2015 (2) TMI 483 - HC - Indian Laws

Court Requires Escrow Deposit for Arbitration Agreement Validity. Petitioner's Delay Tactics Fined.

The court upheld the lower courts' decisions, ruling that the deposit in the Escrow Account was a condition precedent for the arbitration agreement. ... Reference to arbitration - existence of an arbitration agreement - power to refer parties to arbitration under Section 8 of the Arbitration Act and Section 408 of BPMC Act - condition precedent - intention of the parties in contract formation - Kompetenz Kompetenz and judicial determination of preliminary jurisdictional issues - abuse of process/prolongation of litigationReference to arbitration - existence of an arbitration agreement - power to refer parties to arbitration under Section 8 of the Arbitration Act and Section 408 of BPMC Act - Kompetenz Kompetenz and judicial determination of preliminary jurisdictional issues - Whether the mere presence of an arbitration clause requires the Court to refer the matter to arbitration. - HELD THAT: - The Court held that the use of the word 'shall' in Section 8 of the Arbitration Act and Section 408 of the BPMC Act is subject to the prior existence of an arbitration agreement. The judicial authority must first ascertain whether a valid arbitration agreement exists between the parties before directing reference. Reliance on precedents, including the principles in SBP & Co. and National Insurance, establishes that where judicial intervention is sought (as under Section 8/Section 11), the court may decide preliminary questions - including existence and validity of the arbitration agreement - and, if necessary, take evidence before referring the matter. The competence of an arbitral tribunal to decide its own jurisdiction (Kompetenz Kompetenz) does not permit it to override a prior judicial determination on matters within the court's competence where the court has been approached for a reference. [Paras 16, 17, 18, 20, 21]Existence of an arbitration clause alone does not ipso facto oblige the Court to refer the dispute to arbitration; the Court must first determine that a valid arbitration agreement exists and may decide preliminary issues before making a reference.Condition precedent - intention of the parties in contract formation - abuse of process/prolongation of litigation - Whether deposit of the disputed tax amount in the Escrow Account was a condition precedent to the activation of the arbitration agreement. - HELD THAT: - On construing the agreement as a whole, the Court found that Clauses 1 and 2 operate together to make deposit in the Escrow Account a precondition for issuance of the No-Objection Certificate and for the reference to arbitration. Clause-1 conditions issuance of the No-Objection Certificate on deposit of the disputed amount; Clause-2 defers the timing of that deposit to a date linked to completion of sale formalities, thereby showing the parties' intention that escrow deposit precede the obligations that flow from the agreement. The petitioner obtained the benefit of the No-Objection Certificate and advanced the sale without fulfilling the escrow obligation, thereby frustrating the Corporation's ability to secure tax recovery. The Courts below correctly treated non-deposit as non-activation of the arbitration agreement and as part of a scheme to delay prosecution of the appeals. [Paras 24, 25, 26, 27, 28]Deposit of the disputed amount in the Escrow Account was a condition precedent to the arbitration clause; in the absence of such deposit the arbitration agreement did not become operative.Final Conclusion: The writ petitions are dismissed with costs; the High Court upheld that a court must first satisfy itself as to the existence of a valid arbitration agreement before referring a dispute to arbitration, and held that escrow deposit was a condition precedent to activate the arbitration clause - the petitioner may, after payment of costs, deposit the disputed amount in escrow and renew its application for reference. Issues Involved:1. Validity of Arbitration Agreement under Section 8 of the Arbitration Act and Section 408 of the BPMC Act.2. Condition Precedent for Arbitration: Whether the deposit of Rs. 6,68,76,000/- in Escrow Account is a condition precedent for referring the dispute to arbitration.Detailed Analysis:1. Validity of Arbitration Agreement:The primary issue is whether the mere existence of an arbitration clause in the agreement obligates the court to refer the matter for arbitration under Section 8 of the Arbitration Act and Section 408 of the BPMC Act. The court highlighted that the provisions use the word 'shall' for referring parties to arbitration, but this is contingent upon the existence of an arbitration agreement. The court must ascertain the existence of a valid arbitration agreement before referring the matter for arbitration. This principle is supported by the decision in National Insurance Company Limited vs. Boghara Polyfab Private Limited, where the Apex Court emphasized that the court must decide on the existence of an arbitration agreement. The court concluded that the existence of an arbitration clause does not automatically compel reference to arbitration; the court must first confirm the validity and existence of the arbitration agreement.2. Condition Precedent for Arbitration:The second issue is whether the deposit of Rs. 6,68,76,000/- in an Escrow Account is a condition precedent for referring the dispute to arbitration. The court examined the agreement dated 22nd April 2009, particularly Clauses 1, 2, and 6. Clause 1 required KDMC to issue a 'No-Objection Certificate' (NOC) conditional upon the petitioner depositing the amount in the Escrow Account. Clause 2 complicated this by allowing the petitioner to deposit the amount within four months after receiving the third installment from the purchaser, effectively delaying the deposit until after the sale transaction. The court found that this arrangement allowed the petitioner to benefit from the agreement without fulfilling its obligations, thereby tricking KDMC into issuing the NOC without securing the tax dues. The court held that the deposit in the Escrow Account was indeed a condition precedent for the arbitration agreement to become effective. Without fulfilling this condition, the arbitration agreement does not come into existence.Conclusion:The court upheld the decisions of the lower courts, concluding that the deposit of the amount in the Escrow Account was a condition precedent to the arbitration agreement. Consequently, without fulfilling this condition, the arbitration agreement was not activated. The court also noted that the petitioner's actions were an attempt to delay the proceedings and avoid tax liabilities, depriving KDMC of legitimate funds since 1996. The petitions were dismissed with costs, and the petitioner was ordered to pay Rs. 1,00,000/- for each petition to KDMC within two weeks. If the costs were not paid within the stipulated time, the appeals filed by the petitioner would stand dismissed. The petitioner was also given the option to deposit the amount in the Escrow Account within the same period and renew its application for reference to arbitration.