Delhi High Court
Food Corporation Of India vs Reed Mdway Packaging Co. Of India Pvt. ... on 19 December, 2003
Author: B.N. Chaturvedi
Bench: B.N. Chaturvedi
JUDGMENT B.N. Chaturvedi, J.
1. By instant application under Section 34 of the Arbitration Act, 1940, Reed Medway Packaging Company of India Private Limited (defendant No. 1), in a suit for recovery of Rs.22,15,247.57, brought by Food Corporation of India(plaintiff), seeks stay of proceedings and reference of disputes to arbitration.
2. In the year 1980, Food Corporation of India(plaintiff) floated a tender for supply, erection and commissioning of 38 road vehicle weighbridges for All India Grain Storage Project. The applicant(defendant No. 1), in collaboration with M/s. Carl Sehrenck, in response to the aforesaid tender, made joint offer, which was accepted by Food Corporation of India under two separate letters of acceptance dated 15.12.1980. The scope of the contract for supply of 38 road vehicle weighbridges and spare parts, was, subsequently, modified to 48 on 15th of January, 1981. The award of contract was subject to the general and special conditions of the contract forming part of the tender documents. A formal contract between the parties was signed and executed on 2nd of February, 1981. The contract contained an arbitration clause No.34 to the following effect:-
''CLAUSE 34: SETTLEMENT OF DISPUTES(ARBITRATION).
Notwithstanding any provisions to the contrary in these general conditions, if any dispute or difference of any kind whatsoever shall arise between the Corporation and the Contractor in connection with or arising out of the contract or the carrying out of the work (whether during the progress of the works or after their completion and whether before or after the termination, abandonment or breach of the contract) it shall be referred to two arbitrators, one to be appointed by the Corporation and new by the contractor, or in the case of the said arbitrators not agreeing, then to the award of an umpire to be appointed by the said arbitrators pursuant to and so as with regard to the mode and consequence of the reference and in all other respects to conform to the provisions of the Arbitration Act, 1940(Act No.10 of 1940) or rules made there under or any re-enactment or statutory modification thereof for the time being in force provided however that the umpire will be appointed in writing before entering on the reference.
The arbitrators or umpire shall not enter on the reference until after the completion or alleged completion of the work unless with the written consent of the Corporation and the contractor provided always:
a) that such reference may be opened before such completion or alleged completion in respect of withholding by the Engineer of any certificate or withholding of any portion of the security deposit to which the contractor claims, in accordance with the conditions set out in the clause 40 and 61 to be entitled.
b) that the giving of a certificate of completion under clause 42 or certificate of provisional taking over under clause 66 thereof shall not be a condition precedent to the opening or any such reference.''
3. The defendant No.1 failed to complete the contract in spite of extensions granted to it for the purpose from time to time. The Food Corporation of India, therefore, eventually, terminated its contract and balance work was got executed through other contractors at the risk and cost of the defendant No.1.
4. The dispute, in the present suit , relates to a sum of Rs. 17,96,253/10, which the applicant(defendant No.1) is stated to have received from the Joint Chief Controller of Imports and Exports(defendant No.2) on account of customs duty drawback which was required to be passed on to the plaintiff Corporation in terms of clause 6 of the contract. The applicant/defendant No.1 pleads that disputes having arisen with respect to the interpretation of some of the clauses of the contract agreement, the same need to be referred to arbitration for adjudication thereon in view of clause 34 of the contract agreement. It is alleged that the plaintiff Corporation had not only denied and withheld payment of legitimate dues under the terms of the contract but has also illegally terminated the contract and got the balance work carried out at its risk and cost.
5. The plaintiff-Corporation while admitting the existence of an arbitration clause in the contract, asserted that only such disputes which are covered under the arbitration agreement and which have not been specifically excluded could make out a case for reference to arbitration. Referring to clause 6 of the contract, it was stated that the applicant/defendant No.1 was to apply for customs duty drawback as actual user and upon receipt of the same it was to pass it on in its entirety to the plaintiff-Corporation. The applicant/defendant No.1, however, failed to act in terms of clause 6 by withholding the amount received by it from defendant No.2 on account of customs duty drawback. It is alleged that the applicant/defendant No.1 received a huge amount of Rs. 26,10,920/- by way of 35% advance and, thereafter, it started raising fictitious disputes and delayed the execution of the contract. Under the agreement dated 2.2.1981, the applicant/defendant No.1 was to complete the entire work on or before 14th of December, 1982. Extensions were granted to it from time to time to enable it to complete the work by 30th September, 1987. The applicant/defendant No. 1, however, again failed and eventually by a notice dated 8th of September, 1987, it was called upon to complete the work on or before 7th of October, 1987. The work, however, could not be completed by that date also and, in the circumstances, left with no option, the plaintiff-Corporation had to terminate its contract to get the balance work executed through other contractors at the risk and cost of the applicant/defendant No.1. The plaintiff-Corporation maintains that since the applicant/defendant No.1 has failed to complete the contract, it has no right whatever to seek a reference of alleged disputes to arbitration.
6. I have heard arguments on either side.
7. Section 34 of the Arbitration Act, 1940 stipulates certain conditions which need to be satisfied before the proceedings in a suit are stayed. These are: (i) the proceedings must have been commenced by a party to an arbitration agreement against any other party to the agreement; (ii) the legal proceedings which is sought to be stayed must pertain to a matter agreed to be referred; (iii) the applicant seeking stay must be a party to the legal proceedings; (iv) the applicant must have taken no step in the proceedings after appearance; (v) the applicant must satisfy that the applicant was at the time when the proceedings were commenced, ready and willing to do everything necessary for the proper conduct of the arbitration; and (vi) the court must also be satisfied that there was no sufficient reason that the matter should not be referred to arbitration. The burden lies on the plaintiff to show that some sufficient reason exists why the matter should not be referred to arbitration and not on the defendant to show that no such reasons exists.(see '' Bahrein Petroleum Company Limited Vs. Pappu and Another'', )
8. Grant of stay of proceedings under Section 34 is discretionary. Of course, such discretion is to be exercised judiciously. If Section 34 of the Act is attracted, cordinarly, the approach of the Court should be to see that the parties are held to their bargain. Therefore, the party, who in breach of arbitration agreement, institutes an action before the Court, the burden would be on such party to prove why the stay should be refused. (see '' Ramji Dayawala and Sons (P) Limited Vs. Invest Import'', )
9. Adverting to the facts of the present case, there is no dispute that the terms and conditions of the contract contained an arbitration clause, as reproduced at the outset. However, instead of seeking recourse to arbitration proceedings, the plaintiff-Corporation filed the present suit for recovery of an amount together with interest thereon from the applicant/defendant No. 1 received by it on account of customs duty drawback. There is no controversy that clause 6 of the supplementary agreement date 4.12.1984 provides for passing on the amount of customs duty drawback in full received by the applicant/defendant No. 1 from the Government, to the plaintiff-Corporation. In fact, the applicant/defendant No. 1 does not contest its liability as such. It however, seeks to justify withholding of the amount of that account on the ground that certain payments due to it unless made by the plaintiff-Corporation, it holds a lien over the amount of customs duty drawback and in the event of non-payment of its ligitimate dues, it is within its rights to apply that amount and adjust the same towards its claims. There is, thus, no dispute as such in so far as determination of amount on account of customs duty drawback, which is payable by applicant/defendant No. 1 to the plaintiff-Corporation, is concerned.
10. On being served with summons of the suit, applicant/defendant No. 1 immediately applied for stay of proceedings by making instant application stating that it has already been ready and willing to do everything necessary for the proper conduct of the arbitration. In the present case, so far as first five conditions necessary to attract Section 34 are concerned, the same stand satisfied. It is, however, yet to be seen if there is really a case for reference to arbitration of the dispute constituting subject matter of the suit. According to the applicant/defendant No. 1, reference to arbitration is essential as there is difference of opinion in regard to the application of the contract in the context of working out of the contract or giving effect to its terms.
11. In ''The Printers(Mysore) Private Limited Vs. Pothan Joseph'', , it has been laid down that stay of proceedings under Section 34 is discretionary and a party applying for stay of legal proceedings instituted in a Court cannot claim it as a matter of right.
12. The Food Corporation of India opposes the application for stay of proceedings on the basis of proviso to the arbitration clause 34 which stipulates that arbitrators or umpires are not to enter upon reference until after the completion or alleged completion of the work unless the Corporation and contractor consent to it in writing. It is pleaded that the applicant/defendant No.1 failed to complete the work in spite of extensions of time granted to it from time to time and, eventually, its contract ad to be terminated to get the balance work executed by other contractors at the risk and cost of the applicant(defendant No. 1).
13. On behalf of applicant(defendant No. 1), with reference to clause 34, it was stressed that completion of the work was not a condition precedent for a reference to arbitration as the arbitration clause clearly stipulates reference of disputes to arbitration even during the progress of the work and before and after termination, abandonment or breach of the contract. Undoubtedly, the arbitration clause provides for reference of disputes or differences of any kind whatsoever arising between the Corporation and the contractor in connection with or arising out of the contract or the carrying out of the work during the progress of the work or after completion thereof and before or after the termination, abandonment or breach of the contract. The provision to the arbitration clause that the arbitrators or umpires are not to enter upon the reference until after the completion or alleged completion of the work, cannot be invoked to refuse to proceed with arbitration proceedings if the disputes or differences are of a kind which are said to arise in connection with or out of the contract as, in any case, both the parties could agree to proceed with arbitration proceedings if there be no real justification to refuse the same.
14. In the present case, the problem, in fact, does not appear to be on account of proviso to the arbitration clause in the sense that the applicant/defendant No.1 had failed to complete the work. The amount as such being claimed by the plaintiff-Corporation on account of customs duty drawback is not being disputed by the applicant/defendant No.1 and it simply seeks to resist the recovery on that account on the ground that it holds a lien over that amount and unless its legitimate dues are paid by the plaintiff-Corporation, it is within its rights to apply and adjust that amount towards satisfaction of its claims. No stipulation in the terms and conditions of the contract governing the works contract was brought to my notice which could justify with holding of the amount in question on account of customs duty drawback by the applicant/defendant No.1. In the face of a clear stipulation in the agreement that the same was liable to be passed on in full to the plaintiff-Corporation, in the absence of an stipulation in the agreement entitling the applicant/defendant No.1 to withhold the amount for adjustment towards satisfaction of its claims, if any, the dispute in this regard would obviously appear to fall beyond the scope of the agreement containing arbitration clause and, thus, cannot be a subject matter for adjudication by arbitration. While considering the present application for stay of proceedings, any other disputes between the parties, which the applicant/defendant No.1 has detailed in its application, cannot be relevant. The question to be determined is whether the subject matter of the suit pertaining to recovery of customs duty drawback, is one which can be arbitrated upon between the parties under the terms and conditions of the contract. The answer is clearly in negative. There being no dispute regarding the amount which is payable by the applicant(defendant No. 1) to the plaintiff-Corporation on account of customs duty drawback, no adjudication is called for on this point. The fact is the applicant/defendant No.1 is entitled to retain this amount to adjust the same for satisfying its alleged pending claims, if any, even in the absence of any stipulation to that effect in the terms and conditions of the contract, is a matter of defense, which can be raised by it in its written statement before the Court. Thus, there being no real dispute for adjudication by arbitration, stay of proceedings of the suit is unlikely to serve any useful purpose.
15. Finding no merit in the application, the same is dismissed.