Karnataka High Court
Embassy Marketing Private Limited vs Icds Limited on 13 June, 2024
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MFA No. 7243 of 2009
C/W MFA No. 7241 of 2009
MFA No. 7242 of 2009
IN THE HIGH COURT OF KARNATAKA AT BENGALURU
DATED THIS THE 13TH DAY OF JUNE, 2024
BEFORE
THE HON'BLE MR JUSTICE R. NATARAJ
MISCELLANEOUS FIRST APPEAL NO.7243 OF 2009 (AA)
C/W
MISCELLANEOUS FIRST APPEAL NO.7241 OF 2009 (AA)
MISCELLANEOUS FIRST APPEAL NO.7242 OF 2009 (AA)
IN MFA NO.7243/2009:
BETWEEN:
1. WISDOM HOLDINGS PRIVATE LIMITED,
A COMPANY INCORPORATED UNDER THE PROVISIONS OF
THE COMPANIES ACT, 1956, HAVING ITS REGISTERED
OFFICE AT NO.8,
HO-CHI MINH SARANI, SUITE NO.26,
2ND FLOOR, CALCUTTA-700071 AND
ITS ADMINISTRATIVE OFFICE AT NO.6/5,
PRIMROSE ROAD, BANGALORE-560 001,
REP. HEREIN BY ITS CONSTITUTED ATTORNEY
SRI SUVARNA MURTHY.
Digitally signed 2. SAJJAN JHUNJHUNWALA
by
MARKONAHALLI S/O LATE R.N. JHUNJHUNWALA,
RAMU PRIYA AGED ABOUT 59 YEARS, R/A NO.1189,
Location: HIGH
COURT OF
13TH MAIN, 4TH CROSS, HAL 2ND STAGE, INDIRANAGAR,
KARNATAKA BANGALORE-560 038.
...APPELLANTS
(BY SRI SIDDHARTH S., ADVOCATE FOR
SMT. SUMANA NAGANAND, ADVOCATE)
AND:
1. ICDS LIMITED,
A COMPANY INCORPORATED UNDER THE COMPANIES
ACT, 1956,
HAVING ITS REG. OFFICE AT
SYNDICATE HOUSE,
POST BOX NO.46, UPENDRA NAGAR,
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MFA No. 7243 of 2009
C/W MFA No. 7241 of 2009
MFA No. 7242 of 2009
MANIPAL-576 119, UDUPI DISTRICT,
REP. HERE IN BY ITS CONSTITUTED ATTORNEY
SRI. K. BALAKRISHAN RAO.
2. S. VITTALA SHETTIGAR,
ADVOCATE & SOLE ARBITRATOR
FATHER'S NAME NOT KNOWN TO
APPELLANTS, AGE: MAJOR,
R/O MARUTHI VEETHIKA, UDUPI-576 101.
...RESPONDENTS
(SRI AJITH ANAND SHETTY, ADVOCATE FOR R1;
V/O DATED 11.04.2022, R2 DECEASED)
THIS MISCELLANEOUS FIRST APPEAL IS FILED UNDER
SECTION 37(1)(B) OF THE ARBITRATION AND CONCILIATION ACT,
1996 AGAINST THE ORDER DATED 18.06.2009 PASSED IN
A.S.NO.41/2005 ON THE FILE OF VI ADDITIONAL CITY CIVIL JUDGE,
BANGALORE CITY, PARTLY ALLOWING THE SUIT FILED U/S 34(2) OF
THE ARBITRATION AND CONCILIATION ACT, 1996 TO SET ASIDE
THE IMPUGNED AWARD PASSED BY THE ARBITRATOR DATED
14.06.2005.
IN MFA NO.7241 OF 2009:
BETWEEN:
SAJJAN JHUNJHUNWALA
S/O LATE R.N. JHUNJHUNWALA,
AGED ABOUT 59 YEARS,
R/AT NO.1189, 13TH MAIN,
4TH CROSS, HAL 2ND STAGE,
INDIRANAGAR, BANGALORE-560 038.
...APPELLANT
(BY SRI SIDDHARTH S., ADVOCATE FOR
SMT. SUMANA NAGANAND, ADVOCATE)
AND:
1. ICDS LIMITED,
A COMPANY INCORPORATED UNDER THE
COMPANIES ACT, 1956,
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MFA No. 7243 of 2009
C/W MFA No. 7241 of 2009
MFA No. 7242 of 2009
HAVING ITS REGISTERED OFFICE AT
SYNDICATE HOUSE, POST BOX NO.46,
UPENDRA NAGAR, MANIPAL-576 119,
UDUPI DISTRICT,
REP. HEREIN BY ITS CONSTITUTED ATTORNEY
SRI K. BALAKRISHAN RAO.
2. S. VITTALA SHETTIGAR,
ADVOCATE & SOLE ARBITRATOR,
FATHER'S NAME NOT KNOWN TO
APPELLANTS, AGE: MAJOR,
R/O MARUTHI VEETHIKA, UDUPI-576 101.
...RESPONDENTS
(SRI AJITH ANAND SHETTY, ADVOCATE FOR R1;
V/O DATED 11.04.2022, R2 DECEASED)
THIS MISCELLANEOUS FIRST APPEAL IS FILED UNDER
SECTION 37(1)(B) OF THE ARBITRATION AND CONCILIATION ACT,
1996, AGAINST THE ORDER DATED 18.06.2009 PASSED IN
A.S.NO.40/2005 ON THE FILE OF VI ADDITIONAL CITY CIVIL JUDGE,
BANGALORE CITY, PARTLY ALLOWING THE SUIT FILED U/S 34(2) OF
THE ARBITRATION AND CONCILIATION ACT, 1996 TO SET ASIDE
THE IMPUGNED AWARD PASSED BY THE ARBITRATOR DATED.
13.06.2005.
IN MFA NO.7242 OF 2009:
BETWEEN:
1. EMBASSY MARKETING PRIVATE LIMITED,
(FORMERLY KNOWN AS VICTORY
INFOSYSTEMS PRIVATE LIMITED),
A COMPANY INCORPORATED UNDER THE
COMPANIES ACT, 1956,
HAVING ITS REG. OFFICE AT NO.3320,
12TH 'A' MAIN ROAD, HAL 2ND STAGE,
INDIRANAGAR, BANGLORE-560 038,
REP. HEREIN BY ITS CONSTITUTED ATTORNEY
SRI SUVARNA MURTHY.
2. SAJJAN JHUNJHUNWALA
S/O LATE R.N. JHUNJHUNWALA,
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NC: 2024:KHC:21047
MFA No. 7243 of 2009
C/W MFA No. 7241 of 2009
MFA No. 7242 of 2009
AGED ABOUT 59 YEARS,
R/A NO.1189, 13TH MAIN,
4TH CROSS, HAL 2ND STAGE,
INDIRANAGAR, BANGALORE-560 038.
...APPELLANTS
(BY SRI SIDDHARTH S., ADVOCATE FOR
SMT. SUMANA NAGANAND, ADVOCATE)
AND:
1. ICDS LIMITED,
A COMPANY INCORPORATED UNDER THE
COMPANIES ACT, 1956,
HAVING ITS REG. OFFICE AT
SYNDICATE HOUSE, POST BOX NO.46,
UPENDRA NAGAR, MANIPAL-576 119,
UDUPI DISTRICT,
REPRESENTED BY ITS
CONSTITUTED ATTORNEY
SRI K. BALAKRISHAN RAO.
2. S. VITTALA SHETTIGAR,
ADVOCATE & SOLE ARBITRATOR
FATHER'S NAME NOT KNOWN TO
APPELLANTS, AGE: MAJOR,
R/O MARUTHI VEETHIKA, UDUPI-576 101.
...RESPONDENTS
(SRI AJITH ANAND SHETTY, ADVOCATE FOR R1;
V/O DATED 11.04.2022, R2 DEAD)
THIS MISCELLANEOUS FIRST APPEAL IS FILED UNDER
SECTION 37(1)(B) OF THE ARBITRATION AND CONCILIATION ACT,
1996 AGAINST THE ORDER DATED 18.06.2009 PASSED IN
A.S.NO.39/2005 ON THE FILE OF VI ADDITIONAL CITY CIVIL JUDGE,
BANGALORE CITY, PARTLY ALLOWING THE SUIT FILED U/S 34(2) OF
THE ARBITRATION AND CONCILIATION ACT TO SET ASIDE THE
IMPUGNED AWARD PASSED BY THE ARBITRATOR DATED
15.06.2005.
THESE APPEALS COMING ON FOR DICTATING JUDGMENT THIS
DAY, THE COURT DELIVERED THE FOLLOWING:
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MFA No. 7243 of 2009
C/W MFA No. 7241 of 2009
MFA No. 7242 of 2009
JUDGMENT
In MFA No.7241/2009, the appellant has challenged the judgment and decree dated 18.06.2009 passed by the VI Additional City Civil Judge, Bangalore City (henceforth referred to as 'District Court') in A.S.No.40/2005, by which, an arbitration suit filed under Section 34(2) of the Arbitration and Conciliation Act, 1996 (henceforth referred to as 'the Act of 1996') challenging an Arbitration Award dated 13.06.2005 was allowed-in-part and the over due compensation of Rs.3,13,231/- awarded by the Arbitrator was set aside and the remaining part of the award was confirmed.
2. In MFA No.7242/2009, the appellants have challenged the judgment and decree dated 18.06.2009 passed by the District Court in A.S.No.39/2005, by which, an arbitration suit filed under Section 34(2) of the Act of 1996 was allowed-in-part and the award of over due compensation of Rs.17,09,887/- was set aside and but the -6- NC: 2024:KHC:21047 MFA No. 7243 of 2009 C/W MFA No. 7241 of 2009 MFA No. 7242 of 2009 remaining portion of the award dated 15.06.2005 was upheld.
3. In MFA No.7243/2009, the appellants have challenged the judgment and decree dated 18.06.2009 passed by the District Court in A.S.No.41/2005, by which, an arbitration suit filed under Section 34(2) of the Act of 1996 was allowed-in-part and the award of over due compensation of Rs.14,17,068/- was set aside but the remaining portion of the award dated 14.06.2005 was upheld.
4. As common questions of fact and law are involved in these three appeals, filed by and against parties, who are more or less similar and since a common arbitrator had passed the awards that are questioned in these appeals, they are disposed off by this common judgment.
5. The appellant No.1 in MFA No.7242/2009 was formerly incorporated as "Victory Infosystems Private Limited". The appellant No.1 in MFA No.7242/2009 and -7- NC: 2024:KHC:21047 MFA No. 7243 of 2009 C/W MFA No. 7241 of 2009 MFA No. 7242 of 2009 appellant No.1 in MFA No.7243/2009 are Companies incorporated under the erstwhile Companies Act, 1956. The appellant No.2 in MFA Nos.7242/2009 and 7243/2009 (appellant in MFA No.7241/2009) was the Director of appellant No.1 in MFA No.7242/2009 and appellant No.1 in MFA No.7243/2009. The two companies and the appellant in MFA No.7241/2009 had entered into separate loan agreements dated 20.05.1996 for Rs.50,00,000/-, dated 18.03.1996 for Rs.50,00,000/- and dated 27.09.1997 for Rs.25,00,000/- respectively with respondent No.1 and had executed the prescribed documents. The appellant No.2 in MFA No.7242/2009 and 7243/2009 (appellant in MFA No.7241/2009) was the Director and guarantor, who stood guarantee for the repayment of the loan raised by the appellant No.1 in MFA No.7242/2009 and appellant No.1 in MFA No.7243/2009.
6. The respondent No.1 alleged that despite granting sufficient time, the appellants did not repay the loan outstanding in their respective accounts. The -8- NC: 2024:KHC:21047 MFA No. 7243 of 2009 C/W MFA No. 7241 of 2009 MFA No. 7242 of 2009 respondent No.1 therefore, addressed a notice demanding the amount that was over due. Since the appellants did not comply with the demand, the respondent No.1 invoked the arbitration clause prescribed under the respective loan agreements and issued notices dated 07.08.2001, 24.09.2001, 24.08.2001, 05.10.2001 to the appellants stating that the dispute would be referred for resolution by a sole arbitrator, who was named in the agreement. The appellants did not reply to this notice. Thereafter, the arbitrator entered reference and claim petitions were filed before the arbitrator.
7. The appellants herein contested the claim petitions and denied their liability to pay the amount demanded by respondent No.1. They contended before the arbitrator that he was not appointed through the due process of law, as they did not concede or accept his appointment and therefore, the respondent No.1 must have taken recourse to the provisions contained in Section 11 of the Act of 1996. The arbitrator ruled on his -9- NC: 2024:KHC:21047 MFA No. 7243 of 2009 C/W MFA No. 7241 of 2009 MFA No. 7242 of 2009 jurisdiction and held that the respective loan agreements entered into between the parties provided for resolution of disputes through any one of the two named arbitrators. He held that in response to a notice issued by the respondent No.1 suggesting the name of an arbitrator, the appellants did not respond to the notice let alone express their unwillingness to accept him as an arbitrator. Therefore, he held that the appellants had accepted or acquiesced the appointment of the arbitrator suggested by the respondent No.1. Thereafter, considering the merits of the claims, the arbitrator passed respective awards declaring that the appellants were liable to pay amounts as demanded by the respondent No.1.
8. Being aggrieved by the said awards, the appellants filed respective suits under Section 34(2) of the Act of 1996 at Bengaluru that were numbered as A.S.No.40/2005, A.S.No.39/2005 and A.S.No.41/2005.
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9. The appellants raised the following grounds in support of their challenge to the awards passed by the arbitrator:
(i) At the time of disbursement of the loan, the names of the arbitrators were left blank.
That taking advantage of the trust reposed in the respondent No.1, it had inserted the name of the arbitrator, long after the loan agreements were entered into.
(ii) that there was no mutual consent between the parties in writing about the person who had to arbitrate the dispute, more particularly when there were two names mentioned in the agreements.
(iii) that the respondent No.1 cannot unilaterally refer the dispute for arbitration just because the appellants have not replied to the notice issued by the respondent No.1 suggesting the name of
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NC: 2024:KHC:21047 MFA No. 7243 of 2009 C/W MFA No. 7241 of 2009 MFA No. 7242 of 2009 one of the named arbitrators. They contended that the respondent No.1 must have resorted to the provisions contained in Section 11 of the Act of 1996.
(iv) that there was no agreement that the place of arbitration would be at Udupi. It was contended that when the loan agreements were entered into there were blanks in the agreements relating to the place of arbitration and that the respondent No.1 had later inserted the place as Udupi. It is contended that no act took place in Udupi and both appellants and respondent No.1 had their offices at Bengaluru, the agreements were executed at Bengaluru and the payment was also made in Bengaluru.
10. The District Court after considering the contentions, held that
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(i) the appellants had admitted that any dispute that may arise between the parties relating to the arbitration agreement may be referred to a Sole arbitrator and amongst the two named arbitrators mentioned in this agreement, one of them could be appointed to resolve the dispute. It held that since respondent No.1 had caused a notice to the appellants suggesting the name of one of the named arbitrators and as the appellants failed to respond, they could not resile and claim that the procedure under Section 11 of the Act of 1996 had to be resorted to.
(ii) That the place of arbitration was Udupi as per the loan agreements and that the appellants participated in the proceedings before the arbitrator without contest or protest and therefore, they could not
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(iii) that the appellant No.2 was an educated person and it was difficult to accept that he could have signed such blank forms.
(iv) that the loan was availed by the appellants by pledging their shares and until they gave instructions in writing, the respondent No.1 was not bound to sell the shares and adjust the proceeds against the outstanding in the loan accounts.
(v) That the claim was not belated or barred by time to realize the loan.
11. The District Court thereafter noticed that the arbitrator had awarded over due compensation without there being any evidence. Consequently, it allowed the suits filed under Section 34(2) of the Act of 1996 in part
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NC: 2024:KHC:21047 MFA No. 7243 of 2009 C/W MFA No. 7241 of 2009 MFA No. 7242 of 2009 and set aside the over due compensation awarded in all the cases and confirmed the remaining part of the award.
12. Being aggrieved by the said judgments and decrees passed by the District Court, these appeals are filed.
13. The appellants raised the following common contentions in their appeal memorandums:-
(i) That under the terms of the agreements, the respondent No.1 did not have any unilateral right to appoint the arbitrator. The arbitration clause provided that both the parties were entitled to refer the disputes to one of the two arbitrators named in the agreements, by giving notice of their intention to refer the disputes to the other party. That there should be mutual consent between the parties as to who amongst the two should arbitrate the dispute. That there was nothing on record to show that the
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NC: 2024:KHC:21047 MFA No. 7243 of 2009 C/W MFA No. 7241 of 2009 MFA No. 7242 of 2009 appellants had consented to the appointment of the arbitrator Mr. S. Vittala Shettigar. That there can be no acquiescence in the matter of appointment of an arbitrator as a separate procedure is prescribed in Section 11 of the Act of 1996 for appointment of an arbitrator.
(ii) That though the agreement showed that the names of Mr. S. Vittala Shettigar and Mr.B.I.Sharma were inserted by the respondent No.1, it had mischievously proceeded on the assumption that Mr. S. Vittala Shettigar was the sole arbitrator and that the parties were consensus ad idem on the identity of the arbitrator. Further, the arbitrator had no right to enter reference merely because the appellants had failed to respond to the notice proposing the name of Mr. S. Vittala Shettigar as the arbitrator.
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NC: 2024:KHC:21047 MFA No. 7243 of 2009 C/W MFA No. 7241 of 2009 MFA No. 7242 of 2009 Reliance is placed on the Judgment of the Hon'ble Apex Court in the case of Seth Thawardas Pherumal and Another vs Union of India [AIR 1955 SC 468] and Dharma Prathishthanam vs Madhok Construction (P) Ltd [(2005) 9 SCC 686].
(iii) That a person who is not a party to the arbitration agreement cannot be compelled to join in the arbitration proceedings. That the appellant No.2 in MFA Nos.7242/2009 and 7243/2009 was arrayed as a party in the arbitration proceedings on the ground that he had executed a personal guarantee in favour of the respondent No.1. However, the deed of guarantee did not contain an arbitration clause and as such, he could not be roped into the proceedings.
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(iv) That the parties had never agreed that the place of arbitration would be at Udupi. That the respondent No.1, who had obtained signatures on blank forms had inserted the place of arbitration after it was executed. That there was no reason to accept Udupi as the place of arbitration as the parties had their respective offices in Bengaluru and the transaction was finalized and entered into Bengaluru and the loan was sanctioned in Bengaluru. That the loan agreements merely stated that all disputes arising out of and from the loan agreements shall be subject to the jurisdiction of the Courts in Udupi, which did not make Udupi as the place of arbitration. That the District Court to verify the records to determine whether the arbitration proceedings were fair and unbiased by summoning the records of the arbitration proceedings as provided under
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NC: 2024:KHC:21047 MFA No. 7243 of 2009 C/W MFA No. 7241 of 2009 MFA No. 7242 of 2009 Rule 4(d) of the High Court of Karnataka Arbitration (Proceedings before the Courts) Rules, 2001.
(v) That if the parties do not reach a consensus regarding he place of arbitration then, under Section 20(2) of the Act of 1996, the arbitrator is bound to decide the said question depending upon the convenience of the parties and the circumstances of the case. Therefore, the award of the arbitrator is liable to be set aside. That the finding of the District Court that the appellants did not protest the place of arbitration, is erroneous in view of the finding of the Hon'ble Apex Court in the case of Sanshin Chemicals Industry vs Oriental Carbons and Chemicals Ltd., [AIR 2001 SC 1219], where it was held that the party disputing
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NC: 2024:KHC:21047 MFA No. 7243 of 2009 C/W MFA No. 7241 of 2009 MFA No. 7242 of 2009 the place of arbitration cannot challenge the ruling till the award is passed.
(vi) That the respondent No.1 had filled up blank forms to suit its convenience. That the arbitrator had lightly brushed aside the evidence of a witness examined by the appellants in support of the above contention. That a perusal of the demand loan agreement dated 20.05.1996 revealed that a few clauses in the agreement were blank and were subsequently filled up in different font than the one used for printing the demand loan agreement. That when the execution of the document was denied, it was incumbent upon the respondent No.1 to prove due execution of the document.
(vii) That the awards are liable to be set aside under Section 34(2)(b)(ii) of the Act of 1996 and the explanation given thereunder.
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14. When these appeals were listed for final hearing, the learned counsel for the appellants fairly restricted the grounds to the following, having regard to the contours of Section 34 of the Act of 1996:-
(i) though there were two arbitrators named in the agreement either of whom could be appointed and though the respondent No.1 had issued notices suggesting the name of Mr. S. Vittala Shettigar as arbitrator, as the appellants did not reply to the said notice, it should be deemed that the appellants did not consent to the appointment of Mr. S. Vittala Shettigar.
He contended that there can be no acquiescence in matters of appointment of arbitrator. He contended that when there was no consensus, the procedure under Section 11 of the Act of 1996 ought to be resorted to. Therefore, he contends that the arbitrator in the present case could not have entered reference and the award passed by the arbitrator is unenforceable. In support of his contentions, he relied
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NC: 2024:KHC:21047 MFA No. 7243 of 2009 C/W MFA No. 7241 of 2009 MFA No. 7242 of 2009 upon the judgment of the Apex Court in the case of Dharma Prathishthanam, referred supra. He referred to para 31 of the said judgment, which reads as follows:
"31. Three types of situations may emerge between the parties and then before the court. Firstly, an arbitration agreement, under examination from the point of view of its enforceability, may be one which expresses the parties' intention to have their disputes settled by arbitration by using clear and unambiguous language, then the parties and the court have no other choice but to treat the contract as binding and enforce it. Or, there may be an agreement suffering from such vagueness or uncertainty as is not capable of being construed at all by culling out the intention of the parties with certainty, even by reference to the provisions of the Arbitration Act, then it shall have to be held that there was no agreement between the parties in the eye of the law and the question of appointing an arbitrator or making a reference or disputes by reference to Sections 8, 9 and 20 shall not arise. Secondly, there may be an arbitrator or arbitrators named, or the
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NC: 2024:KHC:21047 MFA No. 7243 of 2009 C/W MFA No. 7241 of 2009 MFA No. 7242 of 2009 authority may be named who shall appoint an arbitrator, then the parties have already been ad idem on the real identity of the arbitrator as appointed by them beforehand; the consent is already spelled out and binds the parties and the court. All that may remain to be done in the event of an occasion arising for the purpose, is to have the agreement filed in the court and seek an order of reference to the arbitrator appointed by the parties. Thirdly, if the arbitrator is not named and the authority who would appoint the arbitrator is also not specified, the Appointment and reference shall be to a sole arbitrator unless a different intention is expressly spelt out. The appointment and reference-both shall be by the consent of the parties. Where the parties do not agree, the court steps in and assumes jurisdiction to make an appointment, also to make a reference, subject to the jurisdiction of the court being invoked in that regard. We hasten to add that mere inaction by a party called upon by the other one to act does not lead to an inference as to implied consent or acquiescence being drawn. The appellant not responding to the respondent's proposal for joining in the appointment of a sole arbitrator named by him could not be construed as
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NC: 2024:KHC:21047 MFA No. 7243 of 2009 C/W MFA No. 7241 of 2009 MFA No. 7242 of 2009 consent and the only option open to the respondent was to have invoked the jurisdiction of court for appointment of an arbitrator and an order of reference of disputes to him. It is the court which only could have compelled the appellant to join in the proceedings."
(ii) That the appellant No.2 in MFA Nos.7242/2009 and 7243/2009 (appellant in MFA No.7241/2009) was not a party to the loan agreements and consequently, was not bound by the arbitration clause contained therein. Therefore, he could not have been arrayed as a party in the proceedings.
15. Per contra, learned counsel for respondent No.1 contended that
(i) the disputes between the parties were undoubtedly to be settled through the process of arbitration. He submitted that the loan agreement itself specified the name of the arbitrator, who would arbitrate the dispute
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NC: 2024:KHC:21047 MFA No. 7243 of 2009 C/W MFA No. 7241 of 2009 MFA No. 7242 of 2009 that may arise between the parties. He submitted that respondent No.1 had issued a notice calling upon the appellants to accept one of the two arbitrators namely, Mr.S.Vittala Shettigar. He submits that the appellants did not reply to this notice and therefore, the arbitrator entered reference and proceedings commenced before the arbitrator. He submitted that once the appellants were notified about the arbitrator, who was named in the agreement, then it was for the appellants to have chosen the other arbitrator, who was named in the agreement.
He submits that as the consent to appointment of Mr. S. Vittala Shettigar was inherent, the silence on the part of the appellants, amounted to acquiescence and consent and therefore, there is no error committed by the arbitrator in entering reference and deciding dispute between the
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NC: 2024:KHC:21047 MFA No. 7243 of 2009 C/W MFA No. 7241 of 2009 MFA No. 7242 of 2009 parties. He further submits that even in case there was no consensus, if the petition was filed under Section 11 of the Act of 1996, then this Court could not have appointed anybody else as an arbitrator than either of the two arbitrators named in the agreement. He thus, submits that appointment of the arbitrator was in accordance with law and as per the agreement entered into between the parties and hence, the award of the arbitrator cannot be assailed under Section 34 of the Act of 1996.
(ii) Besides this, he contended that the venue of the arbitration was at Udupi as per the agreement between the parties. However, for the sake of convenience, the seat was at Bengaluru and for all practical purposes, the appellants were bound to challenge the award before the Principal Court of original
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NC: 2024:KHC:21047 MFA No. 7243 of 2009 C/W MFA No. 7241 of 2009 MFA No. 7242 of 2009 jurisdiction in a District, which in the present case is Udupi and therefore, the suits filed by the appellants at Bengaluru were not maintainable.
16. I have considered the submissions made by the learned counsel for the appellants as well as the learned counsel for respondent No.1.
17. Since the grounds on which these appeals are contested are restricted to the manner of appointment of the arbitrator and the competency of the arbitral Tribunal to involve the appellant No.2, this Court has proceeded on the premise that the loan agreements were indeed executed between the parties naming two arbitrators, one of whom could be appointed as an arbitrator to arbitrate the dispute. This Court has thus proceeded on the assumption that the appellants had consented to the appointment of one of the two arbitrators as a sole arbitrator.
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18. The arbitration agreement between the parties provided for resolution of disputes, differences and claims arising out of the agreement and reads as follows:
"All disputes, differences and claims arising out of this agreement, shall be settled by Arbitration in accordance with the provisions of the ARBITRATION AND CONCILIATION ACT, 1996 and shall be referred to the sole Arbitration of either Mr. S V Shettigar, Advocate, Udupi or Mr B I Sharma, Advocate, Udupi. The award given by the Arbitrator shall be final and binding on all the parties concerned."
19. In furtherance of the arbitration clause, respondent No.1 addressed a notice dated 24.08.2001 (Ex.P7) suggesting the name of Mr. S. Vittala Shettigar. This was followed by another notice dated 05.10.2001 (Ex.P10). These notices were served on the appellants as per Exs.P8, P11 and P12. Therefore, it can safely be held that the appellants knew of the possible appointment of Mr. S. Vittala Shettigar as a sole arbitrator to decide the claims of the respondent No.1. If the appellants had any reason not to consent to the appointment of Mr. S. Vittala
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NC: 2024:KHC:21047 MFA No. 7243 of 2009 C/W MFA No. 7241 of 2009 MFA No. 7242 of 2009 Shettigar, they were bound to resort to the procedure contemplated under Section 13(2) of the Act of 1996 within the time prescribed. It is only then that the appellants would be clothed with the right to challenge the appointment of the arbitrator in a suit under Section 34 of the Act of 1996. However, the notices issued by the respondent No.1 suggesting the name of Mr. S. Vittala Shettigar were not replied by the appellants, thereby they tacitly consented to his appointment. They did not even suggest the name of the other named arbitrator (Mr.B.I.Sharma) in the agreement. It is only after the arbitrator entered reference and only after claim petitions were filed that the appellants raised a contention that the arbitrator was not duly appointed and therefore, he was not entitled to continue with the proceedings. If the appellants had agreed to the appointment of one amongst the two named arbitrators, the grounds for challenge of such an arbitrator was restricted to what are provided under sub-sections (3) and (4) of Section 12 of the Act of 1996. The record of the arbitration which was produced
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NC: 2024:KHC:21047 MFA No. 7243 of 2009 C/W MFA No. 7241 of 2009 MFA No. 7242 of 2009 before the Court did not show any effort made by the appellants to challenge the arbitrator, except claiming that his appointment was unilateral. Having regard to the conduct of the appellants in not suggesting the name of the other arbitrator, it has to be held that the appellants did not resist or protest the appointment of Mr. S. Vittala Shettigar as the arbitrator and their silence did amount to consent.
20. In similar circumstances, the Gujarat High Court in the case of Viralbhai Natwarbhai Patel vs. Bharatbhai Pravinbhai Patel (R/Special Civil Application No.12158/2022) had held that whenever a notice for appointment of named arbitrator is issued and the party refuses to reply or accept such a notice then, such party is deemed to have conceded to the appointment of such an arbitrator.
21. The Hon'ble Apex Court in the case of Dharma Prathishthanam, referred supra held,
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NC: 2024:KHC:21047 MFA No. 7243 of 2009 C/W MFA No. 7241 of 2009 MFA No. 7242 of 2009 "Secondly, there may be an arbitrator or arbitrators named, or the authority may be named who shall appoint an arbitrator, then the parties have already been ad idem on the real identity of the arbitrator as appointed by them beforehand; the consent is already spelled out and binds the parties and the Court. All that may remain to be done in the event of an occasion arising for the purpose, is to have the agreement filed in the Court and seek an order of reference to the arbitrator appointed by the parties".
22. In the case of National Highways Authority of India and another vs Bumihiway DDB Ltd., (JV) and others [(2006)10 SCC 763], the Hon'ble Apex Court held as under:-
"The parties have entered into a contract after fully understanding the import of the terms so agreed to from which there cannot be any deviation. The courts have held that the parties are required to comply with the procedure of appointment as agreed to and the defaulting party cannot be allowed to take advantage of its own wrong."
23. That takes us to the seminal question, whether the parties to an agreement are exempt from resorting to the procedure contemplated under Section 11 of the Act of
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NC: 2024:KHC:21047 MFA No. 7243 of 2009 C/W MFA No. 7241 of 2009 MFA No. 7242 of 2009 1996, if an arbitrator is named in the agreement. A reading of Section 11 of the Act of 1996 makes it more than evident that it applies when (i) the parties have agreed on a procedure for appointment of an arbitrator or
(ii) fail to agree on the procedure for appointment of the arbitrator. Contrarily, in the present case, the parties have agreed to appoint one of the two arbitrators as the sole arbitrator. If the appellants had any reservation over the appointment of Mr. S. Vittala Shettigar, they must have opted the other arbitrator. The silence on the part of the appellants did amount to consent on the part of the appellants to the appointment of Mr. S. Vittala Shettigar as the arbitrator. Therefore, once the parties had appointed the arbitrators by naming them in the agreement, question of they resorting to Section 11 did not arise.
24. In that view of the matter, the first ground urged by the learned counsel for the appellants that the appointment of the arbitrator was not in accordance with
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NC: 2024:KHC:21047 MFA No. 7243 of 2009 C/W MFA No. 7241 of 2009 MFA No. 7242 of 2009 law and therefore, award passed by him is unenforceable, is rejected.
25. In so far as the second contention is concerned, the appellant No.2 in MFA Nos.7242/2009 and 7243/2009 (appellant in MFA No.7241/2009) had executed a letter of guarantee, "In consideration of ICDS Ltd., ------- giving credit or financial accommodation or affording credit facilities to M/s Wisdom Holdings Private Limited" and he had agreed "to pay to and satisfy the Company (respondent No.1) on demand all and every sum of money which are now or shall at any time be owing to the Company in any of its offices on any accounts whatsoever from the borrower solely or from the borrower jointly with any other person/s whether as principal or surety or otherwise"
It also contained, "Provided that the total liability ultimately enforceable against the guarantors under this guarantee shall not exceed the sum of
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NC: 2024:KHC:21047 MFA No. 7243 of 2009 C/W MFA No. 7241 of 2009 MFA No. 7242 of 2009 Rs.50,00,000/- and interest thereon at 27% per annum from the date of demand by the Company upon the guarantor for payment".
It further contained the following clause:-
"Notwithstanding the borrower's Account/s with the Company may be brought to credit or the credit given to the Borrower fully exhausted or exceeded or howsoever the said financial accommodation varied or changed from time to time notwithstanding any payments from time to time or any settlement of account, this guarantee shall be continuing guarantee for payment of the ultimate balance to become due to the company by the borrower not exceeding Rs.50,00,000/-."
26. Clause 10 of the loan agreement reads as follows:
"10. The Obligors agree that ICDS ltd., will be at liberty to initiate court proceedings at Udupi against them or the Guarantors either jointly or severally for the realization of the
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NC: 2024:KHC:21047 MFA No. 7243 of 2009 C/W MFA No. 7241 of 2009 MFA No. 7242 of 2009 dues of ICDS Ltd., reserving the aforesaid right of charge on the securities."
27. An arbitration agreement as defined under Section 7(1) of the Act of 1996 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."
28. Though the contention of the learned counsel for the appellant No.2 that he was not a party to the agreement containing the arbitration clause and therefore, was not a "party" to the agreement appeals at the first blush but the recitals of the loan agreement and the letter of guarantee show that both were inseparable and had to be read together. The consideration for the letter of guarantee was the financial assistance provided to the appellant No.1 in both the appeals. Consequently, the letter of guarantee, which is an indemnity by the appellant No.2 indemnifying the respondent No.1 against any loss arising out of non-payment, had to be read as an integral
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NC: 2024:KHC:21047 MFA No. 7243 of 2009 C/W MFA No. 7241 of 2009 MFA No. 7242 of 2009 part of the loan agreement, which meant that the appellant No.2 was also bound by the arbitration clause contained in the loan agreement. Besides this, under Section 128 of the Indian Contract Act, 1872, the liability of the borrower and guarantor is co-extensive and therefore, reference to the word "borrower" in the loan agreement invariably included the guarantor. Therefore, the second contention urged by the appellant No.2 is also rejected.
29. Since no other contentions were urged, these appeals filed under Section 37 of the Act of 1996 do not merit consideration and the same are dismissed.
30. In view of dismissal of the appeals, pending I.As., if any, do not survive for consideration and the same stand dismissed.
Sd/-
(R. NATARAJ) JUDGE LG/PMR