Mulheim Pipecoatings Gmbh vs Welspun Fintrade Limited A ...
2012 Latest Caselaw 522 Bom

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                  IN THE HIGH COURT OF JUDICATURE AT BOMBAY




                                                                                      
                     ORDINARY ORIGINAL CIVIL JURISDICTION

                       ARBITRATION PETITION NO. 1070 OF 2011




                                                              
                                        IN
                             SUIT (L) NO. 2344 OF 2011

           1. Mulheim Pipecoatings GmbH, a company




                                                             
              incorporated in Germany and having its
              registered office at Friedrich-Ebert-Strasse
              154, 45473 Mulheim an der Ruhr, Germany                  ..       Petitioner

                                          Versus




                                                  
           1. Welspun Fintrade Limited a company
                                 
              incorporated under the Companies Act,
              1956 and having its registered office at
              Welspun City, Village Versamei, Taluka Anjar,
                                
              Anjar, Guajrat 370 110.

           2. Welspun Corp. Limited, a company incorporated
              under the Companies Act, 1956 and having its
             

              registered office at Welspun City, Village Versamei,
              Taluka Anjar, Anjar, Gujarat 370 110.                    ..       Respondents
          



      Mr. Iqbal Chagla, Sr. Advocate along with Mr. Riyaz Chagla along with Ms.
      Nandini Singh i/by M/s. Bharucha & Partners for the petitioner.





      Mr. Virag Tulzapurkar, Sr. Advocate along with Mr. Cyrus Ardeshir along with
      Mr. Rahul Dwarkadas, Mr. Kingshuk Banerjee along with Ms. Prachi Dhanani





      i/by M/s. Wadia Ghandy & Co. for respondents.
                            CORAM : R.D. DHANUKA,J.

DATED : DECEMBER 20 , 2012

ORAL JUDGMENT :

1. By this petition filed under section 45 of the Arbitration & Conciliation Act,

1996, the petitioner seeks direction to refer respondent no. 1 to arbitration under

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clause 11.13 of Share Purchase Agreement (for short "SPA") and seeks dismissal

of the suit (2287/11) filed by the first respondent in this court against the

petitioner.

2. Some of the relevant facts for the purpose of deciding this petition are

summarized as under :

(a) The Petitioner is a company incorporated under the laws of

Germany and is constituent of the Europipes Group carrying on business

in the large diameter pipes Industries. The Petitioner is a substantial

share holder of respondent no. 2 company. The respondent no. 1 is

incorporated under the laws of India and is constituent of Welspun

Trading Ltd. The first respondent is a promoter and share holder of

second respondent. The shares in the capital of second respondent are

listed on the National Stock Exchange and Stock Exchange, Mumbai.

(b) On 10th December, 2004, Welspun Trading Limited (referred to

as transferor/ M/s. Eupec PipeCoatings GmBH (referred to as the

"transferee") and Welspun Gujarat Stahl Rohren Limited (referred to as

the company or WGSRL), the first respondent agreed to sell to the

petitioner M/s. Eupec PipeCoatings 4469793 equity shares of WGSRL.

The transferor agreed to transfer to the transferee at the price of Rs. 51

only per equity shares so as to ensure that the transferee shall hold 8% of

the post merger equity share capital of WGSRL. Clause 8 of the said SPA

which provides for the pre-emption rights reads thus :

"8. PRE-EMPTION RIGHTS :

8.1. Subject to applicable law, the parties hereby agrees

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that in the event that the Transferee wishes to sell any of its shares in WGSRL to any third party, the Transferee shall offer the same on the same terms and conditions to the

Transferor or any of its associates as may identified by the Transferor by way of a notice in writing (the "Notice of Offer").

8.2 The Transferor may accept the offer within fifteen (15) days of the date of the Notice of Offer and if the Transferor has accepted the offer, the Transferor and the

Transferee shall complete the transaction within fifteen (15) days of such acceptance of the offer subject to compliance with applicable laws. In the event that the Transferor does not accept the offer in accordance with the terms hereof, the Transferee shall have the right to sell the shares (whether in

whole or part) to any third party as it may deem fit. "

(c ) Clause 11.1 provides that such agreement shall be construed in accordance

with the applicable laws in India and shall be governed accordingly. The

purchase consideration agreed under the said SPA was in the aggregate

equivalent to Euro 4 Millions in Indian Rs.22,80,00,000/- at the time of

execution of SPA. Clause 11.11, 11.13 and 11.15 of the said SPA reads thus :

"11.11 Variation : No variation of this Agreement shall be valid unless it is in writing and signed by or on behalf of each of the Parties to this Agreement.

11.13 Dispute Resolution : Th Parties shall try and amicably resolve all claims, disputes, questions or controversies or claims arising out of or in connection with this agreement or the execution, interpretation, validity, performance, breach or termination hereof. All disputes

arising out of or in connection with the present agreement shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce (ICC) by one Arbitrator appointed in accordance with the said Rules. The Arbitration shall take place in Dhubai, The language of the Arbitration shall be English.

11.15 Termination : Subject to the provisos of Clause 5 above, this Agreement may be terminated by the Transferee if the Transferor has failed to fulfill the conditions precedent

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as provided in Clause 5 of this Agreement or if the requisite consents and permissions for transfer of Sale Shares cannot be obtained in good faith as aforesaid. The Transferee may

terminate this Agreement by providing a written notice to the Transferor. Upon such notice being served, the transaction contemplated herein shall stand abandoned

forthwith if such transaction has not been consummated or the Agreement is not extended for a further period, without prejudice to any rights that may have accrued to the Transferee or the Transferor under this Agreement prior to

termination as aforesaid."

(d) The first respondent and second respondent are sister concerns

belonging to Welspun Group. In the year 1999, the first respondent and

second respondent entered into ig a joint venture/promotion/collaboration

agreement pursuant to which the parties incorporated a company known as

Eupec Welspun PipeCoatings (India) Limited under the provisions of the

Companies Act, 1956. Subsequently the first respondent also acquired

shares in the said company i.e. Eupec Welspun Pipecoatings (India)

Limited.

(e) The name of the Eupec-Welspun Coatings (India) Limited was

subsequently changed to Mulheim Pipecoatings GmBH petitioner herein. It

is the case of the first respondent that in pursuance of the issuance of second

respondent's shares to the first respondent under the scheme and post

acquisition of shares by the petitioners, under the scheme and post

acquisition of the shares by the petitioner under the said SPA, the petitioner

became holder of 12236460 equity shares of the second respondent

company constituting approximately 8% of the total equity share capital

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therein. The respondent no. 2 reduced its share capital by 65%. Accordingly

the share holdings of the petitioner in the second respondent got reduced

from 12236460 equity shares to 8565255 equity shares of face value of Rs.

5 constituting approximately 8% of the second respondent's share capital.

Vide its letter dad 6th October, 2009, the petitioner informed the first

respondent that it was intended to sell its entire share holdings in second

respondent and that the first respondent was being given "Notice of Offer"

contemplated under clause 8 of the SPA.

(f)

The first respondent by its letter dated 21st October, 2009 and e-mail

dated 27th October, 2009 informed the petitioner that the notice of offer

dated 6th October, 2009 was not in accordance with the requirements

stipulated under the SPA and consequently the same was not a valid notice.

(g) The Petitioner thereafter addressed a letter dated 5 th November, 2009

to the first respondent and expressed its intention to sell its shares in the

second respondent company to third party.

(h) The first respondent by its letter/e-mail dated 20 th November, 2009

replied to the letter dated 5th November, 2009 and denied that the said letter

constitutes valid notice of offer as the same did not meet the requirements

set out in the said SPA.

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    (i)    By its letter dated 20th November, 2009 to the petitioners, the first

respondent requested to treat the said letter as notice invoking arbitration in

accordance with the provisions of clause 11.13 of the SPA.

(j) The first respondent thereafter filed petition under section 9 of the

Arbitration and Conciliation Act, 1996 (1022/2009) and sought temporary

order and injunction restraining the petitioner from creating third party

rights in respect of the equity shares held by it in the second respondent

company. By order dated 21.11.2009, passed in the said Arbitration Petition

(1022/2009) this court granted ad interim relief in favour of the first

respondent herein temporarily restraining the petitioner herein from

creating any third party rights in respect of the shares held by it in second

respondent company.

(k) It is the case of the first respondent that the petitioner and the first

respondent made another attempt to settle their disputes and differences

and ultimately final biding and concluded contract came to be recorded

in the memorandum of Understanding (for short MOU) dated 17 th March,

2010 between them. Clause 1 to 3 of the said MOU reads as under :

"1. In terms of the settlement, out of the 8,565,523 equity shares, WTL shall purchase from MPC 5,00,000 equity shares of Welspun Gujarat Stahl Rohern Limited, at a price of Rs.207/- per equity share from MPC. The sale and transfer of the shares as well as payment of sale proceeds shall be completed by 10th April, 2010. Income Tax on the aforesaid sale transaction shall be borne by MPC.

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2. MPC may sell the balance 35,65,523 shares in monthly installment of 100,000 equity shares over a period of 3 or more years.

3. Upon signing of this MoU, the Share Purchase Agreement dated 10th December, 2004 shall stand null and

void and the petition filed by WTL in High Court, Mumbai shall be withdrawn by WTL. WTL shall also withdraw notice of Arbitration sent by WTL."

The said MoU was signed by Mr. Balkrishnan Goenka, Director on

behalf of the first respondent. It was also signed by Mr. Hans Warner

Gauer, authorized signatory on behalf of the petitioner herein.

(l) By letter dated 18th March, 2010 addressed by M/s. Amarchand,

Mangaldas & Suresh A. Shroff & Co. Advocates for the first respondent

in Arbitration Petition (1022/2009) (present petitioner), to the advocates

representing the petitioner therein (present first respondent) stated as

under :

"Our clients have placed in our hands a copy of the Memorandum of Understanding dated 17 th March, 2010 ("MOU") executed by Mr. Balkrishnan Goenka on behalf of

your clients, you known as Welspun Fintrade Ltd. And Mr. Hans Werner Gauer on behalf of our clients. We understanding you already have a copy of the MOU.

In terms of the MOU, upon signing thereof, your clients are

required to withdraw the captioned petition and the arbitration notice issued by your clients. Accordingly, our client hereby calls upon your client to take immediate steps for unconditional withdrawal of the captioned petition as well as your clients' Notice dated November 20, 2009 invoking arbitration."

(m) The Securities and exchange Board of India vide its exparte ad

interim order dated 2nd December, 2010 restrained the promoters of the

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second respondent company from dealing with the shares of the second

respondent. Being aggrieved by the said order passed by SEBI, the first

respondent herein filed appeal (21 of 2011) which was rejected on the

basis that the SEBI passed an exparte order and the first respondent had

not been heard and therefore, it was not necessary for the appellate

authority to go into the issues raised in the appeal. The said enquiry is

pending. It is the case of the first respondent that though the the

prevailing market price of the sale shares under the said MOU was

approximately at Rs. 250/-, price agreed to be paid by the first respondent

under the said MOU was at Rs.207/- and thus the first respondent had an

opportunity of selling the same in the market at the then prevailing market

price and thereby make substantial profit.

(n) It is the case of the first respondent that pursuant to the said MOU

and the letter received from the advocates of the petitioner herein, and

keeping with the terms of the MOU, the first respondent withdrew the

arbitration petition (1022 of 2009) filed by the first respondent in this court

on 22nd March, 2010 and thereby injunction granted in the said petition

came to an end. It is the case of the first respondent that the petitioner

herein in accordance with the terms of the said MOU and from and out

of the 3565532 shares held by it over and above the sale shares sold 3

lac. shares in three monthly installments. The first respondent now held

over and above sale shares, 3265523 equity shares in the second

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respondent company. By mutual consent of parties, the sale transaction

contemplated under the said MOU to be completed by 10 th April,2010

was extended by one month.

(o) It is the case of the first respondent that after execution of the

concluded and binding MOU and after partly implementing upon, the

petitioners purport to raise untenable issue regarding its tax liability. Vide

its e-mail dated 16th June, 2010, the petitioners disputed the tax liability

over and above 10.6% towards capital gains. The Petitioner vide its e-mail

dated 18th August, 2010 contended that the MOU was not a binding

contract between the parties and that it only amounted to agreement to

negotiate the deal in good faith and nothing more. By the said e-mail, the

petitioner informed that the pricing point might perhaps be the only item

left that could allow the parties to find a solution to their problems

without the help of a tribunal.

(p) The first respondent vide its e-mail dated 1st September, 2010

reiterated that the MOU was valid and binding contract between the

parties and the petitioner herein had committed beach of the terms and

conditions of the said MOU. The first respondent reiterated that it was

only because the petitioner in complete disregard of its obligation under

the said MOU had refused to bear the tax liabilities connected with the

transaction and was seeking revision of the terms and conditions of the

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MOU.

(q) It is the case of the first respondent that the market price of the sale

shares fell below the agreed price.

(r) On 25th May, 2011 the petitioner made a request to the Court of

Arbitration of International Chamber of commerce for arbitration. The

Petitioner herein was shown as claimant whereas the first respondent was

shown as respondent. The Petitioner invoked clause 11.13 of the said SPA.

The Petitioner applied for the declaration that the petitioner was entitled

to sell at its discretion all or parts of the shares in the second

respondent, to any third party on the basis that the petitioner had alleged

to have complied with its obligations under the said SPA including one

to his offer those shares to the first respondent as provided for in clause 8

of the said SPA.

(s) On 18th June, 2011, the first respondent received letter dated 16 th

June, 2011 from the International Chamber of Commerce informing the

first respondent about the request for arbitration received from the

petitioners in relation to the disputes and differences that had arisen

between the petitioner and the first respondent.

(t) By its letter dated 20th July, 2011, the petitioner herein sought to

terminate the said MOU and contended that the MOU was never binding

contract between the parties.

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(u) By letter dated 26th July, 2011, the first respondent reiterated that the

MOU was valid, subsisting and binding contract between the parties and

informed that subject to the outcome of the SEBI investigation, it was

ready and willing to perform its obligation under the said MOU and

purchase sale shares even on the date of writing of the letter. The

respondent objected to the purported termination of the MOU by the

petitioners as illegal, null and void.

(v) On 18th August, 2011, the first respondent filed suit (2287 of 2011)

in this court against the petitioners herein and the second respondent.

Prayer clauses (a) to (f) of the said suit are set out as under :

"(a) this Hon'ble Court be pleased to declare that the Plaintiff and Defendant No. 1 have by mutual agreement terminated/rescinded and put an end to the share purchase Agreement dated December 24, 2004 thereby rendering it

null and void and that accordingly the said Share Purchase Agreement is no longer valid, subsisting binding and/or

enforceable.

(b) this Hon'ble be pleased to declare that the Memorandum of Understanding dated May 17, 2010 Exhibit H hereto, entered into between the Plaintiff and

Defendant no. 1 is a valid, biding and subsisting contract between the parties.

(c ) Defendant No. 1, its agents, servants or any other person claiming through or under it be restrained

perpetually by an order injunction of this Hon'ble Court from, in any manner, directly or indirectly, dealing with, disposing of, selling, encumbering, transferring, crating or causing to be created any third party rights of whatsoever nature, or any right, title or interest in the Balance Shares i.e. 32,65,523 (Thirty Two lac Sixty Five Thousand Five Hundred and Twenty Three) equity shares held by Defendant no. 1 in Defendant No.2 Company or any part thereof, save and except in the manner provided under the Memorandum of Understanding dated March 17, 2010 and

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be further restrained from committing any breach of the said Memorandum of Understanding or acting contrary to the terms and conditions of the same.

(d) Defendant No. 1 be restrained perpetually by an order injunction of this Hon'ble Court from carrying on or

proceeding with or prosecuting the arbitration proceeding initiated by Defendant No. 1 before the International Chamber of Commerce vide its letter dad May 25, 2011 addressed to the International Chamber of Commerce or

commencing or initiating or proceeding with any other proceeding of any nature whatsoever on the basis of the Share Purchase Agreement dated December 10, 2004.

(e) This Hon'ble court be pleased to order and decree that

upon the Order dated December 2, 2010 passed by the Securities and Exchange Board of India being vacated or

inoperative by any reason whatsoever or appropriately modified, Defendant No. 1 shall in accordance with terms of the Memorandum of Understanding dated march 17, 2010,

sell to the Plaintiff 50,00,000 (Fifty lac) equity shares held by Defendant no. 1 in Defendant No.2 Company and do all other acts, deeds and things as may be necessary to complete the sale of the aforesaid equity shares in favour of

the plaintiff in terms of the MOU March 17, 2009.

(f) that in addition to the reliefs in prayer (e), Defendant No. 1 be ordered and decreed to pay the Plaintiff as and by way of liquidated damages such sum as may be ascertained by this Hon'ble court upon enquiry. "

(w) On 17th August, 2011, this Court granted ad interim order in

Notice of Motion No. 2465 of 2011 against the petitioner herein from

carrying on or proceeding with or prosecuting arbitration proceeding

initiated by the petitioner herein before the International Chamber of

Commerce vide its letter dated 22nd May, 2011 or commencing or

initiating or proceeding with any other proceedings of any nature

whatsoever against the first respondent/defendant on the basis of the

SPA dated 10th December, 2004. The said ad interim order is extended

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from time to time and is in operation. On 13 th October, 2011 the

International Chamber of Commerce appointed Mr. Tim Taylor as an

arbitrator in response to the request for arbitration made by the

petitioner. The first respondent vide its advocates letter dated 30 th

August, 2011 to the International Chamber of Commerce submitted its

jurisdictional objections without prejudice to its rights and contentions

in the suit filed and pending before this court and in particular that

there was no valid, binding and enforceable arbitration agreement

between the parties.

(x) The Petitioners herein thereafter filed statement of claim before

the learned arbitrator. It is pleaded that the said MOU did not render

the said SPA and in any event the arbitration clause mentioned in SPA

ineffective. The Petitioner disputed the authority of Mr. Gauer to sign

any such MOU.

(y) The Arbitration Proceeding filed by the petitioner which are

pending before the learned arbitrator appointed by International Chamber

of Commerce.

(z) On 19th September, 2011 the petitioners filed this petition praying

for direction to refer the first respondent to arbitration under clause

11.13 of the SPA and for the dismissal of the suit filed by the first

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respondent or in the alternative to stay the suit sine die.

3. Section 44 and 45 of the Arbitration and Conciliation Act, 1996 reads

thus :

Section 44 - Definition

In this Chapter, unless the context otherwise requires, "foreign award" means an arbitral award on differences between persons arising out of legal relationships, whether contractual or not, considered as commercial under the law in force in India, made on or after the 11th day of October, 1960--

(a) in pursuance of an agreement in writing for arbitration to which the

Convention set forth in the First Schedule applies, and

(b) in one of such territories as the Central Government, being satisfied

that reciprocal provisions have been made may, by notification in the Official Gazette, declare to be territories to which the said Convention applies.

Section 45 - Power of judicial authority to refer parties

to arbitration

Notwithstanding anything contained in Part I or in the Code of Civil Procedure, 1908 (5 of 1908), a judicial authority, when seized of an action in a matter in respect of which the parties have made an agreement referred to in section 44, shall, at the request of one of the parties or any person claiming through or under him, refer the parties to arbitration, unless it finds that the said agreement is null and void, inoperative or

incapable of being performed."

Article 6(4) of the Rules of Arbitration framed by International

Court of Arbitration reads as under :

"Unless otherwise agreed, the Arbitral Tribunal shall not cease to have jurisdiction by reason of any claim that the contract is null and void or allegation that it is non-existent,

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provided that the Arbitral Tribunal upholds the validity of the arbitration agreement. The Arbitral Tribunal shall continue to have jurisdiction to determine the respective

rights of the parties and to adjudicate their claims and pleas even though the contract itself may be non-existent or null and void."

4. Mr. Chagla, the learned senior counsel appearing for the petitioner made

the following submissions :

(a) the disputes between the parties fall within the four corners of

arbitration agreement. SPA is valid, subsisting, operative and is

capable of being performed. Under Section 45 of the Act, this court

thus has to refer the parties to arbitration in accordance with clause

11.13 of the SPA.

(b) The MOU relied upon by the first respondent was only

preparatory to the final agreement and was not concluded agreement.

(c) Mr. Gauer, the signatory of the said MOU had no authority to

negotiate and sign the said MOU on behalf of the petitioners. The

Petitioner had made it clear to the respondent about Mr. Gauer having

no authority to negotiate or sign any such MOU.

(d) Under Clause 11.11 it was agreed that no variation of the said

SPA would be valid unless it was in writing and signed by and on

behalf of each of the parties to that agreement. The said SPA was

between three parties. The MOU was between two parties and thus the

agreement between three parties cannot be set at naught and be

declared null and void by two parties. Two parties could not modify

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and or substitute the SPA signed by three parties. The rights and

obligations under the SPA would thus continue including arbitration

agreement. The MOU being in the teeth of clause 11.11 of SPA is not

valid or binding on the petitioners.

(e ) The validity of the MOU is not an admitted position. The first

respondent itself has filed the suit for declaration that the MOU is

valid, binding and subsisting contract between the parties.

(f)

The MOU is in violation of the pricing guidelines framed by

the Reserve Bank of India.

(g) The Arbitral Tribunal is already constituted by the International

Chamber of Commerce and the first respondent herein is party to the

said proceedings. The arbitral tribunal can rule on its own jurisdiction

as per Article 6(4) of the Rules of Arbitration framed by International

Chamber of Commerce. The arbitral tribunal has already decided to

rule on its own jurisdiction. Reliance also is placed on section 16 of

the Arbitration Act, 1996. The MOU is in breach of the provisions of

Security Contract Regulation Act and is illegal. Such illegal MOU

cannot supersede SPA and this issue can be considered only by the

arbitral tribunal.

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        (h)    The MOU is also in violation of the          Foreign Exchange

Management (transfer or issue of security by person resident outside

India) Regulations, 2000. Reliance is placed on Regulation 10(B)(2)

which requisites prior permission of the Reserve bank of India before

transfer of shares or equity debentures of Indian company by the person

resident outside India to the person resident in India subject to

adherence to pricing guidelines, documentation and reporting

requirements for such transfers as may be specified by Reserve Bank

from time to time. It is submitted that under the MOU the shares are

offered at discounted prices which is contrary to the provisions of

FEMA. The MOU being not enforceable agreement, and thus cannot

be construed as an agreement superseding the SPA. Subsequent

agreement has to be valid and legally enforceable agreement. The

conduct of the petitioner would not make the illegal agreement as legal.

(i) Reliance is placed on the e-mail dated 7 th April, 2010, 7th May,

2010, 25th May, 2010, 16th June, 2010, 18th August, 2010, 1st September,

2010 and 16th June, 2011 to suggest that the final agreement was yet to

be executed and the MOU was only preparatory to final agreement. The

learned senior counsel placed reliance on Para 114 of the judgment of

the Supreme Court delivered on 28th September, 2012 in the case of

Chloro Controls India P. Ltd. Vs. Severn Trent Water Purification

Inc.1 on the issue of scope of jurisdiction of court under section 45 of

the Arbitration and Conciliation Act, 1996 which reads thus :

    1 2012 (4) ArbLR 1 (SC)




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"114. An application for appointment of arbitral tribunal under Section 45 of the 1996 Act would also be governed by the provisions of Section 11(6) of the Act. This question is

no more res integra and has been settled by decision of a Constitution Bench of seven Judges of this Court in the case of SBP and Co. v. Patel Engineering Limited and Anr.

MANU/SC/1787/2005 : (2005) 8 SCC 618, wherein this Court held that power exercised by the Chief Justice is not an administrative power. It is a judicial power. It is a settled principle that the Chief Justice or his designate Judge will

decide preliminary aspects which would attain finality unless otherwise directed to be decided by the arbitral tribunal. In para 39 of the judgment, the Court held as under :

"It is necessary to define what exactly the Chief Justice, approached with an application under Section

11 of the Act, is to decide at that stage. Obviously, he has to decide his own jurisdiction in the sense whether the party making the motion has approached the right High Court. He has to decide whether there

is an arbitration agreement, as defined in the Act and whether the person who has made the request before him, is a party to such an agreement. It is necessary to indicate that he can also decide the question whether the claim was a dead one; or a long-barred claim that

was sought to be resurrected and whether the parties have concluded the transaction by recording

satisfaction of their mutual rights and obligations or by receiving the final payment without objection. It may not be possible at that stage, to decide whether a live claim made, is one which comes within the

purview of the arbitration clause. It will be appropriate to leave that question to be decided by the Arbitral Tribunal on taking evidence, along with the merits of the claims involved in the arbitration. The Chief Justice has to decide whether the applicant has satisfied the conditions for appointing an arbitrator

under Section 11(6) of the Act. For the purpose of taking a decision on these aspects, the Chief Justice can either proceed on the basis of affidavits and the documents produced or take such evidence or get such evidence recorded, as may be necessary. We think that adoption of this procedure in the context of the Act would best serve the purpose sought to be achieved by the Act of expediting the process of arbitration, without too many approaches to the court at various stages of the proceedings before the Arbitral Tribunal."

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    (j) The learned senior counsel      placed reliance also on the following




                                                                                 

paragraphs of the Judgment in Chloro Controls India Pvt. Ltd. (supra):

"55. The language of Section 45 read with Schedule I of the 1996 Act is worded in favour of making a reference to arbitration when a party or any person claiming through or under him approaches the Court and the Court is satisfied that the agreement is valid, enforceable and operative. Because of the legislative intent, the

mandate and purpose of the provisions of Section 45 being in favour of arbitration, the relevant provisions would have to be construed liberally to achieve that object. The question that immediately follows is as to what are the aspects which the Court should consider while dealing with an application for reference to

arbitration under this provision.

56. The 1996 Act makes it abundantly clear that Part I of the Act

has been amended to bring these provisions completely in line with the UNCITRAL Model Law on International Commercial Arbitration (for short, the 'UNCITRAL Mode Law'), while

Chapter I of Part II is meant to encourage international commercial arbitration by incorporating in India, the provisions of the New York Convention. Further, the protocol on Arbitration Clauses (for short 'Geneva Convention') was also incorporated as part of Chapter II of Part II.

57. For proper interpretation and application of Chapter I of Part II, it is necessary that those provisions are read in conjunction

with Schedule I of the Act. To examine the provisions of Section 45 without the aid of Schedule I would not be appropriate as that is the very foundation of Section 45 of the Act. The International Council for Commercial Arbitration prepared a Guide to the

Interpretation of 1958 New York Convention, which lays/contains the Road Map to Article . Section 45 is enacted materially on the lines of Article of this Convention. When the Court is seized with a challenge to the validity of an arbitration agreement, it would be desirable to examine the following aspects :

1. Does the arbitration agreement fall under the scope of the

Convention?

2. Is the arbitration agreement evidenced in writing?

3. Does the arbitration agreement exist and is it substantively valid?

4. Is there a dispute, does it arise out of a defined legal relationship, whether contractual or not, and did the parties intend to have this particular dispute settled by arbitration?

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5. Is the arbitration agreement binding on the parties to the dispute that is before the Court?

6. Is this dispute arbitrable?

60. Amongst the initial steps, the Court is required to

enquire whether the dispute at issue is covered by the arbitration agreement. Stress has normally been placed upon three characteristics of arbitrations which are as follows - (1) arbitration is consensual. It is based on the parties' agreement;

(2) arbitration leads to a final and binding resolution of the dispute; and

(3) arbitration is regarded as substitute for the court litigation and

results in the passing of an binding award.

76. Where the Court which, on its judicial side, is seized of an action in a matter in respect of which the parties have made an arbitration agreement, once the required ingredients

are satisfied, it would refer the parties to arbitration but for the situation where it comes to the conclusion that the agreement is null and void, inoperative or incapable of being performed. These expressions have to be construed somewhat strictly so as to ensure that the Court returns a

finding with certainty and on the correct premise of law and fact as it has the effect of depriving the party of its right of

reference to arbitration. But once the Court finds that the agreement is valid then it must make the reference, without any further exercise of discretion {refer General Electric Co. v. Renusagar Power Co. MANU/SC/0007/1987 : (1987) 4

SCC 137. These are the issues which go to the root of the matter and their determination at the threshold would prevent multiplicity of litigation and would even prevent futile exercise of proceedings before the arbitral tribunal.

78. This is the position of law in France and in some other countries, but as far as the Indian Law is concerned, Section 45 is a legislative mandate and does not admit of any ambiguity. We must take note of the aspect of Indian law that Chapter I of Part II of the 1996 Act does not contain any provision analogous to Section 8(3) under Part I of the Act. In other words, under the Indian Law, greater obligation is cast upon the Courts to determine whether the agreement is valid, operative and capable of being performed at the

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threshold itself. Such challenge has to be a serious challenge to the substantive contract or to the agreement, as in the absence of such challenge, it has to be found that the

agreement was valid, operative and capable of being performed; the dispute would be referred to arbitration. (State of Orissa v. Klockner and Company and Ors.

MANU/SC/1460/1996 : AIR 1996 SC 2140.

117. In National Insurance Co. Limited v. Boghara Polyfab (P) Limited MANU/SC/4056/2008 : (2009) 1 SCC 267, another equi-bench of this Court after discussing various

judgments of this Court, explained SBP & Co. (supra) in relation to scope of powers of the Chief Justice and/or his designate while exercising jurisdiction under Section 11(6), held as follows :

22. Where the intervention of the court is sought for appointment of an Arbitral Tribunal under Section 11, the duty of the Chief

Justice or his designate is defined in SBP & Co. This Court identified and segregated the preliminary issues that may arise for consideration in an application under Section 11 of the Act into

three categories, that is, (i) issues which the Chief Justice or his designate is bound to decide; (ii) issues which he can also decide, that is, issues which he may choose to decide; and (iii) issues which should be left to the Arbitral Tribunal to decide.

22.1. The issues (first category) which the Chief Justice/his designate will have to decide are:

(a) Whether the party making the application has approached the appropriate High Court.

(b) Whether there is an arbitration agreement and whether the

party who has applied under Section 11 of the Act, is a party to such an agreement.

22.2. The issues (second category) which the Chief Justice/his designate may choose to decide (or leave them to the decision of the Arbitral Tribunal) are:

(a) Whether the claim is a dead (long-barred) claim or a live claim.

(b) Whether the parties have concluded the contract/transaction by recording satisfaction of their mutual rights and obligation or by receiving the final payment without objection.

22.3. The issues (third category) which the Chief Justice/his designate should leave exclusively to the Arbitral Tribunal are:

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(i) Whether a claim made falls within the arbitration clause (as for example, a matter which is reserved for final decision of a departmental authority and excepted or excluded from

arbitration).

(ii) Merits or any claim involved in the arbitration.

118. We may notice that at first blush, the judgment in the case of Shree Ram Mills (supra) is at some variance with the judgment in the case of National Insurance Co. Ltd. (supra) but when examined in depth, keeping in view the judgment in the case of

SBP & Co. (supra) and provisions of Section 11(6) of the 1996 Act, both these judgments are found to be free from contradiction and capable of being read in harmony in order to bring them in line with the statutory law declared by the larger Bench in SBP & Co. (supra). The expressions "Chief Justice does not in strict

sense decide the issue" or "is prima facie satisfied", will have to be construed in the facts and circumstances of a given case.

Where the Chief Justice or his designate actually decides the issue, then it can no longer be prima facie, but would be a decision binding in law. On such an issue, the Arbitral Tribunal

will have no jurisdiction to re-determine the issue. In the case of Shree Ram Mills (supra), the Court held that the Chief Justice could record a finding where the issue between the parties was still alive or was dead by lapse of time. Where it prima facie found the issue to be alive, the Court could leave the question of

limitation and also open to be decided by the arbitral tribunal."

(k) Mr. Chagla, the learned senior counsel also placed reliance upon

the judgment of the Supreme Court in the case of Oil and Natural Gas

Commission Versus Western Company of North America 2, and more

particularly paragraph 18 in support of the plea that the injunction

cannot be granted against the parties from proceeding with arbitration

unless the court is convinced that it is one of those rarest cases where

such injunction is warranted and if no such injunction is granted, it

would be oppressing the parties to proceed with arbitration. Para 18 of

the said judgment reads thus :

"18. In the result we are of the opinion that the facts of this 2 (1987) 1 Supreme Court Cases 496

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case are eminently suitable for granting a restraint order as prayed by ONGC. It is no doubt true that this Court sparingly exercises the jurisdiction to restrain a party from

proceeding further with an action in a foreign court. We have the utmost respect for the American Court. The question however is whether on the facts and circumstances of this

case it would not be unjust and unreasonable not to restrain the Western Company from proceeding further with the action in the American Court in the facts and circumstances outlined earlier. We would be extremely slow to grant such a

restraint order but in the facts and circumstances of this matter we are convinced that this is one of those rare cases where we would be failing in our duty if we hesitate in granting the restraint order, for, to oblige the ONGC to face the aforesaid proceedings in the American Court would be

oppressive in the facts and circumstances discussed earlier. But before we pass an appropriate order in this behalf, we

must deal with the plea that the High Court does not have the jurisdiction to grant such a restraint order even if the proceeding in the foreign court is considered to be

oppressive. Counsel for the Respondent has placed reliance on Cotton Corporation of India v. United Industrial Bank MANU/SC/0375/1983 : [1983]3SCR962 in support of this plea. In Cotton Corporation's case, the question before the

Court was whether in the context of Section 41(b) of the Specific Relief Act, the Court was justified in granting the

injunction. The said provision runs thus:

41. An injunction cannot be granted:

(a)

(b) to restrain any person from instituting or prosecuting any proceeding in a court not subordinate to that from which the injuction is sought;

(Emphasis added)

This provision, in our opinion, will be attracted only in a fact- situation where an injuction is sought to restrain a party from instituting or prosecuting any action in a Court in India which is either of co-ordinate jurisdiction or is higher to the Court from which the injuction is sought in the hierarchy of Courts in India. There is nothing in Cotton Corporation's case which supports the proposition that the High Court has no jurisdiction to grant an injunction or a restraint order in exercise of its inherent powers in a situation like the one in the present case. In fact this Court had granted such a restraint order in V/O Tractoroexport, Moscow v. Tarapore & Co. and Anr. MANU/SC/0003/1969 : [1970]3SCR53

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and had restrained a party from proceeding with an arbitration proceedings in a foreign country (in Moscow). As we have pointed out earlier, it would be unfair to refuse the restraint order

in a case like the present one for the action in the foreign Court would be oppressive in the facts and circumstances of the case. And in such a situation the Courts have undoubted jurisdiction to

grant such a restraint order whenever the circumstances of the case make it necessary or expedient to do so or the ends of justice so require. The following passage extracted from paragraph 1039 of Halsbury's Laws of England Vol. 24 at page 579 supports this point of view:

With regard to foreign proceedings the court will restrain a person within its jurisdiction from instituting or prosecuting proceedings in a foreign court whenever the circumstances of the case make such an interposition necessary or expedient. In a proper case the

court in this country may restrain person who has actually recovered judgment in a foreign court from proceeding to enforce that judgment. The jurisdiction is discretionary and the court will

give credit to foreign courts for doing justice in their own jurisdiction.

It was because this position was fully realized that it was argued on behalf of the Respondent that the action in the U.S. A. Court could not be considered as being oppressive to the ONGC. We have already dealt with this aspect and reached a conclusion adverse to Western Company. There is thus no merit in the

submission that the High Court of Bombay has no jurisdiction in this behalf."

(l) The learned senior counsel placed reliance on para 7-058 of the

Russel on Arbitration in support of the plea that no injunction to restrain

arbitration proceedings shall be granted by this court. Para 7-058 reads as

under :

"Injunctions to restrain arbitral proceedings : Injunctions to restrain arbitrations are, at least in England, few and far between and becoming fewer still over time. This is principally because of the acceptance of the principle that the arbitrator should usually determine his own jurisdiction and so to restrain an arbitration by way of injunction would be inconsistent with the scheme of the Arbitration Act, 1996. However, there are exceptional circumstances where an injunction to restrain an arbitration may be obtained. Such an injunction is different in nature from an injunction

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granted in support of arbitral proceedings, but it is convenient to mention this type of injunction at this stage. Subject to the extreme limitations on the exercise of the

court's discretion set out below, the possibility of obtaining an injunction to restrain the continuation of arbitral proceedings can arise in the following cases :

Case 1: where one party commences an action before the court and successfully opposes a stay (whether under s. 9 or the court's inherent jurisdiction) on the ground that the arbitration agreement is invalid and the arbitral proceedings

based on the invalid agreement continue in defiance of the court's findings. This case is also likely to cover situations where the court has decided that it, rather than the arbitrators, must decide an issue as to the jurisdiction of the arbitrators upon a s.9 stay application having been made and

where there is a risk that the arbitrators might proceed to consider the same jurisdictional issue pending the court's

decision.

Case 2 : where a party does not wish to take part in the arbitral proceedings but disputes the substantive jurisdiction

of the tribunal and wants to prevent that tribunal determining claims against him. It is virtually impossible to obtain an injunction on this basis absent truly exceptional circumstances; and

Case 3 : where all parties to an arbitration agreement apply to the court under s. 32 of the Arbitration Act, 1996

and despite their request for a suspension of the arbitral proceedings the tribunal proceeds with a view to making an award."

(m) Mr. Chagla, the learned senior counsel also placed reliance on

para 25 of the judgment of the Supreme Court in the case of Renusagar

Power Co. Ltd. Vs. General Electric Company and another 3, in

support of his plea that the arbitration clause agreed upon by the parties

under clause 11.36 of the SPA is very widely worded and thus the

arbitral tribunal appointed by the International Chamber of Commerce

has power to decide the question of existence, validity and effect of the

3 AIR 1985 Supreme Court 1156

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arbitration agreement. Para 25 of the said judgment reads thus :

"25. Four propositions emerge very clearly from the

authorities discussed above :

1. Whether a given dispute inclusive of the arbitrator's

jurisdiction comes within the scope or purview of an arbitration clause or not primarily depends upon the terms of the clause itself; it is a question of what the parties intend to provide and what language they employ,

2. Expressions such as "arising out of" or "in respect of" or "in connection with" or "in relation to" or "in consequence of" or "concerning" or "relating to" the contract are of the widest amplitude and content and include even questions as to the existence, validity and effect (scope) of the arbitration agreement.

3. Ordinarily as a rule an arbitrator cannot clothe himself with

power to decide the questions of his own jurisdiction (and it will be for the Court to decide those questions) but there is nothing to prevent the parties from investing him with power to decide those questions, as for instance, by a collateral or separate agreement

which will be effective and operative.

4. If, however, the arbitration clause, so widely worded as to include within its scope questions of its existence validity and effect (scope), is contained in the underlying commercial contract

then decided cases have made a distinction between question as to the existence and or validity of the agreement on the one hand

and its effect (scope) on the other and have held that in the case of former those questions cannot be decided by the arbitrator, as by sheer logic the arbitration clause must fall along with underlying commercial contract which is either non-existent or

illegal while in the case of the latter it will ordinarily be for the arbitrator to decide the effect or scope of the arbitration agreement i.e. to decide the issue of arbitrability of the claims preferred before him."

(n) Mr. Chagla, relied upon paragraphs 2.2 and 2.3 of Revised

pricing guidelines issued by reserve Bank of India which in support of

this plea that MOU is contrary to pricing guidelines issued by R.B.I.

Paragraphs 2.2 and 2.3 read as under :

"2.2 Transfer by Resident to Non-resident (i.e. to foreign

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national, NRI, FII and incorporated non resident entity other than erstwhile OCB).

(a) where shares of an Indian company are listed on a a recognized stock exchange in India, the price of shares transferred by way of sale shall not be less than the price at

which a preferential allotment of shares can be made under the SEBI Guidelines, as applicable, provided that the same is determined for such duration as specified therein, preceding the relevant date, which shall be the date of purchase of sale

of shares.

(b) where the shares of an Indian company are not listed on a recognized stock exchange in India, the transfer of shares shall be at a price not less than the fair value to be

determined by a SEBI registered Category-I Merchant Banker or a Chartered Accountant as per the discounted free

cash flow method.

The price per share arrived at should be certified by a SEBI registered Category-I-Merchant Banker/Chartered Accountant.

2.3 Transfer by Non-resident (i.e. by incorporated non- resident entity, erstwhile OCB, foreign national, NRI and

FII) to resident.

Price of shares transfered by way of sale, by non-resident to resident shall not be more than the minimum price at which the transfer of shares can be made from a resident to a non-

resident as given in para 2.2 above."

5. Mr. Tulzapurkar, learned senior counsel appearing on behalf of the first

respondent on the other hand submits as under :

(a) Section 45 of the Arbitration and Conciliation Act, 1996

(hereinafter referred to as the "Arbitration Act") does not bar the

institution of a suit merely because one party alleges that there subsists

an arbitration agreement between the parties to the suit. In a petition

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under Section 45 of the Arbitration Act, a mere averment by the

petitioner that there subsists an arbitration agreement between the

parties to a suit does not entail an automatic reference of the disputes

and the parties to arbitration. In view of the express provisions of

section 45, the judicial authority, before whom the Suit is pending is

required to adjudicate upon the existence, validity, operability and

enforceability of the alleged arbitration agreement and only after it is

satisfied that the arbitration agreement being propounded, is valid,

operative, enforceable and covers the disputes in the suit should the

judicial authority refer the parties to arbitration.

(b) The onus is on the petitioner to prove that the conditions in

section 45 of the Act are satisfied when he applies to the judicial

authority for referring the parties to arbitration. The Petitioners have

failed to prove the conditions under section 45 required to be satisfied

before the judicial authority can refer the parties to arbitration. The

SPA dated 10th December, 2004 is totally substituted, terminated by

mutual consent, superseded, replaced entirely by the MOU signed by

the petitioner and first respondent. Even the arbitration clause

contained in the SPA also perished. The learned senior counsel placed

reliance on the judgment of the Supreme Court in the case of Nathani

Steels Ltd. Vs. Associated Constructions4 and more particularly para

3 which reads thus :

"3.................... Even otherwise we feel that once the

4 1995 Supp (3) Supreme Court Cases 324

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parties have arrived at a settlement in respect of any dispute or difference arising under a contract and that dispute or the difference is amicably settled by way of

a final settlement by and between the parties, unless that settlement is set aside in proper proceedings, it cannot lie in the mouth of one of the parties to the

settlement to spurn it on the ground that it was a mistake and proceed to invoke the Arbitration clause. If this is permitted the sanctity of contract, the settlement also being a contract, would be wholly lost

and it would be open to one party to take the benefit under the settlement and then to question the same on the ground of mistake without having the settlement set aside. In the circumstances, we think that in the instant case since the dispute or difference was finally

settled and payments were made as per the settlement, it was not open to the respondent unilaterally to treat

the settlement as non est and proceed to invoke the Arbitration clause. We are, therefore, of the opinion that the High Court was wrong in the view that it

took."

(c ) The learned senior counsel placed reliance on the judgment of

the Supreme Court in the case of Damodar Valley Corporation Vs.

K.K. Kar5 and more particularly paragraphs 7, 9 and 10 which reads

thus :

"7. The contention that has been canvassed before us is that

as there has been a full and final settlement under the contract, the rights and obligations under the contract do not subsist and consequently the arbitration clause also perishes along with the settlement. If so, the dispute whether there has or has not been a settlement cannot be the subject of an

arbitration. There is, in our view, a basic fallacy underlying this submission. A contract is the creature of an agreement between the parties and where the parties under the terms of the contract agree to incorporate an arbitration clause, that clause stands apart from the rights and obligations under that contract, as it has been incorporated with the object of providing a machinery for the settlement of disputes arising in relation to or in connection with that contract. The questions of unilateral repudiation of the rights and

5 (1974) 1 Supreme Court Cases 141

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obligations under the contract or of a full and final settlement of the contract relate to the performance or discharge of the contract. Far from putting an end to the

arbitration clause, they fall within the purview of it. A repudiation by one party alone does not terminate the contract. It takes two to end it, and hence it follows that as

the contract subsists for the determination of the rights and obligations of the parties, the arbitration clause also survives. This is not a case where the plea is that the contract is void, illegal or fraudulent etc., in which case, the entire

contract along with the arbitration clause is non est, or voidable. As the contract is an outcome of the agreement between the parties it is equally open to the parties thereto to agree to bring it to an end or to treat it us if it never existed.

It may also be open to the parties to terminate the previous

contract and substitute in its place a new contract or alter the original contract in such a way that it cannot subsist. In all

these cases, since the entire contract is put an end to the arbitration clause, which is a part of it, also perishes along with it, Section 62 of the Contract Act incorporates this

principle when it provides that if this parties to a contract agree to substitute a new contract or to rescind or alter it, the original contract need not be performed. Where, therefore, the dispute between the parties is that the contract itself does

not subsist either as a result of its being substituted by a new contract or by rescission or alteration, that dispute cannot be

referred to the arbitration as the arbitration clause itself would perish if the averment is found to be valid. As the very jurisdiction of the arbitrator is dependent upon the existence of the arbitration clause under which he is appointed, the parties have no right to invoke a clause which

perishes with the contract.

9. We have adverted to these several aspects merely to show that contracts being consensual, the question whether the arbitration clause survives or perishes would depend upon

the nature of the controversy and its effect upon the existence or survival of the contract itself. Where the binding nature of the contract is not disputed, but a difference has arisen between the parties thereto as to whether there has been a breach by one side or the other or whether one or both the parties have been discharged from further performance such differences are "upon" or "in relation to" or "in connection with" the contract. That a contract has come to an end by frustration does not put an end to the contract for all purposes, because there may be rights and obligations which had arisen earlier when it had

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not come to an end, as it is only the future performance of the contract that has come to an end. It is, therefore, clear that a dispute as to the binding nature of the contract cannot

be determined by resent to arbitration, because as we have stated earlier, the arbitration clause itself stands or falls according to the determination of the question in dispute. It

may be stated that the Privy Council had in Hirji Mulji v. Cheong Yue Steamship Company held that as the authority of a person claiming arbitral jurisdiction depends on the existence of some submission to him by the parties of the

subject-matter of the complaint, a contract that has determined is in the same position as one that has never been concluded at all". The observations of Lord Summer in that case as to the effect of frustration of the contract before its performance on the arbitration clause inasmuch as

frustration operates automatically and the contract ceases to exist for all purposes save for the enforcement of claims

vested before that date of which there were none, were dissented from in Heyman and Anr. v. Darwins Ltd. , though Lord Macmillan did not want to express any opinion on this

question. Be that it may, in Heyman's case MANU/SC/0180/1959 : [1960]1SCR493 . Lord Macmillan pointed out at pp. 370-371 :

If it appears that, the dispute is whether there has ever been a

binding contract between the parties, such a dispute cannot be covered by an arbitration clause in the challenged contract. If

there has never been a contract at all, there has never been as part of it an agreement to arbitrate. The greater includes the less. Further, a claim to set aside a contract on such grounds as fraud, duress or essential error cannot be the subject-matter of a reference under an arbitration clause in the contract sought to be

set aside. Again, an admittedly binding contract containing a general arbitration clause may stipulate that in certain events the contract shall come to an end. If a question arises whether the contract has for any such reason come to an end I can see no reason why the arbitrator should not decide that question. It is

clear, too, that the parties to a contract may agree to bring it to an end to all intents and purposes and to treat it as if it had never existed. In such a case, if there be an arbitration clause in the contract, it perishes with the contract. If the parties substitute a new contract for the contract which they have abrogated the arbitration clause in the abrogated contract cannot be invoked for the determination of questions under the new agreement. All this is more or less elementary.

10. The above observations of Lord Macmillan as well as the observations of other Law Lords in Heyman's case were considered by this Court in The Union of India v. Kishorilal

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Gupta and Bros. MANU/SC/0180/1959 : [1960]1SCR493 where the respondents had entered into three contracts with the appellant each of which contained an arbitration clause. Before

the contracts had been fully executed, disputes arose between the parties one alleging that the other was committing a breach of the contract The parties then entered into three fresh contracts on

successive dates purporting to settle these disputes on the terms therein contained. By the first two of these settlement contracts the respondents agreed to pay to the appellant certain moneys in settlement respectively of the disputes relating to the first two original contracts. By the last of these settlement contracts the

respondents agreed to pay to the appellant in specified installments certain moneys in settlement of the disputes relating to the third original contract as also the moneys which had then become due on the first two settlement contracts and had not been paid. This settlement further undertook to hypothecate certain

properties to secure the due repayment of these moneys. In the end it provided as follows :

The contracts stand finally concluded in terms of the settlement and no party will have any further or other claim against the other.

On a question whether the arbitration clauses in the original contracts had ceased to have any effect and the contracts stood finally determined as a result of the settlement contracts, the Calcutta High Court held that the first original contract had not

been abrogated by the settlement in respect of it, but the third original contract and the arbitration clause contained in it had

ceased to exist as a result of the last settlement, as such the arbitrator had no jurisdiction to arbitrate under that arbitration clause. Imam and Subba Rao, JJ., (Sarkar, J., dissenting) confirmed the High Court's decision. They held that the three contracts were settled and the third settlement contract was in

substitution of the three contracts; and, after its execution, all the earlier contracts were extinguished and the arbitration clause contained therein also perished along with them. They further held that the new contract was not a conditional one and after its execution the parties should work out their rights only under its

terms. Sarkar, J., however, held that the award was valid and could not be set aside as the third settlement neither expressly put an end to the arbitration clause, nor, considered as an accord and satisfaction, did it have that effect. He observed that an arbitration clause stands apart from the rest of the contract in which it is contained. It does not impose on the one party an obligation in favour of the other; it only embodies an agreement that if any dispute arises with regard to any obligation which one party has undertaken to the other, such dispute shall be settled by arbitration. An accord and satisfaction which is concerned with the obligations arising from the contract, does not affect an arbitration clause contained in it. It will be observed that while

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the decision rested on the interpretation of the settlement clause as to whether the original contracts were put an end to and in their place new contracts were substituted with the result that the

arbitration clause did not survive, the principle of law that where the parties put an end to the contract as if it had never existed and substitute it with a new contract governing the rights and

obligations of the parties thereunder, the arbitration clause also perishes along with it, was accepted as correct by all the learned Judges."

(d) The learned senior counsel also placed reliance upon the judgment of

the Supreme Court in the case of National Insurance Company Limited

Vs. Boghara Polyfab Private Limited6 in which the Supreme Court has

held that the principles laid down ig in the case of Union of India Vs.

Kishorilal Gupta and Bros. continue to hold good and apply to the matters

under Arbitration & Conciliation Act, 1996. Para 16 of the said judgment

reads thus :

"16. In Union of India v. Kishorilal Gupta & Bros. [1960]1SCR493 ,

this Court considered the question whether the arbitration clause in the contract will cease to have effect, when the contract stood discharged as

a result of settlement. While answering the question in the affirmative, a three Judge Bench of this Court culled out the following general principles as to when arbitration agreements operate and when they do not operate:

(i) An arbitration clause is a collateral term of a contract distinguished from its substantive terms; but none the less it is an integral part of it.

(ii) Howsoever comprehensive the terms of an arbitration clause may be, the existence of the contract is a necessary condition for its operation; and the

arbitration clause perishes with the contract.

(iii) A contract may be non est in the sense that it never came legally into existence or it was void ab initio. In that event, as the original contract has no legal existence, the arbitration clause also cannot operate, for along with the original contract, it is also void.

(iv) 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. In such an event, as the original contract is extinguished by the substituted one, the arbitration clause of the original 6 (2009) 1 Supreme Court Cases 267

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contract perishes with it.

(v) Between the two extremes referred to in paras (c) and (d), are the cases

where the contract may come to an end, on account of repudiation, frustration, breach etc. In these cases, it is the performance of the contract that has come to an end, but the contract is still in existence for certain

limited purposes, in respect of disputes arising under it or in connection with it. When the contracts subsist for certain purposes, the arbitration clauses in those contracts operate in respect of those purposes.

The principle stated in para (i) is now given statutory recognition in Section

16(1)(a) of the Act. The principle in para (iii) has to be now read subject to Section 16(1)(b) of the Act. The principles in paras (iv) and (v) are clear and continue to be applicable. The principle stated in para (ii) requires further elucidation with reference to contracts discharged by performance or accord and satisfaction."

(e)

It is submitted that the MOU does not contain any arbitration clause.

Clause 3 of the MOU categorically provides that upon signing of the said

MOU, SPA dated 10th December, 2004 shall stand null and void. Under

Section 45, the Judicial Authority can refer the parties to arbitration unless

the Judicial Authority finds that the agreement referred to in section 44 is null

and void inoperative or incapable of being performed. It is submitted that

by the MOU, the SPA is declared null and void and inoperative and the said

SPA is incapable of being performed. It is submitted that MOU is even partly

acted upon by the petitioner also. The Petitioner has sold 3 lac. Shares in

the part implementation of the MOU. The Petitioner had also called upon

respondent no. 1 to withdraw arbitration petition filed by the first respondent

in this court under section 9 in view of such agreement recorded in clause 3

of the MOU which was implemented by the first respondent by withdrawing

the said petition. The interim order passed in favour of the first respondent

restraining the petitioners from selling shares came to be vacated by virtue

of such withdrawal of the petition. The Petitioner has failed to prove that

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SPA is valid, subsisting, operative, capable of being performed and is not

null and void. As there being no arbitration clause in MOU, the petition

itself is thoroughly misconceived and is not maintainable.

(f) As far as contention of the petitioner that the MOU is not final,

but preparatory document is concerned, the learned senior counsel

submits on behalf of the first respondent that the MOU contained all

the essence of the terms such as price and quantum of shares and did

not contemplate execution of any other formal document. The

Petitioner has taken benefit of the MOU and has sold 3 lac. shares of

the second respondent company in the market. Even if it is construed

that the MOU envisaged execution of the further and more detailed

agreement, the same does not in any manner detract from the binding

legal character of the MOU. He submits that the right of pre-emption

given to the first respondent under the SPA is done away totally with

the MOU. The first respondent gets only limited shares under the

MOU. As set out in the MOU, the first respondent has given up the

right of pre-emption in respect of the balance shares. The MOU is at

complete variance with the terms of the SPA. New terms were agreed

upon between the parties in substitution of the SPA with independent

terms which are binding upon the parties and it does not contain

arbitration clause. The SPA is totally replaced by the MOU. The learned

senior counsel placed reliance on the judgment of the Supreme Court in

th case of Kollipara Sriramulu Vs. T. Aswatha Narayana and Ors. 7

7 (1968) 3 SCR 387

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and more particularly paragraph No. 3 in support of his plea that mere

reference to the future former contract will not prevent binding bargain

between the parties and mere fact that the parties refer to preparation

of the agreement by which the terms agreed upon and to be put in

more formal shape does not prevent existence of the binding contract

which reads thus :

"3. We proceed to consider the next question raised in these

appeals, namely whether the oral agreement was ineffective

because the parties contemplated the execution of a formal

document or because the mode of payment of the purchase

money was not actually agreed upon. It was submitted on behalf

of the appellant that there was no contract because the sale was

conditional upon a regular agreement being executed and so such

agreement was executed. We do not accept this argument as

correct. It is well-established that a mere reference to a future

formal contract will not prevent a binding bargain between the

parties. The fact that the parties refer to the preparation of an

agreement by which the terms agreed upon are to be put in a

more formal shape does not prevent the existence of a binding

contract. There are, however, cases where the reference to a

future contract is made in such terms as to show that the parties

did not intend to be bound until a formal contract is signed. The

question depends upon the intention of the parties and the special

circumstances of each particular case. As observed by the Lord

Chancellor (Lord Cranworth) in Ridgway v. Wharton the fact of a

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subsequent agreement being prepared may be evidence that the

previous negotiations did not amount to a concluded agreement,

but the mere fact that persons wish to have a formal agreement

drawn up does not establish the proposition that they cannot be

bound by a previous agreement In Von Hatzfeldt-Wildenburg v.

Alexander it was stated by Parker, J. as follows :

"It appears to be well settled by the authorities that if the

documents or letters relied on as constituting a contract

contemplate the execution of a further contract between the

parties, it is a question of construction whether the

execution of the further contract is a condition or term of

the bargain or whether it is a mere expression of the desire

of the parties as to the manner in which the transaction

already agreed to will in fact go through. In the former case

there is no enforceable contract either because the condition

is unfulfilled or because the law does not recognize a

contract to enter into a contract. In the latter case there is a

binding contract and the reference to the more formal

document may be ignored.""

(g) It is submitted that Section 16 of the Arbitration Act would apply and

give jurisdiction to the tribunal to decide on its own jurisdiction only when

the parties approach the arbitral tribunal without recourse to either Section 8

or section 45 of the Arbitration Act. Where therefore, a petition/application

under section 8 or section 45 is pending before a judicial authority, the

determination as to whether or not there subsists a valid arbitration

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agreement between the parties cannot be left to be decided by the arbitral

tribunal and must be decided finally by the judicial authority and the parties

are bound by such decision. The judicial authority has to determine these

questions as jurisdictional facts at the threshold, without which no order of

reference can be made.

(h) On the issue as to whether the MOU was preparatory to final

and concluded agreement and whether Mr. Gauer had no authority to

negotiate and sign the MOU raised by the petitioner is concerned, Mr.

Tulzapurkar submitted that the authority of Mr. Gauer was ig never

challenged by the petitioner prior to filing of the suit by the first

respondent. Mr. Gauer was authorized signatory of the petitioner and

who was at the relevant time Managing Director of the petitioner's

parent company and was admittedly authorized to negotiate the

settlement/transactions. The learned counsel placed reliance on

paragraph 3(h)(viii) of the Petitioner's affidavit in reply to Notice of

Motion filed by the first respondent in suit No. 2287 of 2011 in which

the petitioner has admitted that Mr. Gauer travelled to India for the

purpose of negotiating the terms of settlement and executing the MOU.

Mr. Gauer thereafter corresponded on behalf of the petitioner with the

representative of the first respondent and also extended period of

MOU. The objection regarding the authority of Mr. Gauer was not even

raised by the petitioner in its request for arbitration filed before the

International Chamber of Commerce. The Petitioner has also admitted

extension of MOU mutually in paragraph 8 of the affidavit in rejoinder

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dated 1st December, 2011 filed by the petitioner in Notice of Motion in

Suit No. 2287 of 2011. After execution of the MOU, the petitioner

through its advocate's letter dated 18th March, 2010, after admitting

that the MOU was duly executed on petitioner's behalf by its

representative Mr. Han Warner Gauer called upon the respondents to

act on the same and to withdraw the arbitration Petition (1022 of 2009)

and also notice dated 20th November, 2009 invoking arbitration. It is

thus clear that the execution of the MOU by the petitioner through Mr.

Gauer who had authority to sign on behalf of the petitioner was

admitted, acted upon and dispute now raised is afterthought. No

affidavit has been filed by Mr. Gauer alleging that he has no authority

to execute the MOU on behalf of the petitioner. Respondent no.1 also

acted upon the said MOU and withdrew the arbitration Petition No.

1022 of 2009 and also notice invoking arbitration. The interim order in

favour of respondent no. 1 stood vacated. The Petitioner has taken

advantage of the withdrawal of the arbitration petition and vacation

of ad interim order passed by this court and had thereafter sold 3 lac.

equity shares in accordance with the terms of the MOU. Both the

parties have thus acted upon the MOU. The respondent no. 1 acted to

its detriment on the basis that the SPA stood terminated/ended and

MOU was valid, binding and subsisting and covers legal relationship

and contractual obligations of the parties. The Petitioner is thus

estopped by his conduct from challenging the legal character and or

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legality of the MOU.

(h ) In so far issue regarding variation of SPA between three parties

by MOU which is between two parties is concerned, the learned senior

counsel submits that respondent no. 2 was only a formal party to the

SPA and was not required to perform any obligation thereunder. The

Petitioner itself sought performance of the obligation under the MOU

vide its advocate's letter dated 18th March, 2010. The second respondent

is not even impleaded as party to the arbitration proceeding filed by

the petitioner before the International Chamber of Commerce. The said

party has been therefore, rightly not joined by the first respondent in its

suit filed in this court.

(i) The suits cannot be referred to arbitration since it involves matters

which are not arbitrable. The suit is in essence suit for specific

performance of the MOU, which does not contain arbitration clause.

Clause 11.3 of the SPA clearly provided that the same was applicable

only to the disputes arising out of or in connection with the SPA alone

and not other document/contract. The dispute relating to enforceability,

validity and binding nature of the MOU is not one which falls within the

ambit of arbitration clause contained in SPA. The learned senior counsel

placed reliance upon the request for arbitration dated 25 th May, 2011

filed by the petitioner which does not contain any prayer seeking

cancellation of the MOU or declaration that the same is null and void.

The MOU created new rights and obligations inconsistent and totally

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different from the SPA. Hence, no reference of the suit to arbitration

under arbitration clause of SPA can be made.

(j) In the alternative of the aforesaid submissions, the leaned senior

counsel Mr. Tulzapurkar submits that the cause of action cannot be

bifurcated and part of the dispute cannot be referred to arbitration. The

learned senior counsel placed reliance upon the judgment of the

Supreme Court in the case of Sukanya Holdings (p) Ltd. Vs. Jayesh

H. Pandya and another8 and more particularly paragraph 13, 15, 16,

and 17 which reads thus :

"3. Secondly, there is no provision in the Act that when the subject matter of the suit includes subject matter of

the arbitration agreement as well as other disputes, the matter is required to be referred to arbitration. There is also no provision for splitting the cause or parties and referring the subject matter of the suit to the arbitrators.

15. The relevant language used in Section 8 is--"in a matter which is the subject matter of an arbitration agreement".

Court is required to refer the parties to arbitration. Therefore, the suit should be in respect of 'a matter' which the parties have agreed to refer and which comes within the ambit of arbitration agreement. Where, however, a suit is commenced - "as to a matter" which lies outside the

arbitration agreement and is also between some of the parties who are not parties to the arbitration agreement, there is no question of application of Section 8. The word 'a matter' indicates entire subject matter of the suit should be subject to arbitration agreement.

16. The next question which requires consideration is--even if there is no provision for partly referring the dispute to arbitration, whether such a course is possible under Section 8 of the Act? In our view, it would be difficult to give an interpretation to Section 8 under which bifurcation of the cause of action that is to say the subject matter of the suit or in some cases bifurcation of the suit between parties who are parties to the arbitration agreement and others is possible. This would be laying down a totally new procedure not contemplated under the Act. If bifurcation of

8 (2003) 5 Supreme Court Cases 531

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the subject matter of a suit was contemplated, the legislature would have used appropriate language to permit such a course. Since there is no such indication in the

language, it follows that bifurcation of the subject matter of an action brought before a judicial authority is not allowed.

17. Secondly, such bifurcation of suit in two parts, one to be

decided by the arbitral tribunal and other to be decided by the civil court would inevitably delay the proceedings. The whole purpose of speedy disposal of dispute and decreasing the cost of litigation would be frustrated by such procedure.

It would also increase the cost of litigation and harassment to the parties and on occasions there is possibility of conflicting judgments and orders by two different forums."

         (k)     It is submitted that until this court decides          under section 45




                                                 
         whether the arbitration agreement
                                 ig                 is null, void and inoperative or

records such finding the Civil Court would continue to have jurisdiction.

In support of this plea, the learned senior counsel placed reliance upon

the judgment of this court in the case of Global Marketing Direct

Ltd. Vs. GTL Ltd9 and more particularly paragraph 6 which reads thus

:

"6 An analysis, therefore, of the law would be that in a proceeding pending before a judicial authority, Section 45 can be resorted to if there are disputes between the

parties as to the validity of the arbitration agreement.

Unlike Section 8 which provides that the application shall be moved not later than when submitting the first statement of the substance of the dispute under Section 45 there is no such limitation. All that Section 45 says

is that when a judicial authority is seized of an action in a matter in respect of which parties had made an agreement for arbitration the judicial authority at the request of one of the parties or any person claiming through them or under him refer the parties to arbitration, unless it finds that the said agreement is null android, inoperative or incapable of being performed. Prima facie, therefore, there seems to be no time limit within which such an application can be

9 2004(3) Mh.L.J. 421

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made. A further aspect of the matter is that even if Section 45 is invoked, the Civil Court would continue to nave jurisdiction until it decides whether the

arbitration agreement is void, inoperative or unlawful. It is only after recording such a finding with the issue of jurisdiction be answered."

(l) As far as submission of the petitioners that the MOU is in teeth

of the pricing guidelines issued by the Reserve Bank of India or is in

teeth of the FEMA Regulations, 2000, or in the teeth of provisions of

Securities Contract Regulation Act is concerned, the learned senior

counsel submits that even if it is held that the MOU is in violation of

any

of such provisions, such issues would be relating to the

performance of the agreement and the suit may be dismissed if non

performance is proved at the hearing of the suit and thus such ground

cannot be a ground for referring the parties to arbitration. Such issue

cannot be considered by this court under section 45 of the Act. The

compliance of the provisions of FEMA/Securities Contract Regulation

Act or any compliance thereof would touch the merits of the suit filed

by the respondent no.1 and cannot be subject matter of the present

proceedings under section 45.

(m) If the petitioner is contesting the MOU, the petitioner will have

to apply for setting aside the MOU before invoking arbitration clause

under the SPA. The learned counsel placed reliance upon the judgment

of the Supreme Court in the case of Nathani Steels Ltd. Vs. Associated

Constructions10 (1975) 3 SCC 324 and more particularly paragraph 3

10 1995 Supp (3) Supreme Court Cases 324

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which reads thus :

"3...... Even otherwise we feel that once the parties have

arrived at a settlement in respect of any dispute or difference arising under a contract and that dispute or the difference is amicably settled by way of a final settlement by and between

the parties, unless that settlement is set aside in proper proceedings, it cannot lie in the mouth of one of the parties to the settlement to spurn it on the ground that it was a mistake and proceed to invoke the Arbitration clause. If this is

permitted the sanctity of contract, the settlement also being a contract, would be wholly lost and it would be open to one party to take the benefit under the settlement and then to question the same on the ground of mistake without having the settlement set aside. In the circumstances, we think that in

the instant case since the dispute or difference was finally settled and payments were made as per the settlement, it was

not open to the respondent unilaterally to treat the settlement as non est and proceed to invoke the Arbitration clause. We are, therefore, of the opinion that the High Court was wrong in

the view that it took."

(n ) Similarly obtaining prior permission of the Reserve Bank of India

under FEMA is in the realm of performance and has nothing to do with

the existence of the MOU. The only objection raised by the petitioner

was in respect of the tax liability as is apparent from the

correspondence entered into. All these issues are therefore, after

thought and are frivolous. The Petitioner themselves wanted to modify

the terms of the MOU which presupposes existence of the MOU and

such proposal was turned down by the first respondent. The Arbitral

Tribunal would not be able to go into the validity of the MOU as such

dispute does not fall within the ambit of the SPA or arbitration clause

mentioned in the SPA. As a matter of record, spot delivery was agreed

between the parties also in the SPA which is now challenged by the

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petitioner under the MOU.

(o) It is submitted that since there is no arbitration agreement and

no arbitrable disputes, the party cannot be directed to arbitration. The

learned counsel placed reliance upon the judgment of the Supreme

Court in the case of SBP & Co. Vs. Patel Engineering Ltd. And

another11 and more particularly paragraph 25 which reads thus :

"Dragging a party to an arbitration when there existed

no arbitration agreement or when there existed no

arbitrable dispute, can certainly affect the right of that

party and even on monetary terms, impose on him a

serious liability for meeting the expenses of the

arbitration, even if it be preliminary expenses and his

objection is upheld by the arbitral tribunal. therefore, it

is not possible to accept the position that no

adjudication is involved in the constitution of an

arbitral tribunal."

6. On reading of section 45 of the Arbitration & Conciliation Act, 1996, it is

clear that if the required ingredients of section 45 are satisfied, the Judicial

Authority which is seized of an action in the matter in respect of which the parties

have made agreement referred to in section 44, shall refer the parties to arbitration.

The Judicial Authority however, if finds that the agreement is null and void,

11 (2005) 8 Supreme Court Cases 618

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inoperative or incapable of being performed, the Judicial Authority shall not refer

the parties to arbitration. The Judicial Authority has to examine as to whether the

arbitration agreement falls within the scope of convention, agreement is in

writing, it exists and is substantially valid, dispute is capable of adjudication by

arbitration, such agreement is binding on the parties to the dispute, the agreement

is not null and void, agreement is in operation and is capable of being performed,

when the judicial authority is seized of an action in respect of such agreement

made by the parties before the court.

7. In

view of the rival contentions raised by the parties, in my view,

following questions arise for consideration of this court :

(a) Whether the SPA is valid, subsisting, operative, is capable of being

performed and not null and void, inoperative, substituted by MoU and does not

exist.

(b) Whether the disputes in the suit filed by the respondent in this court are

capable of being adjudicated upon by the arbitral tribunal appointed under the

SPA.

(c ) Whether the MoU was not final and conclusive but was only preparatory

document and was not binding on the parties.

8. I shall first decide the issue whether the SPA is valid, subsisting, operative

and is capable of being performed or the same is null and void, inoperative or is

substituted by execution of MoU and the arbitration clause contained in the SPA

47/57 902-ARBP-1070.11.sxw

perishes along with the SPA itself.

9. It is not in dispute that the arbitration agreement contained in SPA fall

within the scope of convention and thus satisfies all the conditions under section

44 of the Act. It is also not in dispute that the SPA was in writing and was duly

signed by the authorized signatories. Perusal of the MoU indicates that the said

document was executed in view of the settlement arrived at between the parties. It

refers to the transaction entered into by and between the petitioner and respondent

recorded in the SPA dated 10 th December, 2004. It refers to the offer of the

petitioner to sell certain shares of Western Gujarat Stahl Rohran Ltd. The

dispute in respect of the said transaction had arisen. The respondent had invoked

arbitration and had filed petition in this court in that regard, this court had granted

injunction on sale of shares. After recording recitals, both the parties have relied

on settlement on the terms recorded therein. Clause (3) of the said MoU states

that upon signing of the said MOU, the SPA dated 10th December, 2004 shall

stand null and void and the petition filed by the first respondent in this court shall

be withdrawn along with the notice invoking arbitration.

10. On the plain reading of clause 3 to MoU, it is clear that upon execution of

the said MoU, the SPA dated 10 th December, 2004 is declared null and void by

agreement of the parties. It is also clear that the first respondent had agreed to

withdraw the arbitration petition filed in this court and also the notice of

arbitration sent by them to the petitioner. Clause (1) and (2) of the MoU shows

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that the first respondent became entitled to purchase from the petitioner 5 lacs

equity shares of the second respondent company at the price of Rs. 207 per equity

shares from the petitioner. It is agreed to complete the sale and transfer of such

shares by 10th April, 2010. Simultaneously, the petitioner has been permitted to

sell the balance 3,56,523 shares in monthly installment of 1 lac. Equity shares

over a period of three or more years. The said MoU has been signed by the first

respondent through its Director and signed by the petitioner through its

authorized signatory Mr. Hans Warner Gauer. In my view, the parties have thus

substituted the SPA by the said MoU in toto by recording fresh terms ig thereby

giving go-bye to SPA completely. The parties have voluntarily declared that upon

signing of the said MoU, the SPA shall stand null and void. In my view, thus on

the date of filing this petition under section 45 of the Act, the SPA which

contained arbitration clause was already null and void, inoperative and the

arbitration clause has perished along with the SPA in toto.

11. Under section 62 of the Contract Act, if the parties to the contract agreed to

substitute a new contract or rescind or alter it, the earlier contract need not be

performed. The Supreme Court in the case of Damodar Valley Corporation Vs.

K.K. Kar (supra) has held that if the contract is put to an end, the arbitration

clause which is part of it also perishes along with it. In my view since the SPA is

totally substituted and put to an end by execution of the MoU thus as a result

thereof, neither the SPA nor arbitration clause survives as if it never existed.

49/57 902-ARBP-1070.11.sxw

12. Mr. Chagla, the learned senior counsel appearing on behalf of the petitioner

raised the issue that the said MoU was not final and concluded agreement but was

only a preparatory document and this was not binding on the parties. It is

submitted that the SPA continued to exist and in operation. It is submitted that thus

the arbitration clause contained in the SPA also is in operation and the parties

having satisfied the ingredients of section 44 and 45 of the Act, this court shall

refer the parties to arbitration in respect of the subject matter of the dispute

arising out of the subject matter of SPA. The learned counsel submits that in any

event Mr. Hans Warner Gauer who has signed as authorized signatory on behalf

of the petitioner was not authorized to either negotiate or to sign any such MoU

on behalf of the petitioner and the said document is thus not binding on the

petitioners. The learned counsel submits that the from the correspondence

exchanged between the parties, it is cleat that the parties had not reached to

conclusive settlement and were only at the stage of negotiation before any final

deal could be arrived at.

13. In the alternative to the aforesaid submissions, Mr. Chagla further submits

that in any event said MoU is contrary to and in violation of the provisions of

FEMA, Security Contract Regulation Act and in violation of Pricing Guidelines

issued by the Reserved Bank of India.

14. Perusal of the record indicates that the authority of Mr. Gauer was never

challenged by the petitioner prior to the filing of the suit by the first respondent.

50/57 902-ARBP-1070.11.sxw

At the relevant time, Mr. Gauer was authorized signatory of the petitioner and

was Managing Director of the petitioners' parent company. In the affidavit in

reply filed by the petitioner and the Notice of Motion in Suit No. 2287 of 2011, it

was admitted by the petitioner that Mr. Gauer had travelled to India for the

purpose of negotiating the terms of settlement and executing MoU. The record

also indicates that Mr. Gauer had entered into correspondence on behalf of the

petitioner with the representative of the first respondent and had also extended

the performance period under the MoU. The Petitioner did not raise any

objection in respect of the ig authority of Mr. Gauer even in its request for

arbitration filed before the International Chamber of Commerce. The Petitioner

on the contrary admitted extension of MoU mutually in para 8 of the affidavit in

rejoinder dated 1st December, 2011 filed by the petitioner in Notice of Motion.

After execution of the MoU, the advocates of the present petitioner representing

them in Arbitration Petition No. 1032 of 2009 by its letter dated 18 th March, 2010

admitted that the MoU was duly executed on petitioner's behalf by its executive

Mr. Hans Warner Gauer and called upon the first respondent to act upon the

same as recorded and to withdraw the said petition along with notice dad 20 th

November, 2009 invoking arbitration. Pursuant to such letter, it is not in dispute

that the first respondent withdrew the arbitration petition No. 1022 of 2009 and

also notice invoking arbitration. As a result thereof, interim order passed in the

said proceedings in favour of the first respondent and against the petitioner from

selling shares came to an end. The Petitioners thereafter sold about 3 lacs.

    Shares to outsiders. It is also clear from the record that    no affidavit has been





                                           51/57                  902-ARBP-1070.11.sxw

filed by Mr. Gauer alleging that he had no authority to execute the MoU on behalf

of the petitioner. The Petitioner has thus taken advantage of the withdrawal of the

arbitration petition and vacation of ad interim order passed by his court. In my

view, both the parties have acted upon the said MoU, which records that the SPA

was null and void on execution of the said MoU. It is clear that the first

respondent has acted to its detriment on the basis that the SPA stood

terminated/ended and the MoU was valid, binding, subsisting. Perusal of the

MoU clearly shows that all the requisite terms and conditions for transfer of

shares are recorded by and between the parties in the said MoU and cannot be

construed as a preparatory document. The correspondence also indicates that the

dispute was raised by the petitioner in respect of the percentage of income tax

liability on sale of such shares which was one of the condition in the said MoU. It

was the request and suggestion of the petitioner to sit across the table and to re-

negotiate about such condition regarding payment of income tax. In view of the

withdrawal of the earlier arbitration petition as well as notice invoking

arbitration and the petitioner having sold some of the shares in furtherance of

and in compliance of the said MoU, I am not thus inclined to accept the

submission of Mr. Chagla, the learned senior counsel that Mr. Gauer was not

authorized to sign any such MoU or that the said MoU was a preparatory

document and not a concluded deal between the parties.

15. The next submission of Mr. Chagla, learned senior counsel for the

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petitioner is that in view of clause 11.11 of the SPA, variation of SPA which was

admittedly between three parties, could not be made unless it was in writing and

signed by all the parties to SPA. The MoU between two parties thus could not be

considered as substitution of the SPA. In my view, Mr. Tulzapurkar, the learned

counsel appearing for the respondent is right in his submission that the second

respondent or its predecessor which was party to SPA was only the formal party.

There was no obligation imposed on the second respondent to perform any part of

the obligation under the said SPA. On perusal of the SPA it is clear that the second

respondent had no obligation of any nature whatsoever in the said SPA. Even in

its request for arbitration and in the statement of claim filed before the

International Chamber of Commerce by the petitioner, the second respondent is

neither joined as party respondent nor any relief is sought against the second

respondent. The record produced by the parties indicate that the MoU is acted

upon by both the parties which records that on execution of the said MoU, the

SPA became null and void. In view of the finding rendered aforesaid that the MoU

was in substitution of the SPA and was duly signed by the authorized

representative of both the sides and acknowledged by the parties in

correspondence and having acted upon the same, in my view, the submission of

Mr. Chagla that the SPA could not be varied by two parties has no merits and the

same is rejected.

16. The next submission of Mr. Chagla, which I have to consider is that as the

arbitral tribunal is already constituted by International Chamber of Commerce

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and the respondent being party thereto and in view of the wider arbitration clause,

the issue of jurisdiction and or existence of SPA can be agitated by the respondent

before the arbitral tribunal. Reliance is placed on the judgment of the Supreme

Court in the case of Renusagar Power Company Limited (supra). It is submitted

that this court therefore, shall not decide this issue and the same can be left open

to be agitated before the arbitral tribunal. In my view, before referring the parties

to arbitration under section 45 of the Act, it is mandatory for the court or judicial

authority before whom the application is made to decide whether the agreement

is null and void and inoperative or is unenforceable. In view of the fact that the

respondents have raised the issue that the SPA which contained arbitration clause

has become null and void, inoperative and is totally substituted by execution of

the MoU, the arbitration clause contained in such MoU is perished, such issues

raised by the respondent cannot be left open to be agitated upon before the

arbitral tribunal and has decided only by this court. In my view, the reliance placed

by Mr. Chagla, the learned senior counsel for the petitioner on the judgment of the

Supreme Court in the case of Renusagar Power Company Limited (supra) is of

no assistance to the petitioner. In my view, section 16 of the Act thus is not

attracted.

17. In my view the reliance placed by Mr. Chagla, the learned senior counsel

for the petitioner on the judgment of the Supreme Court in the case of Oil

&Natural Gas Commission Vs. Western Company of North America (supra) also

is of no assistance to the petitioner. The Supreme Court has held that if it would

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be oppressive in the facts and circumstances of the case to refer the party to

arbitration, the court shall not be hesitant in granting restraint order. In my view

Mr. Tulzapurkar was right in placing reliance upon the judgment of the Supreme

Court in the case of SBP Company Vs. Patel Engineering (supra) in which the

Supreme Court has held that if at all there exists no arbitration agreement or their

exist no arbitrable dispute, dragging a party to the arbitration would affect the

right of that party and even on monetary terms, impose on him a serious liability

for meeting the expenses of the arbitration, even if it be preliminary expenses. In

my view as the SPA is completely substituted by MoU and the arbitration clause

contained in the SPA is perished along with SPA, the respondent cannot be

referred to arbitration under such arbitration clause which is not in existence.

Even otherwise, the issues raised by the respondent that the SPA is null and void,

inoperative or is incapable of being performed, cannot be gone into by the

arbitral tribunal under section 16 of the Act in view of the present application

having been made under section 45 of the Act and such issue has to be decided

only by this court.

18. In my view, Mr. Tulzapurkar is right in his submission that the suit filed

by the respondent cannot be referred to arbitration as it involves the matters

which are not arbitrable. Perusal of the prayers in the suit indicates that the suit is

for specific performance of the MoU which does not contain arbitration clause.

Clause 11.3 of the SPA clearly provide that the said clause was applicable only to

the disputes arising out of or in connection with the SPA alone and no other

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document/contract. The dispute relating to enforceability, validity and binding

nature of the MoU, in my view, does not fall within the ambit of arbitration clause

contained in the SPA. In my view, as the cause of action in any case in the said

suit filed by the respondent cannot be bifurcated and or split, part of the dispute

cannot be referred to arbitration. The learned counsel for the respondent has

rightly placed reliance upon the judgment in the case of Sukanya Holdings

(supra). I am not inclined to stay the proceedings in the suit filed by the

respondent during the pendency of this petition under section 45 of the Act. The

Supreme Court in the case of Global Marketing Direct Ltd. Vs. GTL Ltd. (supra)

has held that even if section 45 is invoked, Civil Court would continue to have

jurisdiction until it decides whether the arbitration agreement is void,

inoperative and or unlawful. It is only after recording such finding that the issue

of jurisdiction be answered. In view of the fact that this court has rendered a

finding in this judgment that the SPA is void, inoperative, null and void and is

substituted by the MoU, no relief as claimed by the petitioner can be granted in

the present proceedings.

19. In my view Mr. Tulzapurkar, the learned senior counsel appearing for the

respondent is right in his alternate submission that if the petitioner is contesting

the MoU, the petitioner would have to apply for setting aside the same before

invoking arbitration clause in the SPA.

20. The next submission of Mr. Chagla, learned senior counsel is that the MoU

is void and illegal as the same is in the teeth of Pricing Guidelines issued by the

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Reserve Bank of India or in the teeth of FEMA Regulations and or in the teeth of

provisions of Security Control Regulation Act and thus is unenforceable and void.

On plain reading of the MoU, it is clear that the document is complete and

concluded agreement in all respects. If any permissions are required under any of

the provisions aforesaid, before conducting the sale of the shares, in compliance

with the obligations under the said MoU or at particular rate or within such time as

is prescribed under the aforesaid provisions, in my view, compliance with the

provisions of law would be in the realm of performance of contract and such

conditions are condition subsequent to said MoU having come into effect. The

MoU has come into effect on the date of its execution and upon execution of said

MoU, the SPA has become null and void. Even if the grievance of the petitioner

that non-compliance would be in violation of any of the aforesaid provisions

while performing their part of obligation under the MoU, the same would not

make the contract illegal or inoperative. In any event, all these issues can be

agitated by the petitioner in the suit filed by the respondent which is pending in

this court. Mr. Tulzapurkar was right in pointing out that one of the clause in the

MoU regarding the rates in respect of sale of shares is identical to clause in the

SPA in respect of which the petitioner never raised any dispute. In my view,

compliance of the provisions of law before effecting sale of shares, would be in

the realm of condition subsequent and would not make the contract ab initio.

21. I am, therefore, of the view that SPA is null and void, inoperative and is

substituted by the MoU and does not exist. The arbitration clause contained in

57/57 902-ARBP-1070.11.sxw

SPA also thus perishes and is not in existence. The dispute in the suit filed by

the respondent is incapable of being adjudicated upon by the arbitral tribunal

appointed under the SPA. In my view as the arbitration clause does not exist, the

arbitral tribunal appointed by the petitioner would be without jurisdiction. In my

view the MoU is final and conclusive and is not a preparatory document. The

Petitioner has thus not satisfied the ingredients of section 45 read with section

44 of the Act and thus no relief as claimed by the petitioner can be granted in

favour of the petitioner. The onus is on the petitioner to prove that the conditions

under section 45 of the Act are satisfied. In my view the petitioner has failed to

prove that the conditions under section 45 are satisfied in the facts of this case.

22. In view of the above, I pass the following order :

Arbitration Petition is dismissed.

There shall be no order as to costs.

(R.D. DHANUKA,J.)