SUPREME COURT APPOINTS SOLE ARBITRATOR TO DECIDE UPON THE ISSUE OF EXISTENCE OF ARBITRATION CLAUSE

Recently, a two-Judge Bench of the Supreme Court comprising Justice B.V. Nagarathna and Justice B.R. Gavai passed a Judgment dated 23.11.2022 in M/s. Meenakshi Solar Power Pvt. Ltd. vs. M/s. Abhyudaya Green Economic Zones Pvt. Ltd. and Ors. in Civil Appeal No. 8818 of 2022 (Arising out of SLP (Civil) No. 11570 of 2021), and thereby appointed a Sole Arbitrator to decide upon the issue of existence of Arbitration Clause in the present case and further, held that the High Court erred in dismissing the Application seeking Appointment of Arbitrator by observing that the Arbitration Clause contained in the Share Purchase Agreement dated 24.09.2018 was superseded and novated by a subsequent Tripartite Agreement dated 03.04.2019 executed between the Parties.

Facts

In this case, one, M/s. Meenakshi Solar Power Pvt. Ltd. (“Appellant”) is engaged in the business of power production. Whereas, one, M/s. Abhyudaya Green Economic Zones Pvt. Ltd. (“Respondent No. 1”) is the Owner of the Solar PV Power Project (“Power Project”) located at Kummera Village, Chevella Mandal, Ranga Reddy District, Telangana. The Promoters of the Power Project (“Respondent No. 2 and Respondent No. 3”) were 100% shareholders in the Respondent No.1 Company. One, M/ s. Meenakshi Power Pvt. Ltd. (“Respondent No. 4”) is an Affiliate of the Appellant herein. It is a Proforma Respondent in the present case while the other three Respondents are the contesting Respondents.

A Power Purchase Agreement was executed between Respondent No. 1 with Telangana State Southern Power Distribution Company Limited for period of 20 years. Further, the Power Project was partly financed by Corporation Bank, Film Nagar Branch, Hyderabad, and partly by M/s. IFCI Venture Capital Funds Limited.

However, due to some constraints, the Respondent No.1, Owner of the Power Project, failed to repay the debt amount to the Corporation Bank and M/s. IFCI Venture Capital Funds Limited. Hence, the Promoters of the Power Project i.e. the Respondent Nos. 2 and 3 were willing to sell the said Power Project. At this stage the Appellant showed interest in buying the Power Project and thus, entered into a Share Purchase Agreement dated 24.09.2018 with Respondent Nos. 1 to 3, wherein Respondent Nos. 2 and 3 agreed to sell 100% ownership of Respondent No. 1 Company to the Appellant as a going concern entity, comprising of all its assets including land, buildings, plant, equipment along with continuity of the Power Purchase Agreement, for a consideration of Rs. 29 Crores (Rupees Twenty Nine Crores only). The said consideration would be paid through purchase of 100% of Equity Shares and Preference Shares of the Respondent No. 1-Power Project, take over of loans of the Respondent No.1 Company and payment of balance amount to the Sellers i.e., Respondent No. 2 and 3.

Thereafter, a Tripartite Agreement dated 03.04.2019 was executed between the Appellant through its Affiliate i.e. Respondent No.4 with the Respondent No. 2 and 3 and the IFCI Venture Capital, thereby, recording the information about the earlier Share Purchase Agreement dated 24.09.2018 and payment of balance Rs. 50 Lakhs made thereunder.

Thereafter, an Addendum to the Share Purchase Agreement was signed on 10.04.2019 between the Respondent Nos.1 to 3 and the Respondent No.4, who is an Affiliate of the Appellant Company, whereby the latter agreed to remit an amount of Rs. 1.65 Crores to the Respondent No. 1 to 3 to regularize the loan with the Corporation Bank and facilitate the transfer of the Project i.e. Respondent No.1 Company, to the Appellant.

Later, due to some conflict of interest, disputes arose between the Appellant and the Respondents, and thereafter, the Appellant filed an Application to restrain the Respondents from alienating their shares in the Power Project before the Commercial Court, City Civil Court, Hyderabad (“Commercial Court”) vide COP No.27 of 2020 under Section 9 (Interim measures, etc., by Court.) of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as “Act of 1996”). The Commercial Court vide Order dated 19.06.2020 granted Ad-Interim Injunction restraining the Respondents from alienating their shares in the Power Project.

The Appellant, as per Clause 10 of the Share Purchase Agreement, sent a Letter dated 22.06.2020 to the Respondent, for invoking Arbitration Clause thereunder for resolution of disputes. The Appellant nominated an Arbitrator and requested the Respondent Nos. 1 to 3 to nominate their arbitrators as well, so that the Arbitration Committee can be formed for adjudication purposes. However, there was no response from the Respondent’s side for the same.

Being aggrieved, the Appellant filed an Application under Section 11(6) (Appointment of arbitrators) of the Act of 1996 seeking appointment of arbitrator(s), before the Telangana High Court, which was dismissed vide Order dated 12.02.2021 on the following grounds:

1. The Arbitration Clause was only a part of the Share Purchase Agreement dated 24.09.2018 and not the subsequent Tripartite Agreement dated 03.04.2019.
2. Further, with the execution of the Tripartite Agreement dated 03.04.2019, it is deemed to have superseded and novated the earlier Share Purchase Agreement dated 24.09.2018 executed between the Parties. Thus, the Share Purchase Agreement was no longer effective.
3. Hence, the Arbitration Clause also perished along with the Share Purchase Agreement.
4. Thus, the High Court held that owing to novation, as both the Share Purchase Agreement and the Arbitration Clause were no longer effective, hence, the Application seeking appointment of Arbitrator in terms of the said Arbitration Clause was no longer tenable.

Aggrieved by the High Court Order dated 12.02.2021, the Appellant approached the Supreme Court by way of the present Appeal.

Contentions of the Parties

As per the Appellant, there was no novation in the Share Purchase Agreement and moreover, the Arbitration Clause was an integral part of the said Share Purchase Agreement. Hence, the High Court ought to have referred the matter to arbitration.

As per the Respondent, as there was novation in the Share Purchase Agreement, the Arbitration Clause no longer existed. Thus, there was no scope to resolve the dispute through arbitration.

Supreme Court Observations

The Apex Court passed a Judgment dated 23.11.2022 and observed as follows:

In case of disputes in connection with a contract pertaining to its repudiation, frustration, breach, etc, it is only the performance of the contract that has come to an end but the contract is still in existence for certain purposes and hence, the arbitration clause also continues to operate for resolution of disputes in respect of the said purposes.

Thus, in this case, the Supreme Court held that the High Court erred in dismissing the Application seeking Appointment of Arbitrator by observing that with the execution of the Tripartite Agreement, there was novation in the Share Purchase Agreement and hence, Arbitration Clause was not effective. The said issue was further left to be decided by Ld. Sole Arbitrator, Hon. Sri Justice R. Subhash Reddy, Former Judge, Supreme Court of India, who was appointed by the Apex Court in this Judgment dated 23.11.2022 to arbitrate the disputes between the Parties in the present case.

As a result, the Apex Court allowed the Appeal and thereby, set aside the High Court Order dated 12.02.2021.

 

Ankit Tiwari

Legal Associate

The Indian Lawyer