Delhi High Court
Sharad Dogra vs Sahara Airlines Ltd. And Ors. on 6 July, 2007
Author: A.K. Sikri
Bench: A.K. Sikri
JUDGMENT A.K. Sikri, J.
1. Plaintiff herein is a pilot by profession and is currently employed with Air India Chartered Limited, a public limited company, which flies aircrafts of Air India Express. Prior to this, he was in the employment of defendant No. 1 company, namely, M/s. Sahara Airline Limited, where he served from 3.3.2004 till 19.4.2005 when he resigned from the services of the defendant No. 1 company and joined the present employer. However, disputes have arisen out of his employment with the defendant No. 1 company. The reason is his resignation. The plaintiff states that he was compelled to resign because of non-fulfillment of the assurances and promises held out by the defendant No. 1 company. The defendant No. 1 company, in reply to resignation dated 19.4.2005 responded vide communication dated 23.4.2005 rejecting this request of resignation. The defendant No. 1 company also treated it as breach of the contract between the plaintiff and the defendant No. 1 company and demanded payment of compensation/damages vide legal notice dated 6.5.2005. According to the defendant No. 1 company, it had suffered loss of Rs. 2,54,60,566/- and this amount was demanded from the plaintiff as well as the defendants No. 2 and 3, who had executed surety bond for faithful discharge of duties by the plaintiff. Thereafter, the defendant No. 1 company appointed Mr. Justice R.K. Aggarwal, a retired Judge of Allahabad High Court, as the arbitrator to adjudicate upon the claims of the defendant No. 1 company. The plaintiff received an order from the learned arbitrator intimating that arbitration proceedings had commenced against the plaintiff and the defendants No. 2 and 3, which was received by the plaintiff on 13.6.2005. The plaintiff states that he was surprised to receive this letter. He then immediately contacted his colleagues and co-pilots and was informed that a letter dated 28.5.2005 was passed by the defendant No. 1 company appointing Mr. Justice R.K. Aggarwal (Retd.) as the arbitrator. Prior to that, notice dated 25.5.2005 was received by other pilots by which the defendant No. 1 company had invoked the arbitration clause. The plaintiff says that he did not receive any such notice dated 25.5.2005 invoking the arbitration or order of appointment dated 28.5.2005. After collecting those documents from the other pilots, who had been sent the same letters, present suit is filed by the plaintiff challenging the appointment of arbitration and the arbitral proceedings.
2. Following reliefs are prayed:
a) pass a decree of declaration declaring the arbitration clause in the surety bond dated 24.3.2004 as null and void;
ALTERNATIVELY
b) pass a decree of declaration declaring that the dispute between the parties is beyond the scope of Arbitration as envisaged in the Surety Bond dated 24.3.2004;
c) pass a decree of declaration declaring the surety bond dated 24.3.2004 as null and void;
3. The first application (IA No. 9764/2005) is filed by the defendant No. 1 company under Order 7 Rule 11 CPC seeking rejection of the plaint being barred by law, as there is a valid arbitration agreement between the parties and, therefore, suit is not maintainable. The other application (IA No. 9765/2005) is filed by the plaintiff under Order 8 Rule 10 CPC read with Section 151 CPC with a prayer that judgment and decree, as prayed for in this suit, be passed as the defendant No. 1 company has failed to file the written statement within the statutory period prescribed by law.
4. As is clear from the averments made in the plaint and the prayer reproduced above, the plaintiff wants that arbitration clause contained in the surety bond dated 24.3.2004 be declared null and void. His alternate prayer is that a decree of declaration declaring that the disputes, in any case, are beyond the scope of the arbitration clause contained in surety bond dated 24.3.2004 Though the surety bond dated 24.3.2004 is not produced on record, as the case of the plaintiff is that copy thereof was never given to the plaintiff, the plaintiff has filed copy of standard format of surety bond, which was executed by one Asim Kumar Mitra, another pilot, who worked with the defendant No. 1 company.
5. Before adverting to the plea taken by the defendant No. 1 in this application under Order VII Rule 11 CPC, it would be appropriate to find out the basis of filing of the suit containing prayers extracted above. The case of the plaintiff is that after his selection as a Commander on Boeing 737-700/800 vide offer letter dated 3.3.2004 by the defendant No. 1. He joined the services. He was promised suitable enhancement of his salary to it equivalent to the pay package of pilots of other airlines very shortly. However, he was not given the terms and conditions of his employment. He, therefore, repeatedly asked the defendant No. 1 to provide him the terms and conditions of his employment but the needful was not done, though the defendant company kept on assuring that the same would be supplied in due course of time. He, however, signed the surety bond on 17.3.2004, though a copy of the said bond was also not supplied to him. His salary was enhanced vide letter dated 23.9.2004 with effect from 1.10.2004 But he was disappointed by this enhancement as it was not in conformity with the assurances held out by the defendant company to give enhancement in tune with the packages of other airlines. He felt exploited. The terms and conditions were ultimately given on 27.12.2004 and on reading the same, he found that they had been materially altered as given in the offer letter dated 3.3.2004 He was compelled to resign because of various reasons which he has set out in para 3(f) of the plaint.
6. As noted above, this resignation was rejected by the defendant No. 1 and the defendant No. 1 claimed damages and appointed the arbitrator. He has challenged the appointment of arbitrator on the ground that arbitration clause in surety bond dated 24.3.2004 is null and void and in any case, the purported disputes between the parties are beyond the scope of the said arbitration clause as envisaged in the surety bond dated 24.3.2004
7. Before coming to the submission on the basis of which the plaintiff so alleges, we may reproduce the relevant arbitration clause in the surety bond. It reads as under:
Any dispute, claim or controversy arising out of or related to this bond or interpretation thereof, shall be resolved by arbitration under Indian Arbitration and Conciliation Act 1996 and be adjudicated by a sole arbitrator to be appointed by a partner/director of "the employer". The place of arbitration shall be in Lucknow (U.P.) and the award given by the Arbitrator shall be final and binding between the parties.
8. It is the submission of the plaintiff that surety bond is a unilateral agreement and not bilateral one. The defendant is only a beneficiary of this surety bond. Therefore, the aforesaid clause cannot be treated as arbitration agreement between the parties as arbitration agreement has to be bilateral and thus, it does not satisfy the requirement of Section 7 of the Arbitration and Conciliation Act 1996 (in short 'the Act'). This submission was dilated by the learned Counsel by quoting from Black's Law Dictionary, 6 edn., which defines surety bond to mean:
A contractual agreement between the surety, the principal and the obligee whereby the surety agrees to protect the obligee if the principal defaults in performing the principal's obligations. The bond is the instrument which binds the surety.
9. It was submitted that the purported arbitration clause, which was contained in a bond, i.e. unilateral guarantee, would be null and void inasmuch as (i) there has to be an agreement in writing between the parties to have an arbitration clause in an agreement; (ii) a bond is a document executed by a single party unilaterally confirming that he shall pay a certain amount in the event of principal defaulting-there is no agreement between two parties since a bond only has one person who is confirming and accepting that he shall clear off the liability in the event of principal defaulting, therefore there can be no arbitration clause in a surety bond; (iii) the employer is not a party to the surety bond and therefore there can be no arbitration clause in the first instance; (iv) Section 2(h) of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as the said Act) defines "party" to mean a party to arbitration agreement and in the present case the employer is admittedly not a party to the surety bond; (v) Section 7(i) of the Act defines "arbitration agreement" to be an agreement by the parties to submit to arbitration all or certain disputes...while Section 7(iii) mandates that an arbitration agreement shall be in writing and Section 7(iv)(a) explains that arbitration agreement is in writing if it is contained in a document signed by the parties; (vi) the surety bond sought to be relied upon by the defendant company does not have the employer, i.e. the defendant company as a party nor is it signed by the defendant company as mandated under the provisions of the Arbitration and Conciliation Act, 1996 and therefore there is a clear bar for any arbitration proceedings to be held between the parties.
10. It was also argued that in any case, the said bond is arbitrary, unconscionable and violative of Section 23 of the Contract Act since the same is opposed to public policy. The alternate submission was that the terms of surety bond as per which the plaintiff had indemnified the employer, i.e. the defendant No. 1 was against all or any kind of loss, damage, injury or liability that may be caused directly or indirectly by the conduct of the employee due to negligence, dereliction of duty, default, misconduct, dishonesty, non-performance, error in judgment, breech of duty, mismanagement and/or embezzlement by him "during the course of his employment with the employer." Submission was that resignation of the plaintiff and recovery of money as a result thereof was clearly outside the scope of the surety bond and, therefore, it could not be the subject-matter of arbitration proceedings and was not arbitrable.
11. In the application filed by the defendant No. 1 under Order 7 Rule 11 CPC, it is submitted that the aforesaid clause contained in the bond constitutes a valid arbitration agreement and the disputes also fall within the ambit of the said arbitration clause. Therefore, the suit is not maintainable. In order to butress this stand taken in the application, learned senior counsel for the defendant No. 1 argued that Section 124 of the Contract Act defines indemnity and Section 126 of the said Act defines guarantee. His submission was that in the present case the plaintiff had given indemnity against any losses, which could be suffered by the defendant No. 1 arising out of the plaintiff's employment with the defendant No. 1 and the defendant Nos. 2 and 3 stood guarantee therefore. The bond in question was, therefore, a tripartite contract and the essence of that contract was that primary liability was that of the plaintiff and on his failure to discharge the same, sureties, namely, the defendant Nos. 2 and 3 were to be held liable. Therefore, it constituted a 'contract' between the parties and was not a unilateral agreement. His submission was that the objective with which the said bond was signed had to be kept in mind. Once that is done, it would be clear that it fulfillls the conditions contained in Section 7 of the Act and constitutes an arbitration agreement. He also submitted that at this stage only a prima facie view regarding existence of the agreement was to be taken as held by the Supreme Court in Shin-Etsu Chemical Co. Ltd. v. Aksh Optifibre Ltd. and Anr. 2005 (7) JT 426 and as agreement was there in the bond, all these contentions were open to the plaintiff to raise before the arbitrator in view of the judgment of the Supreme Court in SBP and Co. v. Patel Engg. Ltd. 2005 (9) JT 219.
12. I may state at the outset that both the parties conceded that the outcome of this application would determine the fate of the case itself. The moot question, which falls for consideration, is as to whether there is an arbitration clause between the parties" It is not in dispute that the Bond executed by the plaintiff contains an arbitration clause. However, highlighting the legal nature of this bond, the plaintiff argues that it is not an 'agreement' between the parties as it is a unilateral statement of the plaintiff.
13. Let us go through the language of this bond to understand as to what it conveys. Recital of the said bond shows that the plaintiff having been appointed as a Commander with the defendant No. 1 (referred to as the employer in the said Bond), the employer has called upon him to execute and produce a Bond with two sureties in its favor for faithful discharge of service by the plaintiff to his employer. Therefore, in consideration of the said employment and conferment of responsibility as Commander or any other work and for other good and valuable consideration, the plaintiff and the two sureties, namely, the defendant Nos. 2 and 3 have agreed to execute the said bond for due performance of duty by the plaintiff whereby they have indemnified the employer against its any or all kinds of losses, damage, injury or liability that may be caused directly or indirectly by the plaintiff. The nature of such indemnity and surety is indicated in the following words:
AND WHEREAS THE UNDERSIGNED "THE EMPLOYEE" AND SURETIES HEREIN UNCONDITIONALLY BIND THEMSELVES JOINTLY AND/OR INDIVIDUALLY AND UNDERTAKE TO INDEMNFY "THE EMPLOYER" AGAINST ITS ALL AND ANY KIND OF LOSS, DAMAGE, INJURY OR LIABILITY CAUSED DIRECTLY OR INDIRECTLY BY "THE EMPLOYEE' DUE TO NEGLIGENCE IN PERFORMANCE, DERELICTION OF DUTY, DEFAULT, MISCONDUCT, DISHONESTY, NON- PERFORMANCE, ERROR IN JUDGMENT, BREACH OF DUTY, MISMANAGEMENT AND/OR EMBEZZLEMENT DURING THE COURSE OF HIS EMPLOYMENT WITH "THE EMPLOYER" WHILE SERVING ON HIS PRESENT POST OR ANY OTHER POST TO WHICH HE IS SUBSEQUENTLY PROMOTED OR ASSIGNED ON DEPUTATION OR REVERTED BY THE MANAGEMENT OF "THE EMPLOYER.
14. The Surety Bond is made irrevocable and is extended to cover the total service period. At the end of the surety bond, it is mentioned that if any dispute claimed or controversy arises, the same shall be resolved by arbitration under the Indian Arbitration and Conciliation Act 1996, exact language thereof is already extracted above. The plaintiff is, thus, right to the extent that by this Surety Bond he and the two sureties have indemnified the defendant No. 1 against any losses which the defendant No. 1 could suffer due to the act of the plaintiff. The plaintiff is also right when he submits that this is the act of the plaintiff/defendant Nos. 2 and 3. In this context, what would be the effect of a clause whereby at least the plaintiff and the defendant Nos. 2 and 3 agreed that in case there are disputes, the same shall be settled through arbitration, as agreed by them in the said Bond. Whether it would not be an "arbitration" agreement within the meaning of Section 7 as it is not signed by the defendant No. 1 as well. To find the answer, let us examine the language of the said provision. Section 7 reads as under:
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 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 defense 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.
15. Sub-section (1) of Section 7 defines arbitration agreement to mean an agreement "by the parties to submit to arbitration" all or certain disputes which have arisen or may arise between them. It is on the strength of this language that the learned Counsel for the plaintiff argues that the aforesaid clause contained in the bond is not an agreement by the parties to submit to arbitration inasmuch as the other party, namely, the defendant No. 1 is not the party to this Bond. He further submits that as per Clause (a) of Sub-section (4) of Section 7, document is to be signed and such a writing is to be signed by the parties. Therefore, to constitute a valid agreement it was imperative that the document is signed by the defendant No. 1 as well. Learned Counsel for the plaintiff had referred to the judgment of a single Judge of this Court in Alankar Globle Pvt. Ltd. and Ors. v. Dinesh Kumar Mathur and Ors. 137 (2007) DLT 164. However, that was a case where all the parties to the dispute were not the parties to arbitration agreement. It was also found that the dispute raised in the suit was not subject-matter of the agreement between the parties. In these circumstances, the application under Section 8 of the Arbitration and Conciliation Act was rejected. He had also referred to the judgment of the Supreme Court in the case of Sukanya Holding Pvt. Ltd. v. Jayesh H. Pandya and Anr. . That was again a case where it was found that the subject-matter of the suit filed partly fell within the arbitration agreement and partly outside and all the parties in the suit were not the parties to the arbitration agreement. On this basis, the Court held that Section 8 of the Act was not attracted. Both these judgment obviously would be of no avail to the plaintiff in the present case.
16. Submission of learned Counsel for the defendant No. 1, on the other hand, is that Sub-section (2) of Section 7, which stipulates that an arbitration agreement may be in the form of an arbitration clause in a contract or in the form of a separate agreement, is thus in two parts. Clause (1) of Sub-section (4) of Section 7, which mentions that an agreement would be in writing, if it is contained in a document signed by the parties, refers to the second mode of arbitration agreement prescribed in Sub-section (2), namely, only when the separate agreement is signed. He submitted that when the arbitration agreement is in the manner provided in first part of Sub-section (2), i.e. it is in the form of arbitration clause in a contract, Clause (a) of Sub-section (4) would not apply, as inasmuch as there can be a contract by exchange of letters etc. as provided in Clause (b) of Sub-section (4) of Section 7. He also submitted that the very fact that Clause (a) of Sub-section (4) mentions a 'document' signed by the parties, this document means a document other than the contract. On this premise, his submission was that once a Bond is to be treated as contract between the parties as it contains an arbitration clause, it was not necessary that it was signed by the defendant No. 1.
17. By means of the Surety Bond in question, the plaintiff has agreed to indemnify the defendant No. 1 from any loss caused to the defendant No. 1 by the plaintiff's conduct. It is, thus, crystal clear that this Surety Bond is a contract of indemnity as per Section 124 of the Contract Act. Section 124 defines the contract of indemnity as under:
24. Contract of indemnity defined A contract by which one party promises to save the other from loss caused to him by the contract of the promisor himself, or by the conduct of any other person, is called a contract of indemnity.
18. It also cannot be disputed that with the execution of this Surety Bond, right is given to the defendant No. 1 to enforce the said bond in case the plaintiff commits any such breach provided under the bond as a result of which loss is suffered by the defendant No. 1. Defendant No. 1 is, thus, made beneficiary of this bond. No doubt, an agreement as defined under Section 2 of the Contract Act has to be a bilateral agreement to make it enforceable contract. However, Section 124 of the Act gives specific definition to the indemnity bond and once the essentials of that definition are fulfillled, it is treated and called as a "contract of indemnity". In that sense it becomes a contract between the parties. Likewise, Section 126 of the Contract Act defines the expression "contract of guarantee", "surety", "principal debtor" and "creditor". It explains that "a contract of guarantee is a contract to perform the promise or discharge the liability, of a third person in case of his default. The person who gives the "guarantee' is called the "surety". The person in respect of whose default the guarantee is called the "principal debtor" and the person whom the principal debtor and the person whom the guarantee is given is called the "creditor".
19. The Bond in question is executed by the defendant No. 2 and 3 as sureties. Thus, it is a contract of guarantee in so far as the defendant Nos. 2 and 3 are concerned and contract of indemnity in so far as the plaintiff is concerned. Therefore, even if it is executed by the defendant Nos. 2 and 3 as sureties, the defendant No. 1 is the beneficiary and 'creditor' thereof and has right to enforce the same in case of default. When looked into from this angle, the Bond in question is a contract. As it contains arbitration clause as well, it would be an arbitration clause in a contract. This arbitration clause is in writing. Therefore, the requirement of Sub-section (3) of Section 7 is also fulfillled. Sub-section (4) of Section 4, to my mind, is only illustrative and mentions three circumstances where an arbitration agreement would be treated as the one reduced in writing. Clause (a) of Sub-section (4) of Section 7 uses the expression 'document' in contradistinction to the expression 'contract' used in Sub-section (2) of Section 7. Therefore, the meaning assigned to a document signed by the parties has to be different from an arbitration clause in a contract. Submission of the learned Counsel for the defendant No. 1, therefore, appears to be correct that the expression 'document' occurring in Clause (a) of Sub-section (4) of Section 7 would relate to second mode of arbitration agreement provided under Sub-section (2) of Section 7, namely, where the arbitration agreement is in the form of a separate agreement.
20. Once it is held that the Bond is question is a contract between the parties and it is obviously in writing as well, arbitration clause contained in the said contract would constitute arbitration agreement between the parties.
In such a case, it would not be necessary that it has to be signed by the defendant No. 1 as well. To take care of such situations, Clause (b) of Sub-section (4) of Section 7 provides that there can be an arbitration agreement by exchange of letters, telex etc., which provided a record of the agreement.
21. Interestingly, in so far as the plaintiff is concerned, it has agreed for resolution of disputes by means of arbitration. He as well as defendant Nos. 2 and 3 have signed the said agreement. Still, it is he and not the defendant No. 1, who wants to wriggle out of this arbitration agreement on the plea that the defendant No. 1 has not signed the same. When the plaintiff has signed the said contract containing arbitration clause and the defendant No. 1 is accepting the same, it is not open to the plaintiff to raise such a plea. I am, therefore, of the opinion that the arbitration clause contained in the Bond will constitute an arbitration agreement between the parties.
22. I also do not agree with the submission of the learned Counsel for the plaintiff that the subject-matter of the dispute is not covered by the arbitration agreement. The plaintiff agreed to indemnify the defendant No. 1 (for which the defendant Nos. 2 and 3 also stood guarantee) against any losses which could be suffered by the defendant No. 1 on account of its all or any kind of loss, damage, injury or liability that may be caused directly or indirectly by the conduct of the employee due to negligence, dereliction of duty, default, misconduct, dishonesty, non-performance, error in judgment, breech of duty, mismanagement and/or embezzlement by him during the course of his employment with the employer. The plaintiff has argued that if any such act during the employment could be the subject-matter of arbitration and it would not be resignation. The bond, inter alia, mentions that if the loss is caused by the conduct of employee, default, breach of duty etc., the defendant No. 1 shall be entitled to recover the said loss. The case set up by the defendant No. 1 is that as a result of resignation, thereby prematurely terminating the contract of employment, which constitute the conduct of the employee or his default or his breach of duty that the defendant No. 1 has allegedly suffered the losses. Therefore, prima facie it does not appear that the dispute raised is outside the scope of the arbitration clause. However, I refrain from giving any final opinion on the same as it would be open to the plaintiff to put forth this submission before the learned arbitrator and in the first instance it is for the arbitrator to take appropriate view thereon.
23. In so far as other submissions of the plaintiff, namely, the agreement is void or it is against the public policy etc. are concerned, these pleas can be raised by the plaintiff before the learned arbitrator in the arbitration proceedings. The scheme of the Act is clear in this behalf. Once it is held that there is a valid arbitration agreement between the parties, the present suit would not be maintainable as the genesis of the entire dispute raised in the plaint is that there is no agreement. As already pointed out above, learned Counsel for the plaintiff had even conceded that if it is held that the arbitration clause contained in the bond would constitute arbitration agreement, it will have the effect of non-suiting the plaintiff. IA No. 9764/2005 under Order 7 Rule 11 CPC filed by the defendant is allowed. The plaint is rejected as suit is not maintainable in law in view of arbitration agreement between the parties. Consequently, IA No. 9765/2005 filed by the plaintiff under Order 8 Rule 10 CPC stands rejected along with the plaint.
24. I may mention that after the judgment was reserved in this case, while dictating the judgment I felt that it may be more equitable if an independent person is appointed as the arbitrator so that the plaintiff has faith in the impartiality of the said arbitrator. Therefore, I fixed the matter for direction and put this proposal to both the parties. Whereas the plaintiff readily agreed for this course of action and the plaintiff's counsel stated that he would withdraw the suit in case an independent arbitrator is appointed by this Court, learned Counsel for defendant No. 1 took time to seek instructions and later on, made the statement that this course of action was not acceptable to the defendant No. 1 and it was also impressed upon that the arbitrator appointed by the defendant No. 1 was a retired Judge of the Allahabad High Court. Since as per the arbitration agreement, the arbitrator was to be appointed by the defendant No. 1 and therefore, I do not have any legal authority to thrust any other arbitrator in case the defendant No. 1 does not agree to do so, I leave the matter at that. However, I still feel that it would have been more appropriate for the defendant No. 1 to agree for the appointment of an arbitrator by the Court having regard to the nature of this case. It would still be open to the defendant No. 1 to reconsider this aspect of the matter.
25. With these observations, the plaint is rejected.
No costs.