Introduction

Arbitration is the most competent dispute resolution method between parties when they prefer to refer the dispute for arbitration, and the decision by the Arbitral tribunal will be binding. Parties may agree to arbitrate a dispute by referring it to arbitration through an Arbitration Clause or another means. The Arbitration Clause can be included in the Agreement or not.

In India and other countries, it is well-established law that an Arbitration Clause is considered independent or separate from the contract containing that clause. This principle is known as the Doctrine of Separability. The existence and validity of the arbitration clause are not affected when the legality or the contract is challenged.

A clause of arbitration is separate from the contract. The arbitration clause will apply even if an agreement is canceled, terminated, or violated. If the parties agree to novate a contract completely, it is unclear whether the arbitration clause from the previous warranty will be retained.

Common law states that novation is when an agreement is replaced completely by a new one as a result of a transfer. Both parties to the contract must agree if the contract is dissolved. This means that the assignee must approve for the arbitration contract to be enforced.

A novation agreement replaces an existing agreement. The parties agree to modify the roles and responsibilities in the new contract. The Indian Contract Act of 1973, Section 62, recognizes novation of contract.

The High Court of Delhi, in Sanjiv v. Seema Kumareja & Others, tries to clarify the situation under the Arbitration and Conciliation Act 1996 by referring to relevant provisions of the Indian Contract Act 1872, but the Apex Court overruled the judgment on account of the limited power of the court under section 11, which gives power to prima facie determine whether there is an arbitration agreement between the

This article examines whether an arbitration clause survives the novation or the supersession of a contract containing that condition.

What is the Novation of Contract ?

A novation occurs when parties to a contractual agreement agree to replace the terms of a contract with new terms or when parties are restored by a third party. It is important to note that novation must be done by both parties in harmony. This includes new parties who have replaced an older party. The old contract is completely replaced by the new contract.

First, the parties must agree on ad indemnities. Second, the parties must have had a prior contract. Thirdly, Substitution or recession of a contract will result in a valid contract. When a contract is novated, and the old Agreement is nullified, the parties will be bound by the new contract. The Act states that the original contract does not have to be fulfilled if both parties agree to replace it with a new one, withdraw it or change it.

In Lata Construction & Ors v. Rameshchandra Ramniklal Shah, the Supreme Court held that only under certain circumstances is the original contract required to be performed; novation requires a complete replacement of the previous contract with the new contract. The previous contract’s conditions should be annulled or completely altered by the substituted contract.

In Ramdayal V. Maji Devdiji, the court stated that novation is when new clauses or parties have been added to a contract. To enter into a contract of novation, a party must consent to having his debt or obligation extinguished. A novation cannot take place until this is done. The test determines whether the parties intend to enter into a new contract.

According to the Calcutta High Court ruling in the case Juggilal kamlapat v. NV Internationale, a contract’s fundamental nature must be altered for a novation to have any effect.

A contract can be novated in two different ways. First, by replacing the original contract terms with new ones and second, by changing the parties to the contract.

Effect of a Novation of Contract Clause in Arbitration

The doctrine of separability is a theoretical and practical foundation of arbitration in all jurisdictions. The doctrine of separability states that an arbitration provision in a contract can be viewed as existing independent of the contract in which it is included, even if the contract in question is terminated, violated, or declared invalid.

The doctrine was crucial to the success of arbitration when a tribunal’s jurisdiction was challenged. If a party wants to avoid arbitration, they can claim that the arbitration clause in the contract is illegal because it is part of the Agreement. The parties also claimed that the arbitral panel established, according to it, lacked the authority to issue an award.

The doctrine of separability only applies to the validity of the arbitration agreement as a result of the invalidity of the main contract. This doctrine is only applicable in this situation. In the case of Novation, the situation is different, as the parties willingly replace the contract with a newer one. Arbitration agreements are created by an agreement and can be revoked.

The arbitration clause would also be nullified if the contract was replaced by another. If the contract was terminated as a unit, then the arbitration clause would also be terminated.

In the recent case of Sanjeev Prakash vs Seema Kukreja, the Delhi High-count addressed the principle. The court stated that every arbitration agreement was created by an agreement and that it could be destroyed by that Agreement. This means that if a contract is replaced by another contract, the arbitration clause that is part earlier contract will fall along with it. If the original contract is terminated, the arbitration clause that is part of it perishes

The Apex Court also addresses the issue of whether arbitration clauses can be invoked when a dispute arises under a contract that has been superseded. In the instant case, it is held that the arbitration clause is a part of an earlier contract and therefore falls away if this contract is replaced by another. The arbitration clause will not apply to disputes involving the validity of a contract ab into. Its operative force is dependent on the existence and validity of the contract.

In Larsen and Toubro Ltd. V. Mohan Lal Harbans Lal Bhayana, the Supreme Court held that when the terms in the supplementary contract changed the whole structure of the principal Agreement, it was impossible to arbitrate between the parties the claims of the appellant and a Section 11 application would be misconceived.

The arbitration provision is no longer in effect when a new contract replaces an older one with an arbitration clause. It is clear that the parties have a novated contract when they decide to enter a new agreement and agree on the dispute resolution procedures for the future.

In all of these cases, the court’s position seems to be slightly deferred by the principle of “Separability” or “Severability” of the arbitration agreement. It is the “acquiescence” of the parties that makes the difference between situations where contract conditions are violated or unfulfilled and those where the original contract is completely replaced with a new contract.

In the first instance, the contract becomes null because either one party failed to fulfill their obligations or it was missing a component that would have made it legally binding. The contract can be canceled in certain circumstances, but only if it is related to future performance. The contract and arbitration clause are both still valid for the purpose of determining damages.

In these circumstances, the arbitration clause, although it is part of the contract and meets all of the criteria of an essential contract as defined in section 7 of the Act of 1996, does not automatically abrogate because it is its own contract, with its foundation and limbs. When a contract has been novated, however, it is a different situation because the scheme of the new contract supersedes the original.

It is also possible to dissolve the arbitration agreement or provision with the consent of both parties, as it is based upon their mutual consent and has legal effects. In these cases, the parties have no right to rely upon an arbitration clause which has been terminated through the parties’ Agreement.

Conclusion

The Court has stated in multiple instances that it is the legal position that once a contract replaces an earlier contract containing an arbitration clause, the effect of this arbitration ceases along with the termination of the previous contract.

When the parties enter into a contract and agree on how to resolve disputes in the event of a dispute in the future, and the previous contract is not mentioned with respect to its resolution, and the novation has occurred. In a number of cases, the Courts have explained how a contract’s arbitration clause is affected by novation.