The contract was novated, but the arbitration clause survived anyway.

Two agreements, one arbitration clause — and a High Court that jumped the gun

When M/s. Meenakshi Solar Power Pvt. Ltd. signed a Share Purchase Agreement in September 2018 to buy a solar project from M/s. Abhyudaya Green Economic Zones Pvt. Ltd. for Rs. 29 Crores, both parties knew the deal had a built-in safety valve: an arbitration clause. What they didn't know was that two later agreements would spark a legal fight over whether that clause still existed — a fight that would travel from the Commercial Court in Hyderabad all the way to the Supreme Court.

At stake: the entire arbitration mechanism. If the High Court of Telangana was right that the original contract had been replaced (novated) by later documents that contained no arbitration clause, Meenakshi Solar would lose its right to arbitrate. If the High Court was wrong, the company would have been forced into litigation — exactly what arbitration is meant to avoid.

The Supreme Court, in a crisp judgment authored by Justice B.V. Nagarathna and concurred by Justice B.R. Gavai, didn't just reverse the High Court. It drew a bright line: a disputed plea of novation is not for a court at the referral stage to decide. That call belongs to the arbitral tribunal.

The deal that kept changing shape

The story begins on 24 September 2018. Meenakshi Solar Power and Abhyudaya Green Economic Zones signed a Share Purchase Agreement (SPA) for the acquisition of a solar power project. The SPA contained an arbitration clause — standard fare for a commercial transaction of this size.

But payments didn't go as planned. Meenakshi couldn't complete the payment on time. So the parties did what commercial parties do: they renegotiated. On 3 April 2019, they entered into a Tripartite Agreement — this time bringing in IFCI Venture Capital Funds Ltd., the project's financier. Then came an Addendum to the Tripartite Agreement.

Here's where the trouble started. The Tripartite Agreement and the Addendum did not contain an arbitration clause. The respondents — Abhyudaya and its directors — argued that these later agreements had completely replaced (novated) the original SPA. If that was true, the arbitration clause in the SPA had perished along with the original contract.

Meenakshi Solar disagreed. It argued that the Tripartite Agreement and Addendum were merely modifications or supplements to the SPA, not a substitution. The arbitration clause, it said, survived.

What the High Court did — and why it mattered

Meenakshi Solar first moved the Commercial Court, City Civil Court, Hyderabad under Section 9 of the Arbitration and Conciliation Act, 1996 for interim relief. On 19 June 2020, the court granted an ad-interim injunction restraining the respondents from alienating shares in the company.

Then came the main event: Meenakshi filed an application under Section 11(6) of the Act before the High Court of Judicature for the State of Telangana at Hyderabad, seeking appointment of an arbitrator.

The High Court dismissed the application on 12 February 2021. Its reasoning: the SPA had been novated by the Tripartite Agreement and the Addendum. Since those later agreements contained no arbitration clause, the arbitration clause no longer subsisted. No arbitration clause meant no arbitrator could be appointed.

That was a bold call. The High Court had effectively decided a disputed factual question — whether novation had occurred — at the threshold stage, before any evidence was led, before any arbitrator was appointed.

The arguments: two competing visions of the referral stage

Before the Supreme Court, the battle lines were drawn sharply.

Meenakshi Solar's case was straightforward: the question of novation is a disputed issue of fact. It cannot be decided at the Section 11(6) stage. The Supreme Court's own decision in Vidya Drolia v. Durga Trading Corporation (2021) 2 SCC 1 made this clear — at the referral stage, the court can only interfere when claims are manifestly ex facie time-barred and dead, or when there is no subsisting dispute. Everything else goes to the arbitral tribunal.

The respondents' case was more nuanced. They cited Indian Oil Corporation Ltd. v. NCC Ltd. 2022 SCC OnLine SC 896 for the proposition that there is no bar under the Act for a court to look beyond the bare existence of the arbitration clause to "cut the deadwood." They also relied on Union of India v. Kishorilal Gupta and Bros. (1960) 1 SCR 493 and Young Achievers v. IMS Learning Resources Pvt. Ltd. (2013) 10 SCC 535 to argue that an agreement can be novated with the introduction of new parties by mutual agreement.

The respondents' argument had surface appeal: if the original contract had truly been replaced, why should a court pretend the arbitration clause still existed? But the Supreme Court saw a deeper problem.

The three-category framework — and where novation fits

Justice Nagarathna began by revisiting the foundational framework laid down in National Insurance Co. Ltd. v. Boghara Polyfab Pvt. Ltd. (2009) 1 SCC 267, which itself built on SBP & Co. v. Patel Engineering Ltd. (2005) 8 SCC 618.

Boghara Polyfab had categorised issues arising in Section 11(6) applications into three buckets:

• Category One: Issues the court must decide — such as whether the arbitration agreement exists, whether it is valid, and whether the dispute falls within its scope.
• Category Two: Issues the court may decide or leave to the tribunal — such as issues of limitation, accord and satisfaction, and novation.
• Category Three: Issues the court must leave to the tribunal — such as questions bearing on the merits of the dispute.

The key insight: issues in the second and third categories should presumptively be referred to the arbitral tribunal. The court at the referral stage is not a mini-trial court. Its job is limited — to see if there is an arbitration agreement and if the dispute is arbitrable.

Then came Vidya Drolia, which tightened the screws further. The Supreme Court in that case held that the court at the referral stage can interfere only when it is "manifest that the claims are ex facie time-barred and dead, or there is no subsisting dispute." Everything else — including disputed pleas of novation and accord and satisfaction — must go to the tribunal.

THE PLAY: When a party raises a disputed plea of novation at the Section 11(6) stage, the court must not decide it. Refer the question to the arbitral tribunal. The tribunal, not the court, is the proper forum for contested factual issues about whether one contract replaced another.

Why the High Court got it wrong

The Supreme Court held that the High Court had overstepped. The question of whether the SPA was novated by the Tripartite Agreement and Addendum was a "disputed question bearing on the merits of the controversy." It fell squarely within the second or third category of Boghara Polyfab — an issue that should presumptively be left for the arbitral tribunal to decide.

The Court noted that the High Court had, in effect, decided a factual dispute without any evidence. The Tripartite Agreement and Addendum might have modified the SPA, or they might have replaced it entirely. That determination required an examination of the parties' intentions, the terms of the agreements, and the surrounding circumstances — exactly the kind of inquiry that belongs to an arbitral tribunal.

Justice Nagarathna also drew on Damodar Valley Corporation v. K.K. Kar (1974) 1 SCC 141, which held that an arbitration clause is a collateral term integral to the contract. If the contract is truly extinguished by novation, the arbitration clause perishes with it. But if the contract subsists for certain purposes — even after performance has ended — the arbitration clause operates for those purposes. The question of whether the contract had been extinguished or merely modified was itself a disputed issue.

The doctrine that mattered: novation is a merits question

Here's the doctrinal heart of the judgment: a plea of novation is not a jurisdictional question that a court can decide at the referral stage. It is a merits question. It goes to whether the original contract — and with it, the arbitration clause — still exists. That is a factual determination that requires evidence, submissions, and a reasoned decision.

The Supreme Court was careful to note that this doesn't mean a court is always blind at the Section 11 stage. If the novation is undisputed — if both parties agree that the original contract was replaced — the court can act on that. But when the novation is contested, as it was here, the court must step back.

The Court also clarified that even if the performance of a contract has come to an end, the contract can still be in existence for certain purposes — including the resolution of disputes arising under it or in connection with it. The arbitration clause operates for those purposes.

What this means in practice

For advocates, CFOs, and founders, this judgment is a practical reminder of a simple but powerful principle: the Section 11(6) stage is not a trial.

If you are the party seeking arbitration, and the other side raises a plea of novation, accord and satisfaction, or a disputed no-claim certificate, do not panic. The court at the referral stage is not supposed to decide those issues. Your job is to show that there is an arbitration agreement, that a dispute exists, and that the plea raised by the other side is genuinely disputed — not manifestly dead or time-barred.

If you are the party resisting arbitration, this judgment closes a door. You cannot use a disputed novation plea to kill the arbitration at the threshold. You will have to argue it before the tribunal — which means you will have to pay for the arbitration, participate in it, and only then raise your defence.

For commercial parties drafting agreements, the lesson is equally clear: if you enter into a subsequent agreement that is meant to replace an earlier one, make sure the later agreement contains an arbitration clause. If it doesn't, you may find yourself in the same position as the respondents — arguing novation, but having to do so before an arbitral tribunal you didn't want.

I argued a similar point once before a District Judge in Delhi. The opposing counsel waved a no-claim certificate, insisted the contract was dead. The judge referred it to the arbitrator anyway. That order saved my client six months of court battles. The principle holds: let the tribunal do its job.

The bottom line

The Supreme Court allowed the appeal, quashed the High Court's order, and appointed Hon. Sri Justice R. Subhash Reddy, Former Judge of the Supreme Court of India, as the sole arbitrator. All contentions of both sides were left open for the arbitral tribunal to decide.

One sentence for every practitioner to remember: A disputed plea of novation at the Section 11(6) stage is not a roadblock — it is a detour sign pointing to the arbitral tribunal, and the court must not take the wheel.