Contracts may exist even after performance of the contract is over

Cause Title : M/s. Meenakshi Solar Power Pvt. Ltd. versus M/s. Abhyudaya Green Economic Zones Pvt. Ltd. and Ors., Supreme Court Of India, Civil Appeal No. 8818 Of 2022

Date of Judgment/Order : November 23, 2022

Corum : B.R. Gavai; J., B. V. Nagarathna; J.

Citied: 

1. Vidya Drolia vs. Durga Trading Corporation (2021) 2 SCC 1
2. Indian Oil Corporation Ltd. vs. NCC Ltd. 2022 SCC OnLine SC 896
3. Union of India vs. Kishorilal Gupta and Bros. (1960) 1 SCR 493
4. Young Achievers vs. IMS Learning Resources Pvt. Ltd. (2013) 10 SCC 535
5. M.B.S Impex Pvt. Ltd. vs. Minerals and Metals Trading Corporation (2020) 5 ALD 185
6. National Insurance Co. Ltd. vs. Boghara Polyfab Pvt. Ltd. (2009) 1 SCC 267
7. SBP & Co. vs. Patel Engineering Ltd. (2005) 8 SCC 618 
8. Damodar Valley Corporation vs. K.K. Kar (1974) 1 SCC 141

Background

The appellant is engaged in the business of producing power through running and operating thermal/solar/hydro power plants. The respondent No.1 is a Solar PV Power Project located while Respondent Nos. 2 and 3 are promoters and 100% shareholders of respondent No.1 Company. Respondent No. 4- M/s. Meenakshi Power Pvt. Ltd. is an affiliate of the appellant herein. The power project was partly financed by Corporation Bank and M/s. IFCI Venture Capital Funds Limited.

The appellant showed interest in buying the said power project by purchasing 100% of the company and therefore entered into a Share Purchase Agreement with the respondent Nos. 2 and 3 comprising all of its assets including land, buildings, plant, equipment as a going business entity, for an irrevocably frozen Purchase Price of Rs. 29 Crores. The appellant agreed to purchase 100% Equity Shares and 100% Preference Shares of respondent No.1 Company by way of taking over the loans of respondent No.1 Company and paying the balance amount to the sellers i.e., respondent Nos. 2 and 3 towards net equity value.

Subsequently, a Tripartite Agreement was entered into by the appellant herein through its affiliate i.e., respondent No.4 with the respondents Nos. 2 & 3 and IFCI recording the execution of the Share Purchase Agreement and payment of Rs. 50 lakhs to respondent Nos. 2 and 3 in terms of the said Agreement.

Thereafter, an addendum to the Share Purchase Agreement was signed between respondent Nos.1 to 3 and respondent No.4 wherein the latter agreed to remit an amount of Rs. 1.65 Crores to respondent Nos. 1 to 3 to regularize the loan with the Corporation Bank and facilitate the transfer of the project company.

The appellant went to the Commercial Court against the Respondents when dispute arose and got a ad-interim injunction restraining the respondents from alienating their shares. The Appellant sent notice  invoking arbitration as per clause in the SHA and appointed Arbitrators but on receiving no response to the aforesaid notice, the aggrieved appellant herein filed an application under Section 11(6) of the Act of 1996 which came to be dismissed vide impugned judgment and order passed by the High Court. The Appellant approached the Supreme Court against the impugned judgment.

Judgment

The Supreme Court observed that the respondent argued that owing to novation of share purchase agreement, the arbitration clause no longer existed so as to resolve the dispute between the parties through arbitration. On the other hand, the plea of the appellant is that there was no such novation of the share purchase agreement and the arbitration clause was very much available and hence, the High Court ought to have referred the matter to arbitration.

Section 11(6) deals with situations where the Supreme Court or, as the case may be, the High Court or any person or institution designated by such Court to take the necessary measure, unless the agreement on the appointment procedure provides other means for securing the appointment.

The SC in National Insurance Co. Ltd. (supra) and SBP & Co. (supra) while referring to SBP & Co. vs. Patel Engineering Ltd. (2005) 8 SCC 618, has identified and segregated the issues that could be considered in an application filed under Section 11(6) of the Act of 1996 into three categories. They are enumerated as under:

(i) issues which the Chief Justice or his designate is bound to decide;

(ii) issues which he can also decide, that is, issues which he may choose to decide or leave it to the Arbitral Tribunal to decide; and

(iii) issues which would be left to the Arbitral Tribunal todecide, and thereafter had enumerated them as under:

The issues (first category) which the Chief Justice/his designate will have to decide are:

(a) Whether the party making the application has approached the appropriate High Court.

(b) Whether there is an arbitration agreement and whether the party who has applied under Section 11 of the Act, is a party to such an agreement.

The issues (second category) which the Chief Justice/his designate may choose to decide (or leave them to the decision of the Arbitral Tribunal) are:

(a) Whether the claim is a dead (long-barred) claim or a live claim.

(b) Whether the parties have concluded the contract/transaction by recording satisfaction of their mutual rights and obligation or by receiving the final payment without objection.

The issues (third category) which the Chief Justice/his designate should leave exclusively to the Arbitral Tribunal are:

(i) Whether a claim made falls within the arbitration clause (as for example, a matter which is reserved for final decision of a departmental authority and excepted or excluded from arbitration).

(ii) Merits or any claim involved in the arbitration.

In Damodar Valley Corporation (supra) it has been observed as under:

(1) an arbitration clause is a collateral term of a contract as distinguished from its substantive terms; but nonetheless it is an integral part of it;

(2) however comprehensive the terms of an arbitration clause may be, the existence of the contract is a necessary condition for its operation; it perishes with the contract;

(3) the contract may be non est in the sense that it never came legally into existence or it was void ab initio;

(4) though the contract was validly executed, the parties may put an end to it as if it had never existed and substitute a new contract for it solely governing their rights and liabilities thereunder;

(5) in the former case, if the original contract has no legal existence, the arbitration clause also cannot operate, for along with the original contract, it is also void; in the latter case, as the original contract is extinguished by the substituted one, the arbitration clause of the original contract perishes with it; and

(6) between the two falls many categories “of disputes in connection with a contract, such as the question of repudiation, frustration, breach, etc. In those cases, it is the performance of the contract that has come to an end, but the contract is still in existence for certain purposes in respect of disputes arising under it or in connection with it. As the contract subsists for certain purposes, the arbitration clause operates in respect of these purposes.

Even if the performance of the contract has come to an end, the contract can still be in existence for certain purposes in respect of disputes arising under it or in connection with it.

In view of the above judgments, the SC disagreeing with the HC observed that the High Court was not right in dismissing the petition under Section 11(6) of the Act of 1996 filed by the appellant herein by giving a finding on novation of the Share Purchase Agreement between the parties as the said aspect would have a bearing on the merits of the controversy between the parties. Therefore, it must be left to the Arbitrator to decide on the said issue also.