M/S Today Homes & Infrastructure Pvt. ... vs Ludhiana Improvement Trust on 25 October, 2013

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Punjab-Haryana High Court

M/S Today Homes & Infrastructure Pvt. ... vs Ludhiana Improvement Trust on 25 October, 2013

The vexed question as to whether the disputes inter-se the parties should be resolved through mode of arbitration has consumed period of seven years and in that process, there have been two rounds of litigation before the Hon'ble Supreme Court.

2. The factual matrix of dispute involved is limited. The State Government is stated to have sanctioned a Development-cum-Housing Accommodation Scheme under Section 41 of the Punjab Town Arbitration Case No. 76 of 2007 2 Improvement Trust, 1922 on 28.06.1979. The respondent-Ludhiana Improvement Trust (for short 'LIT') is stated to have passed a resolution on 03.02.2000 for development of the City Centre through a Special Purpose Vehicle on the basis of equal shares. The auction of the site was to be conducted by the Special Purpose Vehicle (SPV) with profits distributed in proportion to the shares of the parties. This resulted in LIT inviting Expression of Interest (EOI) on 15.03.2005 for the development of the City Centre in accordance with the design selected by it. Pre-bid meetings were stated to be held on 02.04.2005 and the last date for receipt of the bids was stipulated as 20.04.2005.

3. The respondents also participated in the bid process and the technical bids were evaluated on 16.05.2005 with financial bids being opened on 17.05.2005. The petitioner's bid was found to be highest and it was envisaged that the revenues from the project were to be shared on 70:30 ratio basis between the developer and the L.I.T. In pursuance of the success of the bid of the petitioner, the L.I.T. declared the petitioner as such and the petitioner was called upon to furnish a Performance Guarantee of ` 3.72 Crores and a concession agreement dated 24.05.2005 was executed between the two parties with possession of the land measuring 25.59 acres being handed over to the petitioner in August, 2005 itself. A power of attorney is also stated to have been executed on 29.08.2005 by the L.I.T. in favour of the petitioner to facilitate construction at the site and for sale/rental of the developed properties. In order to have a proper accounting procedure, a Tripartite Agreement was entered into between the L.I.T; the petitioner and Arbitration Case No. 76 of 2007 3 H.D.F.C. Bank Ltd. on 25.08.2005 in respect of opening of an escrow account and the proceeds in the account were to be divided in the ratio of 30:70 between the trust and the petitioner as aforesaid.

4. In respect of the aforesaid arrangement arrived at, the petitioner claims to have started construction of Ludhiana City Centre with the construction of boundary wall and other preliminary works such as excavation and construction of two basements. The petitioner claims to have spent ` 125 Crores on the project and also entered into agreements for sale and lease of the areas of the project with about 300 different parties, in respect of which an amount of ` 78 Crores approximately was received, as advance from the customers, in the joint escrow account with ` 55 Crores having been transferred to the petitioner and ` 23 Crores being transferred to the L.I.T.

5. The petitioner claims that while the project construction was going on, certain press reports appeared alleging financial irregularities in sale of spaces in L.I.T. which gave in turn rise to disputes inter-se the parties. This resulted in cancelling of power of attorney by L.I.T. on 05.10.2006 and discontinuing operation of joint escrow account in H.D.F.C. Bank on or around 06.10.2006. The project was thus brought to a standstill. It is this which forced the petitioner to file an application under Section 11(6) of the Arbitration & Conciliation Act, 1996 (hereinafter referred to as 'the said Act') on 15.09.2006 before this Court which was registered as Arbitration Case No. 263 of 2006 seeking appointment of an Arbitrator in order to resolve the disputes inter-se the parties.

Arbitration Case No. 76 of 2007 4

6. The petitioner pleads that after filing of the petition, various meetings took place between the State Government; L.I.T. and the petitioner, to resolve the dispute amicably and certain decisions were also taken jointly on 06.10.2006, which were, however, not implemented. Since the subsequent facts were material for determining the controversy, the earlier petition was withdrawn with liberty to file a fresh petition on 22.08.2007 and the fresh petition was filed which is now numbered as Arbitration Case No. 76 of 2007.

7. In so far as L.I.T. is concerned, certain facts are sought to be pleaded which according to them go to the root of the controversy as there is no valid and binding arbitration agreement inter-se the parties. The pleas arise from certain communications and inter decisions between the State Government and the L.I.T. On 17.05.2005, when the financial bids were opened, it is pleaded that the State Government/respondent No.2 directed the Chairman of the L.I.T. vide letter of even date that the Trust should not evaluate any bid or issue any L.O.I. till the policy decisions are conveyed to it or approved by it. The L.O.I. was however issued despite lack of such approval by the Chairman on 18.05.2005 while prior approval was required as per Rule 94 of the Punjab Town Improvement Trust Rules, 1939. The State Government is stated to have issued a letter dated 18.05.2005 (Annexure R-1/3) to the Executive Officer of the L.I.T. to ensure strict compliance of its instructions on 17.05.2005 but it was informed by the Executive Officer that the Chairman of the Trust had gone ahead at his own level without the consent/approval of the office of the Trust. The Arbitration Case No. 76 of 2007 5 Executive Officer also informed the State Government vide communication dated 24.05.2005 that there was every likelihood that the Chairman will sign the agreement with the petitioner. A meeting of the L.I.T. was held on 30.08.2005 wherein it was resolved that L.O.I., Concession Agreement and Power of Attorney issued by the Chairman in favour of the petitioner be got approved by the State Government. The State Government responded to this on 27.09.2005 stating that the request for approval is under consideration.

8. It appears that even as per the State Government no action was taken by it one way or the other i.e. neither approval nor negating the action of the Chairman for almost a year till news items appeared on 30.08.2006 alleging that the petitioner has been accepting upto 70% of the consideration from prospective purchasers in cash and only 30% by cheque. This resulted in explanation being called for from the petitioner which was given on 13.09.2006 and on 14.09.2006 Chief Minister of Punjab announced on the floor of the State legislature that a vigilance enquiry would be held and L.I.T. would be abolished. On 15.09.2006, a notification was issued by the State Government abolishing the L.I.T. The intervening circumstance in this quick succession was the reply of the Chairman to the letter of the petitioner dated 13.09.2006 stating that he was not satisfied with the reply and that an Arbitrator would be appointed within two weeks for auditing the accounts.

Arbitration Case No. 76 of 2007 6

9. It is the version of the L.I.T. that post revocation of the Power of Attorney and the Arbitration Application No. 263 of 2006, a meeting was held between the Principal Secretary, Local Government, officers of the Trust and the petitioner on 06.10.2006 where it was decided to change the terms of the Agreement from fund sharing to floor sharing mode. On 12.10.2006, the State Government informed the L.I.T. that a decision would be taken after culmination of the vigilance enquiry. Thereafter, as noticed above, the action of the petitioner in withdrawing the application and filing the subsequent application under Section 11(6) of the said Act took place. In the said proceedings, the L.I.T. filed an additional affidavit giving details/entire history of the case and ultimately Arbitration Application No. 76 of 2007 was allowed vide order dated 04.04.2008 and Justice R.C.Lahoti ( a former Chief Justice of India) was appointed as the sole Arbitrator to adjudicate upon all the disputes inter-se the parties. The arbitration proceedings were stated to have commenced and accordingly statement of claims was filed by the petitioner but in the meantime order dated 04.04.2008 was assailed before the Hon'ble Supreme Court of India by the L.I.T. and the State Government by way of S.L.P.(C) No. 10550 of 2008 in which leave was granted and it was registered as C.A. No. 6104 of 2008.

10. The appeal was allowed vide order dated 14.10.2008. The Supreme Court took note of the pleas and the counter pleas including facts subsequent to the filing of the second application under Section 11(6) of the said Act including the fact of the Trust being dissolved. Arbitration Case No. 76 of 2007 7 The L.I.T. and the State Government canvassed the plea that the agreement itself was void having been entered into under suspicious circumstances and by perpetrating fraud by altering the terms of the advertisement inviting bids thereby enlarging the eligibility criteria for participation in bid, so that the persons, who were otherwise ineligible, were given an entry to the bidding process and ultimately the contract was awarded to one of such persons. Despite this the matter had been referred to the Arbitrator by observing that these aspects would be addressed before the Arbitrator. The Supreme Court was of the view that the judgment on the application has not taken into account the decision of the Bench of Seven Judges of the Supreme Court in S.B.P. & Company Vs. Patel Engineering Ltd. & Anr. 2005(8) SCC 618 concluding that an order passed by the Chief Justice or his delegate Judge on an application under Section 11(6) of the said Act would be a judicial order and not an administrative order. The plea advanced on behalf of the petitioner that even if the main agreement was held to be void, it did not affect the arbitration agreement, which formed a part of the main agreement, was also considered. The Hon'ble Supreme Court opined that the Hon'ble High Court had left everything to be decided by the Arbitrator going by the earlier judicial view in Konkan Railway Corporation Limited and another V Rani Construction P.Ltd. 2002(2) SCC 388. The order of the then Hon'ble Chief Justice of this Court was set aside and the matter was remanded back for fresh decision Arbitration Case No. 76 of 2007 8 keeping in mind the decision of Seven Judges of the Hon'ble Supreme Court in S.B.P. Vs. Patel Engineering case (supra).

11. Thus, began with the second round of litigation in the form of rehearing of the arbitration application, which culminated in the judgment of learned Single Judge of this Court dated 08.10.2009. In this elaborate judgment, seven questions were framed for adjudication and it was concluded that the agreement dated 24.05.2005 signed by the Chairman of the Trust in favour of the petitioner was not legal and valid and thus the disputes between the parties arising out of the said agreement were not referable to the Arbitrator. The matter thus once again went before the Hon'ble Supreme Court now by the petitioner challenging the same in S.L.P.(C) No. 7334 of 2010 in which leave was granted and petition was registered as C.A. No. 4596 of 2013. The impugned judgment was set-aside and the matter was once again directed to be considered de-novo in the light of the observations made. This Court may note that both the judgments of the Hon'ble Supreme Court are two Judges Bench and both are authored by Hon'ble Justice Altamas Kabir, who was the then Chief Justice of India.

12. In the aforesaid judgment, the plea advanced on behalf of the petitioner was that the learned Single Judge had really tried the matter as a suit without adducing evidence and had not taken note of what was envisaged under Section 11(6) of the said Act. All that was required to hold a preliminary enquiry qua the existence of an arbitration agreement and a dispute which was required to be considered by an Arbitrator to be so appointed. It was alleged that the Arbitration Case No. 76 of 2007 9 application under Section 11(6) of the said Act did not envisage going into intricate details by framing issues and deciding the same without taking evidence.

13. On the other hand, the plea on behalf of the Trust was that once the main agreement was found to be void, the contents thereof including the arbitration agreement were rendered void. The Hon'ble Supreme Court opined that the learned designated Judge had exceeded bounds of his jurisdiction as envisaged in SBP Vs. Patel Engineering case (supra). The learned designated Judge was not required to undertake a detailed scrutiny of the merits and demerits of the case, almost as if he was deciding a suit but was required to decide such preliminary issues such as jurisdiction to entertain the application, the existence of a valid arbitration agreement, whether a live claim existed or not, for the purpose of appointment of an Arbitrator. The impugned order was held to be deciding much more than this.

14. What is extremely relevant is the observation of the Hon'ble Supreme Court to the effect that the issue regarding the continued existence of the arbitration agreement, notwithstanding the main agreement itself being declared void, was considered in SBP Vs. Patel Engineering case (supra) and it was held that an arbitration agreement could stand independent of the main agreement and did not necessarily become otiose, even if the main agreement, of which it was a part, was declared void. This is also reasoning of pronouncement in Reva Electric Car Company Private Ltd. Vs. Green Mobil 2012(2) S.C.C. 93 decided by Surinder Singh Nijjar, J. who was the other Arbitration Case No. 76 of 2007 10 member of the Bench deciding the Civil Appeal vide the judgment dated 10.05.2013. A reference was also made to the provisions of Section 16(1)(a) of the said Act to hold that even if the Arbitral Tribunal concludes that the contract is null and void, it should not result, as a matter of law, in an automatic invalidation of the arbitration clause. Section 16(1)(a) of the said Act presumes the existence of a valid arbitration clause and mandates the same to be treated as an agreement independent of the other terms of the contract. The learned designated Judge was thus held to have misunderstood the scope of the earlier order of the Supreme Court dated 14.10.2008. This is how the matter has now been placed for consideration once again.

15. The learned Senior Counsel for the petitioner sought to canvass that there is nothing much left to be argued in view of what had been observed by the Hon'ble Supreme Court in the order dated 10.05.2013 and it was almost a ministerial act to be performed of reference of disputes to arbitration. This was of-course seriously opposed by learned counsel for respondent No.1 in the process of his elaborate arguments. Learned Addl. Advocate General, appearing for the respondent-State of Punjab argued that there was really not much role to be played by it in view of the fact that the dissolution order qua L.I.T. had been withdrawn and thus the disputes now only remains between the petitioner and the L.I.T.

16. Learned Senior Counsel for L.I.T. once again sought to contend that the scope of jurisdiction under Section 11(6) of the said Act envisages in enquiring into the validity of the agreement by this Arbitration Case No. 76 of 2007 11 Court and relied upon the judgment of the Hon'ble Supreme Court in SBP Vs. Patel Engineering case (supra). A reference was also made to the observations made by the Hon'ble Supreme Court in Alva Aluminium Ltd. Bangkok Vs. Gabriel India Ltd. 2011(1) S.C.C. 167; Reva Electric Car Co. P. Ltd. Vs. Green Mobil 2012(2) S.C.C. 93 and Bharat Rasid Lal Asra Vs. Gautam Rasid Lal Asra 2010(2) S.C.C. 144, for the same proposition i.e. the existence of an arbitration agreement is a jurisdictional fact and the same has to be decided by the Chief Justice or his designate.

17. The second limb of the submission of learned Senior Counsel for the L.I.T. was that the Concession Agreement dated 24.05.2006 is not a valid agreement and void ab-initio in view of violation of Rule 94(2) of the Punjab Town Improvement Rules, 1939. The Rule was claimed to be mandatory and clearly commanded that before execution of the contract having value above ` 1000/-, there should be a 'prior approval' of the Trust and non-compliance of this condition would render the agreement as not binding on the trust. The requirement of such prior approval was pleaded to be mandatory and non-compliance of which would render the action as void ab-initio and in this behalf reliance was placed on the judgments of the Supreme Court in Naryan Dass Indurkhya Vs. State of M.P. 1974(4) S.C.C. 788 and N.G.Joshi Vs. Commission M.C.Kalyan & Domb ivali AIR 2005 SC 34 and Munna Lal Khetan Vs. Kedar Nath Khetan 1977(2) S.C.C. 424.

Arbitration Case No. 76 of 2007 12

18. I am of the view that the task which has to be undertaken in the present proceedings has to be in the context of what has been laid down by the Hon'ble Supreme Court in its order dated 10.05.2013. Effectively that order only emphasizes that the principles laid down in S.B.P. Vs. Patel Engineering and Reva Electric Car Vs. Green Mobil cases (supra) should be kept in mind in the given factual matrix of the present case.

19. It is not in dispute that the L.I.T. invited an Expression of Interest (EOI) in which various bids were made. The technical bids were evaluated whereafter financial bids were opened on 17.05.2005 and L.O.I. was issued to the petitioner. There is no doubt qua some inter-se disputes and the manner of issuance of L.O.I. to the petitioner inasmuch as the State Government wanted a prior approval of the trust. The Executive Officer of the Trust was of the opinion that the meetings had not been called for the said purpose and the Chairman of the L.I.T. of his own did venture into signing of the concession agreement, tripartite agreement and giving power of attorney to the petitioner to act in pursuance of the agreements. However, in view of the controversy raised, the resolution was passed by the trust on 13.08.2005 that the actions already taken by the Chairman should be got approved from the State Government. On this, the State Government informed that the aspect of approval was under consideration vide communication dated 27.05.2009.

20. The silence of the State Government after that for a year is a telling. The petitioner proceeded to act in pursuance of the Arbitration Case No. 76 of 2007 13 agreements and power of attorney inter-se the parties by expending monies and carrying on construction and claims to have incurred expenses of ` 125 crores. Not only that the monies so collected were deposited with the H.D.F.C. bank in pursuance of the Tripartite agreement which resulted in both the parties being beneficiaries under the joint escrow account to different extents of ` 55 crores for the petitioner and ` 23 crores of the L.I.T. respectively.

21. As to what would be the effect of such acts going on for a period of one year under the nose of the State Government and the L.I.T. would be the moot point which can be examined only by adducing evidence on the larger issue "as to whether the rights and obligations under the agreements would or would not be binding on the parties and the consequences thereof". Suffice it to say that without adducing evidence it is not possible to give a categorical answer to these questions. It is in this context infact that the Hon'ble Supreme Court opined vide order dated 10.05.2013 that the learned Single Judge should not have proceeded to really do a trial on the issues without adducing evidence. Such an exercise is to be carried out before the Civil Court or the Arbitral Forum depending upon what is the mode of settlement of disputes.

22. It is not in dispute that the concession agreement in Article 17 provides for a 'Dispute Resolution' through arbitration. The endeavour under Section 17.1 did not succeed as discussed aforesaid. Even post the first Arbitration Application No. 263 of 2006, the endeavours were made but agreed terms are alleged to have not been Arbitration Case No. 76 of 2007 14 implemented. This gave rise to a sequitur of arbitration under clause 17.2 requiring for settlement of disputes through the said Act and said clause reads as under:-

17.1 Amicable Resolution:-

a) Save where expressly stated otherwise in this Agreement, any dispute, difference or controversy of whatever nature however arising under, out of or in relation to this agreement including incompletion of the Project between the parties and so notified kin writing by either party to the other ( the 'Dispute') in the first instance shall be attempted to be resolved amicably by the SPV and failing resolution of the same in accordance with the procedure set forth in sub- article (b) below.

b) Either party may require the dispute to be referred to the Chairman, LIT and the authorized nominee of the Concessionaire, for the time being for amicable settlement. Upon such reference, the two shall meet at the earliest mutual convenience and in any event within 15 days of such reference to discuss and attempt to amicably resolve the Dispute. If the Dispute is not amicably settled within 15 (fifteen) days of such meeting between the two, either party may refer the dispute to arbitration in accordance with the provisions of Article 17.2 below.

17.2 Arbitration:-

a) Arbitrators Any Dispute, which is not resolved amicably as provided in Article 17.1(a), shall be finally settled by binding arbitration under the Arbitration and Conciliation Act, 1996. The parties shall nominate a single Arbitrator for the entire arbitration. If the parties fail therewith the arbitration shall be by a panel of three arbitrators, one to be appointed by each party and the third to be appointed by the two arbitrators appointed by the Parties. A party requiring arbitration shall appoint an Arbitrator in writing, inform the other party about such appointment and Arbitration Case No. 76 of 2007 15 call upon the other party to appoint its arbitrator. If the other party fails to appoint its arbitrator, the party appointing arbitrator shall take steps in accordance with the Arbitration and Conciliation Act, 1996.

b) Place of Arbitration:-

The place of arbitration shall be Punjab but by agreement of the parties, the arbitration hearings, if required, can be held elsewhere from time to time.

c) English language The request for arbitration, the answer to the request, the terms of reference, any written submissions, any orders and rulings shall be in English and, if oral hearings take place, English shall be the language to be used in the hearings.

d) Procedure The procedure to be followed within the arbitration, including appointment of arbitrator/arbitral tribunal, the rules of evidence which are to apply shall be in accordance with the Arbitration and Conciliation Act, 1996.

e) Enforcement of award:

Any decision or award resulting from arbitration shall be final and binding upon the parties. The parties hereto agree that the arbitral award may be enforced against the parties to the arbitration proceeding or their assets wherever they may be found and that a judgment upon the arbitral award may be entered in any court having jurisdiction thereof.

f) Fees and expenses:

The fees and expenses of the arbitrators and all other expenses of the arbitration shall be initially borne and paid by respective parties subject to determination by the arbitrators. The arbitrators may provide in the arbitral award for the reimbursement to the prevailing party of its costs and expenses in bringing or defending the arbitration claim, including legal fees and expenses incurred by party.

g) Performance during arbitration Pending the submission of and/or decision on a Dispute, difference or claim or until the arbitral award Arbitration Case No. 76 of 2007 16 is published, the parties shall continue to perform all of their obligations under this Agreement without prejudice to a final adjustment in accordance with such award."

23. In my view there cannot be any doubt that it is the arbitrator who has to examine the dispute in such a scenario especially when the question of enforcement of the concession agreement, whether its validity was affected on account of non prior approval, the effect of the execution of the agreement, the effect of the performance by the petitioner of the obligations under the agreement in the meantime for one year, are all aspects which would have to be examined in the adjudicatory process of resolution of disputes. The conclusion to the same would thus be only determined in the arbitration to be carried out in pursuance of the agreement inter-se the parties.

24. I am thus of the view that the disputes arising between the parties can only be decided post evidence being led and the mode of settlement would be arbitration. The touch stone of the satisfaction of the Chief Justice or his designate in terms of the judgments of the Supreme Court in S.B.P. Vs. Patel Engineering and Reva Electric Car Vs. Green Mobil cases (supra) thus stands satisfied.

25. In view of the aforesaid and keeping in mind that the arbitration process had already begun before Justice R.C.Lahoti (former Chief Justice of India) in pursuance to the first order which of-course was subsequently set-aside and the matter remitted back, I consider it appropriate to appoint Justice R.C.Lahoti to carry out the task of Arbitration Case No. 76 of 2007 17 settlement of disputes inter-se the parties through the mode of arbitration with the hope that this would finally bring to an end at least the chapter of the forum before whom the resolution of disputes has to take place.

Accordingly, the application under Section 11(6) of the said Act is allowed in the aforesaid terms leaving the parties to bear their own costs.


                                                           (SANJAY KISHAN KAUL)
                                                               CHIEF JUSTICE
           25.10.2013
           'ravinder sharma'



                        Whether to be referred to the Reporter or not.    √
                                                                          Yes    No.




Sharma Ravinder
2013.10.26 12:55
I attest to the accuracy and
integrity of this document

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