TaxTMI 
TaxTMI 
2011 (7) TMI 1309
X X X X Extracts X X X X
X X X X Extracts X X X X
....(OS) No. 112/2010 and C.M. No. 20283/2010, A.S. Chandhiok, Sr. Adv. Ranjana Roy Gawai, Vasudha Sen, Pradeep Chhindra, T.K. Ganju, Advs. in RFA (OS) No. 59/2010 and C.M. No. 11380/2010, Gaurav Chauhan, Adv. in RFA (OS) No. 43/2009 For the Respondents/Defendant: P.V. Kapur, Sr. Adv., P.V. Kapur, Sr. Adv. Anish Dayal, Siddharth Vaid, Aman Anand, Ranabir Dutta, Advs. for Respondent No. 1, Rajiv Nayar, Sr. Adv., Prateek Jalan, Siddharth Bhatnagar, Darpan Wadhwa, Sonia Dube and S. Chakraborty, Advs. for Respondent No. 2 in FAO (OS) No. 268/2011 and C.M. No. 10057/2011, N.K. Kaul, Sr. Adv., R. Sudhir, Gaurav Liberhan, Prerna Amitabh, Advs. in RFA (OS) No. 112/2010 and C.M. No. 20283/2010, Sandeep Sethi, Sr. Adv., Anil Kumar Mishra, Sindhu Sinha, Advs. for Respondent No. 2 in RFA (OS) No. 59/2010 and C.M. No. 11380/2010, Bharat Sangal, Vernika Tomar and Srijana Lama, Advs. for Respondent No. 1 , Rajiv Nayyar, Sr. Adv., Ayush Agrawal, Adv. for Respondent No. 2, Chetan Sharma, Sr. Adv. and S. Kumar, Adv. for Respondent No. 3 JUDGMENT Vikramajit Sen, J. 1. This Appeal challenges the Order dated 4.5.2011 of the learned Single Judge who has concluded that the Court cannot go into th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....filed in those proceedings in which one of the prayers was for a Declaration that the Arbitration Clause was non est and unenforceable. The other reliefs pertained to the validity of the Arbitral Award which had already been rendered. Inasmuch as an Arbitral Award has not been published so far as the parties before us are concerned, Spentex does not apply on all fours. After analyzing the celebrated judgments reported as Bhatia International v. Bulk Trading S.A., (2002) 4 SCC 105, and SBP and Co. v. Patel Engineering (2005) 8 SCC 618 and Shin-Etsu Chemical Co. Ltd. v. Aksh Optifibre Ltd., (2005) 7 SCC 234, the Division Bench in Spentex held that the suit was incompetent and that the only procedure provided by law was to assail the Award after it had been published, by way of filing Objections either under Section 34 or Section 48 of the Arbitration and Conciliation Act, 1996 (A and C Act), as the case may be. It would also be apposite to mention another Division Bench decision titled fv. which has been delivered on 16.5.2011. A batch of Appeals and one Reference from a learned Single Judge to the Division Bench had been heard together, all of which concerned the jurisdiction of civ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....poration could have approached the Court under Section 11(6) of the A and C Act stating that the Appellant/Plaintiff has failed to act as required under the agreed procedure and, therefore, the Chief Justice of India should ordain necessary measures. So far as the facts of the case in hand are concerned, Realogy Corporation as well as DGS Realtors Pvt. Ltd. have, in consonance with the Arbitration Clause, appointed their respective Arbitrators. The legal nodus is that the Arbitration Clause does not postulate that similar action has to be taken by the Plaintiff/Appellant, apparently vindicating his contention that he should not be compelled to submit to the jurisdiction of the Arbitral Tribunal. Be that as it may, none of the provisions of Section 11 of the A and C Act empower the Chief Justice of India to appoint an arbitrator on behalf of a third party, such as the Plaintiff/Appellant. This could only mean that Section 11 would have no application to cases such as the one before us. But the Plaintiff/Appellant cannot be left without legal remedy, which can either be by way of filing a civil suit or, if he has received a notice from the Arbitral Tribunal, to immediately object to ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ete adjudication of all contentions; the other that before doing so the Court must satisfy itself that an agreement to arbitrate is present so far as each and every party is concerned before any or all of them can be so referred. As regards maintainability of a Suit asserting the absence of an Arbitral Agreement or challenging the constitution of an Arbitral Tribunal under an alleged Arbitral Agreement, learned Single Judges of this Court have held divergent opinions. (i) In Akshay Kapur v. Rishan Kapoor: 105 (2003) DLT 467 : 2003 (2) Arb LR 508 (Del), a Suit for Declaration and Injunction was filed against an =Evaluation Report' and connected arbitral proceedings, and the view was that ?if the Court is of the opinion that the action, in the present case the suit for declaration and injunction, is not the subject matter of the arbitration agreement, it would be improper not to hear it. Notwithstanding the non obstante words employed in Section 5, if the dispute raised in the suit is not covered by the Arbitration Clause, it must be considered on its merits, regardless of whether the Arbitration Proceedings are impeded in the process. It cannot be laid that Section 16 of 1996 Ac....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ing performed.? However on facts, the Court found that the Agreement is binding on the parties. The fraud alleged by the Plaintiff was not such as would annul the Arbitration Agreement. The Court drew a distinction between frauds that vitiate the entire base of the Contract and those which are incidental and do not strike at the root of the agreement. (iii) In Bharti, the Court was once again confronted with the issue of maintainability of a Suit in respect of an International Arbitration. The Findings of Court on this legal conundrum can be enumerated as follows: (a) Pronouncement in Bhatia International to the effect that Part I applies to all arbitration, domestic and international does not conclude that Section 8 overrides Section 45 of A and C Act. (b) Section 5 does not act as an absolute bar to Civil Courts. (c) Section 8 requires/mandates filing of an application for reference, whereas Section 45 contemplates only a =request' for this purpose. (d) Section 8 envisages the reference to the Arbitration of only those disputes which the Arbitrator is competent or empowered to decide. (e) The enquiry of applicability of Arbitral Ag....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nd balance of convenience, an interim injunction in favour of Plaintiff was granted. (vii) In Oval Investment v. India Bulls Financial Services 2009 (165) DLT 652, Muralidhar, J. a Suit for Declaration and Injunction against the Defendant alleging that the invocation of Arbitration Agreement by issuance of notices under Section 21 was fraudulent as the notices sent on the wrong addresses had been filed. The Court held that such a Suit, in light of Sections 5 and 16 of A and C Act, for restraining the Defendant from invoking the arbitration Agreement was not maintainable, particularly when it was not the case of the Plaintiff that the Arbitration Agreement either did not exist or that it was otherwise vitiated in law. The same was upheld by the Division Bench. (viii) In Handicraft and Handloom Export v. Ashok Metal Corp., Reva Khetrapal, J. held a Suit for Declaration and Injunction against arbitration proceedings to be not maintainable. 21. A conjoint reading of Sections 5, 8 and 16 of the Act, in my view, point to the legislative intent that the Civil Court must keep well away from the turf of arbitration proceedings. Section 9, Section 37 and Section 34 are the only Section....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Mukesh Sharma 127 (2006) DLT 62 : 2006(1) Arb LR 155. By piercing the corporate veil, the Court went into the issue of whether the Plaintiff Company was a party to Arbitration Agreement and held that, in light of Kvaerner, the Court must refer these questions to the Arbitral Tribunal. In this case, Plaintiff, a registered Company, approached the Court with a Suit for Declaration and Injunction against the Defendant from proceeding with the Arbitration under ICC Rules in terms of shareholders agreement between Defendant No. 1, Defendant No. 2, a company and Defendant No. 3; Defendant No. 1 being the major share holder in Plaintiff Company. An ad interim injunction was sought in that matter and the stand taken by the Plaintiff was that since the Plaintiff Company was not a party to the Arbitration Agreement, the claims could not be referred to Arbitration. Per contra, Defendant No. 2 adopted the stance that Plaintiff Company was only an alter ego of Defendant No. 1 who is the major share holder in the Company. Bharti was distinguished on the point that unlike Bharti, in this case the Court could not come to the conclusion that the agreement was null, void or inoperative. Sukanya was....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... Naraini Newar 114 (2004) DLT 272 where another learned Single Judge had concluded that ?in the absence of the existence of a ?defined legal relationship?, there is no question of there being an arbitration agreement between the parties to submit their disputes to arbitration. The disputes which are referable to arbitration are those disputes which are in respect of a ?defined legal relationship?, whether contractual or not. It does not relate to all kinds of disputes. Therefore, it is the duty of the judicial authority, before it passes an order referring the parties to arbitration under Section 8 of the said Act, to satisfy itself that there exists an arbitration agreement of the nature described in Section 7 of the Act?. Fortunately, these discordant opinions have been put in a crucible by several judgments of the Apex Court and the maelstrom has ceased to exist. 6. In Kvaerner Cementation India Ltd. v. Bajranglal Agarwal 2001(6) Supreme 265, their Lordships had specifically taken pains to observe that - ?there cannot be any dispute that in the absence of any arbitration clause in the agreement, no dispute could be referred for arbitration to an arbitral Tribunal?. The facts....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rovision in the Act that when the subject-matter of the suit includes subject-matter of the arbitration agreement as well as other disputes, the matter is required to be referred to arbitration. There is also no provision for splitting the cause or parties and referring the subject-matter of the suit to the arbitratOrs. 14. Thirdly, there is no provision as to what is required to be done in a case where some parties to the suit are not parties to the arbitration agreement. As against this, under Section 24 of the Arbitration Act, 1940, some of the parties to a suit could apply that the matters in difference between them be referred to arbitration and the court may refer the same to arbitration provided that the same can be separated from the rest of the subject-matter of the suit. The section also provided that the suit would continue so far as it related to parties who have not joined in such application. 15. The relevant language used in Section 8 is: ?in a matter which is the subject of an arbitration agreement?. The court is required to refer the parties to arbitration. Therefore, the suit should be in respect of ?a matter? which the parties have agreed to ref....
X X X X Extracts X X X X
X X X X Extracts X X X X
....v. N.K. Modi). When the Defendant to an action before a judicial authority raises the plea that there is an arbitration agreement and the subject-matter of the claim is covered by the agreement and the Plaintiff or the person who has approached the judicial authority for relief, disputes the same, the judicial authority, in the absence of any restriction in the Act, has necessarily to decide whether, in fact, there is in existence a valid arbitration agreement and whether the dispute that is sought to be raised before it, is covered by the arbitration clause. It is difficult to contemplate that the judicial authority has also to act mechanically or has merely to see the original arbitration agreement produced before it, and mechanically refer the parties to an arbitration. 10. Our research has revealed Andhra Pradesh Tourism Development Corporation Limited v. Pampa Hotels Limited, (2010) 5 SCC 425 which, indeed, is an interesting precedent relevant and germane to the controversy before us. The facts were that an application under Section 11 had been filed during the regime of Konkan Railway Corporation Ltd. v. Mehul Construction Co., (2000) 7 SCC 201 and hence, taking the exerci....
X X X X Extracts X X X X
X X X X Extracts X X X X
....being in existence, but being under some legal disability to enter into contracts. This is a case where there was no ?party? at all, but someone claiming that there was an existing company capable of entering into contracts. The position would have been different, had the agreement been entered into by the promoters of the Respondent Company before its incorporation for the purposes of the Company and such contract was warranted by the terms of incorporation. 19. Section 15 of the Specific Relief Act, 1963 provides as follows: 15. Who may obtain specific performance.-Except as otherwise provided by this Chapter, the specific performance of a contract may be obtained by- * * * (h) when the promoters of a company have, before its incorporation, entered into a contract for the purposes of the company, and such contract is warranted by the terms of the incorporation, the company: Provided that the company has accepted the contract and has communicated such acceptance to the other party to the contract. (emphasis supplied) 20. It is evident from Section 15(h) of the Specific Relief Act that if the lease agreement and the man....
X X X X Extracts X X X X
X X X X Extracts X X X X
....eement. If there is a dispute between a party to an arbitration agreement, with other parties to the arbitration agreement as also non-parties to the arbitration agreement, reference to arbitration or appointment of arbitrator can be only with respect to the parties to the arbitration agreement and not the non-parties. 9. There is no dispute that the loan agreements among the first Respondent (lender), the second Respondent (borrower) and the third Respondent (guarantor) contained a provision for arbitration. The said provision for arbitration is extracted below: In the event of any dispute, question or difference arising out of or in connection with this agreement and the respective rights and obligations of the parties hereunder, the same shall be referred to the arbitration in accordance with the provisions of the Arbitration Act, 1940. But the Appellant was not a party to the same. In fact the Appellant's letter of guarantee for Rs. 75 lakhs was given on 27-10-1995, prior to the dates of the two loan agreements. It is also not in dispute that the letter dated 27-10-1995 given by the Appellant to the first Respondent did not contain a provision for....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d Single Judge has applied the Division Bench judgment in Spentex as also the Single Judge decision in Roshan Lal Gupta v. Parasram Holdings Pvt. Ltd. 2009 (157) DLT 712. The first feature to be noted is that Roshan Lal deals with a domestic arbitration and, therefore, Section 45 of the A and C Act was not in contemplation. The learned Single Judge, inter alia, concluded that the word =party' in Section 8 of the A and C Act refers to a party to the suit in contradistinction to a party to the arbitration agreement. The learned Single Judge, in the impugned judgment, has dismissed the applications seeking interim relief but inexplicably has kept the Suit alive for further consideration. The learned Single Judge was statutorily bound to return a finding with regard to whether or not the action or suit was the subject matter of an arbitration agreement. In the facts of the case before us, since we are dealing with an international commercial arbitration, Section 45 of the A and C Act comes into play. After considering all the complexities in the case, one of us had concluded in Bharti that a formal application under Section 45 of the A and C Act was not necessary, since it is incum....
X X X X Extracts X X X X
X X X X Extracts X X X X
....pulsions of Section 8 and Section 45 of the A and C Act and has dismissed the applications under Order XXXIX Rules 1 and 2 of the Code of Civil Procedure on the premise that the jurisdiction of a civil court is barred under Section 5 of the A and C Act, should the matter be remanded for returning at least a prima facie finding as to the existence of an arbitration agreement between the parties. In SBP as well as Bharti , the expenses that would inevitably have to be incurred in an arbitration where the venue was outside India weighed heavily in the mind of the Court leading Justice Sabharwal (as the learned Chief Justice of India then was) in Shin-Etsu (minority opinion) to conclude that in such matters a final conclusion as to the maintainability of arbitral proceedings ought to be returned. We must always be mindful of the maxim ubi jus ibi remedium. The maxim can be appeased, it seems to us, by the consideration that the Plaintiff could avail his remedy by canvassing pertaining to the non existence of an arbitration clause before the Arbitral Tribunal itself. However, in an international arbitration where the venue is outside India and costs are indeed prohibitive, it is our opi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....late that the Company of which he is the Managing Director is not privy to the arbitration agreements. Indeed, the Company has already submitted to the arbitration of the American Arbitration Association (AAA). The Plaintiff's postulation is that he has wrongly, illegally and mischievously sought to have been made privy to those proceedings. It is at least latent that the reason for this would be to transform the limited liability of the Company into unfettered and unrestricted boundaries. The claimant can indeed press all the reliefs available against the Plaintiff in his status as a guarantor. But the Plaintiff cannot be forced into the arbitration, for the simple reason that he did not agree to be personally bound by the Arbitration Clause. In the backdrop of his refusal to participate in the arbitration conducted by AAA in New York, the claimant could have resorted to Section 11 of the A and C Act, and in that event the Court would have been obliged to pronounce on this point. A perusal of Section 45 of the A and C Act makes it palpably clear that the Court must refer the parties to the arbitration if it finds that an efficacious, operative and performable agreement for arb....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sh Sharma where our learned Brother, Manmohan Singh, J., speaking for the Division Bench, had remained steadfast to his analysis of the law in Usha. Support has also been drawn from Shivnath Rai Harnarain India Co. v. Glencore Grain Rotterdam, AIR 2010 Delhi 31 wherein one of us (Sen, J.), speaking for the Division Bench, had held that Letters Patent are not available. Finally and insurmountably, reference is made to Fuerst Day Lawson Ltd. v. Jindal Exports Ltd., wherein the Hon'ble Supreme Court has set all controversies at rest by holding that Letters Patent cannot be invoked to sustain an Appeal assailing order falling in the realm of arbitration unless this right is specifically bestowed. The entire judgment in Fuerst requires to be read carefully. We, however, shall only mention that Their Lordships had taken note of the fact that, contrary to Section 37 of the A and C Act, Section 50 of the A and C Act does not contain the words ?and from any others?. Despite this departure in Section 50 of the A and C Act, Fuerst nevertheless holds that Letters Patent will not be available. 19. The contention in support of the maintainability of the Appeal is that wherever a decision ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Dr. A.M. Singhvi, learned Senior Counsel for the Appellant, we remain steadfast in our opinion that regardless of any reference to Order VII Rule 11, the present Appeal is not maintainable since the Order avowedly is one passed under Section 45 of the A and C Act. We think it is inconsequential and irrelevant whether it is the Defendant or the Plaintiff who draws the attention of the Court to Section 45 of the A and C Act. So far as the present case is concerned, one of the prayers in the Plaint is for a Declaration that the subject Arbitration Clause is uncertain, null and void, inoperative and incapable of being enforced, words which are remarkably reminiscent and redolent of Section 45 of the A and C Act. If the Suit were to continue, an Issue would have to be struck on this aspect, which would stand comprehensively and completely covered by Section 45 of the A and C Act. Therefore, it cannot be gainsaid that the investigation and determination by the Court, so far as this aspect is concerned, is not fully comprehended and consumed by Section 45 of the A and C Act. As we have already observed above, the Plaintiff, therefore, must be held to have invoked Section 45 of the A and C....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ent with the learned Single Judge that the parties have agreed to resolve or adjudicate their disputes through arbitration. The learned Judge has correctly rejected the Plaint so as to compel the Plaintiff to raise its Claims before the Arbitral Tribunal. We again hasten to clarify that without referring the parties to the Arbitral Tribunal or the Conciliator, as the case may be, the learned Single Judge has only proceeded on a prima facie view. All questions can be raised before the Arbitral Tribunal which will have to answer them definitively. In particular, the Appellant will be fully entitled to argue that inasmuch as the Arbitration Clause refers to =International Law', it may be vague and thus incapable of being performed. A plausible explanation has, however, been proffered by Mr. Sandeep Sethi, learned Senior Counsel for the Respondent by drawing our attention to the factual position obtaining in Singapore. Mr. Sethi has argued that unlike in India, there is an International Arbitration Act concerning international commercial arbitrations as well as an Arbitration Act dealing only with domestic arbitration. According to him, the reference to International Law is quite o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ourt in Sukanya to contend that a partial reference was impermissible in law. The learned Single Judge, in our view, has rightly concluded that the impleadment of other parties was malafide. Order I and II of the Code of Civil Procedure refers to misjoinder of causes of action as well as misjoinder of parties and contains an explanation that courts would react to misjoinder, especially where it may lead to a miscarriage of justice or a complication so far as Trial is concerned. These principles impel us to affirm the conclusion of the learned Single Judge in this regard. It is in these circumstances that the learned Single Judge has rejected the Plaint. This is obviously because by virtue of Section 8 of the A and C Act, the Court was duty-bound to refer the parties to arbitration. To like effect, since a commercial arbitration had uncontrovertibly been entered into between the Plaintiff and Defendant No. 1 (domestic commercial arbitration) and Defendant No. 2 (international commercial arbitration, the venue of which is Paris), the Suit could not be proceeded with. Swenska Handels Banken v. Indian Charge Chrome Limited 1994 (2) SCC 155 has not been discussed hereinabove. Section 3 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 44. The arbitration is contemplated as per Section 3 of the Foreign Awards Act. The Plaintiff by filing a plaint cannot make the arbitration clause invalid or inoperative. Therefore, the finding of the High Court that the arbitration agreements have become inoperative and incapable of being performed or invalid is erroneous in law and, therefore, must be set aside. 26. The learned Single Judge has also correctly rejected what was seen as 'bogey of unworkability due to separate arbitration clauses embedded in two different agreements?. The observations of the Court of Appeal in Janos Paczy v. Haendler and Natermann GmbH 1981 (1) Lloyds LR 302 are apposite and justify extraction: In my judgment, on the true construction of these words, ?incapable of being performed? relates to the arbitration agreement under the consideration. The incapacity of one party to that agreement to implement his obligations under the agreement does not, in my judgment, render the agreement one which is incapable of performance within the section any more than the inability of a purchaser under a contract for purchase of land to find the purchase price when the time comes to complete the sale could....