Since arbitration clause in a contract is treated as an agreement independent of the other terms of the contract, mere adjudication that underlying contract is null and void does not render arbitration clause invalid - Thus, courts are empowered to refer disputes to arbitration even if underlying contract is found to be void ab initio - In view of Ss. 5 and 16, all matters including the issue as to whether main contract was void/ voidable can be referred to arbitration - However, while exercising jurisdiction under S. 11, court can decline to refer disputes to arbitration if contract is patently void or where it reaches a conclusion that contract is void on a meaningful reading of contract document without requirement of any further proof - Mere claim that contract is void however will not suffice
REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL ORIGINAL JURISDICTION
ARBITRATION PETITION NO. 34 OF 2013
Swiss Timing Limited
...Petitioner
Versus
Organising Committee,
Commonwealth Games 2010, Delhi.
Citation;(2014) 6 SCC 677
SURINDER SINGH NIJJAR,J.
1. This
is
a
petition
under
Section
11(4)
read
with
Section 11(6) of the Arbitration and Conciliation Act, 1996
(hereinafter referred to as “the Arbitration Act”), with a
prayer
to
appoint
the
nominee
arbitrator
of
the
Respondent and to further constitute the arbitral tribunal,
by
appointing
the
presiding
arbitrator
in
order
to
adjudicate the disputes that have arisen between the
parties.
2. The relevant facts as set out in the Arbitration Petition are
as under:-
3. The Petitioner is a company duly incorporated under the
laws of Switzerland, having its registered office in
Corgémont,
Switzerland.
The
respondent
is
the
Organising Committee, Commonwealth Games, 2010. It is
a society registered under the Societies Registration Act,
1860
(hereinafter
referred
to
as
“the
Organising
Committee”), established for the primary purpose of
planning, organising and delivering the Commonwealth
Games,
2010
Delhi
(hereinafter
referred
to
as
“Commonwealth Games”) and having its registered office
in New Delhi, India.
4. The
petitioner
entered
into
an
agreement
dated 11th March, 2010 with the respondent for providing
timing, score and result systems (“TSR systems/services”)
as well as supporting services required to conduct the
Commonwealth Games.
According to the petitioner,
Clause 11.1 of the aforesaid agreement stipulated the
fees, as set out in Schedule 3, which shall be paid to the
petitioner for performance of the obligations contained in
the agreement. The aforesaid Schedule 3 gives details of
the amounts which were to be paid, in instalments, by the
Organising Committee.
was
to
submit
monthly
The service provider/Petitioner
tax
invoices,
detailing
the
payments to be made by the Organising Committee.
These invoices were to be paid within 30 days of the end
of the month in which the tax invoices were received by
the Organising Committee. All payments were to be made
in Swiss Francs, unless the parties agree otherwise in
writing.
Clause 11.5 provides that on the date of the
agreement,
Performance
the
service
Bank
provider
Guarantee
must
to
the
provide
the
Organising
Committee to secure the performance of its obligations
under the agreement.
Certain other obligations are
enumerated in the other clauses, which are not necessary
to be noticed for the purposes of the decision of the
present petition.
5. It is also
noteworthy that in
consideration
of the
petitioner’s services as stipulated in the agreement, the
petitioner
was
to
24,990,000/-(Swiss
receive
Francs
a
total
Twenty
amount
Four
of CHF
Million Nine
Hundred and Ninety Thousand only). It was also provided
in Schedule 3 that payment of the 5% of the total service
fees
was
to
be
made
Commonwealth Games.
upon
completion
of
the
Accordingly, the petitioner sent
the invoice No. 33574 dated 27th October, 2010 for the
payment of CHF 1,249,500 (Swiss Francs One Million Two
Hundred Forty Nine Thousand Five Hundred only). This
represents the remaining 5% which was to be paid upon
completion
of
the
Commonwealth
Games
on 27th October, 2010. The petitioner had also paid to the
Organising
Committee
a
sum
of
Rs.
15,00,000/-
(INR 1.5 million) as Earnest Money Deposit (EMD), for
successfully completing the TSR services as provided in
the agreement.
6. According to the petitioner, the respondent defaulted in
making the payment without any justifiable reasons. Not
only the amount was not paid to the petitioner, the
respondent sent a letter dated 15 th December, 2010
asking the petitioner to extend the Bank Guarantee till
31st
January,
2011.
The
petitioner
informed
the
respondent that the Bank Guarantee had already been
terminated
and
released
on
completion
Commonwealth Games in October, 2010.
of
the
It is also the
case of the petitioner that there is no provision in the
service agreement for extension of the Bank Guarantee.
The petitioner reiterated its claim for the aforesaid
amount.
petitioner
Through letter dated 26th January, 2011, the
demanded
repayment
of
Rs.
15
lakhs
deposited as EMD. Instead of making the payment to the
petitioner and other companies, the respondent issued a
Press Communiqué
on 2 nd February, 2011 declaring
that part payments to nine foreign vendors, including the
petitioner, have been withheld for “non-performance of
the contract”.
The petitioner is said to have protested
against the aforesaid communiqué through letter dated 4 th
February, 2011. It was reiterated that the petitioner had
satisfactorily performed the obligations in the service
agreement of 11th March, 2010. Since the respondent was
disputing its liability to pay the amounts, the petitioner
served a formal Dispute Notification on the respondent
under
Clause 38 of the agreement.
7. The petitioner further points out that on 7 th February,
2011, the respondent called upon the petitioner to fulfil its
alleged outstanding obligations under the agreement
including handing over of the Legacy Boards, completion
of the formalities of the material, which were required to
be shipped out and to fulfil certain other requirements as
set out in its earlier e-mails in order to prepare the
“agreement closure report”. The respondent also stated
that they were not addressing the issue of invoking the
Dispute Resolution Clause as they were interested in
settling the dispute amicably. The petitioner pleads that
the respondent failed in its commitment for payments
towards
services
rendered,
not
only
towards
the
petitioner but also towards other international companies
from Australia, Belgium, England, France, Germany, Italy,
the Netherlands and Switzerland, which had provided
various services to the respondent at the Commonwealth
Games. It also appears that collective letters were written
on behalf of various companies by the ambassadors of the
concerned countries, to the Finance Minister of India
indicating the default in payments of the amounts due.
The petitioners, therefore, claim that they were left with
no alternative but to invoke arbitration as provided under
Clause 38.6 of the agreement.
The petitioners have
nominated the arbitrator on its behalf namely Justice S.N.
Variava, former Judge of the Supreme Court of India. A
notice to this effect was served on the respondent through
a communication dated 22nd April, 2013.
Since no
response was received a reminder was issued on 29 th May,
2013.
Upon such failure, the petitioners have filed the
present petition.
8. In the counter affidavit all the averments made by the
petitioners have been denied, as being incorrect in facts
and in law. The respondents have raised two preliminary
objections, which are as follows:-
(i)
The petitioner
has
not followed
the
dispute
resolution mechanism as expressly provided in the
agreement dated 11th March, 2010.
No efforts
have been made by the petitioner to seek
resolution of the dispute as provided under Clause
38.
On the other hand, the respondent through
numerous communications invited the petitioner
for amicable resolution of the dispute.
The
respondent relies on communications dated 3 rd
January, 2011, 9 th January, 2011, 10th
January, 2011, 1 st February, 2011
and 2nd February, 2011.
(ii)
The contract stands vitated and is void ab initio in
view of Clauses 29, 30 and 34 of the Agreement
dated 11th March, 2010. Hence, the petitioner is
not entitled to any payment whatsoever in respect
of the contract and is liable to reimburse the
payments already made. Therefore, there is no
basis to invoke arbitration clause.
The respondent points out that a combined
reading of Clause 29 and Clause 34 would show
that the petitioner had warranted that it will never
engage in corrupt, fraudulent, collusive or coercive
practices in connection with the agreement. The
petitioner
would
be
liable
to
indemnify
the
Respondent against all losses suffered or incurred
as a result of any breach of the agreement or any
negligence, unlawful conduct or wilful misconduct.
The respondent may terminate the agreement
whenever it determines that the petitioner had
engaged in any corrupt, fraudulent, collusive or
coercive
practice
in
connection
with
the
agreement. The respondent seeks to establish the
aforesaid non-liability clause on the basis of
registration of Criminal Case being CC No. 22 of
2011 under Section 120-B, read with Sections 420,
427, 488 and 477 IPC and Section 13(2) read with
Section 13(1)(d) of the Prevention of Corruption
Act against Suresh Kalmadi, the then Chairman of
the Organising Committee and other officials of
the respondent alongwith some officials of the
petitioner, namely Mr. S. Chianese, Sales &
Marketing
Manager,
Mr.
Christophe
Bertaud,
General Manager and Mr. J. Spiri, Multi Sports
Events & Sales Manager.
9. It is further the case of the respondent that due to the
pendency of the criminal proceedings in the trial court,
the present petition ought not to be entertained. In case
the arbitration proceeding continues simultaneously with
the criminal trial, there is real danger of conflicting
conclusions by the two fora, leading to unnecessary
confusion.
10. I have heard the learned counsel for the parties.
11. The submissions made in the petition as well as in the
counter affidavit have been reiterated before me by the
learned counsel. I have given due consideration to the
submissions made by the learned counsel for the parties.
12.
The learned counsel for the petitioners has relied on
an unreported Order of this Court dated 11 th April, 2012 in
M/s Nussli (Swtizerland) Ltd. Vs. Organizing Commit.
Commonwealth Game. 2010, wherein the dispute in
almost identical circumstances have been referred to
arbitration.
13.
On the other hand, learned counsel for the respondent
has
relied
on
a
judgment
in N.
Radhakrishnan Vs. Maestro Engineers & Ors.1 He
has also relied upon
Guru
of
this
Granth
Court
Saheb
Sthan
Meerghat Vanaras Vs. Ved Prakash & Ors.2 Reliance is
also placed on India Household and Healthcare Ltd.
Vs. LG Household and Healthcare Ltd.3
1
(2010) 1 SCC 72
(2013) 7 SCC 622
3
2007 (5) SCC 510
2
14.
The procedure for Dispute Resolution has been
provided in Clause 38 of the agreement, which is as
under:-
“38. Dispute Resolution
38.1 If a dispute arises between the parties out of
or relating to this Agreement (a “Dispute”), any
party seeking to resolve the Dispute must do so
strictly in accordance with the provisions of this
clause. Compliance with the provisions of this
clause is a condition precedent to seeking a
resolution of the Dispute at the arbitral tribunal
constituted in accordance with this clause 38.
38.2 During a Dispute, each party must continue
to perform its obligations under this Agreement.
38.3 A party seeking to resolve the Dispute must
notify the existence and nature of the Dispute to
the other party (“the Notification”).
Upon
receipt of the Notification the Parties must use
their respective reasonable endeavours to
negotiate to resolve the Dispute by discussions
between Delhi 2010 (or a person it nominates) and
the Service Provider (or a person it nominates). If
the Dispute has not been resolved within 10
Business Days of receipt of the Notification (or
such other period as agreed in writing by the
parties) then the parties must refer the Dispute to
the Chairman of Delhi 2010 and the Chief
Executive Officer or its equivalent) of the Service
Provider.
38.4 If the Dispute has not been settled within 5
Business Days of referral under Clause 38.3, the
Dispute shall be settled by arbitration in
accordance with the following clauses.
38.5 For any dispute arising after 31 July, 2010,
the relevant period in clause 38.3 is 48 hours and
the relevant period in clause 38.4 is 24 hours.
38.6 The Dispute shall be referred to a tribunal
consisting of three Arbitrators, one to be
nominated by each party, with the presiding
Arbitrator to be nominated by the two arbitrators
nominated by the parties. The Arbitrators shall be
retired judges of the Supreme Court or High Courts
of India. However, the Presiding Arbitrator shall be
a retired Supreme Court Judge.
38.7 The place of arbitration shall be New Delhi.
All arbitration proceedings shall be conducted in
English in accordance with the provisions of the
Arbitration and Conciliation Act, 1996 as amended
from time to time.
38.8 The arbitration award will be final and binding
upon the parties, and each party will bear its own
costs of arbitration and equally share the fees of
the arbitral tribunal unless the arbitral tribunal
decides otherwise.
38.9 This clause 38 will not affect each party’s
rights to seek interlocutory relief in a court of
competent jurisdiction.”
15.
I am unable to agree with the submission made by the
learned counsel for the respondent that the petitioner has
not satisfied the condition precedent under Clause 38.3.
A perusal of the correspondence placed on the record of
the petition clearly shows that not only the petitioner but
even the ambassadors of the various governments had
made considerable efforts to resolve the issue without
having to take recourse to formal arbitration. It is only
when petitioner
all
these
communicated
to
efforts
the
failed,
that
respondent
its
the
intention
to
commence arbitration by letter /notice dated 22 nd April,
2013.
This was preceded by letters dated 4 th February,
2011, 14th March, 2011 and 20th April, 2011 which clearly
reflect the efforts made by the petitioner to resolve
disputes through discussions and negotiations before
sending the notice invoking arbitration clause.
16.
It is evident from the counter affidavit filed by the
respondents that the disputes have arisen between the
parties out of or relating to the agreement dated 11th
March, 2010. On the one hand, the respondent disputes
the claims made by the petitioner and on the other, it
takes the plea that efforts were made to amicably put a
“closure to the agreement”.
I, therefore, do not
find any merit in the submission of the respondent that
the petition is not maintainable for non-compliance with
Clause 38.3 of the Dispute Resolution Clause.
17.
The second preliminary objection raised by the
respondent is on the ground that the contract stands
vitiated and is void-ab-initio in view of Clauses 29, 30 and
34 of the agreement dated 11th March, 2010. I am of the
considered
opinion
that
the
aforesaid
preliminary
objection is without any substance. Under Clause 29, both
sides have given a warranty not to indulge in corrupt
practices to induce execution of the Agreement. Clause
34 empowers the Organising Committee to terminate the
contract after deciding that the contract was executed in
breach of the undertaking given in Clause 29 of the
Contract.
These are allegations which will have to be
established in a proper forum on the basis of the oral and
documentary evidence, produced by the parties, in
support of their respective claims. The objection taken is
to the manner in which the grant of the contract was
manipulated in favour of the petitioner. The second
ground is that the rates charged by the petitioner were
exorbitant. Both these issues can be taken care of in the
award. Certainly if the respondent is able to produce
sufficient evidence to show that the similar services could
have been procured for a lesser price, the arbitral tribunal
would take the same into account whilst computing the
amounts payable to the petitioner. As a pure question of
law, I am unable to accept the very broad proposition that
whenever a contract is said to be void-ab-initio, the Courts
exercising jurisdiction under Section 8 and Section 11 of
the Arbitration Act, 1996 are rendered powerless to refer
the disputes to arbitration.
18.
However, the respondent has placed strong reliance
on the judgment of this Court in N. Radhakrishnan
(supra). In that case, disputes had arisen between the
appellant and the respondent, who were partners in a firm
known as Maestro Engineers. The appellant had retired
from the firm.
Subsequently, the appellant alleged that
he continued to be a partner. The respondent filed a Civil
Suit seeking a declaration that the appellant is not a
partner of the firm.
In this suit, the appellant filed an
application under Section 8 of the Arbitration Act seeking
reference of the dispute to the arbitration. The plea was
rejected by the trial court and the High Court in Civil
Revision.
This Court also rejected the prayer of the
appellant for reference of the dispute to arbitration. This
Court found that subject matter of the dispute was within
the ambit of the arbitration clause. It was held as under :
“14. The learned counsel for the respondents
further argued that the subject-matter of the
suit being OS No. 526 of 2006 was a different
one and it was not within the ambit of the
arbitration clause of the partnership deed
dated 7-4-2003 and that the partnership deed
had ceased to exist after the firm was
reconstituted due to the alleged retirement of
the appellant. Therefore, the trial court was
justified in not referring the matter to the
arbitrator.
15. The appellant had on the other hand
contended that the subject-matter of the suit
was within the ambit of the arbitration clause
since according to him the dispute related to
his retirement and the settlement of his dues
after he was deemed to have retired according
to the respondents. Further, it was his
contention that the partnership deed dated 6-
12-2005 was not a valid one as it was not
framed in compliance with the requirements
under the Partnership Act, 1932. Therefore,
the argument of the respondents that the
subject-matter of the suit did not fall within the
ambit of the arbitration clause of the original
partnership deed dated 7-4-2003 cannot be
sustained. We are in agreement with the
contention of the appellant to this effect.
16. It is clear from a perusal of the
documents that there was a clear dispute
regarding the reconstitution of the partnership
firm and the subsequent deed framed to that
effect. The dispute was relating to the
continuation of the appellant as a partner of
the firm, and especially when the respondents
prayed for a declaration to the effect that the
appellant had ceased to be a partner of the
firm after his retirement, there is no doubt in
our mind that the dispute squarely fell within
the purview of the arbitration clause of the
partnership deed dated 7-4-2003. Therefore,
the arbitrator was competent to decide the
matter relating to the existence of the original
deed and its validity to that effect. Thus, the
contention that the subject-matter of the suit
before the Ist Additional District Munsiff Court
at Coimbatore was beyond the purview of the
arbitration clause, cannot be accepted.”
19.
Having found that the subject matter of the suit was
within the jurisdiction of the arbitration, it was held that
the disputes can not be referred to arbitration. This Court
approved the finding of the High Court that since the case
relates to allegations of fraud and serious malpractices on
the part of the respondents, such a situation can only be
settled in court through furtherance of detailed evidence
by either parties and such a situation can not be properly
gone into by the arbitrator. In my opinion, the aforesaid
observations runs counter to the ratio of the law laid down
by this Court in Hindustan Petroleum Corpn. Ltd. Vs.
Pinkcity Midway Petroleums4, wherein this Court in
Paragraph 14 observed as follows:
“If in an agreement between the parties before the
civil court, there is a clause for arbitration, it is
mandatory for the civil court to refer the dispute to
an arbitrator. In the instant case the existence of
an arbitral clause in the agreement is accepted by
both the parties as also by the courts below.
Therefore, in view of the mandatory language of
Section 8 of the Act, the courts below ought to
have referred the dispute to arbitration.”
20.
In
my
opinion,
the
observations
in
Hindustan
Petroleum Corpn. Ltd. (supra) lays down the correct
law. Although, reference has been made to the aforesaid
4
(2003) 6 SCC 503
observations in N. Radhakrishnan (supra) but the same
have not been distinguished. A Two Judge Bench of this
Court in P. Anand Gajapathi Raju & Ors. Vs. P.V.G.
Raju (Dead) & Ors.5, had earlier considered the scope of
the provisions contained in Section 8 and observed as
follows:-
“8. In the matter before us, the arbitration
agreement covers all the disputes between the
parties in the proceedings before us and even
more than that. As already noted, the arbitration
agreement satisfies the requirements of Section 7
of the new Act. The language of Section 8 is
peremptory. It is, therefore, obligatory for the
Court to refer the parties to arbitration in terms
of their arbitration agreement. Nothing
remains to be decided in the original action or the
appeal arising therefrom. There is no question of
stay of the proceedings till the arbitration
proceedings conclude and the award becomes
final in terms of the provisions of the new Act. All
the rights, obligations and remedies of the parties
would now be governed by the new Act including
the right to challenge the award. The court to
which the party shall have recourse to challenge
the award would be the court as defined in clause
(e) of Section 2 of the new Act and not the court to
which an application under Section 8 of the new
Act is made. An application before a court under
Section 8 merely brings to the court’s notice that
the subject-matter of the action before it is the
subject-matter of an arbitration agreement. This
5
(2000) 4 SCC 539
would not be such an application as contemplated
under Section 42 of the Act as the court trying the
action may or may not have had jurisdiction to try
the suit to start with or be the competent court
within the meaning of Section 2(e) of the new
Act.”
21.
This judgment was not even brought to the notice of
the Court in N. Radhakrishnan (supra). In my opinion,
judgment in N. Radhakrishnan (supra) is per incuriam
on two grounds:
Firstly, the judgment in Hindustan
Petroleum Corpn. Ltd. (supra) though referred has not
been distinguished but at the same time is not followed
also. The judgment in P. Anand Gajapathi Raju & Ors.
(supra) was not even brought to the notice of this Court.
Therefore, the same has neither been followed nor
considered. Secondly, the provision contained in Section
16 of the Arbitration Act, 1996 were also not brought to
the notice by this Court.
Therefore, in my opinion, the
judgment in N. Radhakrishnan (supra) does not lay
down the correct law and can not be relied upon.
22.
As noticed above, the attention of this Court was not
drawn to the provision contained in Section 16 of the
Arbitration Act, 1996 in the case of N. Radhakrishnan
(supra). Section 16 provides that the Arbitral Tribunal
would be competent to rule on its own jurisdiction
including ruling on any objection with regard to existence
or validity of the arbitration agreement. The Arbitration
Act emphasises that an arbitration clause which forms
part of a contract shall be treated as an agreement
independent of the other terms of the contract.
It further
provides that a decision by the Arbitral Tribunal that the
contract is null and void shall not entail ipso jure the
invalidity
of
the
arbitration
clause.
The
aforesaid
provision came up for consideration by this Court in
Today
Homes
&
Infrastructure
Pvt.
Ltd.
Vs.
Ludhiana Improvement Trust & Anr.6
23.
In the aforesaid case, the designated Judge of the
Punjab & Haryana High Court had refused to refer the
disputes to arbitration. The High Court had accepted the
6
2013 (7) SCALE 327: 2013 (2) Arb. LR 241 (SC)
plea that since the underlying contract was void, the
arbitration clause perished with it. The judgment of the
High Court was challenged in this Court, by filing a Special
Leave Petition. Before this Court it was submitted by the
appellant that the High Court treated the application
under Section 11(6) of the Arbitration Act as if it was
deciding a suit but without adducing evidence. Relying on
SBP & Co. Vs. Patel Engineering Ltd., it was submitted
that the High Court was only required to conduct a
preliminary enquiry as to whether there was a valid
arbitration agreement; or whether it was a stale claim. On
the other hand, it was submitted by the respondents that
once the High Court had found the main agreement to be
void, the contents thereof including the arbitration clause
are also rendered void.
24.
This Court rejected the aforesaid submission of the
respondents with the following observations :
“13. We have carefully considered the submissions
made on behalf of the respective parties and we
are of the view that the learned designated Judge
exceeded the bounds of his jurisdiction, as
envisaged in SBP & Co. (supra). In our view, the
learned designated Judge was not required to
undertake a detailed scrutiny of the merits and de-
merits of the case, almost as if he was deciding a
suit. The learned Judge was only required to
decide such preliminary issues such as jurisdiction
to entertain the application, the existence of a
valid arbitration agreement, whether a live claim
existed or not, for the purpose of appointment of
an arbitrator. By the impugned order, much more
than what is contemplated under Section 11(6) of
the 1996 Act was sought to be decided, without
any evidence being adduced by the parties. The
issue
regarding the continued existence of the
arbitration agreement, notwithstanding the main
agreement itself being declared void, was
considered by the 7-Judge Bench in SBP & Co.
(supra) and it was held that an arbitration
agreement could stand independent of the main
agreement and did not necessarily become otiose,
even if the main agreement, of which it is a part, is
declared void.
14. The same reasoning was adopted by a
member of
this Bench (S.S. Nijjar, J.), while
deciding the case of Reva Electric Car Company
Private Limited Vs. Green Mobil [(2012) 2 SCC 93],
wherein the provisions of Section 16(1) in the
backdrop of the doctrine of kompetenz kompetenz
were considered and it was inter alia held that
under Section 16(1), the legislature makes it clear
that while considering any objection with regard to
the existence or validity of the arbitration
agreement, the arbitration clause, which formed
part of the contract, had to be treated as an
agreement independent of the other terms of the
contract. Reference was made in the said
judgment to the provisions of Section 16(1)(b) of
the 1996 Act, which provides that even if the
arbitral tribunal concludes that the contract is null
and void, it should not result, as a matter of law, in
an automatic invalidation of the arbitration clause.
It was also held that Section 16(1)(a) of the 1996
Act presumes the existence of a valid arbitration
clause and mandates the same to be treated as an
agreement independent of the other terms of the
contract. By virtue of Section 16(1)(b) of the 1996
Act, the arbitration clause continues to be
enforceable, notwithstanding a declaration that
the contract was null and void.
25.
Keeping in view the aforesaid observations made by
this Court, I see no reason to accept the submission made
by the learned counsel for the respondents that since a
criminal case has been registered against the Chairman of
the Organising Committee and some other officials of the
petitioner, this Court would have no jurisdiction to make a
reference to arbitration.
26.
As noticed above, the concept of separability of the
arbitration clause/agreement from the underlying contract
has been statutorily recognised by this country under
Section 16 of the Arbitration Act, 1996. Having provided
for resolution of disputes through arbitration, parties can
not be permitted to avoid arbitration, without satisfying
the Court that it will be just and in the interest of all the
parties not to proceed with the arbitration. Section 5 of
the Arbitration Act provides that the Court shall not
intervene in the arbitration process except in accordance
with the provisions contained in Part I of the Arbitration
Act.
This policy of least interference in arbitration
proceedings recognises the general principle that the
function of Courts in matters relating to arbitration is to
support arbitration process. A conjoint reading of Section
5 and Section 16 would make it clear that all matters
including the issue as to whether the main contract was
void/voidable can be referred to arbitration. Otherwise, it
would be a handy tool available to the unscrupulous
parties to avoid arbitration, by raising the bogey of the
underlying contract being void.
27.
I am of the opinion that whenever a plea is taken to
avoid arbitration on the ground that the underlying
contract is void, the Court is required to ascertain the true
nature of the defence.
“voidable”
are
Often, the terms “void” and
confused
and
interchangeably with each other.
used
loosely
and
Therefore, the Court
ought to examine the plea by keeping in mind the
relevant statutory provisions in the Indian Contract Act,
1872, defining the terms “void” and “voidable”. Section
2, the interpretation clause defines some of the relevant
terms as follows:-
“2(g)
An agreement not enforceable by law is
said to be void;
2(h) An agreement
contract;
enforceable
by
law
is
a
2(i) An agreement which is enforceable by law at
the option of one or more of the parties
thereto, but not at the option of the other or
others, is a voidable contract;
2(j) A contract which ceases to be enforceable by
law becomes void when it ceases to be
enforceable.”
The aforesaid clauses clearly delineate and differentiate
between term “void” and “voidable”.
Section 2(j) clearly
provides as to when a voidable contract would reach the
stage of being void. Undoubtedly, in cases, where the Court
can come to a conclusion that the contract is void without
receiving any evidence, it would be justified in declining
reference to arbitration but such cases would be few and
isolated. These would be cases where the Court can readily
conclude that the contract is void upon a meaningful reading
of the contract document itself. Some examples of where a
contract may fall in this category would be :-
(a)
Where a contract is entered into by a person, who
has not attained the age of majority (Section 11);
(b)
Where both the parties are under a mistake as to
a matter of fact essential to the agreement
(Section 19);
(c)
Where the consideration or object of the contract
is forbidden by law or is of such a nature that, if
permitted, it would defeat the provisions of any
law or where the object of the contract is to
indulge in any immoral activity or would be
opposed to public policy. Glaring examples of this
would be where a contract is entered into between
the parties for running a prostitution racket,
smuggling drugs, human trafficking and any other
activities falling in that category.
(d)
Similarly, Section 30 renders wagering contracts
as void. The only exception to this is betting on
horse racing. In the circumstances noted above, it
may not be necessary for the Court to take any
further evidence apart from reading the contract
document itself.
Therefore, whilst exercising
jurisdiction under Section 11(6) of the Arbitration
Act, the Court could decline to make a reference
to arbitration as the contract would be patently
void.
28.
However, it would not be possible to shut out
arbitration even in cases where the defence taken is that
the contract is voidable. These would be cases which are
covered under the circumstances narrated in Section 12 –
unsoundness of mind; Section 14 – absence of free
consent, i.e. where the consent is said to be vitiated as it
was obtained by Coercion (Section 15), Undue Influence
(Section 16), Fraud (Section 17) or Misrepresentation
(Section 18). Such a contract will only become void when
the party claiming lack of free consent is able to prove the
same and thus rendering contract void. This indeed is the
provision contained in Section 2(j) of the Indian Contract
Act.
In exercising powers under Section 11(6) of the
Arbitration Act, the Court has to keep in view the
provisions contained in Section 8 of the Arbitration Act,
which provides that a reference to arbitration shall be
made if a party applies not later than when submitting his
first statement on the substance of the dispute.
In
contrast, Section 45 of the aforesaid Act permits the Court
to decline reference to arbitration in case the Court finds
that the agreement is null and void, inoperative or
incapable of being performed.
29.
To shut out arbitration at the initial stage would
destroy the very purpose for which the parties had
entered into arbitration. Furthermore, there is no inherent
risk of prejudice to any of the parties in permitting
arbitration to proceed simultaneously to the criminal
proceedings. In an eventuality where ultimately an award
is
rendered
by
arbitral
tribunal,
and
the
criminal
proceedings result in conviction rendering the underlying
contract void, necessary plea can be taken on the basis of
the conviction to resist the execution/enforcement of the
award. Conversely, if the matter is not referred to
arbitration and the criminal proceedings result in an
acquittal and thus leaving little or no ground for claiming
that the underlying contract is void or voidable, it would
have the wholly undesirable result of delaying the
arbitration. Therefore, I am of the opinion that the Court
ought to act with caution and circumspection whilst
examining the plea that the main contract is void or
voidable.
The Court ought to decline reference to
arbitration only where the Court can reach the conclusion
that the contract is void on a meaningful reading of the
contract document itself without the requirement of any
further proof.
30.
In the present case, it is pleaded that the manner in
which the contract was made between the petitioner and
the respondent was investigated by the CBI. As a part of
the investigation, the CBI had seized all the original
documents and the record from the office of the
respondent. After investigation, the criminal case CC
No.22 of 2011 has been registered, as noticed earlier. It is
claimed that in the event the Chairman of the Organising
Committee and the other officials who manipulated the
grant of contract in favour of the respondent are found
guilty in the criminal trial, no amount would be payable to
the petitioner. Therefore, it would be appropriate to await
the decision of the criminal proceedings before the
arbitral tribunal is constituted to go into the alleged
disputes between the parties. I am unable to accept the
aforesaid submission made by the learned counsel for the
respondents, for the reasons stated in the previous
paragraphs. The balance of convenience is tilted more in
favour
of
permitting
the
arbitration
proceedings
to
continue rather than to bring the same to a grinding halt.
31.
I must also notice here that the defence of the
contract being void is now-a-days taken routinely along
with the other usual grounds, to avoid/delay reference to
arbitration. In my opinion, such ground needs to be
summarily rejected unless there is clear indication that
the defence has a reasonable chance of success. In the
present case, the plea was never taken till the present
petition was filed in this Court. Earlier, the respondents
were only impressing upon the petitioners to supply
certain information.
Therefore, it would be appropriate,
let the Arbitral Tribunal examine whether there is any
substance in the plea of fraud now sought to be raised by
the respondents.
32.
The Respondent also relied on the judgment of this
Court in India Household and Healthcare Ltd. (supra),
wherein the application under section 11 (6) of the
Arbitration Act was dismissed. This case, however, will not
come in the way of referring the matter to arbitration
since it is clearly distinguishable from the present case. In
India Household and Healthcare Ltd. (supra), the
substantive/underlying contract containing the arbitration
clause was entered into by the parties on 08.05.2004. This
agreement, however, was preceded by a Memorandum of
Understanding (“MoU”) dated 1.11.2003. It was contended
by the Respondent that both the Agreement and the MoU
are vitiated by fraud which was fructified by a criminal
conspiracy hatched between officials representing the
Petitioner and Respondent therein. This Court also noticed
that the concerned officials of the Respondent had been
convicted and sentenced to undergo imprisonment by the
Korean Criminal Court. The said MoU was also contended
by the Respondent to be in contravention of the laws of
Korea. It was further noticed that the Respondent filed a
suit in the Madras High Court against the Petitioner,
whereby
the
High
Court
vide
interim
order
dated
06.10.2005 issued an injunction and thereby restrained
the Petitioner therein to act directly or indirectly on the
basis of MoU and the Agreement dated 08.05.2004, and to
derive any other benefit based upon the said MoU and the
license agreement in any manner whatsoever. This
interim order, the court noticed, was confirmed by an
order dated 21.01.2006; against which no appeal was filed
by the Petitioner. The Court, relying upon A Treatise on
Law
Governing
Injunctions
by
Spelling
and
Lewis,
concluded that this injunction order having not been
challenged by the Petitioner has become final and also
that this order restrains the invocation of the arbitration
agreement contained in Agreement dated 08.05.2004.
Therefore, the Court declined to refer the matter to
arbitration. Another factor that weighed with Court in
dismissing the Petition, it appears, is that the Petitioner
did not conform to the procedure concerning appointment
of the Arbitrator before filing the Petition under Section 11
(6).
33.
This case is clearly distinguishable and hence is not
applicable into the facts and circumstances of the present
case because of the following reasons: Firstly, there has
been no conviction in the present case, though the trial
has been going on against the officials of both the parties.
Secondly, there is no injunction or any other order
restraining the Petitioner from invoking the Arbitration
Clause. Lastly, all the conditions precedent for invoking
the
arbitration
clause
have
been
satisfied
by
the
Petitioner, as observed earlier.
34.
The respondent had relied on the judgment of this
Court in Guru Granth Saheb Sthan Meerghat Vanaras
Vs. Ved Prakash & Ors.7 This judgment reiterates the
normal rule which was stated by the Constitution Bench of
this Court in M.S.Sheriff Vs. State of Madras in relation
to
the
simultaneous
prosecution
of
the
criminal
proceeding with the civil suit. In the aforesaid case, the
Constitution Bench had observed as follows:-
“14. ... It was said that the simultaneous
prosecution of these matters will embarrass the
accused. ... but we can see that the simultaneous
prosecution of the present criminal proceedings
7
(2013) 7 SCC 622
out of which this appeal arises and the civil suits
will embarrass the accused. We have therefore to
determine which should be stayed.
15. As between the civil and the criminal
proceedings we are of the opinion that the
criminal matters should be given precedence.
There is some difference of opinion in the High
Courts of India on this point. No hard-and-fast rule
can be laid down but we do not consider that the
possibility of conflicting decisions in the civil and
criminal courts is a relevant consideration. The law
envisages such an eventuality when it expressly
refrains from making the decision of one court
binding on the other, or even relevant, except for
certain limited purposes, such as sentence or
damages. The only relevant consideration here is
the likelihood of embarrassment.
16. Another factor which weighs with us is that a
civil suit often drags on for years and it is
undesirable that a criminal prosecution should
wait till everybody concerned has forgotten all
about the crime. The public interests demand that
criminal justice should be swift and sure; that the
guilty should be punished while the events are still
fresh in the public mind and that the innocent
should be absolved as early as is consistent with a
fair and impartial trial. Another reason is that it is
undesirable to let things slide till memories have
grown too dim to trust.
This, however, is not a hard-and-fast rule. Special
considerations obtaining in any particular case
might make some other course more expedient
and just. For example, the civil case or the other
criminal proceeding may be so near its end as to
make it inexpedient to stay it in order to give
precedence to a prosecution ordered under
Section 476. But in this case we are of the view
that the civil suits should be stayed till the criminal
proceedings have finished.”
35.
The purpose of the aforesaid solitary rule is to avoid
embarrassment to the accused. In contrast, the findings
recorded by the arbitral tribunal in its award would not be
binding in criminal proceedings.
Even otherwise, the
Constitution Bench in the aforesaid case has clearly held
that no hard and fast rule can be laid down that civil
proceedings in all matters ought to be stayed when
criminal proceedings are also pending. As I have indicated
earlier in case the award is made in favour of the
petitioner herein, the respondents will be at liberty to
resist the enforcement of the same on the ground of
subsequent conviction of either the Chairman or the
officials of the contracting parties.
36.
It must also notice here that the Petitioners relied
upon an earlier order of this court in the case of M/s
Nussli (Switzerland) Ltd. (supra). The aforesaid order,
however, seems to have been passed on a consensus
between the learned counsel for the parties. This is
evident from the following observations in the aforesaid
order:
“In view of the aforesaid order, learned senior
counsel for both the parties have agreed that the
parties have agreed that the matter ought to be
referred to Arbitration. However, Mr. Gopal
Subramaniam, learned senior counsel appearing
for the Respondent, submits that serious issued
would
arise
which
are
currently
under
investigation of the CBI, which may ultimately
culminate into certain conclusions which could
result in the invalidation of the contract from
inception.
He has, however, very fairly stated that there
would be no impediment for the arbitral Tribunal
to look into all the issues including the allegations
which are pending with the CBI in investigation.
I am of the opinion that the submission made by
the learned senior counsel is in accordance with
the law settled, not only by this Court, but in other
jurisdictions also concerning the international
commercial arbitrations.”
The aforesaid excerpt clearly shows that Mr. Gopal
Subramaniam, had very fairly agreed to proceed with
arbitration. The decision of this Court in M/s Nussli
(Switzerland) Ltd. (supra) has not laid down any law.
37.
As noticed earlier, the petitioners have already
nominated Hon’ble Mr. Justice S.N. Variava, Former Judge
of this Court, having his office at Readymoney Mansion,
2nd floor, Next to Akbarallys, Veer Nariman Road, Fort,
Mumbai – 400 001, as their arbitrator. I hereby nominate.
Hon’ble Mr. Justice B.P. Singh, Former Judge of this Court,
R/o A-7, Neeti Bagh, 3rd Floor, New Delhi – 110 049, as
the second Arbitrator and Hon’be Mr. Justice Kuldip Singh,
Former Judge of this Court, R/o H.No. 88, Sector 10A,
Chandigarh – 160 010, as the Chairman of the Arbitral
Tribunal, to adjudicate the disputes that have arisen
between the parties, on such terms and conditions as they
deem fit and proper.
38.
The Registry is directed to communicate this order to
the Chairman of the Arbitral Tribunal, as well as, to the
Second Arbitrator to enable them to enter upon the
reference and decide the matter as expeditiously as
possible.
39.
The Arbitration Petition is accordingly allowed with no
order as to costs.
.................................J.
[Surinder Singh Nijjar]
New Delhi;
May 28, 2014
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