Karnataka High Court
Shri N. Sreenivasa S/O Shri R. Narayana ... vs Kuttukaran Machine Tools Ltd., A ... on 27 February, 2007
Equivalent citations: 2007(4)ARBLR445(KAR), 2007(5)KARLJ352, 2007 (4) AIR KAR R 76, 2007 A I H C 2264, (2007) 5 KANT LJ 352, (2007) 4 ARBILR 445
Author: N. Kumar
Bench: N. Kumar
ORDER N. Kumar, J.
1. This petition is filed under Section 11(5) of the Arbitration and Conciliation Act, 1996, for short, hereinafter referred to as the 'Act', for the appointment of an arbitrator to resolve the dispute between the parties.
2. The case of the petitioner is that he entered into an agreement of sale dated 21th December, 2005 for purchase of the property bearing plot No. 19-A, Peenya II Phase, Industrial Area, which is morefully described in the schedule to the agreement of sale and for short, hereinafter referred to as the 'schedule property' for a consideration of Rs. 6,99,04,079-00. A copy of the agreement is produced as Annexure-A. Clause 9 of the said agreement provides for resolution of dispute arising out of the agreement by way of arbitration. It is his further case that in terms of the agreement, a sum of Rs. 2,00,00,250-00 was paid by the petitioner to the respondent as advance by way of cheque, which has been duty encashed by the respondent. Sixty days time was stipulated for completion of sale transaction.
3. On 18.02.2006, the petitioner wrote a letter expressing his readiness and willingness to purchase the property and pay the balance sale consideration in terms of the agreement, and take possession of the property. The respondent sent a reply to the said letter stating that they are ready and willing to hand over vacant possession of the property agreed to be sold at the time of registration and there was no question of the same being vacant prior to the completion of the sale transaction. The respondent did not remove the machineries and the premises was not kept vacant. Those letters are produced as Annexures-B and C, In spite of repeated request, when the respondent did not perform his part of the contract, he was constrained to file a petition under Section 9 of the Act for interim measures, which came to be allowed on 23.09.2006. Thereafter, he wrote a letter to the respondent on 28.08.2006 nominating one R. Ramaiah, as an arbitrator and requested the respondent to concur with the appointment of an arbitrator. The said letter has been duly served on the respondent, Annexure-D is the letter and Annexure-E is the acknowledgment. As the respondent did not comply with the demand made therein, he was constrained to file the present petition for appointment of an arbitrator.
4. After service of notice, the respondent entered appearance and filed detailed statement of objections. They do not dispute the agreement, receipt of Rs. 2,00,00,250-00 from the petitioner, and the exchange of letters. Their specific case is that Clause 8.1 of the agreement stipulates that in the event of purchaser failing to pay the sale consideration within sixty days from the date of agreement, the agreement shall stand automatically terminated and the respondent will be entitled to deal with the schedule property. The petitioner did not pay the balance payment within the stipulated period. The agreement stood automatically terminated. The dispute which is now raised by the petitioner is not a live dispute. The existence of live dispute is a condition precedent for this Court to refer the matter to arbitration. Therefore, the petition is not maintainable and requires to be dismissed.
5. The learned Counsel appearing for the petitioner contends that even though time is the essence of the contract as stipulated and non payment of the balance sale consideration would render the agreement cancelled automatically, the question whether time was essence of the contract, whether the contract automatically terminated on expiry of 60 days, is a dispute to be resolved by the arbitrator and therefore, a live dispute exists and a case for reference to arbitration is made out. It is his further contention that it is the respondent who committed the breach of the contract by not keeping the schedule property vacant within sixty days.
6. Per contra, the learned Senior Counsel Sri. Vijayshankar, contends that when the language employed in the agreement is clear and unambiguous, when it declares that the time is the essence of the contract, and if the balance sale consideration is not paid within 60 days, the agreement stands cancelled, the dispute which is raised after the cancellation of the agreement cannot be construed as a dispute arising under the agreement and no live dispute exists, as such a case for reference to arbitration is not made out.
7. The Supreme Court in the case of SBA and Co. v. Patel Engineering Ltd. and Anr. reported in (2005) 8 SCC 618, dealing with the scope of Section 11 of the Act, has now clarified the legal position. While exercising the power or performing the duty under Section 11(6) of the Act, the Chief Justice has to consider whether the conditions laid down by the section for the exercise of that power or the performance of that duty exist. It is open to the parties to contend that there is no dispute subsisting which is capable of being arbitrated upon or that the conditions for exercise of power under Section 11(6) of the Act do not exist. In such circumstances, those issues have to be considered and decided and the decision of the Chief Justice on the issue of jurisdiction and the existence of a valid arbitration agreement would be binding on the parties when the matter goes to the Arbitral Tribunal and at subsequent stages of the proceedings except in an appeal in the Supreme Court. Once such a decision is rendered, it is final and it is incapable of being reopened before the Arbitral Tribunal. The Chief Justice or the designated Judge will have the right to decide the preliminary aspects such as his own jurisdiction to entertain the request, the existence of a valid arbitration agreement, the existence or otherwise of a live claim, the existence of the condition for the exercise of his power and on the qualifications of the arbitration or arbitrators. Therefore, in a proceedings under Section, the questions to be decided by this Court is well settled.
8. In the instant case, there is no dispute regarding the existence of an arbitration agreement. The agreement contains an arbitration clause. It reads as under:
Arbitration:
In the event of there being any dispute with regard to this Agreement or interpretation of any of the clauses hereof, the same shall be referred to Arbitration and the Arbitration shall be as per the provisions of Arbitration and Conciliation Act, 1996. The seat of Arbitration shall be at Bangalore.
The other relevant clause in the agreement which needs to be noticed are:
Clause: (2.2) The balance of the sale price shall be paid by the Purchaser to the vendor at the time of registration of the Deed of sale which shall be within sixty days from the date of sale agreement.
Clause: (3) TIME FOR COMPLETISION: The sale shall be completed within a period, of sixty days from this date. Time being the essence of the contract.
Clause (8.1) In the event of the Purchaser failing to pay the sale consideration with 60 days from this date, then in that event this agreement shall stand automatically terminated and the Vendor will be entitled to deal with the Schedule property.
9. The argument is a conjoint reading of the aforesaid three provisions make it clear, that 60 days is stipulated for payment of balance sale consideration; time is the essence of the contract; and if the amount is not paid within 60 days, the agreement shall stand automatically terminated. Therefore the agreement is extinguished and, the arbitration clause has perished.
10. The Supreme Court had an occasion to consider similar contention in the case of The Union of India v. Kishorilal Gupta And Bros. reported in 1959 SC 1362, after noticing various authorities, the Supreme Court summed up the legal position as under:
The following principles relevant to the present case emerge from, the aforesaid discussion:
(1) An arbitration clause is a collateral term of a contract as distinguished from its substantive terms; but none the less it is an integral part of it;
(2) however comprehensive the terms of an arbitration clause may be, the existence of the contract is a necessary condition for its operation, it perishes with the contract; (3) the contract may be non est in the sense that it never came legally into existence or it was void ab initio; (4) though the contract was validly executed, the parties may put an end to it as if it had never existed and substitute a new contract for it solely governing their rights and liabilities thereunder; (5) in the former case, if the original contract has no legal existence, the arbitration clause also cannot operate, for along with the original contract, it is also void; in the latter case, as the original contract is extinguished by the substituted one, the arbitration clause of the original contract perishes with it; and (6) between the two falls many categories of disputes in connection with a contract, such as the question of repudiation, frustration, breach etc. In those cases it is the performance of the contract that has come to an end, but the contract is still in existence for certain purposes in respect of disputes arising under it or in connection with it. As the contract subsists for certain purposes, the arbitration clause operates in respect of these purposes.
11. Therefore, in law, a contract becomes unenforceable under three circumstances:
(a) A void contract i.e., though an agreement is duly executed between the parties it is void ab-inito and non est in the eye of law as, it would not partake the character of a contract, which is enforceable in law;
(b) A valid contract, entered into between the parties, which is put an end to by execution of a new contract, as a substitute for the old or previous contract, making it clear that with the execution of the new contract, the terms and conditions agreed upon by the parties under the old contract are substituted by the terms and conditions in the new contract.
(c) A valid contract coming to an end in the manner stipulated in the contract itself by way of repudiation, frustration, breach or by performance of the contract itself,
12. An arbitration clause is a collateral term of a contract and it is an integral part of it. It exists if the contract exist. If the contract itself perishes, it cannot exist independent of the contract. In other words, it also perishes with the contract. Therefore, if a contract is said to be void, it means, the agreement is unenforceable. In other words, there is no contract. It is non est. In such circumstances, the arbitration clause in such contract do not exist and cannot be enforced. A contract may be valid. Such an agreement may be put an end to by agreement of the parties and in its place they may substitute a new contract. When a new contract is substituted in place of old contract, the original contract has no legal existence. Even in such cases, the arbitration clause in such original agreement cannot exist independent of the original contract. The effect of substitution of an earlier agreement is, the original contract is extinguished by the substituted one. Consequently, the arbitration clause in the original agreement also perishes with the original contract But in a case where a contract is validly executed, which contains an arbitration clause, if such a contract comes to an end either by way of repudiation, frustration, breach or performance of the contract, though the contract comes to an end, the contract is still in existence, for certain purposes in respect of disputes arising under it or in connection with it. Therefore, the arbitration clause in such contract do not perish. It continues to exist. Any dispute arising under the said contract is to be decided as stipulated in the arbitration clause. Whether the contract has come to an end in the manner stipulated in the contract itself is a dispute. Therefore, notwithstanding the contract coming to an end, the arbitration clause persists and even that dispute is to be resolved in terms of the arbitration clause contained in the agreement.
13. Next, it is contended that when there is an express provision stipulating that the time is the essence of the contract and that it is demonstrated that the contract is not performed by the petitioner within the stipulated period and also consequences have been stipulated in the agreement, namely the agreement stands automatically terminated, there is nothing to be decided by the arbitrator.
14. The Supreme Court in the case of Gomathinayagam Pillai and Ors v. Palaniswamy Nadar dealing with the question whether time is the essence of contract in respect of immovable property, has held, that fixation of the period within which the contract has to be performed does not make the stipulation as to time the essence of contract. In a contract of sale relating to immovable property, it is normally presumed that time is not the essence of the contract. Even if there is an express stipulation to that effect in the agreement of sale, the question whether time is the essence of the contract or not is a question to be decided in the facts of that particular case by looking into the intention of the parties as could be gathered from the material on record. Again in the case of Govind Prasad Chaturvedi v. Hari Dutt Shastri and Anr. relying on the aforesaid observation, the Supreme Court has reiterated the aforesaid legal position. Therefore the law is well settled. In a contract of sale immovable property, normally it is presumed that time is not the essence of the contract. Even if there is an express stipulation to that effect, the said presumption is not rebutted. The intention of the parties is to be gathered from the material on record, and such a stipulation would be one of the valid factors to be taken note of in deciding the said issue.
15. Therefore, merely because in the agreement it is expressly stipulated that time is the essence of the contract and the balance sale consideration is not paid within 60 days from the date of the agreement, it cannot be said that the contract came to an end and the petitioner is not entitled to cause specific performance. That is a dispute which has to be resolved by the Arbitrator. Even though this Court has the power to record evidence, that is only with reference to the existence of proof of agreement, and in respect of other jurisdictional aspects, but not on merits of the claim. In the instant case, the agreement is not in dispute. It is only on the interpretation of the said agreement it is sought to be made out that the agreement has come to an end. Whether the agreement has come to an end as contended by the respondent itself is a question that has to be decided by the arbitrator. Therefore, a live dispute exist between the parties which requires to be adjudicated by the Arbitrator. Hence a case for appointment of an arbitrator is made out by the petitioner.
16. As the dispute involved in this case is purely of a civil nature and the question to be gone into by the arbitrator is whether the agreement entered into between the parties has come to an end, whether time is essence of the contract, whether either of the parties have committed breach of the terms of the contract, it is appropriate to appoint an arbitrator who is well-versed in the branch of civil law. Justice Sri. R.G. Vaidyanatha, retired Judge of this Court as well as the Bombay High Court is competent to decide the said dispute. Hence I pass the following order.
[1] Petition is allowed.
[2] Justice Sri. R.G. Vaidyanatha, retired High Court Judge as well as Bombay High Court, is appointed as the Arbitrator to resolve the dispute between the parties.
[3] The learned Arbitrator shall enter upon the reference immediately after receipt of this order, issue notice to the parties and then proceed to resolve the dispute in accordance with the Arbitration and Conciliation Act 1996.
[4] Parties to bear their own costs.