Atul Jagdish Khanna vs Seco Tools India (P.) Ltd. And Anr.
2001 Latest Caselaw 964 Bom

JUDGMENT

S. Radhakrishnan, J.

1. Rule. Rule is made returnable forthwith by consent. Heard the learned Counsel for the parties.

2. By this petition, the Petitioner is seeking to challenge an order dated 18th August, 2001 passed by the learned Civil Judge, Senior Division, Pune, whereby the learned Judge has referred both the parties to arbitration to settle their disputes involved in the case in accordance with the clauses in 21 of the share holder's agreement and clauses in 11 in share purchase agreement from the Arbitral Tribunal viz. the Arbitration Institute of Stockholm Chamber of Commerce, London. By the said order, the learned Judge has also stayed further proceedings in the suit till the passing of foreign award by the Arbitral Tribunal.

3. The brief facts are that the Petitioner herein and his family members had initially formed Drillco Hertel Ltd. in the year 1989. It may be noted here that now the said Company is known as Drillco Seco (India) Ltd. The said Company was formed for manufacturing Tungsten Carbide Tools. In the said manufacture of Tungsten Carbide Tools, Seco Tools AB Sweden, a Swedish Multinational Company is a World leader. The Seco Tools (India) Pvt. Ltd., (S.T.I.P.) is a 100% subsidiary of the said Seco Tools AB Sweden. The Petitioner has contended that the Petitioner Company had its own well laid out factory. It is the case of the Petitioner that the said Swedish Multinational Company had applied to the Government of India for establishment of a 100% owned subsidiary with projected export production of atleast 60%.

4. In the year 1995 the Government of India had granted permission to the said Swedish Multinational Company to set up such subsidiary prescribing certain conditions therein. Sometime on or about 13th February, 1999 a joint venture between the Petitioner's Company and the Seco Tools (India) Pvt. Ltd., (S.T.I.P.) and the Seco Tools AB Sweden was entered into. By the said agreement it was agreed that the said Swedish Multinational Company viz. Seco Tools AB Sweden will co-operate with the Petitioner's Company to develop its business operations. Under the said arrangement, certain shares were held by the Petitioner Company which were to be sold in exercise of "Call Option". There was proviso to the exercise of the said Call Option viz. the receipt of all necessary governmental and other permissions and licences were necessary for the acquisition by Seco India of the minority shares. On that very day, i.e. on 13th February, 1999 an employment agreement was also entered into, whereby the Petitioner was appointed as the Managing Director at a salary of U.S. $10.470/- per month. On that day, the said Swedish Multinational Company had issued a Guarantee Letter to the Petitioner for a proper performance of the obligations by Seco India. The said agreement also provided an Arbitration clause being Clause 11.2.1 reads as under:

Any dispute, controversy or claim arising out of or in connection with this Agreement, or the breach, termination or invalidity thereof, shall be settled by arbitration in accordance with the Rules of the Arbitration Institute of the Stockholm Chamber of Commerce. The Arbitral Tribunal shall be composed of three Arbitrators. The place of arbitration shall be London....

5. It is also provided in the said agreement that the agreement shall be governed and construed in accordance with the laws of India. However, it may be noted that the guarantee which was executed by the aforesaid Swedish Multinational Company was to be governed by the Swedish law.

6. As per the said arrangement, the Petitioner had sold 9,01,000 shares for Rs. 15,80,00,000/- and the Petitioner had continued to retain 9,00,000 shares and continued as the Managing Director. There is no dispute that the Petitioner was paid sum of Rs. 4,35,10,000/- by way of an advance towards the purchase of aforesaid 9 lakh shares lying with him. It appears that the Respondents herein had exercised their Call Option by a letter dated 31st May, 2001 claiming that they were entitled to buy remaining 9 lakh shares of the Petitioner for further payment of Rs. 5,000/- only being the additional purchase consideration payable, inasmuch as the Petitioner was already paid a sum of Rs. 4,35,10,000/-.

7. It is the contention of the Petitioner that this was fraudulent in the sense that earlier 9,01,000 shares were sold for Rs. 15,80,00,000/- whereas for the remaining 9 lakh shares the only an advance of Rs. 4,35,10,000/- was made and thereafter an amount of Rs. 5000/- is being offered as the additional purchase consideration. Under these circumstances, the Petitioner herein had filed a Special Civil Suit No. 483 of 2001 before the learned Civil Judge, Senior Division, Pune for a declaration that the Call Option notice dated 31st May, 2001 given by the said Seco Tools India (P.) Ltd., be declared illegal, void and not to be acted upon. The Petitioner has also prayed in the said suit for a declaration that certain clauses in the aforesaid share holders agreement and share purchase agreement to be declared as illegal, inoperative and contrary to public policy. In the said suit the Petitioner has also prayed that the Defendants should be permanently restrained from obstructing the Plaintiff from acting as the Managing Director of Seco Tools India Pvt. Ltd. The Petitioner had also prayed for an injunction against the Defendants from taking any action in furtherance of the Call Option notice dated 31st May, 2001 including filing of any proceedings for arbitration before the Arbitrator in London. In the said suit, the impugned order was passed by the learned Civil Judge, Senior Division, Pune, on 18th August, 2001.

8. Mr. Modi, the learned Counsel for the Petitioner has strongly contended that this is not a commercial agreement and as such, ex facie there could not be any arbitration. In that behalf, he had referred to and relied upon the Judgment of the Calcultta High Court in the case of Josef Meisaner CMBR & Co. v. Kanoria Chemicals & Industries Ltd. and Anr. AIR 1986 Cal. 45. He strongly referred to and relied upon the view taken by the Calcutta High Court in para 40 of the said judgment. Para 40 of the said judgment reads as under:

in my view, this submission of Mr. Gupta should be accepted. I am of the view that the agreement in substance provides for the supply of technical know how and expertise from Meissner to Kanoria in exchange for the payment of a 'fee' to Meissner. There is no element of transaction between the merchants and traders as understood in Indian Law. Consequently, Section 3 of the Act of 1961 has no application to the facts and circumstances of the present case.

9. To put in other words, the learned Counsel Mr. Modi contends that in the instant case, the provisions of Foreign Awards (Recognition and Enforcement) Act, 1945 should not be made applicable. He contended that in the instant case, what is involved is only a sale of certain shares and the same cannot be construed to be a commercial activity, which could be subjected to arbitration and the Arbitral Award.

10. Mr. Modi also referred to and relied upon the judgment of the Apex Court in the case of Government of Andhra Pradesh and Ors. v. Karri Chinna Venkata Reddy and Ors. , to contend that the High Court in its writ jurisdiction in exercise of its discretion can look into additional documents also. Mr. Modi contended that the learned Civil Judge, Senior Division, Pune, in fact ought to have granted an injunction restraining the Respondent No. 1 from proceeding with the exercise of Call Option and also restraining the Respondents from proceeding with the arbitration at London. Mr. Modi also makes it clear that his client has no objection for proceeding with the arbitration in India. However, this will be subject to and without prejudice to the rights and contentions of the Petitioner that the subject matter is not capable of being not arbitrated upon as contended in the petition.

11. Mr. Tulzapurkar, the learned Counsel for the Respondents has contended that the issue "commercial" was not raised before the Trial Court. In any event, the learned Counsel Mr. Tulzapurkar submitted that in the instant case, the transaction especially the share holders agreements entered into between the Seco Tools India Pvt. Ltd. and the Petitioner herein and Drillco Hertel Ltd. dated 13th February, 1999 would be a commercial agreement, inasmuch as the same contemplates sale of certain shares and also exercise of Call Option with regard to the same. Mr. Tulzapurkar also pointed out that there is also a Put Option, and in view thereof, he submitted that primarily this agreement deals with the sale of shares which would result into a commercial relationship, and as such, the same would be amenable to Arbitral proceedings. In that behalf, Mr. Tulzapurkar referred to and relied upon the judgment of the Apex Court in the case of R.M. Investment & Trading Co. Pvt. Ltd. v. Boeing Co. and Anr. . In para 12 of the aforesaid judgment, Their Lordships have observed that while construing the expression "commercial" in Section 2 of the Act, it has to be borne in mind that the "Act is calculated and designed to subserve the cause of facilitating international trade and promotion thereof by providing for speedy settlement of disputes arising in such trade through arbitration and any expression or phrase occurring therein should receive, consistent with its literal and grammatical sense, a liberal construction." In the said paragraph, after referring to certain judgments of the Apex Court, the Supreme Court had held that expression "commercial" should, therefore, be construed broadly having regard to the manifold activities which are integral part of international trade today.

12. Mr. Tulzapurkar, also referred to and relied upon the judgment of our High Court in Mukesh H. Mehta and Ors. v. Harendra H. Mehta and Ors. (1995) 5 Com. L.J. 517 (Bom.). In the said judgment, our High Court, after referring to the judgment of the Apex Court in R.M. Investment and Trading Com. (P) Ltd. v. Boeing Co. and Ors., has held that when two individuals joining together and entering into a commercial venture and two brothers entering into such a commercial venture, the relationship between the two is "commercial". Mr. Tulzapurkar has further pointed out that the judgment of the Bombay High Court in the aforesaid case of Mukesh H. Mehta and Ors. v. Harendra H. Mehta and Ors. was upheld by the Apex Court by its judgment and Order in Harendra H. Mehta v. Mukesh H. Mehta and Ors. .

13. While dealing with one more contention of Mr. Modi that in the instant case no prior permission has been obtained and without such a permission from the Central Government, the Call Option could not have been exercised, Mr. Tulzapurkar, the learned Counsel for the Respondents has referred to and relied upon the judgment of the Delhi High Court in the case of Brawn Laboratories Ltd. v. Fittydent International Gmbh and Anr. 2000 C.L.C. 103. In this judgment also a similar issue of prior permission of Central Government or Reserve Bank of India camp up, wherein the Delhi High Court has held that such a permission of approval by Central Government or Reserve Bank of India if any, may be required and/or granted by the Central Government or Reserve Bank of India at the time and for the purpose of enforcing any judgment or order for payment of any of the sums and not otherwise.

14. Mr. Tulzapurkar, the learned Counsel for the Respondents also referred to and relied upon the unreported judgment of the Division Bench of our Court in ABN-AMRO Bank N.V. v. Satish Dayalal Choksi Appeal No. 869 of 1990 dated 3.8.1992, wherein on a similar issue, our Division Bench has held that the Bank is entitled to the grant of relief subject to the condition that the Executing Court shall not issue the process before the Bank secures the permission from the Reserve Bank of India or the Central Government. Mr. Tulzapurkar has contended that the prior permission is necessary at the time of execution of the order, and prior to execution of the order such a permission can always be obtained and therefore, this Court ought not to refuse to grant the relief only on the ground that such a permission has not been obtained.

15. Mr. Tulzapurkar, while dealing with the contentions of Mr. Modi that conducting the arbitral proceedings in London will be very expensive and will cause severe hardship to his client, referred to and relied upon an unreported judgment of the Apex Court in the case of AEG Akatiengesellschaft v. Insotex (India) and Anr. wherein, the Apex Court while interpreting Section 45 of the Arbitration and Conciliation Act, 1996, has held that when there is an arbitration agreement between the parties whereby the disputes arising out of the contract would be referable to an Arbitrator having his legal seat at Zurich, Switzerland, and to which disputes, the substantive law of contract as prevalent in India would apply, in that event, the Company Law Board would be obliged to proceed in accordance with Section 45 of the Arbitration and Conciliation Act, 1996, and refer the parties to arbitration, because the agreement is neither null and void nor inoperative, nor incapable of being performed. The Apex Court has clearly observed that incapability, of course, has not to be understood as being inconvenienced, i.e. when the parties enter Into, such agreement with open eyes they are presumed to have incurred on themselves the inconvenience inherent in the deal. The Apex Court has in fact observed that in such cases the Judicial Authority cannot prevaricate in any manner in granting the relief. On this issue Mr. Tulzapurkar also referred to and relied upon a judgment of the Co. Law Board in Navin Kedia and Ors. v. ChennaiPower Generation Ltd. and Ors. (1998) 31 C.L.A. (C.L.B.), in which it was the stand taken by the Petitioners that referring the matter to arbitration would be expensive, time consuming and would require transfer of documents from India to London for production as evidence. The Company Law Board in unequivocal terms has held that under Section 45 of the said Act, it was mandatory to refer the parties to arbitration and that they had no discretion in the said matter. By virtue of Section 45 of the Act, a judicial body will have to refer the parties to arbitration as it is a mandatory provision.

16. Mr. Tulzapurkar also referred to and relied upon the judgment of Bombay High Court in the case of Suresh Arjundas Bakhtiani v. Union of India and Anr. 1990 Mh.L.J. 1243. In this judgment, out Court has held that the arbitration clause contained in the main contract, cannot bind the Bank in the Bank Guarantee, inasmuch as the Bank is not the party to the main contract. To put in other words, the Bank was not a party to any arbitration agreement and as such, the Bank cannot be forced into the arbitration and the Bank is entitled to invoke the Bank Guarantee irrespective of the disputes between the parties, and the arbitration clause will have no application as far as the Bank is concerned.

17. Mr. Tulzapurkar, the learned Counsel has very strongly contended that if there is an arbitral clause for referring the matter to arbitration, the Court has no discretion, but to refer the matter to arbitration specially in view of Section 3 of the Foreign Awards (Recognition and Enforcement) Act, 1961. In that behalf he referred to and relied upon the judgment of the Apex Court in Svenska Handelsbanken and Ors. v. Indian Charge Chrome Ltd. and Ors. (1994) 2 SCC 155 : 1994 (1) Scale 156 : 1994 (1) Arb. L.R. 205, wherein the Apex Court has clearly held that when the right to foreign arbitration has been provided by the Parliament as an indefeasible right in which the Court does not have any kind of discretion. The Apex Court has further held that the arbitration as contemplated as per Section 3 of the Foreign Awards Act and the Plaintiff by filing a Plaint, cannot make the arbitration clause invalid or inoperative, and therefore, the finding of the High Court that the arbitration agreements have become inoperative and incapable of being performed or invalid was erroneous in law and therefore must be set aside.

18. Mr. Tulzapurkar, the learned Counsel further referred to and relied upon the judgment of the Apex Court in the case of State of Orissa v. Klockner & Co. and Ors. with Orissa Mining Corporation v. Klockner & Co. and Ors. with Klockner & Co. v. Orissa Mining Corporation Ltd. and Ors. , wherein the Apex Court, has referred to the observations in the case of General Electric Co. v. Renusagar Power Co. , of its judgment, which reads as under:

In General Electric Company's case 1987 (4) SCC 137 (supra) this Court had occasion to consider the scope of Section 3 of the Foreign Awards Act and it observed as follows:

It may be straightway noticed that while Section 34 of the Indian Arbitration Act vests in the Court the discretion to stay or not to stay the proceedings, Section 3 of the Foreign Awards (Recognition and Enforcement) Act vests no such discretion in the Court. Under the Foreign Awards (Recognition and Enforcement) Act it is mandatory that the proceedings should be stayed if the conditions prescribed are fulfilled. But the application of the defendant to the Court, be it under Section 34 of the Indian Arbitration Act or Section 3 of the Foreign Awards (Recognition and Enforcement) Act, may be filed before filing a written statement or taking any other step in the proceedings. It is competent then only and not thereafter.

19. Mr. Tulzapurkar, the learned Counsel also referred to and relied upon the judgment of the Apex Court in the case of National Thermal Power Corporation v. The Singer Co. and Ors. . In this case, the Apex Court while dealing with the expression "proper law of contract" with regard to the contract between the Foreign and Indian Company, the Court has held that the express intention of the parties is generally decisive in determining the proper law of contract. The only limitation on this rule is that the intention of the parties must be expressed bona fide and it should not be opposed to public policy. In the instant case the parties have clearly agreed to the proper law of contract to be the law governing in India and therefore, Mr. Tulzapurkar contended that the provisions of Arbitration Act would very much apply in the instant case.

20. Mr. Tulzapurkar, also referred to and relied upon the judgment of Bombay High Court in the case of Section C.I.L. (India) Ltd. v. Indian Bank and Anr. AIR 1992 Bom. 131, wherein this Court has held that as far as the third party is concerned, the third party is not bound by an arbitration agreement between the other two parties.

21. Mr. TulZapurkar, has finally contended that the learned Civil Judge, Senior Division, Pune in the aforesaid judgment which is impugned by the Petitioner in the present case, has considered all the aspects and has given a detailed reasoned order justifying the reference of the matter for arbitration. In that behalf he referred to and relied upon the reasoning adopted by the said Civil Judge, Senior Division, Pune in justifying the said order.

22. After hearing the learned Counsel at length, the basic issue involved in this writ petition is whether the interlocutory order of the learned Civil Judge, Senior Division, Pune is patently erroneous, perverse or without jurisdiction?

23. As pointed out by Mr. Tulzapurkar that when there is an arbitration agreement between the parties, and the Court has no discretion to decline but has to refer the matter for arbitration, this is the settled law as has been held by the Apex Court that the Court has no discretion but to refer the matter for arbitration. As far as objection with regard to the prior permission of Reserve Bank of India or the Central Government is concerned, as raised by the learned Counsel Mr. Modi, it is apparent that such a permission can always be obtained prior to execution of the order. Merely because there is no prior permission of the Central Government or the Reserve Bank of India, it does not mean that the arbitration cannot be proceeded with. What is contemplated is that prior to execution of the orders that may be passed by the Courts, necessary permission from the Reserve Bank of India or the Central Government will have to be obtained as pointed out in the aforesaid judgments.

24. Under these circumstances, I do not find any merit whatsoever in this petition. The learned Civil Judge, Senior Division has passed the impugned interlocutory order based on material, with sound reasoning and there is no error apparent on the face of the record. I am not inclined to exercise the jurisdiction under Article 227 of the Constitution of India, in this interlocutory order. Hence, the writ petition stands dismissed with costs. It is made clear that none of the observations made in this judgment would prejudice either of the parties in the pending arbitral proceedings. 25. Parties to act on an ordinary copy of this order duly authenticated by the Associate. Issuance of certified copy is expedited.