In order to not refer matters to Arbitration, prima-facie case of non-existence of arbitration agreement must be made: Delhi High Court
In case of doubt regarding non-existence of arbitration agreement, the Court has to refer the matter to Arbitration. Further, the court was of the opinion that there must be some prima-face case of non-existence of valid arbitration agreement to not refer a dispute to arbitration. The Delhi High Court presided over by J. J. Nath laid down this ratio in the case of Knowledge Podium System Pvt. Ltd. Vs. S M Professional Services Pvt. Ltd., [CS(COMM) 377/2020]. The brief facts of the case are that the defendant leased a property to the plaintiff on certain conditions and the plaintiff further deposited an interest-free refundable deposit of Rs. 1,90,14,720. Another fresh agreement was arrived between the parties regarding the use and occupation of the premises and maintenance with effect from April 2018. But later it became commercially unviable for the Plaintiff to retain the premises rented and hence began negotiations with the defendant to reduce the rent. However, even before a formal termination of the agreement between the parties or giving a chance to the Plaintiff to remove his movables, the defendant took possession of the premises. The Plaintiff asked for his security deposit, but the defendant invoked arbitration under Section 8 of the Arbitration and Conciliation Act, 1996. The Plaintiff in the case submitted that there was a new agreement signed between the parties in 2018 that did not contain any arbitration agreement and so it superseded and novated the previous agreement. Further, the defendant contended that the main lease agreement contained an arbitration clause, and the new agreement was with respect to certain conditions about the premise. Hence the defendant contended that arbitration under Section 8 of the Act should be allowed. The Court in this case observed that it could not be prima-facie be stated that the new contract entirely superseded the old registered lease deed between the parties. The Court further was of the opinion that the matter would require deep consideration, therefore the court allowed the arbitration application under Section 8 of the Act. The court further observed that, “A novation takes place only when there is a complete substitution of a new contract in place of the old. Do the facts of the present case warrant a conclusion that there was a novation of contract? I may first see the scope of Section 8 of the Arbitration Act.”
 IN THE HIGH COURT OF DELHI AT NEW DELHI Reserved on: 12.01.2021 Pronounced on: 25.01.2021 CS(COMM) 377 2020 KNOWLEDGE PODIUM SYSTEMS PVT. LTD...... Plaintiff Through Mr.Shyam Kapadia Mr.Vikram B.Trivedi Mr.S.R.Trilokchandani Ms.Priya Diwadkar and Mr.Kartik Nagarkatti Ads. S M PROFESSIONAL SERVICES PVT. LTD...... Defendant HON BLE MR. J USTICE J AYANT NATH Through Mr Saurav Agrawal Mr Madhav Misra Mr Harshavardhan Singh Rathore Advs. J AYANT NATH J . IA No.8471 2020 This application is filed under Section 8 of the Arbitration and Conciliation Act 1996 read with Order 7 Rule 11 CPC for rejection of the plaint and for referring the parties to arbitration. The present suit is filed by the plaintiff for recovery of Rs.2 58 24 648 being refund of the available interest free refundable security deposit together with interest. A decree of mandatory injunction is also sought to handover the movables of the plaintiff which it is stated have been illegally detained by the defendant. Alternative relief of Rs.91 05 539 by way of damages or compensation is also sought. CS(COMM) 377 2020 Some of the relevant facts are that vide a Lease Deed dated 21.02.2017 the defendant leased to the plaintiff the office premises on the First Floor and Second Floor at 21 IT Park Sahastradha Road Dehradun Uttarakhand admeasuring 39 614 sq.ft. super built up area with 22 car parking slots the building for nine years from 01.01.2017. 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 lease deed there was a lock in period from 01.01.2017 to 31.12.2022. The plaintiff deposited with the defendant an interest free refundable deposit of Rs.1 90 14 720 being 12 months rental under the Lease Deed Rs.1 04 58 096 being 12 months monthly fit out charges and Rs.57 04 416 being annual maintenance charges respectively under the Maintenance Agreement. It is the case of the plaintiff that a Fresh Agreement was arrived at between the parties in respect of use and occupation of the said premises and maintenance thereof with effect from April 2018. It is stated that the terms and conditions of the Fresh Agreement were captured and agreed upon in emails dated 26.09.2018 and 15.10.2018 exchanged between the parties. Hence it is the case of the plaintiff that the Lease Deed and the Maintenance Agreement stood substituted novated on account of the said Fresh It is stated that later it became commercially unviable for the plaintiff to retain the rented premises. It is stated that the plaintiff initiated negotiations with the defendant for reduction of rentals and maintenance with effect from April 2019. However it is stated that the defendant did not budge. On 17.01.2020 it is stated the defendant illegally disconnected the CS(COMM) 377 2020 electricity connection of the rented premises as means to coerce the plaintiff to make payments. It is stated that before the plaintiff could formally terminate the Fresh Agreement and remove its movables assets furniture etc lying in the rented premises and hand over vacant physical possession of the premises to the defendant one of the employees of the plaintiff who was present at the rented premises at that time acting in concert with the defendant handed over the keys of the rented premises to the defendant without seeking authorization of the plaintiff. On 03.02.2020 the plaintiff sent a legal notice to the defendant whereby it terminated the Fresh Agreement for the reasons stated therein and also requested defendant No. 1 to adjust a sum of Rs. 61 02 584 from the available interest free refundable security deposit of Rs. 3 19 27 232 and to refund the remaining interest free refundable security deposit of Rs.2 58 24 648 . The legal notice also sought grant of access to the authorised representative of the plaintiff to remove the movables and the server. Hence the present suit. In the present application the defendant applicant has taken the stand that the plaintiff has failed to place on record the fact that the plaintiff was on 10.08.2020 served with an advance copy of the petition filed under Section 11 of the Arbitration and Conciliation Act which has since been registered as Arbitration Petition No. 360 2020. The said arbitration petition is said to be pending. Essentially the case of the defendant is that the registered Lease Deed dated 21.02.2017 and the Maintenance Agreement had a lock in period of six years and was valid up to 31.12.2022. It is the case of the defendant that in terms of the Lease Deed dated 21.02.2017 and the Maintenance CS(COMM) 377 2020 Agreement of the same date the plaintiff is obliged to pay the outstanding rents and maintenance charges for the lock in period i.e. upto 31.12.2022. It is further pleaded in the present application that the parties to the present lis have already chosen their forum for the resolution of disputes i.e. arbitration and as such the present suit is not maintainable. It is pleaded that the Lease Agreement dated 21.02.2017 and the Maintenance Agreement of the same date contain arbitration clauses and hence the present application under Section 8 of the Arbitration and Conciliation Act. I have heard learned counsel for the parties. 11. Learned counsel for the plaintiff has 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 has exited from the plaintiff company sometimes in September 2018 and a new management has taken over charge of the plaintiff company. It is strongly urged that there is a novation of Agreement and the original Lease Deed and the Maintenance Agreement dated 21.02.2017 stand 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 is no arbitration agreement and hence the present application is misplaced. 12. Learned counsel for the plaintiff has also relied upon the judgments of the Supreme Court in the case of Young Achievers vs. IMS Learning Resources Pvt. Ltd. 10 SCC 535 Sukanya Holdings Ltd. Vs. Jayesh H. Pandya & Anr. 5 SCC 531 and Booz Allen and Hamilton INC. vs. SBI Home Finance Ltd. & Ors. 5 SCC 532. 13. Learned counsel for the defendant has argued to the contrary. He states that only the agreed rental amount was agreed to be reduced in terms CS(COMM) 377 2020 of the emails that were exchanged and all the other terms and conditions of the Lease Deed dated 21.02.2017 and the Maintenance Agreement remained unchanged. It is stated that the parties remain bound by the arbitration agreement. Learned counsel for the defendant has relied upon the latest judgment of the Supreme Court in the case of Vidya Drolia & Ors. vs. Durga Trading Corporation 2020 SCC OnLine 1018 to plead that in these circumstances this court need not dwell deep into the arguments of the plaintiff and the matter be referred to arbitration. It is also stated that in the petition filed under Section 11 of the Arbitration Act for appointment of an arbitrator the plaintiff keeps taking adjournments on the ground that the present application is pending in the present suit. Hence he stresses that this court may decide the present application and appoint a learned Arbitrator to adjudicate the dispute between the parties I may first look at the arbitration clause in the Lease Deed dated 21.02.2017. Clause 9.1 of the Lease Deed reads as follows: “9.1 The Parties shall attempt in the first instance to resolve any dispute or difference arising in any way or manner out of in relation to or in connection with this Lease Deed by conciliation. If such a dispute is not resolved through conciliation within thirty days after commencement of discussions the same shall be decided by arbitration by a sole arbitrator appointed by the mutual consent of the Parties. The decision of the sole arbitrator shall be final and binding on the parties. The arbitration proceeding shall be conducted in accordance with the Arbitration and Conciliation Act 1996. Arbitration proceedings shall be conducted in English Language. The place of arbitration shall be New Delhi.” 15. A similar arbitration clause namely Clause 10.1 also exists in the Maintenance agreement dated 21.02.2017. CS(COMM) 377 2020 It undoubtedly follows that in the original lease deed and the maintenance agreement the parties have agreed to settle their disputes through arbitration. I may now look at the defence of the plaintiff to the present application. It has strongly been urged that on account of the subsequent novation of the contract through exchange of the emails dated 26.09.2018 and 15.10.2018 a new contract has come into being superseding the Lease Deed dated 21.02.2017 and the Maintenance Agreement of the same date. I may now look at the correspondence exchanged between the parties on the basis of which it is pleaded by the plaintiff that there was a novation of contract. On 26.09.2018 the plaintiff had written an e mail to the defendant which reads as follows: “Anil ji and Rajendra ji Refer the discussion last evening again where is was agreed that SM will reduce billing from April 18 in view of the financial constraints that KP is going thru and the slow down of its growth plans as it was originally envisaged . All other points were agreed and it was asked that the fitout charges should also reduce. Hence I am documenting the Understaning for confirmation so that billing could be closed in September and GST compliance be done. SM shall Bill only upto 60% of the 2nd floor area of 22172 sq ft. @ 42 rent fixed fit out amortisation shall be billed For the above area 15 rupees per sq ft on 8 year basis CAM shall be billed @ rs 8 per sq ft For cafeteria rs 20 per sq ft would be billed for the cafeteria services of the cafeteria space. Electricity will be paid directly at actuals Since KP is not using campus parking no billing shall be billed . CS(COMM) 377 2020 SM shall not separate divide the 2nd floor at the moment but shall try and continue its search to find a suitable tenant to make up for the loss of rent and KP shall have no objections to it. However before bringing in any new client on 2nd floor KP shall have a first right of refusal to expand . KP shall not be using the FF other than the cafeteria on shared basis and SM shall try and find out other tenements to cover up on loss of Regards Mukul” 19. On 15.10.2018 the defendant replied to the said e mail stating as follows: “Hi Mukul Following are the agreed terms for your convenience. We will get an addendum created as per the below.... • KP will use the second floor up to 60% of the area. SM shall bill KP for the usage of the second floor as per the following... o Rent for 13 300 sq. ft.@ Rs. 42 sq. ft. o Fit out amortization on 8 year basis for 13 300 sq. ft.@ Rs. 15 sq. ft. o CAM for 13 300 sq. ft.@ Rs. 8 sq. ft. • KP will use only the cafeteria on the first floor on the shared basis. SM shall bill @ Rs. 20 sq. ft for the area of cafeteria as per actual floor area. • KP will not use the campus parking. SM shall not bill KP for the parking. • KP will pay for electricity as per consumption. SM will ensure that a dedicated meter is installed for measure the electricity usage of KP. CS(COMM) 377 2020 We still need to discuss and finalize the following two items. Can we have a quick chat tomorrow whenever convenient • Lock in period • Deposit Thanks and regards Rajendra” It is admitted by the parties that based on these two documents there was an adjustment of rents. The question is can it be said that on account of the exchange of these communications the parties have rescinded the old agreement being the registered Lease Deed dated 21.02.2017 and the Maintenance Agreement of the same date and completely novated the contract. 21. As noted above the submission of the plaintiff is that on account of these two communications exchanged between the parties the old contract got novated and was substituted by a new contract which does not have an arbitration agreement. In this context reference may be had to Section 62 of the Contract Act which defines novation as follows: “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. In this context reference may be had to the judgment of the Supreme Court in Lata Construction and Ors. vs. Dr.Rameshchandra Ramnikalal Shah and Anr. 1 SCC 586 where the Supreme Court held as follows: CS(COMM) 377 2020 “9. We may at this stage refer to the provisions of Section 62 of the Indian Contract Act which provides as under: “62. 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.” This provision contains the principle of “novation” of 10. One of the essential requirements of “novation” as contemplated by Section 62 is that there should be complete substitution of a new contract in place of the old. It is in that situation that the original contract need not be performed. Substitution of a new contract in place of the old contract which would have the effect of rescinding or completely altering the terms of the original contract has to be by agreement between the parties. A substituted contract should rescind or alter or extinguish the previous contract. But if the terms of the two contracts are inconsistent and they cannot stand together the subsequent contract cannot be said to be in substitution of the earlier contract.” 24. Hence a novation takes place only when there is a complete substitution of a new contract in place of the old. Do the facts of the present case warrant a conclusion that there was a novation of contract I may first see the scope of Section 8 of the Arbitration Act. Section 8 of the Arbitration Act reads as follows: “8. Power to refer parties to arbitration where there is an arbitration agreement.— 1) A judicial authority before which an action is brought in a matter which is the subject of an arbitration agreement shall if a party to the arbitration agreement or any person claiming CS(COMM) 377 2020 through or under him so applies not later than the date of submitting his first statement on the substance of the dispute then notwithstanding any judgment decree or order of the Supreme Court or any court refer the parties to arbitration unless it finds that prima facie no valid arbitration agreement 2) The application referred to in sub sectionshall not be entertained unless it is accompanied by the original arbitration agreement or a duly certified copy thereof. Provided that where the original arbitration agreement or a certified copy thereof is not available with the party applying for reference to arbitration under sub sectionand the said agreement or certified copy is retained by the other party to that agreement then the party so applying shall file such application along with a copy of the arbitration agreement and a petition praying the court to call upon the other party to produce the original arbitration agreement or its duly certified copy before that court. 3) Notwithstanding that an application has been made under sub section and that the issue is pending before the judicial authority an arbitration may be commenced or continued and an arbitral award made.” I may look at the latest judgment of the Supreme Court on Section 8 of the Arbitration Act in the case of Vidya Drolia and Ors. vs. Durga Trading Corporation meaning of non arbitrability and when the subject matter of the dispute is not capable of being resolved through arbitration and CS(COMM) 377 2020 ii) the conundrum “who decides” whether the court at the reference stage or the arbitral tribunal in the arbitration proceedings would decide the question of non arbitrability. The second aspect also relates to the scope and ambit of jurisdiction of the court at the referral stage when an objection of non arbitrability is raised to an application under Section 8 or 11 of the Arbitration and Concilliation Act 1996Ratio of the decision in Patel Engineering Ltd. 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 and even post the amendments vide Act 33 of 2019 is no b) Scope of judicial review and jurisdiction of the court under Section 8 and 11 of the Arbitration Act is identical but extremely limited and restricted. c) The general rule and principle in view of the legislative mandate clear from Act 16 and Act 319 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 clausesii) or of Section 34(2)(a) or sub clause of Section 34(2)(b) of the Arbitration Act. d) Rarely as a demurrer the court may interfere at the Section 8 or 11 stage when it is manifestly and ex facie certain that the CS(COMM) 377 2020 arbitration agreement is nonexistent invalid or the disputes are non arbitrable though the nature and facet of non arbitrability would to some extent determine the level and nature of judicial scrutiny. The restricted and limited review is to check and protect parties from being forced to arbitrate when the matter is demonstrably ‘non arbitrable’ and to cut off the deadwood. The court by default would refer the matter when contentions relating to non arbitrability are plainly arguable when consideration in summary proceedings would be insufficient and inconclusive when facts are contested when the party opposing arbitration adopts delaying tactics or impairs conduct of arbitration proceedings. This is not the stage for the court to enter into a mini trial or elaborate review so as to usurp the jurisdiction of the arbitral tribunal but to affirm and uphold integrity and efficacy of arbitration as an alternative dispute resolution mechanism. 223. At the cost of repetition we note that Section 8 of the Act mandates that a matter should not be referred to an arbitration by a court of law unless it finds that prima facie there is no valid arbitration agreement. The negative language used in the Section is required to be taken into consideration while analyzing the Section. The Court should refer a matter if the validity of the arbitration agreement cannot be determined on a prima facie basis as laid down above. Therefore the rule for the Court is ‘when in doubt do 229. Before we part the conclusions reached with respect to question no. 1 are: a. Sections 8 and 11 of the Act have the same ambit with respect to judicial interference. CS(COMM) 377 2020 b. Usually subject matter arbitrability cannot be decided at the stage of Sections 8 or 11 of the Act unless it s a clear case of deadwood. c. The Court under Sections 8 and 11 has to refer a matter to arbitration or to appoint an arbitrator as the case may be unless a party has established a prima faciecase of non existence of valid arbitration agreement by summarily portraying a strong case that he is entitled to such a finding. d. The Court should refer a matter if the validity of the arbitration agreement cannot be determined on a prima facie basis as laid down above i.e. ‘when in doubt do refer’. e. The scope of the Court to examine the prima facie validity of an arbitration agreement includes only: a. Whether the arbitration agreement was in writing or b. Whether the arbitration agreement was contained in exchange of letters telecommunication etc c. Whether the core contractual ingredients qua the arbitration agreement were fulfilled d. On rare occasions whether the subject matter of dispute is arbitrable ” 27. Hence 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. But when in doubt the court has to refer the matter to arbitration. The court should refer the matter if the validity of the arbitration agreement cannot be determined on a prima facie basis. CS(COMM) 377 2020 In the present case in my opinion as the facts noted above show it cannot be prima facie said that there is a completely new contract and that the old registered Lease Deed dated 21.02.2017 read with the Maintenance Agreement of the same date have been novated and substituted by a completely new contract. The e mail dated 15.10.2018 sent by the defendant merely agrees to reduction of rent. It does not specifically state that all the terms and conditions of the Lease Deed and the Maintenance Agreement stand superseded or novated. The issue would require deeper consideration and is best left to the arbitral tribunal to adjudicate upon. I accordingly allow the present application. I appoint Mr. Justice G. S. Sistani (Mobile No.+91 9871300034) as the Sole Arbitrator to adjudicate the dispute between the parties. The plaintiff will be at liberty to raise the plea about non existence of an arbitration agreement before the Learned Arbitrator. It is left to the discretion of the Learned Arbitrator to fix his fees. The learned Arbitrator shall comply with mandatory stipulations. 31. The application stands disposed of. In view of the above the suit and pending applications if any also J AYANT NATH J CS377 2020 stand disposed of. J ANUARY 25 2021 CS(COMM) 377 2020 