Delhi High Court
M/S Maruti Clean Coal & Power Ltd. vs Kolahai Infotech Pvt. Ltd. & Ors. on 10 March, 2009
* IN THE HIGH COURT OF DELHI AT NEW DELHI
Order reserved on: 03.03.2010
% Order delivered on: 10.03.2010
+ I.A.1659/2010 in CS (OS) 2241/2009
M/S MARUTI CLEAN COAL & POWER LTD.
...........Plaintiff
Through: Mr.Sandeep Sethi, Senior
Advocate with Mr.Sanjay
Kumar and Mr. Kartik Nayar,
Advocates.
Versus
KOLAHAI INFOTECH PVT. LTD. & ORS.
..............Defendants
Through: Mr.Rajiv Nayar, Sr.Adv. with
Mr.Darpan Wadhwa and
Mr.Kailash Gahlot, Advocates
for defendant no.1.
Mr.Neeraj Kishan Kaul, Sr.Adv.
with Mr.Kamal Mehta,
Advocate for defendants no.2 &
3.
Mr.Jayant Nath, Sr.Adv. with
Mr.Manish Kumar, Advocates
for the defendant no.4.
Mr.Kailash Vasudev, Sr.Adv.
with Mr.B.C.Pandey, Advocate
for defendant no.5.
CORAM:
HON'BLE MS. JUSTICE INDERMEET KAUR
1. Whether the Reporters of local papers may be allowed to see
the judgment?
2. To be referred to the Reporter or not?
3. Whether the judgment should be reported in the Digest?
CS(OS) No.2241.2009 Page 1 of 38
INDERMEET KAUR, J.
1. This is an application filed by defendant no.1 under Section 8 of the Arbitration and Conciliation Act (hereinafter referred to as „the said Act‟) wherein a prayer is made that in terms of the arbitration clause contained in the Shareholders Agreement (hereinafter referred to as „SHA‟) dated 4.4.2008, the present suit is liable to be dismissed as the subject matter of the present suit is a dispute which can be adjudicated by the arbitrator alone.
2. Reference has been made to clause 21 of the said SHA which contains the arbitration clause. Aforementioned SHA is an admitted document between the parties. It was executed on 4.4..2008 at Raipur, Chhattisgarh between the plaintiff, defendants no.1, 4 to 7; there are six signatories to the said agreement. As per this document, the plaintiff company is engaged in coal benefication at Korba District, Chhattisgarh. Defendants no.1, 4 to 7 had agreed to join as promoters of the company and to take shareholders equity stake to the extent of 19% each in the company. They were to participate in the management and the business of the company. Each party would nominate two directors each on the Board of the company with the right to recall and substitute nominees. No business meeting could be transacted by the Board unless a quorum is present; quorum shall not be constituted unless at least one Director CS(OS) No.2241.2009 Page 2 of 38 nominated by each party is present. No decision could be taken by the Board on fundamental issues without the affirmative vote of all the Directors present in the meeting which fundamental issue also included contracts worth more than Rs.25 lakhs. No change or amendment in the charter documents of the company could take place unless there was an affirmative vote of the shareholders of the company present at the meeting. The termination clause contained in clause 17 recites that on the occurrence of a termination event; the non-defaulting shareholder shall have the right to acquire the entire shareholding of the defaulting shareholder in the company. The confidentiality clause is contained in article 18. The arbitration clause is contained in article 21. Article 21.5 stipulates the place of arbitration shall be Raipur, Chhattisgarh and the language of the arbitration shall be english. Under article 21.6, the award rendered shall be final and conclusive. In addition, the parties agreed that none of them shall have the right to commence or maintain a suit or legal proceeding concerning a dispute hereunder until the dispute has been determined in accordance with the arbitration procedure provided for herein and only after the enforcement of the award rendered in such arbitration. Clause 21.7 refers to the irrevocable consent by the parties giving no option to any party to withdraw therefrom. Clause 21.8 stipulates that the arbitration clause shall survive and remain in effect even if the agreement fails to come into force or is CS(OS) No.2241.2009 Page 3 of 38 cancelled or otherwise terminated for any reason. Clause 22.4 is the survival clause and states inter alia that notwithstanding anything contained in this Agreement, the provisions of Articles 13, 14 to 18, 21 and articles 22.3 and 22.5 shall survive the termination of this agreement for any reason whatsoever. The governing law for disputes or claims arising out or in connection with its subject matter would be the laws of India. This is stipulated in article 24.
3. These aforenoted articles have been highlighted by the applicant to substantiate his submission that in terms thereof there is a complete exclusion and in terms of this exclusivity clause the civil courts are barred from entertaining any dispute arising out of this agreement; such disputes have to be decided by the arbitrator who is required to adjudicate in Chhattisgarh as per the Indian laws; the award has to be in english; even if the arbitration agreement fails for whatosoever reason the survival clause protects the arbitration clause and notwithstanding any eventuality differences and claims arising out of or in connection with this arbitration agreement have to be referred to the Arbitrator alone.
4. Attention has been drawn to the averments made in the plaint. Admittedly the relief claimed cannot exceed the prayers made in the plaint; there is no relief claimed against defendants no.2 & 3 who have been arrayed as parties to the suit in their CS(OS) No.2241.2009 Page 4 of 38 capacity only as directors of defendant no.1. They have been impleaded only for the single and sole purpose to oust the arbitration clause; their presence in no manner is required in the suit and this is clear from the averments made in the plaint. No relief whatsoever has been sought against them. The mandatory injunction prayed for in prayer „b‟ seeks a transfer of the shares by defendants no.1 to 3 in favour of the plaintiff; defendants no.2 and 3 are admittedly not holding any shares; they are only the nominee directors of defendant no.1; even assuming the relief prayed for by the plaintiff is granted in his favour, defendants 2 & 3 would have no role in the said relief as the shares to be transferred to the plaintiff are those of defendant no.1 alone; even in that eventuality defendant no.2 and 3 who are only superficial parties would have no role to play.
5. The subject matter of the disputes as envisaged in the plaint i.e. the grievance of the plaintiff that defendant no.1 did not withdraw the pending litigations against the plaintiff in terms of its promise and undertaking; further that defendant no.2 had breached certain confidentiality clauses and had bid for the same tender in which the plaintiff was interested are all disputes essentially arising out of and in connection with the SHA itself; these differences and disputes are in no manner separate or distinct from the arbitration agreement; they are a part and parcel CS(OS) No.2241.2009 Page 5 of 38 of it; no part of it can be severed from the other; they can only be adjudicated upon by arbitration.
6. Attention has been drawn to the provisions of Section 8 of the said Act and the observations of the Apex Court in the judgment reported as Branch Manager, Magma Leasing and Finance Limited and another vs. Potluri Madhavilata and Another (2009) 10 SCC 103. It is submitted that Section 8 is in the form of a legislative command to the court and once the prerequisite conditions as aforestated are satisfied, the court must refer the parties to arbitration. As a matter of fact, on fulfillment of the conditions of Section 8, no option is left with the court and the court has to refer the parties to arbitration.
7. Learned counsel for defendant no.1 has in anticipation of an argument to be addressed by the plaintiff on the applicability of the law as laid down in Sukanya Holdings (P) Ltd. vs. Jayesh H. Pandya and Another (2003) 5 SCC 531 has sought to distinguish the facts of the said case from the instant case. It is pointed out that in that case there were two distinct and separate cause of action and the purchasers of the 23 flats admittedly were not parties to the partnership deed containing the arbitration clause and as such the relief claimed holding these sale agreements to be null and void could not be gone into in the arbitration proceedings.
8. Reliance has been placed upon Virender Yadav vs. Aerosvit Airlines & Ors. 153 (2008) DLT 250. It is submitted that in this CS(OS) No.2241.2009 Page 6 of 38 case a coordinate bench of this court had distinguished the facts of Sukanya Holdings‟s case (supra) in similar facts where defendant no.3 had been added as a party only to negative and defeat the arbitration clause; the court upholding the contention of the applicant had held that defendant no.3 being only an agent of defendant no.1 was acting through him and there was no independent claim staked against him; even if he was not a party to the partnership agreement, the cause of action against all the defendants being so inextricably intertwined, it could not be said that same can be bifurcated. The arbitration agreement containing the arbitration clause was held applicable to both the principal and the agent as the cause of action was the same against all the defendants. Facts of Sukanya‟s Holdings (supra) being that the other 23 defendants having been sued in their independent capacity and not being a party to the partnership agreement; the application under Section 8 of the said Act had rightly been rejected.
9. On behalf of defendants no.2 and 3 it has been submitted that there is no role ascribed to either of them. They have been arrayed as per the memo of parties in their capacity as directors of defendant no.1. On a reading of the entire plaint, no case is made out against them. The relief claimed, even if decreed in favour of the plaintiff, ousts the role of defendants no.2 and 3 even if the case of the plaintiff is taken to its highest level. The averments CS(OS) No.2241.2009 Page 7 of 38 made in the plaint only draw out inferences of misrepresentation made by defendant no.2 namely Anil Sehrawat; he had, as per the averments in the plaint, breached the confidentiality clause of the SHA (although admittedly he was not a party to the SHA). In terms of this breach he had made communications with the Gujarat State Electricity Corporation Ltd. (GSECL) who had floated a tender for beneficiation of coal. Plaintiff had made a bid; as per the communication of the GSECL, defendant no.2 Anil Sehrawat vide communication dated 10.9.2009 intimated the GSECL that the offer submitted by the plaintiff is without a proper authorization. These acts of defendant no.2 were against the interest of the company. It is submitted that even taking all these submissions to be the gospel truth, they were at best breaches of the clauses as contained in the SHA. They were disputes, differences and claims arising out of and in connection with the said SHA. Fraud has been pleaded in the plaint yet no specifics of the alleged fraud has been detailed. Such contracts even if based on a plea of fraud would be a voidable contract under Section 19 of the Indian Contract Act; it would not be void ab initio. It is submitted that the plaintiff has even otherwise not made any prayer to declare either the SHA to be void/non est or its arbitration clause; defendants no.2 and 3 are neither necessary nor property parties; they were admittedly not signatories to the SHA; they had only been appointed as nominee directors of defendant no.1 and this is also clear from the role CS(OS) No.2241.2009 Page 8 of 38 ascribed to them in the memo of parties; they were not shareholders; they had no individual role to play. At best, they can be witnesses in the present proceedings.
10. Under Section 16 (1) (b) of the said Act, even if the arbitrator declares the Arbitration agreement/contract to be null and void it would not ipso jure make the arbitration clause to be invalid. Learned senior counsel for defendant no.2 and 3 has placed reliance upon Brawn Laboratories Limited vs. Fittydent International GMBH and another 2000 (3) RAJ 420 (Del). It is submitted that there has been a sea-change in the arbitration law and Section 16 of the said Act has given it its due recognition. It is submitted that in view thereof even assuming that the SHA is to be treated as non est, the arbitration clause would not be invalidated and it would still be within the competence of the Arbitrator to decide the validity of the same.
11. Reliance has been placed upon a judgment of House of Lords, Opinions of the Lords of Appeal for Judgment in Premium Nafta Products Limited (20th Defendant) and others vs. Fili Shipping Company Limited (14th Claimant) and others (2007) UKHL 40 to further substantiate this argument that the arbitration clause is severable and distinct from the main argument.
12. In National Insurance Company Limited vs. Boghara Polyfab Private Limited (2009) 1 SCC 267, the Supreme Court had held that an arbitration clause is a collateral term of a contract CS(OS) No.2241.2009 Page 9 of 38 distinguished from its substantive terms; it has been given a statutory recognition under Section 16 (1) (a) of the present Act.
13. In Ramesh Hirachand Kundanmal vs. Municipal Corporation of Greater Bombay and others (1992) 2 SCC 524 the question as to whose presence before the court would be necessary to enable the court to effectively and completely adjudicate and settle all the questions in the suit was dealt with. It quoted with approval the observations of Wynn-Parry, J. in Dolllfus Mieg et Compagnie S.A. v. Bank of England.
"The test is „May the order for which the plaintiff is asking directly affect the intervener in the enjoyment of his legal rights."
14. The dual test of a necessary party was laid down in Kasturi vs. Iyyamperumal and Others (2005) 6 SCC 733 while expounding the provisions of Order 1 Rule 10 (2) CPC.
15. In W.P.I.L. vs. NTPC Ltd. 2009 (1) Arb.L.R. 378 (Delhi) while distinguishing the facts of Sukanya Holdings‟s (supra) it was held that the defendants in the present case had been arrayed as defendants no.3 to 5 only to circumvent and possibly defeat the arbitration clause. There was no dispute between the plaintiff and them; in any event if any statement of any such party is required in arbitral proceedings, their officials or employees can be cited as witnesses.
16. In A.B.C. Laminart PVt. LTd. vs. A.P. Agencies, Salem (1989) 2 SCC 163 on the question of jurisdiction, the Supreme Court had CS(OS) No.2241.2009 Page 10 of 38 held that an ouster clause in a contract excludes the jurisdiction of all other forums except the agreed upon forum.
17. It is submitted that the ratio of aforestated judgments and a reading of the law as enunciated above when read in context of the various aforenoted clauses of the SHA clearly show that it was the Chhattisgargh courts alone which would have the jurisdiction to adjudicate upon all or any dispute arising out of the aforenoted SHA.
18. The plaintiff has controverted this stand. The background as contained in the plaint has been built up. It is submitted that SHA dated 4.4.2008 had been entered into by the plaintiff with the defendants in estranged circumstances. Plaintiff was not able to start his business of a coal washery in spite of having been granted land, in the year 2002 by Government of Chhattisgarh. The plaintiff could not get the necessary consent and as such in spite of his having made an enormous investment of Rs.55 crores in the said project he could not commence business. This was primarily and largely for the frivolous allegations which had been instituted against him by the Aryan Group of Companies of which defendant no.1 is an active company.
19. Attention has been drawn to a judgment of the Apex court reported in T.N.Godavarman Thirumulpad vs. Union of India and Others 2006 (5) SCC 28. The Apex court while dismissing the public interest litigation filed by one Deepak Aggarwal who was CS(OS) No.2241.2009 Page 11 of 38 held to be merely a name lender of the Aryan Group of Companies who had challenged the allotment of 16 hectare of land leased out by the State of Chhattisgarh to M/s Maruti Clean Coal and Power Limited (plaintiff herein), had noted the 13 litigations pending inter se between the parties i.e. between Maruti Coal Company and the Aryan Group.
20. It is further submitted that false and fraudulent representations had been made by defendant no.1 to the plaintiff. Defendant no.1 had misrepresented that the Aryan Group of Companies would withdraw all pending litigations pending against the plaintiff; these promises had not been adhered to. Plaintiff has reserved its right to file criminal proceedings against the defendant in the appropriate forum. In terms of the SHA the first defendant and its nominee directors were bound to act in the best interest in the company yet they chose to do otherwise. Defendant no.2 intimated GSECL vide letter dated 10.9.1999 that the offer made by the plaintiff company for a tender of benefication of coal was without due authorization by the plaintiff; this act of defendant no.2 was against the interests of the company. In October, 2009 GSECL replied to the plaintiff‟s letter stating that defendant no.2 had alleged that the Articles of Association of the company provided that a unanimous decision of the Board in a contract of more than 25 lakhs is required but there was no such unanimous decision. These acts of the defendant no.1 and his CS(OS) No.2241.2009 Page 12 of 38 nominee directors were not befitting the role of a director of a company; they had reached the heights of malafide. In these circumstances, the plaintiff has little option but to declare the SHA to be non binding and void ab initio. Emphasis had been laid on paras 8, 29, 35, 44 and 49 of the plaint.
21. Attention has been drawn to the provisions of Section 14 of the Indian Contract Act, 1973 defining „free consent'. An agreement obtained by fraud is voidable under Section 17 of the Indian Contract Act and once this option has been exercised by the applicant, the said contract becomes void ab initio.
22. Under Section 2 (g) of the Contract Act, 1872 "An agreement not enforceable by law is said to be void." Under Section 2 (i) of the Contract Act "An agreement which is enforceable by law at the option of one or more of the parties thereto, but not at the option of the other or others, is a voidable contract."
23. In N.Radhakrishnan vs. Maestro Engineers and Others (2010) 1 SCC 72 the court while dealing with an application under Section 8 (2) of the said Act had held that where the disputes related to serious allegations inter se between the parties involving complicated questions of fact, adjudication of the same can only be done by oral and documentary evidence. In this case while quoting with approval the ratio laid down in Haryana Telecom Ltd. v. Sterlite Industries (India) Ltd. (1999) 5 SCC 688 it had been held that the disputes which are referable to the CS(OS) No.2241.2009 Page 13 of 38 arbitrator are only those disputes which the arbitrator is competent or empowered to decide.
24. In National Textile Corporation (Guj.) Ltd. vs. State Bank of India and others 2006 7 SCC 542 while quoting with approval the observations of the Supreme Court in UOI vs. Kishori Lal Gupta and Brothers AIR 1959 SC 1362 the following principles had been deduced:
"(1) an arbitration clause is a collateral term of a contract as distinguished from its substantive terms; but nonetheless 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."
25. It is submitted that in this case, the plaintiff has all along alleged that the SHA itself is a document which is void ab initio; the plaintiff having entered the contract under misrepresentation and a fraud played upon him by the defendant that they would perform all their obligations on their side which included their obligations to withdraw all pending litigations; none of this was CS(OS) No.2241.2009 Page 14 of 38 complied with; the contract being a non est document under Section 17 of the Contract Act it is clear that it is neither enforceable and nor it can be implemented. Such a question cannot be decided by the arbitrator; it falls to be decided in the realm of a civil court.
26. In Damodar Valley Corporation vs. K.K.Kar 1974 1 SCC 141 the Supreme Court had reiterated that where the plea set up is that the entire contract itself is void, illegal and fraudulent, the entire contract along with the arbitration clause becomes non est; this is clearly so in the instant case; not only does the SHA but all the articles including article 21 containing the arbitration clause must necessarily fall.
27. It is further submitted that the seven judges Bench judgment reported in SBP & Co. vs. Patel Engineering Ltd. and Another (2005) 8 SCC 618 had while noting the complementary nature of Section 8 and Section 11 of the said Act held inter alia as follows:
"It is also not possible to accept the argument that there is an exclusive conferment of jurisdiction on the Arbitral Tribunal, to decide on the existence or validity of the arbitration agreement. ... .... ... When the defendant to an action before a judicial authority raises the plea that there is an arbitration agreement and the plaintiff or the person who has approached the judicial authority for relief, disputes the same, the judicial authority, in the absence of any restriction in the Act, has necessarily to decide whether, in fact, there is in existence a valid arbitration agreement and whether the dispute that is sought to be raised before it, is covered by the arbitration clause."
It had further been held that "Section 16 is said to be the recognition of the principle of Kompetenz-Kompetenz. The fact that the Arbitral Tribunal CS(OS) No.2241.2009 Page 15 of 38 has the competence to rule on its own jurisdiction and to define the contours of its jurisdiction, only means that when such issues arise before it, the Tribunal can, and possibly, ought to decide them. This can happen when the parties have gone to the Arbitral Tribunal without recourse to Section 8 or 11 of the Act."
28. It is submitted that when the arbitration agreement is itself under challenge, it is necessary for the court as a prelude to decide whether any such arbitration agreement in fact exists or not; the question of referring the disputes to arbitration can only arise subsequently. In such a case evidence is required to be recorded to decide about the existence of the validity of the arbitration agreement. Section 16 is excluded in such an eventuality.
29. Counsel for the plaintiff has sought to distinguish the judgments relied upon by the defendants. The Supreme Court in the Magma Leasing case (supra) had in fact held that where the dispute is as to whether the contract itself is void, the arbitration clause cannot operate for its operational force depends upon existence of the contract and its validity; such a dispute falls outside the arbitration clause, if the agreement itself is superseded the arbitration clause falls with it. The case of W.P.I.L. (supra) relied upon by the defendants is under appeal. In the judgment of the Lords of Appeal in the Premium Nafta Products Ltd. case (supra) it had in fact been held that if the main agreement and the arbitration agreement are contained in the CS(OS) No.2241.2009 Page 16 of 38 same document and one of the parties claims that he never agreed to anything in the document and that his signatures was forged, that will be an attack on the validity of the arbitration agreement; in such a case the entire agreement along with the arbitration clause must perish. The National Insurance Company Ltd. (supra) was a case of accord and satisfaction; principles of Section 11 and Section 16 of the said Act were under consideration. In the instant case allegations leveled in the plaint are specifically of a fraud; the observations in the case of Kishori Lal Gupta had also been quoted with approval; if the contract ceases to have effect, the arbitration clause contained in the agreement must necessarily cease as an arbitration clause is a collateral term of the contract and an integral part of it.
30. Attention has been drawn to clause 21.8 of the SHA. It is stated that this severability make reference to article 13 and not to article 21 and this has been misrepresented by the defendants. Clause 22.4 protects the survival clause in the case of the termination of a contract which is not so in this case. Allegations of fraud do not lead to the termination of the contract; such a contract is void ab initio.
31. It is for the plaintiff to decide who are the necessary parties. Doctrine of „dominus litis‟ enables the plaintiff to choose the parties who are necessary to the reliefs claimed by him. Acts of defendants no.2 & 3 as nominee Directors of defendant no.1 were CS(OS) No.2241.2009 Page 17 of 38 against the interest of the company. Defendant no.2 by his communication to the GSECL hampered the progress and development of the business of the plaintiff company; he had clandestinely sought to inform the GSECL that the plaintiff was not authorized to bid for the tender which had been advertised by the GSECL.
32. Submissions of the defendants that the plaintiff has not chosen to get the SHA or the arbitration agreement to be declared as null and void is of no consequence. In Sanjay Kaushish vs. D.C. Kaushis and others AIR 1992 Delhi 118, a coordinate bench of this court has held that where a particular document has been declared to be void, a suit seeking substantive relief is maintainable without seeking any declaration that the said document is void. The present suit is maintainable. In Shri Roshan Lal Gupta vs. Shri Parasram Holdings Pvt. Ltd. and Anr. MANU/DE/0146/2009 this principle has been reiterated; a civil court will have the jurisdiction to entertain a suit emanating from a transaction which is the subject matter of an arbitration agreement.
33. The judgment of Sukanya Holdings (supra) squarely applies to the instant case; defendant no.2 and 3 are admittedly not parties to the arbitration agreement; relief sought against them cannot be decided by the arbitrator; causes of action cannot be a split; the entire gamut of the claims raised by the plaintiff relate to CS(OS) No.2241.2009 Page 18 of 38 the grievances of the plaintiff not only against defendants no.1, 4 to 6 (parties to the SHA) but also to defendants no.2 & 3 who are not parties to the SHA.
34. These arguments of the plaintiff have been supported and supplanted by defendants no.4 to 6. It is stated that the plaintiff along with defendants no.4 and 6 are shareholders of 81% equity in the plaintiff company; admittedly, the best interests of the company have been defied by the contesting defendants i.e. defendants no.1 to 3; on the misrepresentations made by the said defendants, plaintiff had entered into the SHA; the fact that these were misrepresentations is evident from the fact that the cases agreed to be withdrawn have not been withdrawn; on the other hand defendants no.2 has sent malicious letters to the GSECL acting as a co-competitor with the plaintiff and harming the interest of the plaintiff.
35. In rejoinder it is stated that the legal position as has been sought to be pleaded is based on a fallacy and misunderstanding of the law. The Arbitration and Conciliation Act 1996 has made a substantial progress from the earlier law as contained in the Act of 1940. The severability clause is contained in the Section 16 of the said Act. Section 16 (1) (b) postulates a situation that even where the Arbitral Tribunal has declared the agreement between the parties to be null and void it would not ipso jure make the arbitration clause to be invalid. The judgment of Kishore Lal CS(OS) No.2241.2009 Page 19 of 38 Gupta (supra) was passed in the year 1959 which proceedings were under the old Act. A co-joint reading of the clause 21.6, 21.7 and 21.8 of the SHA clearly show that the arbitration clause contained in the SHA was sacrosanct and binding in all eventualities between the parties; parties had given an irrevocable consent to the SHA and no party was entitled to withdraw such a consent or to state that it was not bound by this article i.e. article contained in Section 21 which is the article of arbitration. Further the parties had agreed that none of them will have any right to commence or maintain a civil suit or any other legal proceedings except in accordance with the arbitration procedure provided hereunder. Further this article is severable from the SHA and shall survive and remain in effect even if the SHA fails or is cancelled or terminated for any reason. The exclusive jurisdiction of the court would be the Chhattisgarh court. Provisions of Section 16 (1) (B) as contained in the Statute recognize this principle of severability. In National Textile Corporation case (supra) the provisions of the Arbitration Act 1996 were not in issue; from where the distinction has been made between a termination of contract with a contract which is void on the ground of fraud has not been explained. Magma Leasing case (supra) had quoted with approval the observations of the Supreme Court of United States in the judgment reported as Buckeye Check Cashing Inc. v. John Cardegna (2000) 546 US 1 that Prima Paint rule CS(OS) No.2241.2009 Page 20 of 38 permits a court to enforce an arbitration agreement in a contract that the arbitrator later finds to be void.
36. In N.Radhakrishanan case (supra) serious issues relating to misappropriation of accounts and malpractices on the part of the respondents had been made. These were substantive questions relating to facts where detailed material evidence both documentary and oral needed to be produced by the parties on the question of fraud and malpractices raised therein which in the facts of the said case was held necessarily to be tried by a court and not by the Arbitrator. These related to the manipulation of accounts and the fraud committed by one party by cheating the other party of his dues. There is no such allegation in the instant case. At best the allegations which are levelled in the plaint are breaches committed by defendant no.2 who had become a nominee director of defendant no.1 in terms of the SHA; they have no other independent role. The observations relied upon by the plaintiff in the judgment of the Lord of Appeals in the Premium Nafta case (supra) related to a case where the arbitration agreement was under challenge on the ground of forgery; that the said agreement was a forged agreement and had never been entered into by the parties. There is no such averment in the plaint. The SBP and Co. case (supra) has only re-affirmed the principle that the disputes raised must be covered by the arbitration clause.
CS(OS) No.2241.2009 Page 21 of 38
37. Reliance by the plaintiff on the PIL proceedings is misplaced; in this case it had only been held that the PIL is not maintainable as it was an individual interest of the Aryan Group which was involved. There was no public interest; even otherwise these observations have been overridden by the SHA which had been signed between the parties subsequently on 4.4.2008.
38. Plaintiff cannot take advantage of the typing error of the reference to clause 13 in Article 21.8. There has to be a harmonious construction of a document; it has to be read sensibly. Article 21.8 clearly makes reference to this article and being a part of article 21 it has to be read as a part of the said article only. Submissions of the plaintiff on the plea of dominus litis are again misplaced. It cannot override the statutory provisions as contained under Order 1 Rule 10 of the CPC; who is a necessary and proper party has to be decided by the court. Defendant no.2 and 3 have been sued in their capacity as directors of defendant no.1. At the cost of repetition, they have been impleaded only to defeat the arbitration clause and to come within ambit and scope of Sukanya Holdings (supra). The relief of declaration that the SHA and the arbitration clause to be declared null and void has not been sought; even assuming that the present application of the applicants is dismissed and the suit is decreed in favour of the plaintiff, court will have no power to declare either the SHA or the arbitration clause as null and void as there is no such prayer. CS(OS) No.2241.2009 Page 22 of 38
39. Admittedly there is an arbitration clause, parties had by express agreement agreed not to file any civil proceedings, the exclusive jurisdiction of the court for any dispute arising out of and in connection with this SHA being Chhattisgargh court, jurisdiction of the Delhi Court is excluded. These facts had not been brought to the notice of the court at the time when the ex- parte injunction had been obtained by the plaintiff in his favour, this is an active concealment. Attention has been drawn to the legal notice dated 23.11.2009 sent by the plaintiff one day prior to the filing of the suit. Para 14 to 17 clearly speak of the breaches committed by the defendant (applicant herein) in terms of the SHA i.e. relating to the confidentiality clause. It has never been the averment of the plaintiff that the SHA itself is forged or a fabricated document or that the plaintiff had not put his signatures on the said document. A mere allegation of fraud without substantiating it with any further details or instances would not by itself be sufficient to state that the said SHA has become void.
40. Arguments have been heard. Record has been perused.
41. The whole case centers around the SHA dated 4.4.2008. This document running into 47 pages has 24 articles. There are six signatories to the said document i.e. plaintiff, defendant no.1, 4 to
6. It is not the case of either party that this document has not been signed by the respective parties; it has not been pleaded that the signatures on the document are forged, fabricated or not of the CS(OS) No.2241.2009 Page 23 of 38 party concerned. The document is admitted; defendant no.1 has an equity stake of 19% in the plaintiff company. Defendants no.2 and 3 are not shareholders. They have no stake in the company; they have been arrayed as is evident from the memo of parties only in their capacity as nominee directors of defendant no.1. This is in terms of article 7.2 which authorizes each party to the agreement to nominate two directors each on the board of the company. The very fact that the plaintiff has recognized defendants no.2 and 3 as the directors of defendant no.1 shows that the plaintiff has in fact acted upon this SHA.
42. The prayers in the plaint have been perused. They inter alia read as follows:
"a. declare that the shares issued to the Defendant no.1 pursuant to the Shareholders Agreement dated 4th April 2008 are void and of no effect; that they be cancelled or b. issue a mandatory injunction directing Defendant Nos.1 to 3 to transfer the shares held by the Defendant No.1 in Plaintiff Company at a fair valuation not exceeding the face value of the shares or as determined by this Hon‟ble Court to Defendant Nos.4 to 7."
43. The first prayer is that the shares issued to defendant no.1 pursuant to this SHA be declared to be void/cancelled. This relief is sought against defendant no.1 alone. The second prayer seeks a mandatory injunction directing defendants no.1 to 3 to transfer the shares held by defendant no.1 to the plaintiff company at a fair value not exceeding the face value of the shares to defendants no. CS(OS) No.2241.2009 Page 24 of 38 4 to 7. This prayer makes it amply clear that there is no relief claimed against defendant no.2 to 3. Shares are held by defendant no.1 and defendants no.2 and 3 have no role in the transfer of these shares from defendants no.1 to defendants no.4 to 7. In these circumstances, the role of defendants no.2 and 3 as parties to the suit becomes questionable. Averments in the plaint have also been perused. There is not a single averment made against defendant no.3. Against defendant no.2 Anil Sehrawat it has been averred that on 23.9.2009 GSECL had informed the plaintiff company that one of its directors namely Anil Sehrawat had vide letter dated 10.09.2009 intimated GSECL that the offer submitted by the plaintiff is without any proper authorization. The GSECL had floated a tender for the supply of beneficated coal where the plaintiff had made a bid. Further in October 2009, GSECL replied to the plaintiff‟s letter 26.09.2009 stating that Anil Sehrawat had vide his letter dated 10.09.2009 alleged that the Articles of Association of the plaintiff company provide that a unanimous decision is required to enter into a contract of more than Rs. 25 lakhs. The consent of the other directors was required which had not been obtained. It has been averred that these communications by Anil Sehrawat to GSECL were against the interest of the company and demonstrated his ill-will towards the plaintiff and his intention to divert these business opportunities to its rival namely CS(OS) No.2241.2009 Page 25 of 38 the Aryan Group. These acts are malafide. In view thereof the SHA is liable to be declared as not binding and void ab initio.
44. Admittedly defendants no.2 & 3 have been nominated as directors of defendant no. 1 in terms of article 7.2 of the SHA. Defendant no. 1 has acquired 19% equity in the plaintiff company in terms of article 3. Article 8.4 stipulates that no business shall be transacted unless a quorum is present and a quorum shall not be constituted unless at least one director nominated by each party is present during the meeting. Under Article 8.13 no decision of the board on any fundamental issue shall be taken without the affirmative vote of all the directors present in the meeting. Under Article 8.14 the fundamental issues include contacts worth more than Rs. 25 lakhs. This is contained in Article 8.14.15. It is not in dispute that the tender floated by GSECL inviting bids for supply of beneficated coal was a contract of more than Rs. 25 lakhs. Admittedly affirmative vote of all the directors present in the meeting had not been obtained when the plaintiff had submitted its offer/tender bid to the GSECL. Under Article 9.2 any decision of the shareholders on fundamental issues shall require an affirmative vote of all the shareholders present in the meeting which included a change or amendment to the Charter documents. The Charter document includes the Articles of Association of the company. The plaintiff in his communication dated 13.10.2009 had clarified that this restriction was not in relation to contracts CS(OS) No.2241.2009 Page 26 of 38 proposed to be taken up by the plaintiff company i.e. washing of coal and such a contract did not require the unanimous decision of the Board of directors.
45. A wholesome reading of the SHA clearly shows that these are all disputes and claims arising out of and in connection with the SHA. The various articles in the SHA have specified and dealt with each of these contingencies; whether the offer of GSECL inviting tender bids required the unanimous consent of all the directors/shareholders of the plaintiff and whether the act of the plaintiff in making this offer was in conformity with article 8 of the SHA is essentially a dispute arising out of and in relation to the said SHA. Whether in these circumstances the letters if any addressed by defendant no. 2 to GSECL were for the reason that the plaintiff was not acting in terms of the binding terms of the SHA is again a dispute arising out of and in connection with the SHA. Whether there was a breach of the confidentiality clause i.e. article 18 is again a breach committed in terms of the SHA. Whether the Articles of Association amended in terms of the Board meeting dated 15.10.2009 was a violation of article 9.2.1 which required that changes in the Charter document could only be by an affirmative vote of all the shareholders of the company again requires an interpretation of the relevant article of the SHA. The appointment of defendants no. 2 & 3 as directors of defendant no. 1 and the claim of the plaintiff that they ceased to be directors CS(OS) No.2241.2009 Page 27 of 38 with effect from September 2009 would again require the expounding of article 7.8 of the SHA which states that no director shall be removed during the term for which he shall be elected without the consent of the shareholder that has recommended his appointment. Defendant no. 1 had recommended the appointment of defendants no. 2 & 3; such a consent had not been withdrawn by defendant no. 1. This is again a dispute arising out of and in connection with the SHA.
46. Article 21 is the arbitration clause; Article 21.1 stipulates that the parties shall attempt to resolve their disputes arising in connection with this agreement by arbitration. The Arbitral Tribunal would comprise of 3 arbitrators; 1 to be appointed by each party and the 3rd party shall be appointed by the other 2 arbitrators. Under article 21.5 place of arbitration is Raipur, Chhattisgarh and language of the agreement is english. Under article 21.6 the award rendered shall be final and conclusive. In addition the parties agreed that none will have the right to commence or maintain a suit or legal proceedings until the disputes had been determined in terms of the arbitration procedure. Article 21.7 constitutes the irrevocable consent by the parties to which no party is entitled to withdraw. Article 21.8 states that this article meaning thereby that article 21 is severable from the rest of this agreement and shall survive and remain in effect even if the agreement itself fails or is cancelled or is CS(OS) No.2241.2009 Page 28 of 38 otherwise terminated for any reason. Article 22 contains the miscellaneous provisions of which article 22.3 is the clause for severability. It stipulates that if any of the provision of this agreement become or are held to be invalid ineffective or unenforceable the other provisions shall remain in force. Clause 22.4 is the non-obstante clause, it states that notwithstanding anything contained in this agreement, the provisions of the article 13 to 18 and article 21 and clauses 22.3 and 22.5 shall survive the termination of this agreement for any reason whatsoever. This is the survival clause.
47. Admittedly, this document is signed by all the signatories aforestated including the plaintiff, defendant no. 1 and defendants no. 4 to 7. This execution of this document is not under challenge. The case of the plaintiff that this document has been prepared under fraud and misrepresentation, as already noted above, are all differences and disputes relating to the interpretation of the various articles and clauses of the SHA.
48. Allegation of Fraud:
The facts in the N.Radhakrishnan case (supra) are distinct.
This case as discussed supra related to allegations of misappropriation of funds, manipulation of accounts and cheating by one party against the other which required a detailed, oral and documentary evidence. The Supreme Court had further quoted with approval the observations reported in the case of Abdul Kadir CS(OS) No.2241.2009 Page 29 of 38 Shamsuddin Bubere v. Madhav Prabhakar Oak AIR 1962 SC 406 as follows:
"There is no doubt that where serious allegations of fraud are made against a party and the party who is charged with fraud desires that the matter should be tried in open court, that would be a sufficient cause for the court not to order an arbitration agreement to be filed and not to make the reference."
This principle in fact enures for the benefit of the applicant/defendant. Fraud has been alleged against the applicant/defendant but he is not desirous that the matter should be tried in the civil court.
49. Severability of Arbitration Clause:
This arbitration clause contained in Article 21 is severable from the rest of the SHA and even if the SHA fails or is terminated for any reason whatsoever the survival clause protects the arbitration clause which shall remain unaffected, intact and binding upon the parties in all eventualities whatsoever. Statutory recognition of this principle of severability has been enunciated in Section 16 (1) (b) of the said Act which is a substantial progress from the earlier law as contained in the 1940 Act. As such even assuming that the SHA fails for one reason or the other which is not so in the instant case as the plaintiff has himself relied upon SHA and impleaded defendants no.2 and 3 as parties/nominee directors of defendant no.1 only in terms of the SHA. Plaintiff has fully relied upon the SHA and accordingly sued defendants no.2 CS(OS) No.2241.2009 Page 30 of 38 and 3. The severability clause and the survival clause protect and shelter the arbitration clause in all contingencies and eventualities; whatever may come the arbitration clause will be upheld. Under Section 16, the Arbitral Tribunal is clothed with full powers to rule on its own jurisdiction including objections with respect to the existence or validity of the arbitration agreement.
In the National Insurance Corporation Case (supra) the Supreme Court has reiterated that the principle that the original contract having no sanction the arbitration clause must also be held to be inoperative has now to be read subject to the provisions of Section 16 of the said Act. In the Premium Nafta case (supra) the Lord of Appeals had inter alia held:
"17. The principle of separability enacted in section 7 means that the invalidity or rescission of the main contract does not necessarily entail the invalidity or rescission of the arbitration agreement. The arbitration agreement must be treated as a "distinct agreement" and can be void or voidable only on grounds which relate directly to the arbitration agreement. Of course there may be cases in which the ground upon which the main agreement is invalid is identical with the ground upon which the arbitration agreement is invalid. For example, if the main agreement and the arbitration agreement are contained in the same document and one of the parties claims that he never agreed to anything in the document and that his signature was forged, that will be an attack on the validity of the arbitration agreement. But the ground of attack is not that the main agreement was invalid. It is that the signature to the arbitration agreement, as a "distinct agreement" was forged. Similarly, if a party alleges that someone who purported to sign as agent on his behalf had no authority whatever to conclude any agreement on his behalf, that is an attack on both the main agreement and the arbitration agreement.
18. On the other hand, if (as in this case) the allegation is that the agent exceeded his authority by entering into a main agreement in terms which were not authorized or for improper reasons, that is not necessarily an attack on the arbitration CS(OS) No.2241.2009 Page 31 of 38 agreement. It would have to be shown that whatever the terms of the main agreement or the reasons for which the agent concluded it, he would have had no authority to enter into an arbitration agreement. Even if the allegation is that there was no concluded agreement(for example, that terms of the main agreement remained to be agreed) that is not necessarily an attack on the arbitration agreement. If the arbitration clause has been agreed, the parties will be presumed to have intended the question of whether there was a concluded main agreement to be decided by arbitration".
50. The court had referred to it is earlier judgment in Prima Paint Corp. v. Flood & Conklin Mfg. Co. 388 U.S.395 wherein it was observed:
"Prima Paint and Southland answer the question presented here by establishing three propositions. First, as a matter of substantive federal arbitration law, an arbitration provision is severable from the remainder of the contract."
51. Pre-requisites of Section 8:
Magma Leasing case (supra) has spelt out a mandate to the courts whereupon if the conditions as contained in Section 8 of the said Act are satisfied, there is little option left with the court but to make a reference to the Arbitral Tribunal.
52. On an analysis of Section 8 of the said Act it was held that for its applicability the following conditions must be satisfied:
(a) that there exists an arbitration agreement;
(b) that action has been brought to the court by one party to the arbitration agreement against the other party;
(c) that the subject matter of the suit is same as the subject matter of the arbitration agreement;
(d) that the other party before he submits his first statement of the substance of the dispute, moves the court for referring the parties to arbitration; and
(e) that along with the application the other party tenders the original arbitration agreement or duly certified copy thereof.CS(OS) No.2241.2009 Page 32 of 38
53. All the aforestated conditions contained in Section 8 stand satisfied. Admittedly, article 21 contains the arbitration clause in the SHA. SHA is an admitted document. It has admittedly been executed between the parties. The subject matter of the disputes raised in the plaint are all claims and differences arising out of the express terms of the SHA. The subject matter of the suit is the same as the subject matter detailed and entailed in the SHA. The present application has been filed by defendant no.1 before submitting his first statement to the substance of the dispute. The original arbitration agreement has also been placed on record. The parties to the present suit are the same as those of the arbitration agreement.
54. Necessary Parties:
Defendants no.2 and 3 are superfluous parties; they have no role to play. No relief has been claimed against them; they have arrayed as parties to the suit only in their capacity as nominee directors of defendant no.1; even assuming that the suit of the plaintiff is decreed, defendants no.2 and 3 would have no role to play; the transfer of shares sought from defendant no.1 are shares of defendant no.1; defendants no.2 and 3 have no stake in the company. They have been impleaded only to defeat the arbitration clause and to somehow get over the judgment of the Sukanya Holdings case (supra). The facts of the said case were that the parties had entered into an partnership agreement dated CS(OS) No.2241.2009 Page 33 of 38 30.4.1992 for carrying on business to develop land. In the course of their business on 7.4.1998 five Flats were sold to the creditors of the partnership firm in order to repay their loans; the deed of conveyance dated 23.6.1999 was executed between the partnership firm and the said parties in respect of these flats.
Thereafter one of the parties filed a suit for dissolution of the partnership firm and rendition of accounts as also challenging the conveyance deeds executed by the partnership firm in favour of one of the purchasers. Application under Section 8 of the said Act was filed; this was kept pending. Thereafter, a fresh suit was filed for dissolution of the said firm, accounts and other reliefs including the relief for setting aside the transfer of the suit flats in favour of the various defendants; the first suit stood withdrawn. In the subsequent suit an arbitration petition under Section 8 of the said Act was filed. This application was opposed; it was contended that the subject matter of the suit is not between the contracting parties and the relief claimed is not only against the parties to the arbitration agreement but against those 23 parties who are purchasers/so-called tenants of the disputed flats. The Supreme Court upholding the judgment of the High Court held that Section 8 of the said Act was inapplicable. It was held that the suit apart from the relief of dissolution and accounts also claimed other reliefs. 23 defendants in the suit were not parties or partners in the partnership firm and as such the terms of the partnership deed CS(OS) No.2241.2009 Page 34 of 38 including the arbitration clause were not binding upon them; only part of the subject matter could at the most be referred to arbitration. Further, there is no power conferred on the court to add parties who are not parties to the agreement in the arbitration proceedings. The Court also negatived the alternative prayer for referring part of the subject matter in respect of those parties who are parties to the partnership agreement to arbitrator which contains the arbitral clause. The Court arrived at the conclusion that such procedure is a not contemplated under the Act. The object and purpose of the Act is to avoid multiplicity of proceedings and not to allow two forums simultaneously to proceed with the matter. Admittedly, these transactions of the sale of the said flats had no connection with the partnership dispute; distinct relief had been claimed against other parties who were not parties to the partnership agreement. It was in these circumstances that the court had held that the cause of action cannot be split and part disputes alone cannot be referred to arbitration. The relief seeking cancellation of the sale deeds against the independent purchasers cannot be granted by the Arbitrator. It was only the civil proceedings which could adjudicate this dispute. Facts of Sukanya Holdings‟s case (supra) are inapplicable and clearly distinguishable. CS(OS) No.2241.2009 Page 35 of 38
55. In the Kasturi case (supra) the Supreme Court had evolved a dual test to determine as to who is a necessary party. The court has held:
"....two tests are to be satisfied for determining the question who is a necessary party. Tests are - (1) there must be a right to some relief against such party in respect of the controversies involved in the proceedings; (2) no effective decree can be passed in the absence of such party."
By the application of the said test it is clear that defendants no.2 and 3 are neither a necessary and nor a proper party. The decree if passed in favour of the plaintiff can effectively be executed even in their absence; no relief has been sought against either defendant no.2 or defendant no.3. The inescapable inference drawn is that defendants no.2 and 3 have been included in the suit as defendants only to circumvent and defy the arbitration clause.
56. Principle of dominus litis which states that the plaintiff is the person to whom the suit belongs; he is not bound to sue every possible claimant; he may chose to implead only those persons against whom he wishes to proceed; this question however has to be decided on the touchstone of order 1 Rule 10 and has to be subject to it.
57. There are no disputes pending between the plaintiff and defendants no.2 and 3. They are not signatories to the SHA. They have been nominated as the directors of defendant no.1 which nomination has also been disputed by the plaintiff. At best they CS(OS) No.2241.2009 Page 36 of 38 can be cited as witnesses. Cause of action against all the defendants is one and the same. It is not split or bifurcated. The disputes raised by the plaintiff all relate to the interpretation of the clauses of the SHA. They all fall within its ambit and scope.
58. In ABC Laminart Pvt. Ltd. (supra) it has inter alia been held as follows:
".. ..... it can be reasonably deduced that where such an ouster clause occurs, it is pertinent to see whether there is ouster of jurisdiction of other courts. When the clause is clear, unambiguous and specific accepted notions of contract would bind the parties and unless the absence of ad idem can be shown, the other courts should avoid exercising jurisdiction. As regards construction of the ouster clause when words like „alone‟, „only‟, „exclusive‟ and the like have been used there may be no difficulty. Even without such words in appropriate cases the maxim „expressio unius est exclusion alterious‟ -- expression of one is the exclusion of another - may be applied."
Facts of the instant case clearly exclude the operation of all or any other legal proceeding except the disputes to be decided by the forum of arbitration.
59. The application of defendant no.1 is allowed. Disputes between the plaintiff and defendants be referred to arbitration in terms of the shareholders agreement dated 4.4.2008 containing the arbitration clause in article 21. Parties are directed to approach the concerned court for a referral of their disputes in terms thereof for adjudication. It is made clear that any observations hereunder would not affect the merits of the case. CS(OS) No.2241.2009 Page 37 of 38
Application is disposed of in the above terms.
(INDERMEET KAUR) JUDGE MARCH 10, 2010 rb CS(OS) No.2241.2009 Page 38 of 38