The Delhi High Court in Knowledge Podium Systems (P) Ltd. v. S.M. Professionals Services (P) Ltd., addressed the matter, stressing the essentiality of the Novation and Arbitration agreement.
The present application was filed under Section 8 of the Arbitration and Conciliation Act, 1996, read with Order 7 Rule 11 CPC for rejection of the plaint and referring the parties to the arbitration.
Plaintiff sought for the recovery of Rs 2,58,24,648 being refund of the available interest-free refundable security deposit. A decree of mandatory injunction was also sought to hand over the movable of the plaintiff, which has been stated to be illegally detained by the defendant.
The bench noted that the parties agreed to settle their disputes through arbitration in the original lease deed and the maintenance agreement.
Counsel for the plaintiff pointed out that the plaintiff and the defendant were family-held companies at the time of execution of the Lease Deed and the Maintenance Agreement. The family exited from the plaintiff company sometime in September 2018, and new management took over the charge of the plaintiff company. It was strongly urged that there was a novation of Agreement. The original Lease Deed and the Maintenance Agreement dated 21-02-2017 stood superseded and novated because of the terms and conditions settled upon in the emails dated 26.09.2018 and 15.10.2018. There was no arbitration agreement in the novated contract, and hence, the present application is misplaced.
The court observed that the correspondence exchanged between the parties based on which it was pleaded by the plaintiff that there was a novation of a contract.
Whether it could be said that on account of the exchange of the above-stated communication, the parties rescinded the old agreement being the registered Lease Deed and the Maintenance Agreement of the same and completely novated the contract.
In the above context, reference was made to Section 62 of the Contract Act:
“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.”
Supreme Court’s decision in Lata Construction v. Dr. Rameshchandra Ramnikalal Shah, (2000) 1 SCC 586 was also cited.
A Novation takes place only when there is a complete substitution of a new contract in place of the old.
The bench further examined the scope of Section 8 of the Arbitration Act and referred to the Supreme Court decision in Vidya Drolia v. Durga Trading Corpn.,(2019) 20 SCC 406
The bench noted that for rejection of a Section 8 application, a party must make a prima facie case of non-existence of valid arbitration agreement by summarily portraying a solid case. The court should refer to the matter if the validity of the arbitration agreement cannot be determined on a prima facie basis.
High Court opined that in light of the facts and circumstances of the present case prima facie, it could not be said that there was a completely new contract and the old registered lease deed read with Maintenance Agreement were novated and substituted by a completely new contract.
Defendant’s email did not expressly state that all the terms and conditions stood superseded or novated.
Hence, Court found that the present issue required deeper consideration and would be best left to the arbitral tribunal to adjudicate upon.
 2021 SCC OnLine Del 136.
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