Tumlare Software Services ... vs Magic Software Services
2001 Latest Caselaw 744 Del

ORDER

J.D. Kapoor, J.

1. Petitioner No.1 claims itself a wholly owned subsidiary Company of petitioner No.2 having its Registered Office at New Delhi. Petitioner No.2 is a foreign Company having its registered office at Denmark and is the Parent Company of Petitioner No.1. Mr Kuldip Nar is the duly constituted Attorney of Petitioner No.2 and is also the Director of petitioner No.1. He has been duly authorised to file this petition, engage advocates, sign pleadings and take all such steps and required for the proper conduct of the case.

2. The petitioners have through this petition sought appointment of an Arbitrator for entering into the disputes and differences that have arisen due to the non-performance of Agreement dated 7.1.99 by the respondent as the latter has failed to appoint the Arbitrator despite notice given by the petitioner. Respondent is a company incorporated in India and is in the business of developing various types of Software.

3. Petitioners entered into an Agreement with the respondent on January, 1999 at New Delhi and as per this Agreement the petitioners were the "Buyers" who engaged the services of the Respondents who were the "Sellers" to develop the Tumlare Information System Prototype software based upon on the specifications set forth in "Exhibit A". Mr. Kuldip nar the Constituted Attorney of petitioner No.2 signed the Agreement for its behalf as well as its subsidiary proposed to be incorporated in India. As per Agreement the Respondent Company was to complete the development/construction of the software system no later than January 31, 1999 (hereinafter referred as completion date) and if there was any delay on the part of the 'Buyer' in giving the approvals, the completion date would be extended with mutual consultation and if the system was not complete within a week from the completion date the 'Seller' shall pay the buyer Rs. 50,000/- a day for each subsequent day up to working days beginning a week after the completion date or until the system as complete, whichever was before.

4. According top the petitioner, the respondent failed in every manner to complete the said system by completion date and even subsequently for a week and had sought further extension of time and expressed their inability to complete the construction/development of software before 20th February, 1999. The Petitioner Company did not agree as the time was the essence of the contract and any delay affected the business of the petitioner worldwide very severely and adversely.

5. Clause 15 of the Agreement is arbitration clause and reads as under:

"This Agreement shall be governed by the laws of India. Any dispute connected with the formation, performance, interpretation, nullification, termination or invalidation of the agreement or arising there from or related thereto in any manner whatsoever, shall be resolved under the Arbitration and conciliation Act 1996."

6. However, the exchange of communication between the parties for settling the dispute mutually did not bear any fruit and ultimately the petitioner sent a notice for appointment of the Arbitrator on 24.2.99. Non-compliance of the notice has resulted in instant petition.

7. The objections of the respondent in the form of reply are mainly two-fold. However, at the outset the objection was taken as to the wrong description of the name of the respondent which according to the respondent is Magic Software Private Limited and not the Magic Software Services Private Limited. The error was immediately conceded and corrected.

8. First objection is that in the eyes of law there is no privity of contract with the petitioner No.1 as the agreement filed by the petitioners was executed between the respondent and petitioner No.2. Since the petitioner No.1 claims itself a subsidiary of petitioner No.2 though no documents have been placed by it in this regard, privity of contract can not be deemed to have been between the respondent and petitioner No.1.

9. Second objection is that petitioner No.2 is a foreign company and has appointed Mr. Kuldip Nar as its duly constituted Attorney in India. It means it has an established place of business in India and since petitioner No.2 has neither sought registration nor has it been registered as a Company under the Companies Act 1956, the provisions of Section 599 of the Companies Act 1956 place an embargo upon it to sue though there is no such embargo to sue it. Section 599 provides as under :

"Companies failure to comply with Part II not to affect its liability under contracts etc:

Any failure by a foreign company to comply with any of the foregoing provisions of this part shall not affect the validity of any contract, dealing or transaction entered into by the company or its liability to be sued i respect thereof; but the company shall not be entitled to bring any suit, claim any set-off, make any counter-claim or institute any legal proceedings in respect of any such contract, dealing or transaction, until it has complied with the provisions of this part."

10. However, apart from these legal objections the respondent has in turn accused the petitioner for having committed breach of the terms of the agreement and on account of the defaults of the petitioner No.2, the respondent has preferred a counter claim in para 7 of the reply.

11. Mr. Arvind Nigam, learned counsel for the respondent has contended with vehemence that the only course available under the said agreement, on the non-completion of the work by the dates as stipulated in the agreement was to have extended the date for completion in consultation with the respondent and the question of termination of the agreement did not arise; that the correspondence between the respondent and the employees of petitioner No.2 show that infact the employees of petitioner No.2 delayed the timely execution of the development of the software on account of their non-approvals and enlargement of the scope of orks from time to time without compensating the respondent for the delays.

12. In refutation Mr. Rajiv Nayar, learned counsel for the petitioner has contended that petitioner No.1 has complied with all the formalities under the Companies Act and therefore in the eyes of law it is a lawful subsidiary of petitioner No.2 and at the time of signing of the contract the respondent was well aware of the fact that the agreement is between the respondent and the petitioners which included a foreign company i.e. petitioner No.2 and that petitioner No.2 has no established place of business in India and further that even the payment of Rs. 3,17,500.00 as provided for in the Agreement was duly received by the respondent from the petitioner No.1 through their Chartered Accountant Mr. Deloitte Haskins & Sells Haskins

13. To decide the controversy whether there was any privity of contract between the petitioner No.1 and the respondent the title clause of the Agreement as well as the relevant extracts of the Agreement need to be reproduced. The title clause reads as under:

"Tumlare Corporation having its registered office at Vesterbrogade 6 D, DK-1620, Copenhagen, Denmark, through its duly constituted attorney, Mr. Kuldip Nar of 57B, LIG Flats, Rajouri Garden, New Delhi, for its behalf as well as for its subsidiary proposed to be incorporated in India, hereinafter referred to as the Buyer."

14. The relevant extracts of the preamble of the Agreement are as under:

" AND WHEREAS, Tumlare Corporation and/or any of its Subsidiary to be incorporated under the laws of India are/shall be in the business of development of software.

AND WHEREAS, Magic Software Private Limited have undertaken to develop the software as set forth in "Exhibit A" for tumlare Corporation and/or any of its subsidiary to be incorporated under the laws of India Satisfaction in accordance with the terms and conditions and against payments set out herein."

15. For and on behalf of the Tumlare Corporation its constituted attorney Mr. Kuldip Nar had signed. Similarly, in the Confidentiality Agreement which was also executed on the same day the Disclosing Party was mentioned as Tumlare Corporation through its duly constituted attorney for its behalf as well as for its subsidiary proposed to be incorporated in India and the respondent was referred as a Receiving Party. It is pertinent to mention that right from the inception of agreement the respondent has been having the communication with Mr. Kuldip Nar, a constituted Attorney of petitioner No.2 and Director of petitioner No.1.

16. Vide letter dated 24.2.99, Kuldip Nar asked for appointment of the arbitrator and proposed the name of Mr. K.K. Nigam for resolving the dispute. In its reply dated 10.3.99, the respondent did not challenge the authority of petitioner No.1 and for that purpose Mr. Kuldip Nar, the constituted Attorney of petitioner No.2 to make such a request. Rather it came out with the plea that as per terms and conditions of the contract, work could not be accomplished as on 31.1.99 solely on account of the fact that the petitioner did not cooperate in observing the schedule and also suggested that only course available to him was to have extended the completion date in consultation with the respondent and called upon it to comply with this part of the contract and extend the period for completion. It also made known to the petitioner that there was no question of either terminating the contract or appointing an arbitrator.

17. In Nimet Resources Inc. And Another vs. Essar Steels Ltd. a view was taken that where the parties are not totally strangers and there has been some correspondence between them in regard to the sale and supply of the good such a transaction fructfies into a contract and if the contract is in writing and the reference is made to a document containing Arbitration clause as part of the transaction it would mean that the arbitration agreement is part of the contract. Therefore, in a matter where there has been some transaction between the parties and the existence of the arbitration agreement is in challenge, the proper course for the parties is to thrash out such a question under Section 16 of the Act and not under Section 11 of the Act.

18. Subscribing to the above view the Supreme Court made similar observations in Konkan Railway Corporation Ltd vs. Mehul Construction Co. (JT 2000(9) SC 361). It held that Section 16 empowers the arbitral tribunal to rule on its own jurisdiction as well as on objections with respect to the existence or validity of the arbitration agreement. Conferring of such powers on the arbitrator under 1996 Act indicates the intention of the legislature and its anxiety to see that the arbitral process is set in motion.

19. Thus, extracts of the Agreement and the communication between the parties, coupled with the fact that the respondent had received the payment through the Chartered Accountant of petitioner No.1 and further that the constituted attorney of petitioner No.2 is none else but the Director of petitioner No.1 show that for all intents and purposes the respondents had entered into an agreement with the petitioner No.2 and on its behalf with its subsidiary i.e. petitioner No.1. If at all there was any privity of contract it was between the respondent and petitioner No.2 through its constituted attorney and its subsidiary petitioner No.1. Had it not been so there was no occasion for the respondent to have continuous communication with the petitioner No.1 and the constituted Attorney of petitioner No.2 with regard to the contracted job. Thus to say that there was no privity of contract between petitioner No.1 and the respondent is not only denial of the Agreement but is self-contradictory. Agreement itself referred the petitioner No.1 as Buyer in the following term:

"Tumlare Corporation having its registered office at Vesterbrogade 6 D, DK-1620, Copenhagen, Denmark, through its constituted Attorney Mr. Kuldip Nar of 57-B, LIG Flats, Rajouri Garden for its behalf as well as for its subsidiary proposed to be incorporated in India, hereinafter referred as 'BUYER".

20. On the one hand the respondent had been throughout dealing with petitioner No.1 and had been exchanging communication with it as to the progress of the contracted job and also accused it of delaying the project and even received the payment for the work done through its Chartered Accountant while on the other hand calls it a stranger to the Contract or Agreement.

21. So far as petitioner No.1 is concerned there is no dispute that it has complied with all the provisions of the Companies Act. What is being disputed by Mr. Arvind Nigam, learned counsel for the respondent is the locus standi of petitioner No.2 which is a foreign company. According to Mr. Nigam Section 595 of the Companies Act casts certain obligations upon the foreign company which if not fulfillled disentitles the foreign company to bring any suit, claim, any set off, make any counter claim or institute any leal proceedings in respect of any such contract, dealing or transactions.

22. Section 595 of the Companies Act provides as under:

"Obligation to state name of foreign company, whether limited, and country where incorporated. -Every foreign company shall -

(a) in every prospectus inviting subscriptions in India for its shares or debentures, state the country in which the company is incorporated;

(b) conspicuously exhibit on the outside of every office or place where it carries on business in India, the name of the company and the country in which it is incorporated, in letters easily legible in English characters of the language or one of the languages in general use in the locality in which the office or place is situated;

(c) cause the name of the company and of the country in which the company is incorporated, to be stated ineligible English characters in all business letters, bill-heads and letter paper, and in all notice,[***] and other official publications of the company' and

(d) if the liability of the members of the company is limited, cause notice of that fact -

(i) to be stated in every such prospectus as aforesaid and in all business letters, bill-heads, letter paper, notices, advertisements and other official publications of the company, in legible English character; and

(ii) to be conspicuously exhibited on the outside of every office or place where it carries on business in India, in legible English characters and also in legible English characters and also in legible characters of the languages or one of the languages in general use in the locality in which the office of place is situated."

23. Sections 591 and 592 have also been referred to by Mr. Nigam in this regard as these pertain to the requirements to be fulfillled by a foreign company before it acquires the right to sue. These are as under:

591. Application of sections 592 to 602 to foreign companies.

1. Sections 592 to 602, both inclusive, shall apply to all foreign companies, that is to say, companies falling under the following two classes, namely:-

(a) companies incorporated outside India which, after the commencement of this Act, establish a place of business within India; and

(b) Companies incorporated outside India which, have, before the commencement of this Act, established a place of business within India and continue to have an established place of business within India at the commencement of this Act.

2. Notwithstanding anything contained in sub-section (1), where not less than fifty per cent, of the paid-up share capital (whether equity or preference or party equity and partly preference) of a company incorporated outside India and having an established place of business in India, is held by one more citizens of India or by one or more bodies corporate incorporated in India, whether singly or in the aggregate, such company shall comply with such of the provisions of this Act as may be prescribed with regard to the business carried on by it in India, as if it were a company incorporated in India.

592. Documents, etc., to be delivered to Registrar by foreign companies carrying on business in India.

1. Foreign companies which, after the commencement of this Act, establish a place of business within India shall, within [thirty days] of the establishment of the place of business, deliver to the Registrar for registration -

(a) a certified copy of the charter, statutes, or memorandum and articles, of the company or other instrument constituting or defining the constitution of the company; and if the instrument is not in the English languages, a certified translation thereof;

(b) the full address of the registered or principal office of the company;

(c) a list of the directors and secretary of the company, containing the particulars mentioned in sub-section (2);

(d) the name and address or the names and addresses of some one or more persons resident in India, authorised to accept on behalf of the company service of process and any notices or other documents required to be served on the company; and

(e) the full address of the office of the company in India which is to be deemed its principal place of business in India.

(4) Foreign companies, other than those mentioned in sub-section (1), shall, if they have not delivered to the Registrar before the commencement of this Act the documents and particulars specified in sub-section (1) of section 277 of the Indian Companies Act, 1913 (7 to 1913) continue to be subject to the obligation to deliver those documents and particulars in accordance with that Act.

24. Main contention of Mr. Nayar, learned counsel for the petitioner was that petitioner No.2 was not required to fulfill the conditions laid down in part II of the Companies Act as it had no 'established place of business' in India at the time of signing the contract and therefore there is no restriction for the petitioner No.2 under Section 599 of the Companies Act for suing the respondent and further that except for signing the Agreement in question, petitioner No.2 had not entered into any business transaction which may prove the fact that the petitioner No.2 was regularly and habitually conducting the business from a particular premises.

25. As is apparent, the crux of the above provisions of Companies Act is that unless a company has a specified of identifiable place at which it carries on business it can not be said to have an established place of business that includes office, storehouse, godown or any other kind of such activity that has direct relation with the business and the place. Mere appointment of a constituted attorney by such a company for the purpose of signing the contract does not mean that the said company has an established place of business in that country. Sole requirement for complying with the provisions of Part II of the Companies Act by a foreign company is that such a company must have an 'established place of business' at the time of signing the contract. Thus unless a foreign company has an established place of business at the time of signing of the contract the said company can not be governed by the restriction imposed under Section 599 of the Companies Act.

26. The expression that the company has 'an established place of business' in a particular country necessarily mean that at the time of signing of the contract it has a permanent and specific location in that country from-where it habitually and regularly carries on the business.

27. In Malaysian Airlines Systems BHD(II) vs. M/s Stic Travels (P) Ltd JT 2000(Suppl.3) SC 313 the foreign company had its principal place of business at Kaulalumpur, Malaysia. It had an office at New Delhi and was carrying on business of air-transportation, operation of air flights in and from India under a bilateral agreement between Malaysia and India. Its Senior vice President, South Asian Region, held a general Power of Attorney to act and for and on behalf of the petitioner and that the said person was the Principal Officer of the of the petitioner company in India. It was averred by the petitioner that the respondent has been appointed as a General Sales Agent for various countries and that under agreements dated 15.9.86 and 11.1.89, the respondent had been so appointed, the former agreement relating to passengers and the latter relating to cargo. The agreement were to be performed in India. However, the petitioner terminated the agreements by notice dated 1.3.99 on the ground that the respondent had failed to remit and pay to the petitioner all the sums and monies received by it in the course of agency on account of sale of passenger tickets and airway bills. Respondent filed a counter claim contending that the agreements ceased to exist w.e.f. 1.5.99 and hence there was no arbitration clause.

28. The question arose whether when a foreign company has a dispute with an Indian national and approaches an Indian court, is it mandatory for the court under Section 11(9) of the Indian Arbitration and Cancellation Act 1996 to appoint an arbitrator who does not belong to India. It was held that such an issue has to be decided by the arbitrator as an international agreement. It is not necessary that the arbitrator could not be of a nationality of one party.

29. Thus in view of the finding that there exists privity of contract between the petitioners and the respondent and that petitioner No.2 though a foreign company had no established place of business in India at the time of signing the contract through its constituted Attorney was not obliged to fulfill the requirements of Part II of the Companies Act and thus is entitled to bring any suit, claim, any set off, make any counter claim or institute any legal proceedings in respect of contract, dealing or transaction, the petition is allowed as the respondent failed to appoint the Arbitrator despite service of notice in this regard.

30. Since both the parties are raising disputes and there are claims and counter-claims, the Arbitrator shall adjudicate both as referred in the petition and reply.

31. Hon'ble Mr. Justice D.R. Khanna, retired Judge of this Court is appointed as an Arbitrator. Learned Arbitrator shall fix his own fee.

32. Copy of the order and proceedings be sent to the Learned Arbitrator.