Full Judgment Text
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CASE NO.:
Arbitration Petition 9 of 1999
PETITIONER:
WELLINGTON ASSOCIATES LTD. ....
Vs.
RESPONDENT:
MR. KIRIT MEHTA
DATE OF JUDGMENT: 04/04/2000
BENCH:
M.J.Rao
JUDGMENT:
M. JAGANNADHA RAO, J.
L.....I.........T.......T.......T.......T.......T.......T..J
This is an application filed under sub-clauses
(2), (6), (10) and (12) of Section 11 of the
Arbitration
and Conciliation Act, 1996 ( hereinafter called the
Act). The application is made to the Chief Justice of
India and after due nomination, has been placed before
me.
The brief facts as set out in the petition, to the
extent necessary for the purpose of this application,
are as follows. The petitioner is a company with its
registered office at Les Cascades, Port Luis Republic
of
Mauritius. The respondent is the promoter and
Managing
Director of M/s C.M.M. Ltd., Mumbai. The petitioner
entered into two agreements both dated 15.8.1995 with
the respondent under which it was stated that the
petitioner had agreed to subscribe to a private
placement of two lots of 85,000 equity shares ( each
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agreement comprising one lot of 85,000 equity shares,
thereby aggregating to 1,70,000 shares) of C.M.M.
Ltd.
The shares were having face value of Rs.10/- per
share.
They were agreed to be acquired by the petitioners at
a
premium of Rs.20/- per share. The cumulative value
amounted to Rs.51 lakhs ( 1.70 lakhs x Rs.30 per
share).
The shares were to be held by the petitioners for a
period of one year from the date of subscription. It
was
stated that the respondent agreed and undertook to
compulsorily purchase back from the petitioners the
said
shares after the expiry of the said period in the
following manner.(i) under the Ist agreement, 85,000
with an assured return at the rate of 35% p.a. and
(ii)
under the 2nd agreement, 85,000 with an assured return
at the rate of 29% p.a. It was stated that the
respondent agreed that upon default by the respondent,
the respondent would be liable to pay penal interest
at
3% p.a. from the date of subscription till actual
date
of payment. Pursuant to the above agreements, a
"subscription agreement" was later entered into on
25.9.95 between the petitioner (the subscriber), the
respondent-promoter and the C.M.M. company.
On 26.9.95, Sigma Credit and Capital Services Pvt.
Ltd., wrote to the petitioner stating that it had
taken
up the deal of C.M.M. Ltd. and that it would ensure
the
petitioner that the terms of the agreement between the
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prospective investor ( petitioner) and C.M.M.Ltd.
-for
the subscription and assured buy back, especially
regarding the assured return and the confirmed
buy-back
- would be complied with by both the parties. The
said
company further undertook to buy-back the 85,000 NRI
shares of CMM Ltd., at the end of 12 months from the
date of investment, at the rate of 25% p.a. in case
the
respondent failed to meet the commitment of buy-back.
The petitioner paid Rs.51 lakhs to the respondent on
9.10.95 pursuant to the above agreements and 1,70,000
shares were allotted to the petitioner. By 8.10.96,
the
respondent did not buy back the shares. Nor did Sigma
buy back the shares.
On 11.7.1997, the petitioner’s lawyer issued a
registered notice to the respondent complaining that
after the lapse of one year from the date of
subscription, neither the respondent nor Sigma Credit
and Capital Services (P)Ltd. had honoured their
commitments as per agreements dated 15.8.95 and letter
dated 26.9.95. There was no response to this notice
by
the respondent or by Sigma. A further notice was
issued
by the petitioner on 19.4.99 stating that there was no
response to the earlier notice, that the two
agreements
dated 15.8.95 contained an "arbitration clause" and
that
the petitioner desired that the disputes and
differences be referred to arbitration. It was also
intimated that the petitioners had appointed Justice
M.L. Pendse, Retired Chief Justice, Karnataka High
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Court
as their Arbitrator and that the respondent was being
called upon to appoint his Arbitrator within 30 days
from the date of receipt of the letter or else the
respondent should confirm the appointment of Sri
Justice
M.L. Pendse. In default, the petitioners would
proceed
under the Arbitration and Conciliation Act, 1996. The
respondent sent a reply on 28.5.1999 raising various
contentions. One of the contentions was that the
arbitration clause, namely, clause 5 in the agreements
dated 15.8.95 used the words "may" and that the said
clause was not mandatory but was an enabling provision
and, therefore, fresh consent of parties for
arbitration
was necessary. On 16.6.99, the petitioner’s lawyers
wrote back to the respondent stating that the
interpretation put by the respondent on the
arbitration
clause was not correct. The respondent sent a further
reply on 21.6.99. Petitioner’s lawyers sent a
rejoinder
on 2.7.99. Thereafter, the present petition was filed
under section 11 of the Act seeking the appointment of
arbitrator/arbitrators.
In this petition before me, the respondent filed a
reply and the petitioner thereafter filed a rejoinder.
Learned counsel for the petitioner Sri U.A. Rana
submitted that the word ’may’ used in clause 5 of the
agreement was to be read, in the context , as ’shall’
and that, in any event, in view of section 16 of the
Act, the question of the "existence" of the
arbitration
agreement was a matter to be decided by the arbitral
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tribunal and not by me. A point was raised by the
petitioner in the rejoinder based on Ador Samia Ltd.
Vs.
Peekay Holdings Ltd. ( 19998(8) SCC 572) that the
action
of the Chief Justice of India or his designate under
Section 11(6) was an administrative act and did not
amount to the exercise of any judicial function. Nor
would the Chief Justice of India or his designate have
any trappings of a judicial authority, while acting
under section 11. Counsel also submitted that in
Bombay,
a civil suit would take more than 20 years for
adjudication, and therefore such a situation should be
avoided and the matter should be referred to
arbitration.
On the other hand, learned counsel for the
respondent Sri P.H. Parekh submitted that the
relevant
clause, viz., clause 5 was not mandatory in its
language and that in a similar case in P. Gopal Das
Vs.
Kota Styraw Board ( AIR 1971 Raj. 258), it was held
by
the Rajasthan High Court that the use of the word
’may’
indicated that a fresh consent of both parties for
arbitration was necessary. Counsel submitted that
section 16 of the Act would not apply to the situation
on hand and that it was permissible for me to decide
whether clause 5 was an arbitration clause or not.
On the above submissions, the following points
arise for consideration:
(1) Whether clause 5 amounted to an arbitration clause
at all and whether such a question amounted to a
dispute
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relating to the ’existence’ of the arbitration clause?
Whether such a question should be decided only by the
arbitral tribunal under section 16 and could not be
decided by the Chief Justice of India or his designate
while dealing with an application under section 11?
(2) If the Chief Justice or his designate could decide
the said question, then whether clause 5 of the
agreements dated 15.8.95 which used the words "may be
referred" required fresh ’consent’ of the parties
before
a reference was made for arbitration?
(3) To what relief.
Point 1:
This point raises a question as to the scope of
section 16 on the one hand and section 11 on the
other.
Before referring the said section, I shall refer
to the relevant clauses 4 and 5 in the two agreements
dated 15.8.95. They read as follows:
"Clause 4: It is hereby agreed that, if any dispute
arises in connection with these presents, only courts in
Bombay would have jurisdiction to try and determine the suit
and the parties hereto submit themselves to the exclusive
jurisdiction of the courts in Bombay."
Clause 5: It is also agreed by and between the
parties that any dispute or differences arising in
connection with these presents may be referred to
arbitration in pursuance of the Arbitration Act, 1947, by
each party appointing one arbitrator and the arbitrators so
appointed selecting an umpire. The venue of arbitration
shall be at Bombay."
The petitioner’s counsel submits that the question
whether clause 5 extracted above tantamounts to a
dispute as to ’existence" of the arbitration agreement
-
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is a question which can be decided only by the
arbitral
tribunal in view of section 16 of the Act and that it
cannot be decided by me. That section reads as
follows:
"Section 16: Competence of arbitral tribunal to rule
on its jurisdiction.-
(1) The arbitral tribunal may rule on its own
jurisdiction, including ruling on any objections with
respect to the existence or validity of the arbitration
agreement, and for that purpose, -
(a) an arbitration clause which forms part of a
contract shall be treated as an agreement independent of the
other terms of the contract; and
(b) a decision by the arbitral tribunal that the
contract is null and void shall not entail ipso jure the
invalidity of the arbitration clause.
(2) A plea that the tribunal does not have
jurisdiction shall be raised not later than the submission
of the statement of defence; however, a party shall not be
precluded from raising such a plea merely because that he
has appointed, or participated in the appointment of, an
arbitrator.
(3) A plea that the arbitral tribunal is exceeding the
scope of its authority shall be raised as soon as the matter
alleged to be beyond the scope of its authority is raised
during the arbitral proceedings.
(4) The arbitral tribunal may, in either of the cases
referred to in sub- section (2) or sub-section (3), admit a
later plea if its considers the delay justified.
(5) The arbitral tribunal shall decide on a plea
referred to in sub-section (2) or sub-section (3) and, where
the arbitral tribunal takes a decision rejecting the plea,
continue with the arbitral proceedings and make an arbitral
award.
(6) A party aggrieved by such an arbitral award may
make an application for setting aside such an arbitral award
in accordance with section 34.
For appreciating the scope of section 16 of the
new Act, it is necessary to go back to section 33 of
the
Indian Arbitration Act, 1940. That section vested
jurisdiction in the court to decide whether there was
in
’existence’ an arbitration clause or not, whenever the
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’existence’ of the arbitration clause was challenged
by
any of the parties. That section read as follows:
"Section 33: Arbitration agreement or award to be
contested by application -
Any party to an arbitration agreement or any person
claiming under him desiring to challenge the existence or
validity of an arbitration agreement or an award or to have
the effect of either determined, shall apply to the Court
and the Court shall decide the question on affidavits,
........"
In M/s. D. Gobindram Vs. M/s Shamji Kalidas Co.
[AIR 1961 SC 1285 (at 1293)(para 25)] it was held that
the question as to the existence of arbitration clause
was for the Court to decide under section 33 and not
for the arbitrators. In Khardah Co.Ltd. Vs. Raymon
&
Co.(India) Pvt.Ltd. (AIR 1962 SC 1810) and In Waverly
Jute Mills Co.Ltd. Vs. Raymon & Co. (India) Pvt.
Ltd.
(AIR 1963 SC 90, at 96 para 17), it was held that the
question as to the validity of the contract was also
for
the Court to decide under section 33 and not for the
arbitrator. If there was no arbitration clause at the
time of entry of the arbitrators on their duties, the
whole proceedings would be without jurisdiction. In
Renusagar Power Co. Ltd. Vs. General Electric Co.
(AIR
1985 SC 1156 = 1985(1) SCR 432) (at p.1170) it was
stated that ordinarily,. as a rule, an arbitrator had
no
authority to clothe himself with power to decide the
question of his own jurisdiction unless parties
expressly conferred such a power on him.
Thus, it is clear from section 33 of the old
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Act of 1940 that any question as to the "existence" of
the arbitration agreement was to be decided only by
application to the Court and not by the arbitrator.
This
disability on the part of the arbitrator has now been
removed by section 16 of the new Act. Now section 16
has
conferred power on the arbitral tribunal to decide
whether there is in ’existence’ an arbitration clause.
But, it must be noted that the language employed
by section 16 of the new Act shows that the said
provision is only an enabling one which,- unlike
section
33 in the old Act of 1940,- now permits the arbitral
tribunal to decide a question relating to the
’existence’, of the arbitration clause. This section
corresponds to Article 16 of the UNCITRAL Model Law
and
Article 21 of the UNCITRAL Arbitration Rules. While
Article 16 of the Model Law says that the arbitral
tribunal may rule on its own jurisdiction, Article 21
of
the Rules states that the ’arbitral tribunal shall
have
power to rule’ on these questions. Such power given
to
the arbitral tribunal is also referred to as
’Kompetenz
- kompetenz".
The more important question however is whether
section 16 excludes the jurisdiction of the Chief
Justice of India or his designate in this behalf if a
question as to the existence of the arbitration clause
is raised by the respondent in his reply to the
petition
filed under section 11. (I am not concerned with the
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question of the validity or effect of the arbitration
clause, in the present case). In my view, section 16
does not take away the jurisdiction of the Chief
Justice
of India or his designate, if need be, to decide the
question of the ’existence’ of the arbitration
agreement. Section 16 does not declare that except
the
arbitral tribunal, none else can determine such a
question. Merely because the new Act permits the
Arbitrator to decide this question, it does not
necessarily follow that at the stage of section 11 the
Chief Justice of India or his designate cannot decide
a
question as to the existence of the arbitration
clause.
The interpretation put on section 16 by the
petitioner’s counsel that only the arbitral tribunal
can
decide about the "existence" of the arbitration clause
is not acceptable for other reasons also apart from
the
result flowing from the use of the word ’may’ in
section
16. The acceptance of the said contention will, as I
shall presently show, create serious problems in
practice. As Saville L.J. stated in a speech at
Middle
Temple Hall on July 8, 1996: "Question of the
jurisdiction of the tribunal cannot be left (unless
the
parties agreed) to the tribunal itself, for that would
be a classic case of pulling oneself up by one’s own
bootstraps". ( A practical approach to Arbitration
Law,
Keren Tweeddale & Andrew Tweeddale, (1999) Blackstone
Press Ltd.)(P.75). Let us take this very case. If
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indeed clause 5 does not amount to an ’arbitration
agreement’, it will, in my view, be anomalous to ask
the
arbitrator to decide the question whether clause 5 is
at all an arbitration clause. It is well settled and
has
been repeatedly held that the source of the
jurisdiction of the arbitrator is the arbitration
clause. [see Waverly Jute Mills case (AIR 1963 SC 90)
above referred to ) When that is the position, the
arbitrator cannot, in all situations, be the sole
authority to decide upon the "existence" of the
arbitration clause. Supposing again, the contract
between the parties which contained the arbitration
clause remained at the stage of negotiation and there
was no concluded contract at all. Then in such a case
also, there is no point in appointing an arbitrator
and
asking him to decide the question as to the existence
of
the arbitration clause. But, I may point out that
there
can be some other situations where the question as to
the "existence" of an arbitration clause can be
decided
by the arbitrator. Take a case where the matter has
gone
to the arbitrator without the intervention of an
application under section 11. Obviously, if the
question
as to the existence of the arbitration clause is
raised
before the arbitral tribunal, it has power to decide
the
question. Again in a case where the initial existence
of
the arbitration clause is not in issue at the time of
section 11 application but a point is raised before
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the
arbitral tribunal that the said clause or the contract
in which it is contained has ceased to be in force,
then
in such a case, the arbitrator can decide whether the
arbitration clause has ceased to be in force. A
question
may be raised before the arbitrator that the whole
contract including the arbitration clause is void.
Now
Section 16 of the new Act permits the arbitral
tribunal
to treat the arbitration clause as an independent
clause
and section 16 says that the arbitration clause does
not
perish even if the main contract is declared to be
null
and void. Keeping these latter and other similar
situations apart, I am of the view that in cases where
-
to start with - there is a dispute raised at the stage
of the application under section 11 that there is no
arbitration clause at all, then it will be absurd to
refer the very issue to an arbitrator without deciding
whether there is an arbitration clause at all between
the parties to start with. In my view, in the present
situation, the jurisdiction of the Chief Justice of
India or his designate to decide the question as to
the
’existence’ of the arbitration clause cannot be
doubted
and cannot be said to be excluded by section 16.
Further, a reading of sub-clauses (4),(5) and (6)
of section 11 shows that they enable the Chief Justice
or his designate to appoint arbitrator or arbitrators,
and likewise section 11(12) enables the Chief Justice
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of India or his designate to appoint arbitrator or
arbitrators; under Rule 2 of the scheme framed by the
Chief Justice of India, a request is to be made to the
Chief Justice of India alongwith with a duly certified
copy of the ’original arbitration agreement’. Section
2(b) of the Act defines ‘arbitration agreement’ as an
agreement referred to in section 7. section 7 defines
’arbitration agreement’ as follows:
"S.7. Arbitration agreement (1) In this Part,
"arbitration agreement" means an agreement by the parties to
submit to arbitration all or certain disputes which have
arisen or which may arise between them in respect of a
defined legal relationship, whether contractual or not.
(2) An arbitration agreement may be in the form of an
arbitration clause in a contract or in the form of a
separate agreement.
(3) An arbitration agreement shall be in writing.
(4) An arbitration agreement is in writing if it is
contained in --
(a) a document signed by the parties;
(b) an exchange of letters, telex, telegrams or other
means of telecommunication which provide a record of the
agreement; or
(c) an exchange of statements of claim and defence in
which the existence of the agreement is alleged by one party
and not denied by the other.
(5) The reference in a contract to a document
containing an arbitration clause constitutes an arbitration
agreement if the contract is in writing and the reference is
such as to make that arbitration clause part of the
contract.
The words in sub-clause (1) of section 7, "means an
agreement by the parties to submit to arbitration", in
my opinion, postulate an agreement which necessarily
or
rather mandatorily requires the appointment of an
arbitrator/arbitrators. Section 7 does not cover a
case
where the parties agree that they "may" go to a suit
or
that they ’may’ also go to arbitration.
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Thus, unless the document filed by the party
before the Chief Justice of India or his designate is
an
‘arbitration agreement’ as defined in section 7 as
explained above, requiring a reference in a mandatory
sense, no reference, in my view, can be made to the
arbitral tribunal. It is, as already stated, indeed
implicit - if an objection is raised by the respondent
before the Chief Justice of India or his designate
that
the so called arbitration clause is not an arbitration
clause at all falling within section 7 - that such a
question will have to be decided in the proceedings
under section 11 of the Act. Therefore the contention
raised by the learned counsel for the petitioner that
the question - whether clause 5 of the agreement
amounts
to an arbitration clause - is to be decided only by
the
arbitral tribunal is liable to be rejected.
It is true that in Ador Samia Pvt. Ltd. vs. Peekay
Holdings Ltd. & Others [1999 (8) SCC 572], it has
been
held that the Chief Justice or his designate under
section 11(6) acts in an administrative capacity and
he
does not exercise any judicial function and that he
has
no trappings of a judicial authority. But this
decision,
in my view, cannot support the plea raised by the
petitioner in his rejoinder. Even if the Chief
Justice
of India or his designate under section 11(12) is to
be
treated as an administrative authority, the position
is
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that when the said authority is approached seeking
appointment of an arbitrator/arbitrator tribunal under
section 11 and a question is raised that there is, to
start with, no arbitration clause at all between the
parties, the Chief Justice of India or his designate
has to decide the said question.
For the aforesaid reasons, this objection raised
by the learned counsel for the petitioner is rejected.
Point 1 is decided accordingly.
Point 2:
Does clause 5 amount to an arbitration clause as
defined in section 2(b) read with section 7? I may
here
state that in most arbitration clauses, the words
normally used are that "disputes shall be referred to
arbitration". But in the case before me, the words
used
are ‘may be referred’.
It is contended for the petitioner that the word
’may’ in clause 5 has to be construed as ‘shall’.
According to the petitioner’s counsel, that is the
true
intention of the parties. The question then is as to
what is the intention of the parties? The parties, in
my view, used the words ‘may’ not without reason. If
one looks at the fact that clause 4 precedes clause 5,
one can see that under clause 4 parties desired that
in
case of disputes, the Civil Courts at Bombay are to be
approached by way of a suit. Then follows clause 5
with
the words ‘it is also agreed’ that the dispute ’may’
be
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referred to arbitration implying that parties need not
necessarily go to the Civil Court by way of suit but
can
also go before an arbitrator. Thus, clause 5 is
merely
an enabling provision as contended by the respondents.
I
may also state that in cases where there is a sole
arbitration clause couched in mandatory language, it
is
not preceded by a clause like clause 4 which discloses
a general intention of the parties to go before a
Civil
Court by way of suit. Thus, reading clause 4 and
clause
5 together, I am of the view that it is not the
intention of the parties that arbitration is to be the
sole remedy. It appears that the parties agreed that
they can "also" go to arbitration also in case the
aggrieved party does not wish to go to a Civil Court
by
way of a suit. But in that event, obviously, fresh
consent to go to arbitration is necessary. Further,
in
the present case, the same clause 5, so far as the
Venue
of arbitration is concerned, uses word ’shall’. The
parties, in my view, must be deemed to have used the
words ‘may’ and ‘shall’ at different places, after due
deliberation.
A somewhat similar situation arose in B.Gopal Das
vs. Kota Straw Board [AIR 1971 Raj. 258]. In that
case
the clause read as follows:
"That in case of any dispute arising between us, the
matter may be referred to arbitrator mutually agreed upon
and acceptable to you and us."
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It was held that fresh consent for arbitration was
necessary. No doubt, the above clause was a little
clearer there than in the case before me. In the
above
case too, the clause used the word ‘may’ as in the
present case. The above decision is therefore
directly
in point.
Before leaving the above case decided by the from
Rajasthan High Court, one other aspect has to be
referred to. In the above case, the decision of the
Calcutta High Court in Jyoti Brothers vs. Shree Durga
Mining Co. [AIR 1956 Cal. 280] has also been
referred
to. In the Calcutta case, the clause used the words
"can" be settled by arbitration and it was held that
fresh consent of parties was necessary. Here one
other
class of cases was differentiated by the Calcutta High
Court. It was pointed out that in some cases, the
word
‘may’ was used in the context of giving choice to one
of
the parties to go to arbitration. But, at the same
time,
the clause would require that once the option was so
exercised by the specific party, the matter was to be
mandatorily referred to arbitration. Those cases were
distinguished in the Calcutta case on the ground that
such cases where option was given to one particular
party, the mandatory part of the clause stated as to
what should be done after one party exercised the
option. Reference to arbitration was mandatory, once
option was exercised. In England too such a view was
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expressed in Pittalis and Sheriffenttin [1986 (1) QB
868]. In the present case, we are not concerned with
a
clause which used the word ‘may’ while giving option
to
one party to go to arbitration. Therefore, I am not
concerned with a situation where option is given to
one
party to seek arbitration. I am, therefore, not to be
understood as deciding any principle in regard to such
cases.
Suffice it to say, that the words ’may be
referred’ used in clause 5, read with clause 4, lead
me
to the conclusion that clause 5 is not a firm or
mandatory arbitration clause and in my view, it
postulates a fresh agreement between the parties that
they will to go to arbitration. Point 2 is decided
accordingly against the petitioner.
Point 3:
In the light of the finding on Point 2, it is
obvious that I have to dismiss this petition. It may
be
that if the petitioner files a suit in Bombay, there
can
be considerable delay. But that is no ground to
construe
the clause differently. I may state however, that in
case a Civil suit is filed, it will be for the
petitioner to seek an early disposal of the case and I
have no reason to doubt that the civil court will
treat
the request of the petitioner for early disposal with
due consideration.
With the above observations, this petition is
dismissed but in the circumstances without costs.
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