Bombay High Court
Lloyds Steel Industries Limited vs Oil And Natural Gas Corporation Ltd. on 11 July, 1997
Equivalent citations: AIR1997BOM337, AIR 1997 BOMBAY 337, (1998) 1 ALLMR 328 (BOM), 1997 (2) ARBI LR 492, 1998 (1) ALL MR 328, (1997) 2 ARBILR 492, (1997) 4 BOM CR 157, 1997 (99) BOM LR 443, 1997 BOM LR 99 443
Author: M.B. Shah
Bench: M.B. Shah
ORDER
1. The Applicant (Lloyds Steel Industries Ltd.) has filed this Application under Section 11 of the Arbitration and Conciliation Act. 1996 thereinafter referred to as "the Arbitration Act") for appointment of Sole Arbitrator to decide the outstanding dispute relating to interest amount and to set a time-limit for arbitral Award.
2. In the Application, it has been stated trial the Respondent, Oil & Natural Gas Corporation Ltd., is carrying on business, inter alia, of processing of oil and natural gas, including liquefied petroleum gas (LPG) and natural gas liquid (NGL), and loading the same to various destinations through its loading arms. On 26lh May, 1987, the Respondent placed an order with the Applicant for Rail/Road LPG Loading System. Further contracts were given on 25th July. 1988, one for supply of NGL Rail Loading System for LPG Project at ONGC, Hazira, and one for Erection, Testing and Commissioning of NGL Rail Loading System for LPG Project of ONGC, Hazira.
3. The Applicant has also stated various terms and conditions of the contract. It is its contention that final bills were not paid by the Respondent and were withheld in an arbitrary and illegal manner, even though the Applicant made numerous requests to the Respondent for payment of aggregate amount of Rs. 1.77 crores. Final bills were submitted on 31st March, 1989 and 5th June, 1989, respectively. It is contended that these bills were withheld for over 4.1/2 years. As the Respondent withheld large amounts, the Applicant was suffering huge losses and was under grave economic duress. Under such economic duress, the entire business existence of the Applicant was at stake. The Respondent agreed to pay the pending final bills in September, 1993, subject to price reduction for delays. The Respondent did not compensate for the period of delay and misused its economic might to coerce the Applicant under economic duress and coercion to enter into a Memorandum of Understanding (MoU) dated 9th September, 1993, whereby the Respondent agreed to make payment of Rs. 1,47,67,347 against two final bills as full and final settlement. That MoU dated 9th September, 1993 is produced on record at Exh. 6. By the said MoU, it was agreed that the net payment towards full and final settlement was Rs. 1,43,74,777/-. For working out of the said amount, figures are mentioned in the said MoU. It has been further agreed as under :--
"Both ONGC and Contractor hereby agree that once the amounts payable and receivable as detailed above including the Income-tax Deduction at Source has been paid and received, there shall lie no claim on any account whatsoever either by ONGC on the Contractor or by the Contractor on ONGC and the aforesaid contracts shall be deemed to have been closed and both the Parties shall have discharged their respective obligations in respect of the said contracts."
That MoU is duly signed by the parties and witnesses.
4. On the basis of the aforesaid MoU, admittedly, on 14th September, 1993, the Respondent paid to the Applicant the agreed sum, which was unconditionally accepted by the Applicant. This is admitted by the Applicant.
5. After receiving the said amount, on 6th April, 1994, the Applicant wrote letter to the ONGC (Exhibit 7) stating that the Applicant was entitled to recover the said amount in May/June, 1989, but the amount was released only on 13th September, 1993. and, therefore, it should be given interest on the said amount at the rate of 20% per annum for delayed payment. For the said period, it demanded compounded interest amounting to Rs. 1,72,08,660/-. That letter was immediately replied or. 25th April, 1994 by the Chief Engineer, stating that, in view of the MoU dated 9th September, 1993, there lies no claim on any account whatsoever. The Applicant has produced on record a subsequent letter dated 30th November, 1994, in which also demand for the said amount was again made. Again, the Dy. General Manager of the Respondent, by his letter dated 7th December. 1994, informed that ONGC has already written letter on 25th April, 1994 clarifying the position. It appears that, despite this unequivocal statement in the letter dated 25th April, 1994, the Applicant wrote similar letter in April, 1996, and thereafter issued notice of arbitration on 10th August, 1996.
6. It is the contention of the Applicant that as the Respondent failed to comply with the notice of referring the matter to THE Arbitrator, this Application is filed under Section 11 of the Arbitration Act.
7. At the time of hearing of this matter, the learned Counsel for the Applicant submitted that-
(a) Under Section 11, sub-section (5) of the Arbitration Act, appointment of Arbitrator is mandatory;
(b) As provided under Section 21 of the Act, arbitration proceedings in this case have already commenced on 10th August, 1996, in view of the Notice issued by the Applicant.
(c) It is for the arbitral Tribunal to rule on its own jurisdiction, including any objection with respect to the existence or validity of Arbitration Agreement.
(d) The MoU is void, as it is executed under economic duress and coercion.
(e) There has been unjust enrichment on the part of the Respondent, and, therefore, for restitution of unjust enrichment, the matter is required to be referred to arbitration.
8. To these, Mr. Zaiwala, learned Counsel appearing on behalf of the Respondent, submitted that (a) in view of the MoU dated 9th September, 1993, the contract, which was executed in 1989 stands cancelled and the said MoU does not contain any arbitration clause. Hence, there is no question of referring the matter to arbitration, (b) the dispute, if any, was finally settled in terms of the MoU and the Applicant has accepted the amount in full and final satisfaction of its claim. The subsequent allegation of coercion is an afterthought and a device to get over the settlement of the dispute, acceptance of the payment and the receipt voluntarily given and (c) this Application is filed beyond time, because if this Application seeks to rely upon the earlier contract, that contract was executed on 26th May, 1987 and the works under the said contract was completed on 21st March 1989. Therefore, in any case, the Applicant was required to file the Arbitration Application within three years from that date. With regard to fresh contract or MoU, it is executed on 9th September, 1993. The amount is received by the Applicant on 13th September, 1993. After receipt of that amount as per MoU, Notice of Arbitration was given on 10th August, 1996 and this Application for referring the matter for arbitration was lodged before this Court on 9th September, 1996.
9. Further, the Applicant has produced in Court the Agreement. The relevant clauses for arbitration are 26.2 and 26.3, which are as under:--
"26.2 Arbitration Except where otherwise provided in the contract all questions and disputes relating to interpretation or as to any claim, right or thing whosoever, or execution or implementation before or after completion or abandonment thereof shall be referred to the sole arbitration of the person appointed by Member of the Commission (ONGC) at the lime of dispute. It will be no objection to any such appointment that the arbitrator so appointed is a Commission's (ONGC) employee that he had to deal with the mailer to which contract relates and that in the course of his duties as Commission's (ONGC) employee he had expressed views on all or any of the matter in dispute or difference.
The arbitrator to whom the matter is originally referred being transferred or vacating his office or being unable to act for any reason, the Member of the Commission (ONGC) shall appoint another person to act as arbitrator in accordance with the terms of the contract. Such person shall be entitled to proceed with reference from the stage at which it was left by his predecessor. Subject to aforesaid, the provisions of the Arbitration Act, 1940, or any statutory modification or re-enactment thereof and the rules made thereunder and for the time being in force shall apply to the arbitration proceedings under this clause.
"26.3 Execution of the contract shall be continued by the Contractor during arbitration proceedings unless otherwise directed in writing by the Owner."
10. Despite she aforesaid Arbitrators Agreement and the fact that the Applicant has submitted final bill in 1989, the Applicant has not resorted to the said arbitration clause and not filed any application for referring the matter to the sole Arbitrator appointed by the Commission (ONGC) at the lime of its claim. Instead of referring the matter for arbitration, the Applicant has settled the dispute by executing the MoU on 9th September, 1993. After settling and executing MoU the Applicant accepted the amount as agreed on 13th September, 1993. Subsequently, after lapse of nearly 7 months, the Applicant raised a dispute and demanded interest on the delayed payment. Immediately that was turned down by letter dated 25th April, 1994 by the spondent. Thus, it is clear that the application for referring the matter for arbitration or a dispute arising on the basis of the contract executed in 1987, for which final bill is submitted in 1989, is beyond the period of three years from the date of demand made by the Applicant. The dispute has arisen when the Applicant has claimed amount by submitting the final bill, which was not paid by the Respondent. Accrual of the said cause of action is not postponed.
11. Further, the question which would be required to be decided is whether the Agreement referring the matter to the Arbitrator is in existence or not. It has been contended by the Applicant that the aforesaid question is required to be decided by arbitral Tribunal under Section 16 of the Arbitration Act. To this contention it has been pointed out that, before referring the matter for arbitration, the Court is required to decide whether there is any Arbitration Agreement subsisting or existing between the parties. If there is no existing arbitration agreement, then there is no question of referring the matter for arbitration.
12. It has been submitted that similar question is concluded by the Supreme Court and that this Court has to decide whether arbitration agreement is in existence or not before referring the matter for arbitration. If the arbitration agreement is not in existence, there is no question of referring the matter to the arbitral Tribunal. Reference would be without jurisdiction.
Friday, 11th July, 1997.
13. in the case of Damodar V alley Corporation v. K. K. Kar, , the Supreme Court considered the situation when arbitration clause in the contract would survive and cases where arbitration clause would perish with a new contract. The Court held as under (at p. 161 of AIR) :
"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 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 along with 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 parties have no right to invoke a clause which perishes with the contract."
Thereafter, the Court in paragraph 9 referred to the principles stated in Heyman's case ((1942) AC 356). Lord Macmillan pointed out at page 370 as under:--
"If it appears that the dispute is whether there has ever been a binding contract between the parties, such a dispute cannot be covered by an arbitration clause in the challenged contract. If there has ever been a contract at all, there has never been as part of it an agreement to arbitrate. The greater includes the less. Further, a claim to set aside a contract on such grounds as fraud, duress or essential error cannot be the subject-matter of a reference under an arbitration clause in the contract sought to be set aside. Again, an admittedly binding contract containing a general arbitration clause may stipulate that in certain events the contract shall come to an end. If a question arises whether the contract has for any such reason come to an end, I can sec no reason why the arbitrator should not decide that question. It is clear, too, that the parties to a contract may agree to bring it to an end to all intents and purposes and to treat it as if it had never existed. In such a case if there be an arbitration clause in the contract, it perishes with the contract. If the parties substitute a new contract for the contract which they have abrogated, the arbitration clause in the abrogated contract cannot be invoked for the determination of questions under the new agreement. All this is more or less elementary."
Further, the Court referred to the principles laid down by the Supreme Court in the case of Union of India v. Kishorilal Gupta, , for deciding whether contract perishes or subsists which arc as under (at p. 1370 of AIR):--
"(1) An arbitration clause is a collateral terms 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."
14. In the aforesaid decision in the case of Kishorilal , the Court interpreted the clause in the second control which provided as under :--
"The contract stands finally determined and no party will have any further claim against the other."
The Supreme Court held that, in view of the aforesaid new contract, the arbitration clause contained in the old contract perished.
15. The principle of law that, where parties put an end to a contract as if it had never subsisted and substituted it with a new contract governing the rights and obligations of the parties thereunder, the arbitration clause also perishes along with it, was accepted as a correct principle in the said case. In the case of Damodar Valley , the Court was not concerned with the question whether there had been novation, rescission or substitution of the contract, but the question was whether there had been a settlement of all claims arising in connection with a contract which postulates the existence of a contract. In that case, the Court observed that accord and satisfaction does not put an end to the arbitration clause. Hence, the Court held that, in the circumstances, thee question whether the termination was valid or not and whether damages are recoverable for such wrongful termination does not affect the arbitration clause or the right of the Respondent to invoke it for appointment of Arbitrator.
16. From the aforesaid discussion it is clear that the parties can put an end to a contract as if it had never subsisted and can substitute it with a new contract governing their rights and obligations. In such a case, the arbitration clause in the original contract perishes. In such a case, the arbitration clause in the substituted or abrogated contract cannot be invoked for the determination of the questions under the new agreement for a claim to set aside a contract on the grounds such as fraud, duress or coercion. Once the contract is substituted by a new contract, the old contract does not subsist. In a contract which is substituted or abrogated, the parties have no right to invoke the clause which has perished with the contract. In such a case, there is no question of appointing arbitrator as the very jurisdiction of the Arbitrator is dependent upon the existence of the arbitration clause. Facts of the present case clearly reveal that parties to the contract, which was executed in 1987, have subsequently agreed to bring it to an end to all intents and purposes and to treat it as if it had never existed by substituting a fresh MoU. Fresh contract does not provide for arbitration and it has been specifically stated in the MoU that both the parties have discharged their respective obligations in respect of the contract. In full and final settlement the Applicant had received the amount stated in the MoU for the work done. Hence for that purpose there existed no arbitrable dispute for reference.
17. The aforesaid case was referred to and relied upon in the case of P.K. Ramaiah & Company v. Chairman & Managing Director, National Thermal Power Corpn., 1994 Supp (3) SCC 126, and the Court held that, in view of full and final settlement of the claim, there is accord and satisfaction and there was no existing arbitrable dispute for reference to arbitration. The Court considered the following endorsement :--
"Final measurement and payment accepted in full and final settlement of the contract."
After referring to the arbitration clause, the Court said as under:--
"Thus it is clear that if there is an arbitrable dispute, it shall be referred to the named arbitrator. But there must exist a subsisting dispute. Admittedly the appellant acknowledged in writing accepting the correctness of the measurements as well as the final settlement and received the amount. Thereafter no arbitrable dispute arises for reference."
The Court referred to earlier decision and held as under :--
"Admittedly the full and final satisfaction was acknowledged by a receipt in writing and the amount was received unconditionally. Thus there is accord and satisfaction by final settlement of the claims. The subsequent allegation of coercion is an afterthought and a devise to get over the settlement of the dispute, acceptance of the payment and receipt voluntarily given. In Russel on Arbitration, 19th Edn. p. 396, it is stated that "an accord and satisfaction may be pleaded in an action on award and will constitute a good defence". Accordingly, we hold that the appellant having acknowledged the settlement and also accepted measurements and having received the amount in full and final settlement of the claim, there is accord and satisfaction. There is no existing arbitrable dispute for reference to the arbitration."
18. Further, the aforesaid judgment is followed in the case of Nathani Steels Ltd. v. Associated Constructions, 1995 Supp (3) SCC 324. The Apex Court has held that, once the parties have arrived at a settlement in respect of any dispute or difference arising under a contract, and that dispute or difference is amicably settled by way of final settlement by and between the parties, unless that settlement is set aside in appropriate proceedings, it cannot lie in the mouth of one of the parties to the settlement to spurn it on the ground that it was a mistake and to proceed to invoke the arbitration clause. The Court further observed :--
"If this is permitted the sanctity of contract, the settlement also being a contract, would be wholly lost and it would be open to one party to take the benefit under the settlement and then to question the same on the ground of mistake without having the settlement set aside."
In the present case also, since the dispute or difference was finally settled and payments were made as per the settlement, it was not open to the Applicant unilaterally to treat the settlement as non est and proceed to invoke the arbitration clause.
19. The learned counsel for the Applicant, however, submitted that, in view of the new Arbitration Act, the question is required to be decided by the arbitral Tribunal. In my view, even if the arbitral Tribunal is required to decide the said question, under Section 16 of the Arbitration Act, still, however, before referring the matter for arbitration, arbitration agreement must be in existence. Without there being any arbitration Agreement in existence, I would have no jurisdiction to refer the matter for arbitration. Prima facie, it is required to be considered whether arbitration clause survives or not, in view of fresh contract between the parties.
20. In any case, whether fresh contract/MoU is void or not on the ground of economic duress or coercion cannot be decided in this proceeding,
21. Lastly, the contention of the learned counsel for the Applicant that there has been unjust enrichment on the part of the Respondent, and, therefore, for restitution of unjust enrichment, the matter is required to be referred to arbitration, is required only to be stated for its rejection. In this proceeding, this question also cannot be decided.
22. In the result, this Application is rejected.
23. The learned counsel appearing on behalf of the Applicant submits that certificate of fitness under Article 134A(b) of the Constitution of India be granted. Considering the said law discussed above, this is not a fit case for grant of a certificate as prayed for. Hence, this oral prayer is rejected.
24. Application rejected.