Chemicals Ltd vs Oil And Natural Gas Corporation ...
2012 Latest Caselaw 11 Bom

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




                                                                                 
                    ARBITRATION APPLICATION NO.168 OF 2012

    Futuristics Offshore Services and




                                                         
    Chemicals Ltd.                                        ..Applicant.
           versus
    Oil and Natural Gas Corporation Ltd.                  ..Respondent.
                                             .....
    Mr. M.P. Rao, Senior Advocate with Mr. Rahul K. Hakani and Mr. Dushyant




                                                        
    Kumar i/b Mr. Kirit J. Hakani for the Applicant.
    Mr. Pradeep Sancheti, Senior Advocate with Mr. S.A. Bhalwal and Mr. P.N. Singh
    i/b M/s. Vyas & Bhalwal for the Respondent.
                                            ......
                              CORAM : DR.D.Y.CHANDRACHUD, J.

                              ig        28 September 2012.

    ORAL JUDGMENT :

This proceeding has been initiated under Section 11(6) of the Arbitration

and Conciliation Act 1996.

2. In pursuance of an arbitration agreement contained in a contract dated 3

July 2001 for the hiring for operations and maintenance, and management of vessels owned by ONGC, an arbitral Tribunal was constituted. The arbitral

Tribunal consisted of Mr. Justice K. Jagannatha Shetty, Mr. Justice Ajit Sengupta and Mr. Justice A.M. Ahmadi who was the presiding arbitrator. During the pendency of the arbitral proceedings the Applicant and the Respondent agreed

to attempt a resolution of the dispute before an Outside Expert Committee (OEC) in accordance with certain guidelines framed by ONGC. Accordingly, the Applicant furnished its consent by letters dated 22 September 2005 and 23

September 2005.

3. On 26 October 2005 the Respondent appointed a three member OEC, informing them that the proceedings will be broadly in accordance with Part III of the Arbitration and Conciliation Act 1996. Proceedings took place before the OEC. On 29 May 2007 the Respondent forwarded a copy of the recommendations of the OEC to the Applicant. One part of the report of the OEC containing recommendations for settlement was signed by two members,

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whereas the third member submitted his own recommendation. On 23 January 2008 the Applicant sought enforcement of the 'award' of the OEC and followed it

up with further representations dated 4 February 2008 and 1 April 2008. On 11 July 2008 the Respondent informed the Applicant that since the matter was still

pending with the arbitral Tribunal, no question of making any payment arose and whether or not any payment was to be made would depend upon the outcome of the arbitral proceedings. On 16 March 2009 the Respondent made an offer of

settlement to the Applicant and called upon it to intimate whether it was unconditionally and unequivocally acceptable. In response, the Applicant addressed a letter dated 27 April 2009 to the Secretary in the Union Ministry of Petroleum and Natural Gas complaining that the Respondent was offering an

amount less than what had been recommended by the OEC. On 12 February

2010 the Respondent revised its offer and called upon the Applicant to unconditionally accept the terms of settlement. The Applicant by its letter dated 16 February 2010 stated that though the OEC had directed that payment be

made within 120 days, almost two years and 9 months had elapsed and in the interregnum it was suffering from a financial crisis. The Applicant accepted the proposal contained in the Respondent's letter dated 12 February 2010 and

requested for an early release of the payment.

4. Eventually an agreement was entered into between the Applicant and the Respondent on 13 March 2010. The agreement referred to the proceedings

before the three member OEC and to the fact that two of the members submitted their recommendation while there was a separate recommendation by the third member. The settlement agreement recorded that the Applicant accepted an amount of Rs.15.26 Crores in full and final settlement of its claims and that the

contract stood discharged / extinguished. Parties contemplated that an application shall be filed before the arbitrator to terminate the proceedings :

"GBL & GAL (now known as Futuristic Offshore Services and Chemicals Ltd)., and ONGC shall file joint application before Arbitrators to terminate the proceedings. GBL & GAL agrees that this settlement is towards their total Arbitration Claim and ONGC agrees that this amount is payable by ONGC and there is no Counter Claim of ONGC in the matter. All the claims of the parties before the Arbitral Tribunal stand settled through OEC Award."

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5. The settlement agreement recorded that it constituted a full and final

settlement of claims and counter claims. The settlement was signed by the parties and by all the three members of the OEC.

6. The Applicant initiated proceedings under the Right to Information Act for a disclosure of the minutes of the meetings of the Board of Directors of the

Respondent held on 28 January 2009 and 21 January 2010. In pursuance of a direction of the Chief Information Commissioner dated 15 September 2011, these minutes were disclosed to the Applicant by the Respondent on 21 October 2011. According to the Applicant the Board of Directors at a meeting held on 21

January 2010 had resolved to pay to the Applicant an amount in compliance with

the recommendation of two members of the OEC, and that a total amount of Rs.15.47 Crores should be paid subject to deductions. On 6 December 2011 the Applicant addressed a letter to the Respondent stating that the payment made in

pursuance of the settlement was accepted under duress. A monetary claim was made on the Respondent. This was followed by a further representation dated 13 March 2012. By the letter dated 13 March 2012 the Applicant recorded that

the arbitrator (Mr. Justice Ajit Sengupta) nominated by the Applicant had died

and in the event that the Learned Arbitrator nominated by the Respondent was not available, the Respondent may proceed to nominate an arbitrator, so that the arbitral proceedings could be proceeded with. By a further letter dated 30 April

2012 the Applicant nominated Mr. Justice Devinder Gupta instead and in place of Mr. Justice Ajit Sengupta and called upon the Respondent to complete the constitution of the arbitral Tribunal. By its advocate's reply dated 10 May 2012 the Respondent contended that the settlement that was arrived at in the course

of conciliation had the status and effect of an arbitral award under Section 74 and since all the disputes and differences between the parties have been settled and concluded, the arbitration agreement could not be invoked.

7. On behalf of the Applicant it has been submitted that :

i) Parties agreed to conciliation proceedings during the pendency of the arbitral proceedings before the arbitral Tribunal;

ii) The arbitral Tribunal does not cease to be in seisin of the arbitral

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proceedings merely because of a reference to conciliation;

iii) Under Section 30 of the Arbitration and Conciliation Act, 1996 the arbitral

Tribunal is empowered to take recourse to mediation, conciliation or other procedures to encourage settlement. If during the arbitral proceedings

parties settle the dispute, it is for the arbitral Tribunal to terminate the proceedings;

iv) Once arbitral proceedings have been validly initiated, they can only be

terminated under Section 30(2) or under Section 32;

v) The procedure which is prescribed under Part III of the Arbitration and Conciliation Act 1996 in the matter of conciliation was not followed by the OEC. The OEC prepared one report signed by a majority of the three

member committee and another by the third member. Even though

parties did arrive at a settlement which was signed by the three member OEC, the arbitral Tribunal duly constituted in accordance with law would still retain control over the arbitral proceedings until they are brought to an

end by an order of termination;

vi) As laid down by the Supreme Court in its decision in National Insurance Company Limited v. Boghara Polyfab Pvt. Ltd. 1 the issue as to whether

there is accord and satisfaction is one which the Chief Justice or his

designate may decide or in its discretion leave to the arbitral Tribunal to determine. While considering an application under Section 11(6), where one party alleges an accord and satisfaction and the other contends that a

settlement agreement has been executed under fraud, coercion or undue influence, that raises a dispute which would be arbitrable.

8. On the other hand, it has been urged on behalf of the Respondent that :

i) The Applicant cannot be heard to urge that the agreement that was arrived at in the course of conciliation is not an arbitral award;

ii) The Applicant cannot be allowed to place anything on the record which from the inception to the conclusion of the conciliation proceedings is confidential under Section 75 read with Section 81;

iii) Under Section 74 a settlement agreement which is arrived at during the course of conciliation has the same status and the effect as if it is an

1 AIR 2009 SC 170.

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arbitral award on agreed terms on the substance of the dispute rendered by an arbitral Tribunal under Section 30;

iv) Once an agreement is arrived at in the course of conciliation proceedings under Part III which has the same status and effect as an arbitral award

on agreed terms on the substance of the dispute, the arbitral proceedings would stand terminated under Section 32. In that event there would be no occasion for the Chief Justice or his designate to exercise the power

under Section 11(6).

9. Section 30 of the Arbitration and Conciliation Act 1966 provides as follows :

"30. Settlement - (1) It is not incompatible with an arbitration agreement for an arbitral tribunal to encourage settlement of the dispute and, with the

agreement of the parties, the arbitral tribunal may use mediation, conciliation or other procedures at any time during the arbitral proceedings to encourage settlement.

(2) If, during arbitral proceedings, the parties settle the dispute, the arbitral tribunal shall terminate the proceedings and if, requested by the parties and not objected to by the arbitral tribunal, record the settlement in the form of an arbitral award on agreed terms.

(3) An arbitral award on agreed terms shall be made in accordance

with section 31 and shall state that it is an arbitral award.

(4) An arbitral award on agreed terms shall have the same status and effect as any other arbitral award on the substance of the dispute."

Sub section (1) of Section 30 is indicative of the legislative intent that during the pendency of arbitral proceedings, it is open to an arbitral Tribunal to encourage parties to resolve their disputes by recourse to mediation, conciliation or other

procedures that would lead to a settlement. Under sub section (2), if parties settle their dispute during arbitral proceedings, the arbitral Tribunal shall terminate the proceedings. If the parties request the Tribunal to record the settlement in the form of an arbitral award on agreed terms, the Tribunal is empowered to do so. An arbitral award on agreed terms is to be made in accordance with Section 31 and it has the same effect as any other arbitral award on the substance of the dispute . Section 32 deals with the termination of arbitral proceedings. Under sub section (1) of Section 32 arbitral proceedings

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shall be terminated by the final arbitral award or by an order of the arbitral Tribunal under sub section (2). Under sub section (2) of Section 32, the arbitral

Tribunal is empowered to issue an order for termination of the proceedings

(i)where the claimant withdraws his claim; or (ii) if the parties agree on the

termination of the proceedings; or (iii) in a situation where the Tribunal finds that the continuation of the proceedings has for any other reason become unnecessary or impossible. In other words, a termination of the arbitral

proceedings is contemplated by sub section (1) of Section 32, either upon the final arbitral award or by the passing of an order by the Tribunal on any of the grounds indicated in sub section (2).

10. Part III of the Arbitration and Conciliation Act 1966 deals with conciliation machinery.

Sub section (1) of Section 61 provides that save as otherwise provided by any other law for the time being in force and unless the parties have otherwise agreed, the part shall apply to conciliation of disputes arising out of a

legal relationship, whether contractual or not and to all proceedings relating thereto. Conciliation proceedings are initiated under Section 62 and a party initiating conciliation has to send to the other party a written invitation to

conciliate under the part, briefly identifying the subject of the dispute.

Conciliation proceedings commence when the other party accepts in writing the invitation to conciliate. Section 63 provides for the number of conciliators while Section 64 provides for the appointment of conciliators. Section 65 confers a

discretion on the conciliator to require parties to submit a brief written statement describing the general nature of the dispute and the points in issue. Under Section 66 the conciliator is not bound by the Code of Civil Procedure, 1908 or the Evidence Act. The role of the conciliator under Section 67(1) is to assist the

parties in an independent and impartial manner in their attempt to reach an amicable settlement of their dispute. Under sub section (4) of Section 67 the conciliator is empowered at any stage of the conciliation proceedings, to make a proposal for settlement of the dispute. Under Section 72 each party may, on his own initiative or at the invitation of the of the conciliator, submit to the conciliator suggestions for the settlement of the dispute. Under sub section (1) of Section 73 when it appears to the conciliator that there exists an element of settlement which may be acceptable to the parties, he shall formulate the terms of a

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possible settlement and submit them to the parties for their observations. After receiving the observations of the parties, the conciliator may re-formulate the

terms of a possible settlement in the light of those observations. Under Section 73(2) if the parties reach an agreement on a settlement of the dispute, they may

draw up and sign a written settlement agreement. Under Section 73(3) when the parties sign the settlement agreement, it shall be final and binding on the parties and to persons claiming under them respectively. By the deeming fiction that is

created by Section 74, a settlement agreement has the same effect and status as if it is an arbitral award on agreed terms on the substance of the dispute rendered by an arbitral Tribunal under Section 30. Section 76 provides that the conciliation proceedings shall be terminated inter alia by the signing of the

settlement agreement by the parties on the date of the agreement; or by a

written declaration of the conciliator, that further efforts at conciliation are no longer justified; or by a written declaration of the parties or one of them terminating the conciliation.

11. Now in the present case during the pendency of the arbitral proceedings, parties agreed to a recourse to conciliation. It is not in dispute before this Court

that the terms of appointment of the conciliators were governed by Part III of the

Arbitration and Conciliation Act 1996. In fact, the Respondent when it proceeded to appoint the OEC had indicated that Part III of the Act would apply. Proceedings took place before the conciliators. There were evidently two sets of

of suggestion by the conciliators on what should be the possible terms of a settlement. The conciliators submitted a report one signed by two of the three members of the OEC, while there was a note separately appended by the third member embodying those suggestions. Obviously, having regard to the scheme

of Part III, a suggestion by the conciliators has effect in law of being no more than what it purports to be viz. a suggested course of action in order to enable parties to resolve their dispute. The role of the conciliator is only that of a facilitator. The conciliation proceedings are governed by party autonomy and it is only when a party agrees to a settlement that a settlement agreement can be drawn up. The Applicant requested ONGC, through the correspondence that is on record, for accepting the course suggested by two members of the OEC. Initially, as the record before the Court would indicate the Respondent by its

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letter dated 16 March 2009 made an offer which the Applicant in its letter dated 27 April 2009 was not inclined to accept. On 12 February 2010 a further offer

was made by the Respondent. This offer was accepted by the Applicant on 16 February 2010. On 13 March 2010 a settlement agreement was arrived at

between the parties, by which the Respondent agreed to pay an amount of Rs.15.26 Crores in full and final settlement of all the claims of the Applicant upon which the contract was to stand discharged / extinguished. The agreement

contemplated that all the claims of the parties before the arbitral Tribunal stand settled through the OEC award as reflected in the settlement agreement. After the settlement agreement dated 13 March 2010, it was on 6 December 2011 nearly 20 months thereafter that the Applicant raised a dispute in regard to the

amount which it had been paid. On 13 March 2012, the Applicant sought to

contend that its consent had been obtained under duress or misrepresentation.

12. The settlement agreement that was entered into between the Applicant

and the Respondent on 13 March 2010 was evidently in the course of the conciliation proceedings. The settlement agreement has been signed by the Applicant and the Respondent as well as by all the three members of the OEC.

Once a settlement agreement is entered into in the course of conciliation

proceedings governed by Part III of the Arbitration and Conciliation Act 1996, Section 74 would come into operation. Under Section 74 a settlement agreement has the same status and effect as if it is an arbitral award on agreed

terms on the substance of the dispute rendered by an arbitral Tribunal under Section 30. In other words, by a deeming fiction, a settlement agreement has under Section 74 been placed on the same foundation as an arbitral award on agreed terms on the substance of a dispute rendered by an arbitral Tribunal

under Section 30. Once an arbitral award is rendered by an arbitral Tribunal on agreed terms under Section 30(4), the arbitral proceedings stand terminated. Sub section (1) of Section 32 provides for the termination of an arbitral proceeding by two modes. The first mode is by the final arbitral award. The second mode is by an order of the arbitral Tribunal under sub section (2). Once there is a final arbitral award that has the effect, ipso jure, of terminating the arbitral proceedings. An order of the arbitral Tribunal under sub section (2) is required where a claimant is withdrawing a claim or where the parties agree on

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the termination of the proceedings or where the arbitral Tribunal finds that the continuation of the proceedings has become unnecessary or impossible for any

other reason. Once an arbitral award has been passed that in itself has the effect in law of terminating the arbitral proceedings. The effect of a conciliated

settlement is under Section 74 that the settlement agreement has the same status and effect of an arbitral award on agreed terms on the substance of the dispute under Section 30. It is trite law that when a legislative fiction is enacted

by the legislature, full force and effect has to be given to the legislative fiction. A deeming fiction has to be taken to its logical conclusion. Any other construction would, in my view, defeat the efficacy of ADR procedures. A settlement agreement which is arrived at during conciliation has been attributed with a high

degree of sanctity by Parliament by placing it on the same foundation as an arbitral award.

The arbitral proceedings would stand terminated on parties entering into a conciliated settlement which is enforceable as an arbitral award on agreed terms.

13. The judgment of the Supreme Court in National Insurance Company (supra) holds that the issue as to whether the parties have concluded a contract /

transaction by recording their mutual obligations or by receiving final payment

without objection is a matter which the Chief Justice or his designate may choose to decide under Section 11(6) or in an appropriate case leave it to the arbitral Tribunal to determine. In the present case, there are several reasons

why, this issue would have to be resolved in the application under Section 11(6). Firstly, as a matter of law once there is a settlement agreement during the course of conciliation proceedings that ipso facto brings an end to the arbitral proceedings since a settlement agreement of that nature has the effect of an

arbitral award. Secondly, even as a matter of fact it is evident from the record that a settlement agreement was entered into between the Applicant and the Respondent on 13 March 2010 in pursuance of which the Applicant received full and final payment in the month of April 2010. It was only 20 months thereafter on 6 December 2011 that the Applicant sought to contest the basis of the settlement. In that view of the matter, and since the dispute between the parties has been concluded by a conciliated settlement, there would be no occasion to take recourse to the provisions of Section 11(6). The effect of the provisions of

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Part III of the Arbitration and Conciliation Act has been considered in the judgments of the Supreme Court in Haresh Dayaram Thakur v. State of

Maharashtra2 and in Mysore Cements Ltd. v. Svedala Barmac Ltd. 3 The view which I have taken is consistent with the law laid down in the judgments of the

Supreme Court.

14. For the aforesaid reasons, the Arbitration Application cannot be

entertained. The Application is accordingly dismissed.

(Dr. D.Y. Chandrachud, J.)

2 AIR 2000 SC 2281.

3 AIR 2003 SC 3493.