parties’ commitments binding. The arbitral tribunal, which can be selected in the form of a panel or a single arbitrator, is tasked with resolving disputes that may arise under these arbitration agreements. Furthermore, provisions such as requirements for a special majority and deadlock resolution provisions integrated into the SHA and MoU are created to resolve and address effectively management or shareholder deadlocks while maintaining corporate governance and operational stability.
The Proof
Factual Matrix and Contractual Web
Organization of ANI Media Pvt Ltd: The business was initially a family-run operation, ANI Media Pvt Ltd, then Asian Films Laboratories Pvt Ltd, being drastically revamped after aggressive involvement by Sanjiv Prakash and a strategic partnership with Reuters.
Agreements at Play: The family signed a MoU, defining shareholding and management rights, and thereafter signed a SHA and SPA with Reuters, having arbitration and entire agreement provisions.
Board Amendments and Operational Changes: The company’s Articles of Association were modified to incorporate MoU provisions, specifically about share transfer and voting rights. These changes continued until 2012, when they were revoked.
Dispute Trigger: Prem Prakash and Daya Prakash’s efforts at discriminatory share transfer spurred Sanjiv Prakash to use the MoU’s arbitration provision, claiming violation of his pre-emptive rights.
Legal Proceedings
In the impugned judgment, the Delhi High Court found that by virtue of the entire agreement clause, the SHA novated and replaced the MoU, including the arbitration clause. The High Court said that an arbitration provision expires when the original contract is changed, based on examples like Union of India v. Kishorilal Gupta & Bros. and Damodar Valley Corporation v. K.K. Kar.
The Supreme Court’s reasoning is also comprehensively incorporated, wherein it examines the contractual papers and surrounding circumstances. The MoU’s novation and survival or supersession were determined by the Supreme Court to be complex concerns of law and fact. It reinforced that such questions cannot be finally settled at the Section 11 referral stage and should be determined by the arbitral tribunal.
Case Laws
Sanjiv Prakash v. Seema Kukreja & Ors. (2021):
The Supreme Court reversed the Delhi High Court ruling, referring the dispute to arbitration. The Court made it clear that determining novation and arbitrability is a matter for the arbitral tribunal, except where the arbitration agreement is manifestly void.
Vidya Drolia v. Durga Trading Corporation (2020) 2 SCC 1:
The court is limited to conducting a prima facie examination during the Section 11/Section 8 stages. Dubious questions of fact and law like validity, existence, or novation are best left to the arbitral tribunal unless manifestly bad.
Duro Felguera S.A. v. Gangavaram Port Ltd. (2017) 9 SCC 729:
Judicial review at appointment stage is limited very narrowly to determining the existence of an arbitration agreement, not enforceability or validity.
Mayavati Trading Pvt. Ltd. v. Pradyuat Deb Burman (2019) 8 SCC 714:
Reiterates restrictive scope of review under Section 11. Question of validity or arbitrability is to be determined by the tribunal.
Union of India v. Kishorilal Gupta & Bros. (1960) 1 SCR 493:
Held that with the death of a contract, its clause on arbitration also dies unless otherwise stated. But performance, frustration, or dispute under the contract makes the arbitration clause survive for associated disputes.
Damodar Valley Corporation v. K.K. Kar (1974) 1 SCC 141:
Clarifies that accord and satisfaction (resolution of all differences) will terminate an arbitration agreement, but only new substitute contract or express voiding of the arbitration clause will usually bring arbitration rights to an end.
Garware Wall Ropes Ltd. v. Coastal Marine Constructions & Engg. Ltd. (2019) 9 SCC 209:
The Supreme Court’s reasoning in Vidya Drolia was preceded by the concept of the intertwined “existence and validity” of arbitration agreements.
Conclusion
The ruling given by the Supreme Court in Sanjiv Prakash v. Seema Kukreja & Ors. is a landmark ruling on the doctrine of novation, extent of “entire agreement” clauses and jurisprudential division of judicial and arbitral powers. It emphasizes that where complex and debatable questions of survival or extinction of arbitration agreements are raised—particularly where the context is one of family settlements, shareholder agreements, and foreign investment arrangements judicial overreach cannot be tolerated. The arbitral tribunal is the right place to inquire, with adherence to kompetenz-kompetenz and curbing pre-arbitral delay of litigation. The case also points to the significance of drafting clarity, the requirement of separating different legal relationships (family, shareholder, investor), and the equity-based protection of family settlements in Indian law.
For lawyers, corporate clans, and investors alike, the verdict is unequivocal: unless contractual extinction is patent, commercial and family law disputes must be decided by arbitration wherever there is an arguable arbitration agreement. The Supreme Court’s analytical strategy in this game-changing case will influence Indian arbitration jurisprudence for decades to come.
FAQS
Q1. What is meant by “novation” here?
Novation is the substitution of a current contract (and, typically, its clause of arbitration) with a fresh contract which expressly or impliedly brings to an end the original one. The clause of arbitration typically dies unless the new contract specifically saves it or is contemporaneous.
Q2. Do courts have jurisdiction to rule on validity of arbitration agreements in referring a case to arbitration?
No, save in clear cases of ex facie invalidity or non-existence; otherwise, the courts must remit the dispute to the arbitral tribunal, which determines jurisdiction and arbitrability.
Q3. What is kompetenz-kompetenz and what influence does it have on arbitration?
Kompetenz-kompetenz is the rule that the arbitral tribunal possesses competence to determine its own jurisdiction, including whether the arbitration agreement is valid or has been replaced.
Q4. As the relationships and contracts between parties evolve (family to shareholders to foreign partners), which of these arbitration clauses holds sway?
This is contingent upon a precise examination of all contracts, parties, and intent. The arbitral tribunal will determine if prior agreements were fully replaced or if they coexist for separate disputes.
Q5. Why did the Supreme Court reverse the High Court judgment in this case?
Since the Supreme Court decided that issues of novation and survival of arbitration clause are fact-sensitive and are not clearly deadwood. The limited role of the court at Section 11 referral stage is not to determine complicated questions of validity unless agreement’s existence is clearly void.
Q6. Is there special protection for family arrangements in law?
Yes. Courts construe family settlements with equity and generosity, attempting to enforce amicable arrangements unless they are clearly void in law or disregarded by parties’ behavior.
