Bombay High Court

Inc Through Its Authorised ... vs Orchid Chemicals & ... on 20 October, 2010

Bench: S.J. Vazifdar

                                1                                     ARBAP227.08

        IN THE HIGH COURT OF JUDICATURE AT BOMBAY
           ORDINARY ORIGINAL CIVIL JURISDICTION




                                                                         
            ARBITRATION APPLICATION NO. 227 OF 2008




                                                 
    VHB Life Sciences Limited, formerly known         ]
    as V.H. Bhagat & Co. and VHB Life Sciences        ]




                                                
    Inc Through its authorised representative         ]
    Mr. Devdutt Dhikle 40 B/2, Shankar Smruti         ]
    Sir Bhalchandra Road, Dadar (East),               ]




                                      
    Mumbai - 400014.                                  ]... Applicant

          Versus
                        
                       
    Orchid Chemicals & Pharmaceuticals Limited,       ]
    `Orchid Towers', 313, Valluvar Kottam,            ]
    High Road, Nungambakkam, Chennai-600034           ]... Respondent
      
   



    Ms. Nayana Rane with Ms.Manasi Karandikar i/b Mr. Vinod Juwale
    for the Applicant.





    Mr. Amit Vyas with Ms. Nikita Ajwani i/b M/s. Rajani Associates for
    the Respondent.

    Mr. M.S. Doctor with Mr. Nimay Dave - Amicus Curiae.





                             CORAM : S.J. VAZIFDAR, J.

DATED : 20TH OCTOBER , 2010.

                                  2                                       ARBAP227.08


    ORAL JUDGMENT :

This is an application under section 11 of the Arbitration and

Conciliation Act, 1996.

2. The question that arises for consideration in this application is

whether, in a case where a material part of the cause of action arises in

Mumbai, this court would have jurisdiction to entertain and try an

application under section 11 of the said Act, without the Applicant

obtaining leave under clause 12 of the Letters Patent.

3. The parties had admittedly entered into an agreement in writing

dated 26th August 2002 whereunder the Respondent was to sell and

deliver to the Applicant, pharmaceutical products on the terms and

conditions stated therein. Clause 32 thereof contains an arbitration

agreement.

4. The parties thereafter entered into a supplemental agreement

dated 29th March 2005 for including within the scope of the original

agreement, additional products. Clause 3 of the supplemental

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agreement stated that save, as otherwise contained therein, all other

terms and conditions of the agreement dated 26th August, 2002, would

continue to be in full force and effect. There is no dispute that the

arbitration clause contained in the agreement dated 26th August, 2002,

was incorporated in the supplemental agreement.

5. Under the said agreement the Respondent sold and delivered to

the Applicant, diverse quantities of the said products. Disputes and

differences arose in respect of certain consignments. In this

application under section 11 it is not necessary to refer to the details of

the disputes, especially on merits. Suffice it to state that the Food and

Drugs Administration had seized the products covered by some of the

consignments in various parts of the country. According to the

Applicant, this was entirely due to the Respondent's fault. The

Respondent denied the same stating that the Applicant was

responsible for packing the material and that it is the Applicant who

is entirely responsible for the same.

The Respondent had raised an invoice dated 13th

December, 2006, for an aggregate amount of about Rs.1,80,00,000/-.

The Applicant, however, paid a sum of only Rs.98,49,388. The

4 ARBAP227.08

Applicant refused to pay the balance amount of about Rs.81,00,000

contending that it had raised a debit note on account of the aforesaid

consignments seized by the FDA. The Applicant, therefore, seeks an

adjustment in the accounts between the parties as well as an indemnity

against the various losses suffered by it on account of the

Respondent's alleged defaults. Clause 12 of the agreement entitles the

applicant to an indemnity including in such circumstances.

The above disputes must be decided by the arbitrator. They

indisputably fall within the ambit of the arbitration clause in the

agreement which reads and under: -

"32. In the event of any dispute, controversy or claim arising out of or relating to this Agreement or the breach, termination or invalidity thereof, the parties shall endeavor to resolve the same in an amicable manner in

consonance with the spirit of the transaction recorded in this Agreement. If, however, parties fail to resolve such dispute through discussion as mentioned above, the same shall at the request of either party be referred and settled by arbitration in accordance with the Arbitration &

Conciliation Act 1996. The place of Arbitration shall be Delhi and language to be used in such Arbitration proceeding shall be English. Any judgment, decision or award of the arbitrators shall be final and binding and shall be enforceable in any court of competent jurisdiction. The cost of arbitration shall be borne by the loosing party."

5 ARBAP227.08

7. The first question is whether a material part of the cause of

action has arisen in Mumbai. Paragraph 23 of the application contains

an averment that a part of the cause of action has arisen in Mumbai

and that, therefore, this court is vested with jurisdiction to try this

application.

8. It is true that this paragraph does not contain all the facts

necessary to support this averment. That, however, is of little

consequence for the application must be read as a whole. So read, it is

clear that a material part of the cause of action has arisen in Mumbai.

Clauses 9 and 11 of the agreement read as under: -

"9. The sale of product by Orchid to VHB will be deemed to be complete only on VHB accepting the goods at their godown at Mumbai (i.e. V.H. Bhagat & Co., 40-

B/2, Shankar Smruti, Sir Bhalchandra Road, Dadar (E), Mumbai - 400 014) or any other place or places so authorised by VHB. Orchid shall be responsible for any loss of any nature in transit or product including any shortage, damage, breakage theft or deterioration in

quality and packing.

..................

11. Orchid shall send the goods to VHB at Mumbai and/or their agent/s, distributor/s, as instructed by VHB under Delivery Challans. After the delivery and

6 ARBAP227.08

acceptance of the product as stated herein above, Orchid shall send the Sale Invoice to Orchid within Seven days. However, for any unreasonable delay in making such

payment by VHB, after receipt of sales invoices, VHB shall pay interest for delay at the rate of 18% per annum

or such lower rate as may be agreed upon by the parties hereto for the period of delay. If VHB continuously fails to make the3 payment of the product to Orchid for the period of 90 days from the date of delivery, then Orchid

can suspend the sale/delivery of the products to VHB after intimating in writing to VHB."

9. In paragraph 4 of the application it is averred that the products

were packed in Mumbai and the finished products were delivered to

the Applicant's Mumbai office. Thus though the products may

subsequently have been delivered to various parts of the country, a

material part of the cause of action has arisen in Mumbai. If this were

a suit this court would have been inclined to grant leave under clause

12 of the Letters Patent.

10. This brings me to the question of law which falls for

consideration. It was contended on behalf of the Respondent that

even assuming that a material part of the cause of action has arisen in

Mumbai, the Applicant not having sought and obtained leave under

Clause 12, the application is not maintainable and ought to be

dismissed.

7 ARBAP227.08

11. I requested Mr. M.S. Doctor and Mr. Nimay Dave to appear as

Amicus Curiae. Before going further, I must express my gratitude to

both the learned Amicus Curiae for their invaluable assistance in the

matter. They identified the issue and researched and addressed it

thoroughly, saving the time of the court. The rest of this judgment is

based on their submissions which I have accepted.

12.

As suggested by Mr. Doctor, I have dealt with the question

only as regards an application under section 11. This judgment does

not apply to applications under the other provisions of the said Act,

including section 9 thereof.

13. Clause 12 of the Letters Patent reads as under :-

"12. And we do further ordain that the said High Court of Judicature at Bombay, in the exercise of its Ordinary Original Civil Jurisdiction, shall be empowered to receive, try and determine suits of every description, if, in the case of suits for land or other immovable property

such land or property shall be situated, or in all other cases if the cause of action shall have arisen, either wholly, or in case the leave of the Court shall have been first obtained, in part, within the local limits of the Ordinary Original Jurisdiction of the said High Court, or if the defendant at the time of the commencement of the suit shall dwell or carry on business, or personally work

8 ARBAP227.08

for gain, within such limits, except that the said High Court shall not have such Original Jurisdiction in cases falling within the jurisdiction of the Small Cause Court at

Bombay, in which the debt or damage, or value of property sued for does not exceed one hundred

rupees." [emphasis supplied.]

14. A plain reading of Clause 12 of the Letters Patent makes it clear

that it applies to the High Court acting "in exercise of its Ordinary

Original Civil Jurisdiction". The next question, therefore, is whether

when the Chief Justice or his designate exercise power under section

11 of the said Act, the High Court can be said to be acting "in exercise

of its Ordinary Original Civil Jurisdiction". Mr. Doctor's submission

that the question must be answered in the negative is well founded

both in principle and on authority.

15. Section 2(1)(e) and 11 read as under :

"2. Definitions.--(1) In this Part, unless the context otherwise requires,--

................................

(e) "Court" means the Principal Civil Court of Original Jurisdiction in a district, and includes the High Court in exercise of its ordinary original civil jurisdiction, having jurisdiction to decide the questions forming the subject-matter of the arbitration if the same had been the subject-matter of a suit, but does not include any civil court of a

9 ARBAP227.08

grade inferior to such Principal Civil Court, or any Court of Small Causes;

........................

11. Appointment of arbitrators.--(1) A person of any nationality may be an arbitrator, unless

otherwise agreed by the parties.

(2) Subject to sub-section (6), the parties are free to agree on a procedure for appointing the arbitrator or arbitrators.

(3) Failing any agreement referred to in sub- section (2), in an arbitration with three arbitrators, each party shall appoint one arbitrator, and the two appointed arbitrators shall appoint the third arbitrator who shall act as the presiding arbitrator. (4) If the appointment procedure in sub-section (3)

applies and--

(a) a party fails to appoint an arbitrator

within thirty days from the receipt of a request to do so from the other party; or

(b) the two appointed arbitrators fail to agree on the third arbitrator within thirty days from

the date of their appointment, the appointment shall be made, upon request of a party, by the Chief Justice or any person or institution designated by him.

(5) Failing any agreement referred to in sub- section (2), in an arbitration with a sole arbitrator, if the parties fail to agree on the arbitrator within

thirty days from receipt of a request by one party from the other party to so agree the appointment shall be made, upon request of a party, by the Chief Justice or any person or institution designated by him.

(6) Where, under an appointment procedure agreed upon by the parties,--

(a) a party fails to act as required under that procedure; or

(b) the parties, or the two appointed arbitrators, fail to reach an agreement expected of them under that procedure; or

(c) a person, including an institution, fails to perform any function entrusted to him or it under that procedure, a party may request the Chief Justice or any person or institution designated by him to take the necessary measure, unless the agreement on the appointment procedure provides other means for securing the

10 ARBAP227.08

appointment.

(7) A decision on a matter entrusted by sub-section (4) or sub-section (5) or sub-section (6) to the

Chief Justice or the person or institution designated by him is final.

(8) The Chief Justice or the person or institution designated by him, in appointing an arbitrator, shall have due regard to--

(a) any qualifications required of the

arbitrator by the agreement of the parties; and

(b) other considerations as are likely to secure the appointment of an independent and impartial arbitrator.

(9) In the case of appointment of sole or third

arbitrator in an international commercial arbitration, the Chief Justice of India or the person

or institution designated by him may appoint an arbitrator of a nationality other than the nationalities of the parties where the parties belong to different nationalities.

(10) The Chief Justice may make such scheme as he may deem appropriate for dealing with matters entrusted by sub-section (4) or sub-section (5) or sub-section (6) to him.

(11) Where more than one request has been made

under sub-section (4) or sub-section (5) or sub- section (6) to the Chief Justices of different High Courts or their designates, the Chief Justice or his

designate to whom the request has been first made under the relevant sub-section shall alone be competent to decide on the request.

(12) (a) Where the matters referred to in sub- sections (4), (5), (6), (7), (8) and (10) arise in an

international commercial arbitration, the reference to "Chief Justice" in those sub-sections shall be construed as a reference to the "Chief Justice of India".

(b) Where the matters referred to in sub- sections (4), (5), (6), (7), (8) and (10) arise in any

other arbitration, the reference to "Chief Justice" in those sub-sections shall be construed as a reference to the Chief Justice of the High Court within whose local limits the principal Civil Court referred to in clause (e) of sub-section (1) of Section 2 is situate and, where the High Court itself is the Court referred to in that clause, to the Chief Justice of that High Court."

11 ARBAP227.08

16. Based on sections 11(12)((b) and 2(1)(e) of the said Act and

clause 12 of the Letters Patent, Mr. Doctor formulated the question as

follows :

i) Does the Chief Justice of a High Court having jurisdiction to decide questions forming subject matter of the arbitration, if the same had been subject matter of a

suit, have the jurisdiction to entertain an application under Section 11 of the Act, in a case where such High

Court would get jurisdiction to entertain such a suit only after leave has been granted under Clause 12 of the Letters Patent?

Or in other words ii. Is leave under Clause 12 of the Letters Patent pre- requisite to an application made to the Chief Justice of

the High Court, under Section 11 of the Act, in a case where the High Court itself would not have had

jurisdiction to decide questions forming subject matter of the arbitration, if the same had been subject matter of a suit, in the absence of such leave."

17. In SBP & Co. v. Patel Engineering Limited., (2005) 8 SCC

618, the Supreme Court held as under :-

13. It is common ground that the Act has adopted the UNCITRAL Model Law on International Commercial Arbitration, but at the same time it has made some

12 ARBAP227.08

departures from the Model Law. Section 11 is in the place of Article 11 of the Model Law. The Model Law provides for the making of a request under Article 11 to

"the court or other authority specified in Article 6 to take the necessary measure". The words in Section 11 of the

Act are "the Chief Justice or the person or institution designated by him". The fact that instead of the court, the powers are conferred on the Chief Justice, has to be appreciated in the context of the statute. "Court" is

defined in the Act to be the Principal Civil Court of original jurisdiction of the district and includes the High Court in exercise of its ordinary original civil jurisdiction. The Principal Civil Court of original jurisdiction is normally the District Court. The High

Courts in India exercising ordinary original civil jurisdiction are not too many. So in most of the States the

court concerned would be the District Court. Obviously, Parliament did not want to confer the power on the

District Court, to entertain a request for appointing an arbitrator or for constituting an Arbitral Tribunal under Section 11 of the Act. It has to be noted that under Section 9 of the Act, the District Court or the High Court exercising original jurisdiction, has the power to make

interim orders prior to, during or even post-arbitration. It

has also the power to entertain a challenge to the award that may ultimately be made. The framers of the statute must certainly be taken to have been conscious of the definition of "court" in the Act. It is easily possible to

contemplate that they did not want the power under Section 11 to be conferred on the District Court or the High Court exercising original jurisdiction. The intention apparently was to confer the power on the highest judicial authority in the State and in the country, on the

Chief Justices of the High Courts and on the Chief Justice of India. Such a provision is necessarily intended to add the greatest credibility to the arbitral process. The argument that the power thus conferred on the Chief Justice could not even be delegated to any other Judge of the High Court or of the Supreme Court, stands negatived only because of the power given to designate

13 ARBAP227.08

another. The intention of the legislature appears to be clear that it wanted to ensure that the power under Section 11(6) of the Act was exercised by the highest

judicial authority in the State or in the country concerned. This is to ensure the utmost authority to the

process of constituting the Arbitral Tribunal.

........................................................

15. Normally a persona designata cannot delegate his power to another. Here, the Chief Justice of the High Court or the Chief Justice of India is given the power to designate another to exercise the power conferred on him

under Section 11(6) of the Act. If the power is a judicial power, it is obvious that the power could be conferred

only on a judicial authority and in this case, logically on another Judge of the High Court or on a Judge of the Supreme Court. It is logical to consider the conferment

of the power on the Chief Justice of the High Court and on the Chief Justice of India as Presiding Judges of the High Court and the Supreme Court and the exercise of the power so conferred, is exercise of judicial power/authority as Presiding Judges of the respective

courts. Replacing of the word "court" in the Model Law

with the expression "Chief Justice" in the Act, appears to be more for excluding the exercise of power by the District Court and by the court as an entity leading to obvious consequences in the matter of the procedure to

be followed and the rights of appeal governing the matter. The departure from Article 11 of the Model Law and the use of the expression "Chief Justice" cannot be taken to exclude the theory of its being an adjudication under Section 11 of the Act by a judicial authority."

The Supreme Court, therefore, held that the Legislature

did not want the power under section 11 to be conferred on the High

14 ARBAP227.08

Court exercising original jurisdiction. This observation, in fact,

concludes the issue. The fact that the Chief Justice has been held not

to be a `persona designata' makes no difference. Nor does it make

any difference that the Supreme Court has held that the exercise of

power under section 11 by the Chief Justice is a judicial act. That the

exercise of power under section 11 is a judicial act does not lead to

the conclusion that the exercise of such power is in the High Court's

original jurisdiction. As observed by the Supreme Court, the

Legislature having replaced the word "court" with the expression

"Chief Justice" has done so to exclude the exercise of the power by

the court as an entity.

18. Mr. Doctor then invited my attention to the judgment of the

Supreme Court in Rodemadan India Ltd. v. International Trade Expo

Centre Limited, (2006) 11 SCC 651. This case was under section

11(6) of the said Act. The learned Judge held :-

"7. In my view, this contention is entirely misconceived for two reasons. In the first place, Article 145 of the Constitution itself proceeds by declaring that the provisions of the article were "subject to the provisions of any law made by Parliament". The Act is definitely a

15 ARBAP227.08

"law made by Parliament" and it does not prescribe that a petition under Section 11(6) has to be heard by a Bench consisting of at least two Judges. Second, the power

under Article 145 of the Constitution and the Rules framed thereunder, are intended to govern the practice

and procedure of the Supreme Court. I am unable to persuade myself to believe that, the power exercisable by the Chief Justice under Section 11(6) of the Act is the power of the Supreme Court under the Constitution. My

first impression on this issue is also confirmed by the judgment of this Court in Patel Engg. where it was observed that:

................................."

After quoting paragraph 13 of the judgment, the learned Judge

held :

"8. In short, the power under Section 11(6) is the power of a designate referred to under the section and not that of the Supreme Court, albeit that it has now been held to

have judicial characteristics by reason of the judgment in Patel Engg.1 Since this is the power of the Chief Justice

and not the power of the Supreme Court, the specification in Order 7 Rule 1 of the Rules as to the minimum number of Judges, would have no application

thereto. If the argument of the learned counsel is right, then even the Chief Justice cannot pass such an order unless he is sitting in a Bench with one or more companion Judges. No such intention is evidenced by Parliament in enacting Section 11(6) of the Act. Since

Parliament has enacted a law under which the power is exercisable by the Chief Justice or his designate, who could be "any person or institution", I do not think that the requirement of Order 7 Rule 1 of the Rules would apply to such a situation at all. The contention is, therefore, rejected."

16 ARBAP227.08

19. The above judgment also clearly establishes that the power

under section 11(6) is the power of a designate referred to therein and

not that of the Supreme Court albeit that it has now been held to have

judicial characteristics by reason of the judgment in SBP & Co. Vs.

Patel Engineering. On a parity of reasoning, the power exercised by a

Chief Justice of a High Court or his designate is not the power of the

High Court exercising original jurisdiction, but the power of a

designate referred to in the section.

20. As submitted by Mr. Doctor, there is a clear distinction under

the Act between the "court" and the "Chief Justice". It is not possible,

therefore, to suggest that the Chief Justice exercising powers under

section 11 of the Act is synonymous with the High Court acting in

exercise of its Ordinary Original Civil Jurisdiction. In that view of

the matter, clause 12 of the Letters Patent insofar as it mandates the

grant of leave before empowering the court to exercise its Ordinary

Original Civil Jurisdiction does not apply to an application made

under section 11 of the Act.

17 ARBAP227.08

21. However, in view of section 11(12)(b) read with section 2(1)(e)

of the Act, when an application is made under section 11, the Chief