Karnataka High Court
Electronics And Controls Power Systems ... vs Wep Peripherals Limited on 20 November, 2012
Author: Mohan Shantanagoudar
Bench: Mohan Shantanagoudar
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IN THE HIGH COURT OF KARNATAKA AT BANGALORE
DATED THIS THE 20TH DAY OF NOVEMBER 2012
BEFORE
THE HON'BLE MR.JUSTICE MOHAN SHANTANAGOUDAR
C.M.P. NO. 15/2012
BETWEEN :
Electronics & Controls
Power Systems Private Limited
A Company incorporated under
the provisions of the Companies
Act, 1956, having its registered
Office at No.29/A, 2nd Phase
Peenya Industrial Area
Bangalore-560 058, Rep herein by its
Managing Director
Rajaram Ramamurthy. ..Petitioner
(By Sri Naganand, Sr. Counsel for
S. Sriranga, Just Law, Advs.,)
AND :
WeP Peripherals Limited
A Company incorporated under
the provisions of the Companies
Act, 1956, having its Registered
Office at No.40/1A,Basappa Complex
Lavelle Road,
-2-
Bangalore-560 001
Rep herein by its Managing Director
Ram Agarwal. ..Respondent
(By Sri K.G. Raghavan, Sr. Counsel for Sri K.V. Sathish,
Advs.,)
This CMP is filed under Sections 11(5) and 11(6) of
the Arbitration and Conciliation Act, 1996 praying to appoint
Justice R.G. Vaidyanatha (Retd.) or any other appropriate
Arbitral Tribunal comprising sole arbitrator to adjudicate
upon the disputes that have arisen between the petitioner
and the respondent under the agreements dated 29.9.2006
vide (Annexures-A & B).
This CMP having been heard and reserved for
orders, coming on for pronouncement of order this day, the
Court made the following:-
ORDER
Petitioner Company is engaged in the design, development, manufacture, assembly, selling and maintenance of Uninterruptible Power Systems, inverters, hardware, software and components thereof. Respondent company is engaged in the manufacture and sale of computer peripherals, printers etc., The petitioner company and respondent company agreed to have business -3- relationship with each other. Thus on 29.9.2006 the petitioner and the respondent entered into a "Business Participation Agreement" ('BPA' for short) to achieve the objective of participating and enhancing the business growth of each other as per Annexure-A. On the very day, another agreement styled as "Distributorship Agreement"
('DA' for short) was also entered into between the parties and in terms thereof, the petitioner agreed to concentrate on the design and manufacture of UPS in the online segment and the respondent agreed to concentrate on marketing, sales and service of the online UPS as per Annexure-B. The BPA was for a period of three years from 29.9.2006.
Subsequently, the problems have cropped up between the parties with regard to business transactions and consequently, there were exchange of E.mails between the parties in the month of February and March-2007 as per Annexure-E. According to the petitioner, the respondent -4- is liable to pay the balance sum of Rs.250 lakhs alongwith the amount incurred by the petitioner towards interest and that the respondent has not implemented Clause-7(d) of the agreement resulting in loss of name, fame and reputation of the petitioner. It is further stated by the petitioner that the respondent has failed to fulfill all their obligations under both the agreements. However in order to explore the possibility of working out a different arrangement of business participation, the parties have reduced their discussion in the form of a Memorandum of Understanding ('MOU' for short) on 28.12.2007 as per Annexure-T. Further case of the petitioner is that the said MOU was a complete non-starter from its inception inasmuch as the respondent did not invest Rs.500 lakhs in the equity share capital of the petitioner as required under the MOU and therefore the parties continued to be bound by the agreements at Annexures-A and B i.e., BPA and DA.
Since the disputes between the petitioner and the -5- respondent are arbitrable as per Clause-32 of the BPA and Clause 10.9 of the DA and as the respondent has failed to pay the claim to the petitioner company as requested in the notice Annexure-V, the petitioner issued legal notice as per Annexure-X dated 24.3.2011 invoking arbitration clause for appointment of arbitrator. The respondent did not agree for appointment of arbitrator and redressal of disputes through arbitral process. Hence this petition is filed under Sections 11(5) and 11(6) of the Arbitration and Conciliation Act, 1996 ('the Act' for short) praying for appointment of sole arbitrator for adjudication of the dispute between the parties under the agreements dated 29.9.2006 vide Annexures-A and B.
2. The petition is opposed by the respondent vehemently. According to the respondent, there is no valid and subsisting arbitration agreement between the parties; that the City Civil Court, Bangalore in Arbitration Application No.239/2010 while deciding the petition filed under -6- Section-9 of the Act, has already determined that there is no valid and subsisting arbitration agreement between the parties. The petitioner has nowhere in the petition referred the order dated 30.3.2010 passed by the City Civil Court in Arbitration Application No.239/2010. By the MOU duly signed by the parties on 28.12.2007, the parties have entered into new arrangement altogether by terminating BPA and DA entered into on 29.9.2006 and consequently the arbitration agreement entered into between the parties pursuant to agreements Annexures-A and B also came to an end. Clause-22 of the MOU entered into between the parties clearly reveals that all preceding agreements/ MOUs including the one signed in September-2006 stand cancelled. The MOU entered into between the parties provide for new arrangement altogether inasmuch as the amount of Rs.200 lakhs paid under the BPA as financial assistance to the petitioner was agreed to be treated as share application money. The MOU dated 28.12.2007 -7- entered into between the parties is given effect to by the petitioner. Inspite of the same, the petitioner with an ulterior motive has invoked the arbitration clause under the terminated contract. The sum and substance of the case of the respondent is that the MOU entered into between the parties on 28.12.2007 terminates the earlier two agreements viz., BPA and DA vide Annexures-A and B and as the MOU does not contain the arbitration clause, it is not open for the petitioner to approach the Court seeking reference of the matter to the Arbitral Tribunal for adjudication. On these among other grounds, the respondent has prayed for dismissal of the petition.
3. Sri Naganand, learned senior advocate appearing on behalf of the petitioner submits that under Section-16 of the Act, the Arbitral Tribunal may rule on its own jurisdiction; Section-16(1)(a) of the Act presumes the existence of valid arbitration clause and mandates the same -8- to be treated as an agreement independent of the other terms of the contract; that by virtue of Section 16(1)(b) of the Act, it continues to be enforceable notwithstanding the declaration of contract as null and void; that by termination of the agreements Annexures-A and B, the arbitration clause would not cease to exist; that even if the performance of the contract comes to an end on account of repudiation, suspension etc., the arbitration agreement would survive for the purpose of resolution of the dispute arising under the contract; that Clause-25 of the BPA shows that the agreement shall not be deemed or construed to be modified, rescinded, cancelled or waived, in whole or in part, except by written amendment signed by the parties herein and since there is no written amendment filed by the parties, the agreement Annexure-A does not stand cancelled; that the notice Annexure-V issued by the petitioner to the respondent dated 1.10.2009 discloses that the respondent has not fulfilled the obligations undertaken -9- in BPA though the BPA is for a period of three years; that the MOU dated 28.12.2007 does not in any way reveal that the same is entered into towards full and final settlement arrived at between the parties. The order of the Civil Court on a petition filed under Section-9 of the Act is merely an interlocutory order and it does not take away the jurisdiction of the Court dealing with Sections-11(5) and 11(6) of the Act for appointment of the arbitrator, to find out as to whether there is an arbitration agreement or not. Any observation or finding of the Civil Court in respect of arbitration agreement will not bind this Court inasmuch as the Chief Justice or his designate is not a persona designata, but the Chief Justice or his designate as the case may be exercises judicial powers and therefore the observations of the Civil Court made in Arbitration Application No.239/2010 are of no consequence while deciding the present petition. The sum and substance of the argument of Sri Naganand is that MOU does not take
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away the effect of earlier two agreements vide Annexures-A and B and the disputes arisen under Annexures-A and B continue and consequently the arbitration clause contained in the agreements at Annexures-A and B will have to be given effect to by getting the disputes resolved through Arbitral Tribunal.
Per contra, Sri K.G. Raghavan, learned senior advocate appearing on behalf of respondent drawing the attention of the Court to the Directors' report, which is a part of Annexure R2 (balance sheet of the petitioner as at 31.3.2008) produced alongwith the statement of objections, contends that the petitioner clearly admitted therein that the terms of MOU provided for cancellation of the earlier agreements entered into in September-2006; Annexure to Directors' Report further clarifies that during the third quarter of 2007, the petitioner had negotiated with the respondent a new arrangement for augmenting the turnover of the company. The Auditors' report dealing with
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the particulars of mobilisation and deployment of funds clearly reveal that MOU is acted upon inasmuch as the same indicates that the petitioner has got share application money to the tune of Rs.42,320,000/- at the end of the financial year 2009. The observations and the findings given by the Civil Court while deciding the petition under Section-9 of the Act would be binding on the Chief Justice while deciding the petition under Section-11(5) of the Act inasmuch as the Chief Justice is a persona designata. The sum and substance of the arguments of Sri Raghavan is that the agreements vide Annexures-A and B are cancelled and the parties have entered into a new agreement as per Annexure-T i.e. MOU dated 28.12.2007 and as the MOU does not contain the arbitration clause and as the earlier agreements Annexures-A and B do not exist anymore, the petition could not have been filed under Section-11(5) of the Act seeking adjudication by the arbitrator. In other words, his argument is that the third agreement - MOU
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dated 28.12.2007 is a complete revamp of relationship between the parties and it is completely a new arrangement between the parties; that the parties have unreservedly and unconditionally cancelled the earlier agreements and therefore the earlier agreements vide Annexures-A and B cannot be pressed into service for invoking the arbitration clause.
4. As has been held by a seven-Judge Bench of the Apex Court in the case of SBP & CO., -vs- PATEL ENGINEERING LIMITED reported in (2005)8 SCC 618, the power conferred on the Chief Justice under Section 11(6) of Act is not merely an administrative power, but it is a judicial power. The Chief Justice or his designate as the case may be is not conferred with the power as a persona designata under Section-11(6) of the Act. The power is conferred on the highest judicial authority in the country and in the State in their capacities as Chief Justices. So also Section-9 of the Act enables the Civil Court to decide whether it has
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jurisdiction, whether there is an arbitration agreement which is valid in law and whether the dispute sought to be raised is covered by that agreement. There is no indication in the Act that the powers of the Court are curtailed on these aspects. On the other hand, Section-9 of the Act insists that once approached in that behalf, the Court shall have the same power for making orders as it has for the purpose of and in relation to, any proceedings before it. As the power exercised by the Chief Justice under Section- 11(6) of the Act is not an administrative power, but a judicial power, the Chief Justice or the designated Judge has got a right to decide the preliminary aspect. It is the jurisdiction of the Chief Justice or the designated Judge to entertain the request to find out as to whether there exists a valid arbitration agreement or not. This means, there is no bar for this Court while acting under Section-11 of the Act to decide as to whether there exists a valid arbitration agreement or not. In other words, the finding arrived at by
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the Civil Court while deciding the petition under Section-9 of the Act with regard to the existence of the valid arbitration agreement will not deter this Court from deciding the said question while hearing the petition under Sections 11(5) and 11(6) of the Act.
5. The BPA vide Annexure-A contains the arbitration clause. Clause-32 of the BPA is the arbitration clause/agreement. The said clause makes it clear that any and all disputes, questions, differences or claims under or in relation to BPA shall first be negotiated by and between the parties and at any time during the negotiations, either of the parties can refer the dispute for adjudication by the sole arbitrator in accordance with the Act. Thus it is clear that the disputes arising under the BPA can be referred to the Arbitral Tribunal for adjudication as per Clasue-32 of the BPA. So also the second agreement entered into between the parties i.e. DA vide Annexure-B also contains the arbitration clause. Clause 10.9 of the said agreement is the
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arbitration clause/agreement. The said clause also reveals that any and all disputes, questions, differences or claims under or in relation to the said agreement shall be negotiated at the first instance and in case of failure of the negotiations, either of the parties can refer the dispute for adjudication to the Arbitral Tribunal. Thus it is clear that both the agreements vide Annexures-A and B contain arbitration clause. But by virtue of MOU - Annexure-T dated 28.12.2007 between the parties (i.e. 3rd agreement between the parties), the parties have agreed to enter into a new agreement in view of the fact that earlier two agreements Annexures-A and B were not operationalised after some period. Prima facie MOU - Annexure T reveals that the parties have entered into a new arrangement on different lines altogether than the earlier agreements. It is also clarified in the MOU that the earlier two agreements vide Annexures-A and B were not operationalised after some time. Under the new agreement Annexure-T i.e.
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MOU, it is further clarified in Clause-22 that upon the execution of MOU, all preceding Agreements/MOUs including the one signed in September-2006, stand cancelled. Thus it is clear that the parties have unreservedly, unequivocally and unconditionally agreed to cancel the earlier two agreements vide Annexures-A and B. Thus a complete new arrangement is entered into between the parties by virtue of MOU. In this view of the matter, the argument of Sri K.G. Raghavan, learned senior advocate appearing for respondent that there is a clear revamp of relationship between the parties in view of MOU deserves to be accepted.
6. It is also relevant to note Clause-31 of the BPA, which reads thus:
"31. Survival: The provisions as contained in Articles 8 and 9 shall survive the expiration or termination of this Agreement indefinitely. The provisions of
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this Agreement including the
representations, warranties and
undertakings herein contained shall remain in full force and effect notwithstanding Completion and/or termination.
From the aforementioned clause, it is clear that wherever the parties intended that certain clauses survive even after the expiration or the termination of the said agreement, they have specifically mentioned so. The parties have agreed that Articles (clauses) 8 and 9 of BPA shall survive even after the expiration or termination of the said agreement (BPA) indefinitely. But in the matter on hand, Clause-32 of Annexure-A was not saved by the parties. The survival of certain clauses is specific in Annexure-A, which means other clauses would vanish after termination of the agreement Annexure-A. Consequently, Clause-32 also does not survive after termination of the agreement Annexure-A.
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7. The Directors' report pertaining to the petitioner company, which is part of Annexure-R2 produced alongwith the statement of objections clearly reveals that Directors have stated that the earlier agreements are cancelled in terms of MOU. Thus it is clear that Directors of the petitioner company themselves are clear in their mind that the earlier agreements entered into in September-2006 are cancelled in terms of MOU. The report further reveals that MOU dated 28.12.2007 is being implemented by giving go-bye to the earlier agreements Annexures-A and B as is clear from annexure to the Directors' report and Auditor's report
8. There cannot be any dispute that one of the modes by which the contract can be discharged is by the same process which created it i.e., by mutual agreement. The parties to the original contract may enter into new contract by substitution of the old one. It is relevant to note the
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observations of the Apex Court in the case of DAMODAR VALLEY -vs- K.K. KAR reported in AIR 1974 SC 158 at pargraph-7, which reads thus:
"The contention that has been canvassed before us is that as there has been a full and final settlement under the contract, the rights and obligations under the contract do not subsist and consequently the arbitration clause also perishes alongwith the settlement. If so, the dispute whether there has or has not been a settlement cannot be the subject of an arbitration. There is, in our view, a basic fallacy underlying the submission. A contract is the creature of agreement between the parties and where the parties under the terms of the contract agree to incorporate an arbitration clause, that clause stands apart from the rights and obligations under that contract, as it has been incorporated with the object of providing a machinery for the settlement
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of disputes arising in relation to or in connection with that contract. The questions of unilateral repudiation of the rights and obligations under the contract or of a full and final settlement of the contract relate to the performance or discharge of the contract. Far from putting an end to the arbitration clause, they fall within the purview of it. A repudiation by one party alone does not terminate the contract. It takes two to end it, and hence it follows that as the contract subsists for the determination of the rights and obligations of the parties, the arbitration clause also survives. This is not a case where the plea is that the contract is void, illegal or fraudulent etc., in which case, the entire contract along with the arbitration clause is non est, or voidable. As the contract is an outcome of the agreement between the parties it is equally open to the parties thereto to agree to bring it to an end or to treat it as if it never existed. It may also be open to
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the parties to terminate the previous contract and substitute in its place a new contract or alter the original contract in such a way that it cannot subsist. In all these cases, since the entire contract is put an end to, the arbitration clause, which is a part of it, also perishes alongwith it. Section 62 of the Contract Act incorporates this principle when it provides that if the parties to a contract agree to substitute a new contract or to rescind or alter it, the original contract need not be performed. Where, therefore, the dispute between the parties is that the contract itself does not subsist either as a result of its being substituted by a new contract or by rescission or alteration, that dispute cannot be referred to the arbitration as the arbitration clause itself would perish if the averment is found to be valid. As the very jurisdiction of the arbitrator is dependent upon the existence of the arbitration clause under which he is appointed, the
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parties have no right to invoke a clause which perishes with the contract."
(emphasis supplied)
9. From the above, it is clear that as the contract is an outcome of agreement between the parties thereto, it is equally open to the parties to agree to bring it to an end or to treat it as if it never existed. It is also open for the parties to terminate the previous contract and substitute it by a new contract. In the matter on hand, since the agreements entered into between the parties vide Annexure-A and B are put to an end, the arbitration clauses, which are part of the same also perished alongwith it. Section-62 of the Contract Act incorporates this principle when it provides that if the parties to the contract agree to substitute a new contract or to rescind or alter it, the original contract need not be performed.
10. This Court hastens to add here itself that when a question of breach of contract, inter alia, is raised after the
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termination of the contract, it is the performance of the contract that comes to an end on termination of the contract, but the same remains in existence for certain purposes in respect of disputes arising under it or in connection with it. Thus in such an event, as the contract subsists for certain purposes, the arbitration clause operates in respect of these purposes. There cannot be any dispute that sub-section (1) of Section-16 of the Act makes it clear that while considering any objection with respect to the existence or validity of the arbitration agreement, an arbitration clause which forms part of the contract, has to be treated as an agreement independent of the other terms of the contract and a decision that the contract is null and void shall not entail ipso jure the invalidity of the arbitration clause. It is also well settled that even if an agreement comes to an end, the arbitration clause remains in force and any dispute pertaining to agreement should be resolved
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according to the conditions mentioned in the arbitration clause.
But where there is substitution of old contract by a new contract or where there is alteration or rescission of the original contract, the arbitration clause found in the original contract also perishes. In the matter on hand, the MOU is a new contract altogether and it substitutes the earlier two contracts Annexures-A and B. As aforementioned, the MOU testifies that the earlier agreements were not operationalised after some time and therefore new arrangement is entered into between the parties on different terms and conditions altogether. It is specifically made clear in Clause-22 of MOU that upon the execution of MOU, all preceding Agreements/MOUs including the one signed in September-2006, stand cancelled. Thus this Court is of the opinion that by virtue of the new contract i.e., MOU, the earlier contracts were rescinded unequivocally and unconditionally. The MOU is duly signed
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by both the parties. It is a mutual agreement between the parties. The parties to the contract, by mutual agreement, accepted performance of altered, modified and substituted obligations and confirmed in writing the discharge of contract by performance of the altered, modified or substituted obligations.
In view of the above, the arbitration clause contained in rescinded contracts vide Annexures-A and B cannot be pressed into service by the petitioner. The parties are governed by the substituted contract i.e., Memorandum of Understanding dated 28th December 2007 and the same does not contain the arbitration agreement.
Hence the petition is liable to be dismissed and accordingly the same stands dismissed.
Sd/-
JUDGE Gss/-