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Novation, Rescission & Alteration of contracts and Its interplay with reference of parties to Arbitration

The article is inscribed by Advocate Advait Ghosh.

INTRODUCTION

Arbitration arises when there is a valid & subsisting agreement/contract between the parties. Commercial contracts & agreements often change substantially, and often new contracts arise in place of old contracts, significantly altering the rights & liabilities of the contracting parties. Arbitration clauses which are present in these contracts and agreements also can undergo a change, and in some cases they can completely be expunged also. Section 16 of The Arbitration & Conciliation Act, 1996 mandates that an “arbitration clause which forms a part of the contract shall be treated as an agreement independent of terms of the contract”. Despite this principle, there are certain instances in which the arbitration clause is completely expunged. This article will endeavour to explain the circumstances in which arbitration clauses & agreements successfully undergo “novation, rescission & alteration” under the Indian Contract Act, 1872and the circumstances in which they do not.

The meaning of Novation, Alteration & Rescission

As per the Oxford English Concise dictionary, the word “novation” is derived from the word “novel” which means something new. The word alteration is of course derived from “alter” which means change and rescission is a derivative of “rescind” which means to abandon.In the case of Scarf vs Jardine [1] the concept of novation was defined as thus “a contract is in existence , some new contract is substituted for it, either between same/different parties, the consideration being mutual discharge of old contract”.

STATUTORY RECOGNITION

Section 62 of The Indian Contract Act, 1872 says that” If the parties to a contract agree to substitute a new contract for it, or rescind or alter it, the original contract need not be performed.”

Illustration- A owes B 10000. A enters into agreement with B, and gives B a mortgage of his estate for 5,000, in place of debt of 10000. This is a new contract which extinguishes the old.

Section 62 of The Indian Contract Act, 1872 plays a significant role in arbitration. We shall soon see in what way through illustrated case-Laws.

  1. WAPCOS LTD VS SALMA DAM JOINT VENTURE LTD[2](NOVATION OF CONTRACT WHITTLES AWAY RIGHT OF ARBITRATION)[3]

FACTS – The Ministry of External Affairs and the Appellant, which is a Public Sector Enterprise dealing with hydroelectricity entered into an agreement for “reconstruction, rehabilitation & completion of Salma Dam project”. Appellant was given the task of administrative & contract management services by the Ministry of External Affairs. Salma Dam Joint Venture was the successful bidder and was awarded the project. Conditions of Particular Applications (for short “CoPA”) was executed between the parties.  Clause 20.1 thereof deals with Contractor’s claim and Clause 20.6 deals with Arbitration. The consideration of the contract agreement had been Rs.253 crores, however on representations made it was raised to 400 crores. Subsequently, SDJV and WAPCOSL signed a revised agreement for the rates, referred to as the Amendment of Agreement (for short, “AoA”), dated 09.06.2015.

Despite signing of AoA, SDJV raised certain claims before the Engineer of WAPCOSL. After rejection of said representation, SDJV preferred six appeals to the Technical Committee constituted in terms of clause 2.1 of Section – 02 of AoA. Five of these appeals were rejected/disposed of vide report of the Technical Committee dated 28.10.2016.

Notwithstanding the abovementioned letters sent by AIL, upon rejection of the claims of SDJV by the Technical Committee, on 28.10.2016, SSPPL, unilaterally, espousing claims of SDJV proceeded to invoke the arbitration process, under clause 20.6 of CoPA and also appointed a nominee arbitrator, vide letter dated 12.11.2016. WAPCOSL, in response, vide letter dated 05.12.2016, recorded that since the Amended agreement has been executed between the parties, which provides for an entirely different mode of dispute resolution, the arbitration clause does not exist anymore, hence recourse cannot be taken to arbitration. The Delhi High Court allowed the application, aggrieved by this decision the Supreme Court was approached.

Issue – before the Supreme Court?

Whether there exists a valid arbitration agreement between the contracting parties, so that parties can be successfully referred to arbitration?

The Supreme Court opined that in this case parties had agreed to amend the terms & conditions of the original contract agreement, after due negotiations. The dispute resolution clause of the new agreement is as follows-“in case of any dispute or difference on technical specifications of any contract, the decision of CMD, Wapcos will be final and binding”. Only in case of “force majeure” can arbitration be sought to be invoked.

The Court noted that the Amended Agreement has not been challenged, & that it is a matter of record that the amended agreement was given effect to. The Court opined that is not uncommon in the commercial world for parties to amend original contract and give up their claims under that agreement. In this case the parties have consciously amended the agreement, & by doing that they have given up their pending claims under the old contract. In terms of the new contract, no arbitration claim will be valid except for “force majeure”. The Respondent cannot be permitted to take recourse to arbitration for claims which have been resolved by the amended agreement. The Court said that in terms of Section 62 there has been novation of contract, & new contract exists now, in which there is no provision for arbitration. Thus, arbitrator cannot be appointed under Section 11 of The Arbitration & Conciliation Act, 1996 as there is no arbitration agreement in existence.

B:-UNION OF INDIA VS M/S MASTER CONSTRUCTIONS CO[4]

FACTS– Respondent was given the contract by the Union of India for construction of technical buildings in Bhatinda, Punjab. The work was to be done in phases. Agreement between the parties provided for a dispute resolution clause. In the month of April, 2000 the contractor furnished “no-claims certificate”. The payment of final bill was released to the contactor in July. On the same day, the contractor withdrew the “no-claims certificate”. The contractor moved application under Section 11(6) of The Arbitration & Conciliation Act, 1996, which was allowed by the Punjab & Haryana High Court. Appeal by way of Special Leave was preferred to the Supreme Court.

Appellant submitted that no arbitrable dispute persists in light of the “no-claims certificate”. The counsel for the Respondents has argued that the no-claims certificate was given under duress & coercion as the Appellant had withheld payment. They submitted that the issue whether the “no-dues certificate was given by contactor under duress & coercion should be examined by the arbitral tribunal”.

ISSUE BEFORE THE SUPREME COURT?

Whether the no-dues certificate given by the contractor means that the contract has been discharged by “mutual accord & satisfaction” in terms of Section 62 of Indian Contract Act, 1872?

SUPREME COURT– The Supreme Court opined that the instant case was an exception, as mentioned in National Insurance Company Ltd vs BogharaPolyfab Pvt Ltd. In this case no instance of financial duress or coercion has been established prima facie. Mere allegation that the “no-dues certificate” had been obtained would not lead to any arbitrable dispute. Hence the contract is said to have been discharged by “mutual accord & satisfaction” in terms of Section 62 of the Indian Contract Act, 1872.

The above illustrated case-Laws illustrate the concept of novation, rescission, and alteration of contract in the context of arbitration proceedings. The important thing is to take note is that despite the 2015 Amendment to The Arbitration & Conciliation Act, 1996 mandating that when Court considers application under Section 11 of the Act, it is only required to form a “prima-facie view whether the arbitration agreement exists”, even in this narrow domain if the parties are able to successfully prove novation, the remedy of arbitration will become infructuous.It is to be noted that novation or rescission should be of such nature to completely negate the arbitration clause or agreement because Section 16 of The Arbitration & Conciliation Act, 1996 mandates that “even if the contract is declared as invalid, the arbitration clause survives”. Let us see in what manner the Courts are dealing with plea of mutual accord & satisfaction after the 2015 Amendment to The Arbitration and Conciliation Act, 1996.

C.(ORIENTAL INSURANCE COMPANY LTD VS DICITEX FURNISHING PVT LTD[5]

FACTS- Dicitex obtained a standard” fire & insurance policy”, to cover the cost of goods lying in godown in Thane. The insurance policy had an arbitration clause. Fire broke out & all the goods were destroyed. Surveyors assessed loss to be in the region of 13 crores, ultimately the sum of 7 crores was paid. Dicitex entrusted the discharge voucher entrusted to it where it was written that “there was full & final settlement to the extent of 7 crores”. Dicitex denied that this was a clean discharge and said that it had been obtained under coercion. They made application under Section 11(6) of The Arbitration & Conciliation Act, 1996, despite the submission of Oriental Insurance that no dispute persists, matter was referred to arbitration. The Supreme Court was approached by way of Special Leave.

ISSUE BEFORE THE SUPREME COURT?

Whether in light of the discharge voucher given by Dicitex, the claims have been settled in full, and matter cannot be referred to arbitration?

SUPREME COURT- The Supreme Court opined that after the 2015 Amendment to the Arbitration Act, in an application under Section 11 of The Arbitration & Conciliation Act, 1996 the Supreme Court is only required to see whether “the arbitration clause or agreement exists”. In the present case it is evidenced from the correspondence that Dicitex has been repeatedly pleading coercion &duress, and it is not a plea without assertion. In proceedings under Section11 of The Arbitration and Conciliation Act, 1996 the Court is only required to ascertain the existence of the arbitration clause or agreement. In this case the Supreme Court opined that the plea of “claim being satisfied by mutual accord and satisfaction” will be decided by the arbitral tribunal.

CONCLUSION

It is noteworthy to conclude that the 2015 Amendment of The Arbitration & Conciliation Act, 1996 has somewhat circumscribed the plea of “mutual accord & satisfaction” under The Indian Contract Act, 1972, as in a plea under Section 11 of the Arbitration Act the Court will only ascertain the existence of the arbitration agreement, and will not go into the question of “accord and satisfaction”. The amendment may create an impression that this plea has become completely fossilized, and Master Infrastructure Company Ltd is no longer good law. In the view of the author, this is a fallacious belief as we can see how in the case of WAPCOS the Court declined reference to Arbitration in an application under Section 11 of The Arbitration & Conciliation Act, 1996, by contending that the old contract had been replaced by a new contract, in other words, novation of contract as per Section 62 of The Indian Contract Act.1872. It can be said with a certain amount of conviction that Master Infrastructure has not been overruled because in National Insurance Company vs BogharaPolyfab Pvt Ltd[6] & Oriental Insurance Company Ltd vs Dicitex Furnishing Pvt Ltd it was said by the Supreme Court that the facts of these cases were different from Master Infrastructure because in Master Infrastructure the plea of coercion was completely unsubstantiated in totality.


References

[1]1882 7 APP CAS 345.

[2]2019 SCC OnLine SCC 1464

[3]SLP (C) No. 7979 of 2019)

[4]CIVIL  APPEAL NO. 3541 OF 2011

[5]CIVIL APPEAL No.     8550 OF 2019

[6] ibid

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