Bestech India Private Lim. vs Mgf Developments Ltd. & Ors.
2009 Latest Caselaw 1152 Del

*            HIGH COURT OF DELHI : NEW DELHI

+                      Arb. Petition No.147/2005

%                     Judgment reserved on : 14th January, 2009

                      Judgment pronounced on : 6th April, 2009

BESTECH INDIA PRIVATE LIMITED                ...Petitioner
                Through : Mr. Manish Sharma with Mr. Rohan
                          Sharma, Advocates

                      Versus

MGF DEVELOPMENTS LTD. & ORS.                 ....Respondents
              Through : Mr. Jeevesh Nagrath, Advocate

Coram:

HON'BLE MR. JUSTICE MANMOHAN SINGH

1. Whether the Reporters of local papers may
   be allowed to see the judgment?                                   Yes

2. To be referred to Reporter or not?                                Yes

3. Whether the judgment should be reported
   in the Digest?                                                    Yes

MANMOHAN SINGH, J.

1. The present petition under Section 11(6) of the Arbitration

and Conciliation Act, 1996 (for short "the Act") has been filed by the

petitioner for appointment of an Arbitrator. There is a contract dated 5 th

December, 2000 having arbitration clause 49 and 51 which read as

under:-

Clause 49:

"Except where otherwise provided, all disputes arising out of or relating to the contract, instructions or orders of Site engineers/Architect, or the execution or failure to execute the same, whether arising during the progress of the work or after completion or abandonment thereof shall be referred to a Sole Arbitrator to be appointed by

accepting authority. The Arbitrator shall conduct proceedings as per the Arbitration Act, 1940 or any statutory modification or amendment to it from time to time."

Clause 51:

"This Contract shall be governed by the Indian Laws for the time being in force. Any legal proceedings related to this contract shall be limited to Courts of laws under jurisdiction of Delhi Courts."

2. The brief facts are that certain disputes arose in relation to

two contracts regarding civil construction, fire fighting and plumbing

work in terms of which an alleged claim of Rs. 3,21,11,007/- of the

petitioner is outstanding towards respondents 1 and 2. M/s. Bestech

India Pvt. Ltd. is a Pvt. Ltd. Company. According to the petitioner, the

said company was earlier known as M/s. Bestech Engineers and

Contractors (a Partnership firm) and the said Partnership Firm had

originally executed a contract with the respondents. The said

partnership firm was taken over by the petitioner as an ongoing concern

on 1st October, 2001 which executed the work relating to the present

contract.

3. The work of contract was completed on 1 st May, 2003, 7th

May, 2003, 31st May, 2003 and 19th September, 2003 as per the

information given by way of the communications. The Project Manager

also issued a completion certificate for plumbing and fire fighting work

on 31st May, 2003 and the defect liability period expired on 31 st May,

2004. Similarly the Project Manager on 19th September, 2003 certified

the completion of civil and other related work and defect liability period

of the said project expired on 15th September, 2004.

4. The final bill No. 7 and 8 were raised and certificate of

payment was issued by the respondent through their Agent and Project

Manager M/s. Vastu Kriti for a sum of Rs. 7,99,22,509/- and Rs.

1,03,69,650/- respectively. Against these bills, a sum of Rs.

5,81,81,000/- was released by respondent No.1 and 2 in various

instalments and balance of Rs. 3,21,11,007/- is outstanding towards

respondents.

5. The petitioner submits that it was repeatedly assured by

respondents No.1 and 2 that their pending payment would be released in

instalments. However, after releasing a few instalments, no payment

was received except false assurances. The petitioner thereafter sent

reminders dated 20th October, 2003, 15th December, 2003 and 22nd

March, 2004 followed by a legal notice dated 23 rd October, 2004 to the

respondents. However, no payment was received by the petitioner who

ultimately gave a notice dated 28th February, 2005 for appointment of

Arbitrator within 30 days of the receipt of the notice. The said notices

were duly received by respondents No.1 and 2. However, according to

the petitioner, respondents No.1 and 2 failed to give any reply or appoint

any arbitrator. Thereafter, the petitioner filed the present petition under

Section 11(6) of the Act.

6. Respondents No.1 and 2 have filed their reply to the petition

mainly contending that (a) the petitioner has no locus standi to seek

arbitration since there is no arbitration agreement between the petitioner

i.e. M/s. Bestech India Pvt. Ltd. and respondents No.1 and 2 as the two

contracts were between the respondents and erstwhile partnership firm

i.e. M/s. Bestech Engineers and Contractors and therefore, the petition is

not maintainable; (b) the respondents have appointed the Arbitrator vide

their letter dated 4th April, 2005, therefore, the petition filed by the

petitioner is not maintainable; (c) the respondents No.1 and 2 are

separate legal entities and, therefore, separate notices for appointment of

arbitrator should have been issued; and (d) the contracts were executed

in Gurgaon and work was also performed in Gurgaon and merely

because the contracts say that courts at Delhi will have jurisdiction, this

court does not have the territorial jurisdiction to try this petition.

7. The main objection raised by respondents No.1 and 2, have

stressed that the petitioner is a company which is a separate legal entity

distinct from its shareholders and it does not make any difference if the

said company is owned by the partners of the erstwhile firm. It cannot

be said that merely because the partnership firm of which the

shareholders of the company are partners has an arbitration agreement

with a third party, the company will also have an arbitration agreement

with them.

8. As regards the first contention raised by respondents No.1

and 2, the petitioner has relied upon the affidavit filed by Sh. S. Satija,

Director of the petitioner company on 16 th May, 2006 wherein a

statement has been made that the petitioner is a Pvt. Ltd. Company and

at an earlier point of time was a partnership firm under the name and

style of M/s. Bestech Engineers and Contractors wherein Mr.

Dharminder Bhandari and Mr. Sunil Satija were the partners and the

same had entered into an agreement with respondents No.1 and 2. M/s.

Bestech Engineers and Contractors was taken over as an ongoing

concern by the petitioner on 1st October, 2001.

9. All contracts, awards, obligations and undertakings of the

running partnership concern had become the obligation of the petitioner.

In support of the statement, the petitioner has filed a copy of the

agreement dated 1st October, 2001 as Annexure A-1 with his affidavit.

The said agreement indicates that the company was incorporated on 25 th

May, 2001 by Mr. Dharminder Bhandari and Mr. Sunil Satija as

promoters, shareholders and first Directors of the company.

10. Both the promoters were the partners of the firm having 50%

share each. It is also mentioned in Para 2 of the agreement that all the

assets and liabilities of the firm including tangible and intangible assets

on the close of 30th September, 2001 shall become the assets and

liabilities of the company with effect from 1st October, 2001. In Para 6

of the said agreement, it is also mentioned that all contracts, awards,

obligations and undertakings of the running business of the firm shall

become the obligations of the company and the company alone shall be

liable for all past, present and future liabilities or commitments relating

to the said firm.

11. In Para 5 of the affidavit, a statement has been made that the

petitioner informed the fact of the takeover of M/s. Biotech Engineers

and Contractors to the respondents and this position was also accepted

by respondents and the petitioner herein continued to carry out the work

under the agreement and the respondents and their agents issued Project

completion certificate. The respondents also certified bills and made

payments directly to the petitioner for the work done and also

subsequently issued the TDS certificates in favour of the petitioner. In

the light of the aforesaid, the respondents cannot claim that the

petitioner has no locus standi to file the present arbitration application

for appointment of an arbitrator.

12. On the other hand the submission of the learned counsel for

respondents No.1 and 2 is that there is no privity of contract between the

present petitioner and respondents No. 1 and 2. The right to seek

arbitration under the contract between the parties cannot be transferred

without the consent of the parties and in fact after taking consent, a

fresh arbitration agreement ought to have been executed.

13. Further, it is submitted that the petitioner has nowhere

pleaded that the firm M/s. Bestech Engineers and contractors has been

dissolved or not. Mere allotment of shares to the partners Mr.

Dharminder Bhandari and Mr. S. Satija is of no consequence as there is

no written agreement between the petitioner and respondents. No

document has been placed by the petitioner in support of the contention

that the respondents have accepted the assignment or agreed to the

assignment. There is no consensus ad idem between the petitioner and

respondents for resolving their disputes by arbitration.

14. The learned counsel for the respondent has referred to the

decision of this court reported in 2001(3) Arbitration Law Reporter

301 (Delhi), M.M. Aqua Technologies Limited vs. Wig Brothers

Builders and Engineers Ltd and another. Para 10 of the said

judgment read as under:-

"10. ......Arbitration is distinguishable from other clauses in the contract. The other clauses set out the obligations which the parties have undertaken towards each other binding them, but the arbitration clause does not impose on one of the parties an obligation towards the other. It embodies an agreement of both the parties with consensus ad idem that if any dispute arises with regard to the obligations undertaken therein which one party has undertaken towards the other, such a dispute shall be settled by Tribunal of their own constitution. It must be construed according to its language and in the light of the circumstances in which it was made."

It was further held in paragraph 11 that:

"11. From the foregoing discussion it is clear that to be a binding arbitration agreement between the parties, the same must be in writing and the parties should have specifically agreed to settle their disputes by arbitration. An arbitration agreement cannot be inferred by implication....."

15. This judgment of the Ld. Single Judge was affirmed by the

Division Bench in their decision in the case of M.M. Aqua

Technologies Ltd. v. Wig Brothers Builders & Engineers Ltd. &

Anr. reported as 2002 (95) DLT 818. The Special Leave Petition

bearing no. SLP (C) No.4102 of 2002, against the judgment of the

Division Bench was dismissed by the Hon'ble Supreme Court by its

order dated 12th March, 2008.

16. Another decision that has been cited by learned counsel for

the respondent is Sethi Construction Co. vs. Chairman and

Managing Director, NTPC and another, 2002 (65) DRJ 732

wherein this Court refused to appoint an arbitrator vis-à-vis NTPC

holding that there was no arbitration agreement between NTPC and

Sethi Construction Co.

17. The counsel for the petitioner has asserted that the decisions

relied upon by the respondents are not applicable to the facts and

circumstances of the present case as M/s Bestech India Pvt. Ltd. is not

unrelated or totally stranger to the proceedings and he has referred to

the following judgments in support of his contention.

18. In Patanjal & Anr. Vs. Rawalpindi Theatres (P) Ltd., AIR

1970 Del 19 it was held that the letter dated 21-7-1962 written by the

petitioner to the respondent in the instant case did not purport to assign

the rights of the respondent under the Contract in dispute to a third

person who never asserted any right in himself as an assignee but only

claimed to be an attorney representing and prosecuting the claim of the

respondent and that, therefore, the latter could not claim a right to

enforce the arbitration agreement, he not being a party thereto nor an

assignee of the respondent was not entitled to claim its benefits or be

bound by the obligations imposed thereby. Relevant portion of para 12

of this judgment is referred as under :

"(12)........From the legal position just stated, it follows that third persons who are not parties to the arbitration agreement or to the contract containing an arbitration clause and not claiming under such parties, are not bound by such agreement. And not being bound, they would, as a general rule, be disentitled to enforce the agreement. .........Indeed, it is also the general fundamental rule that only a person who is a party to a contract can sue on it. The existence of statutory or equitable exceptions to this rule do not impinge upon its general fundamental character. Of course, if the subject-matter of the arbitration agreement is capable of assignment, then the assignee would step into the shoes of his assignor and be both bound by it and entitled to enforce it, but for this purpose, one has to look to the law relating to assignment of contractual rights and obligations and also to see whether in a given case, the assignee has exercised his right as such."

19. In Prem Lata Bhatia vs. Union of India, 128(2006) DLT

24 (DB) it was held in paras 23 and 24 as under :

"23. With respect we cannot share the view taken by the learned Single Judge. It is well known that it very often happens in the business world that when a person starts a business as a sole proprietor he later on converts it into a partnership firm along with some family member, and thereafter when the business further expands it is incorporated as a private limited company and thereafter on further expansion, it may also be made a public limited company. This is a very common feature in the business world.

24. In such cases, the doctrine of piercing the veil of corporate personality should be utilized. For instance, when a partnership firm converts itself into a private limited company with the partners in the firm becoming the shareholders and directors in the company it will not be a case of transfer of the property of the firm to the company, otherwise a huge amount of stamp paper and registration charges for the transfer of the property of the firm to that of the company will have to be paid, capital gains tax will have to be paid etc. In fact, it is well settled there is no transfer in such cases because in substance the owner remains the same though technically it becomes a different legal entity."

20. In this case, reference has also been made to the English case

of Shayler vs. Woolf wherein it was held as under :

"THAT only leaves one point and that is the arbitration clause. It is said that the contract cannot be assignable because of the existence of the arbitration clause, inasmuch as such a clause is in its nature not assignable or is only assignable (it is said) where the assigns are expressly mentioned in the clause itself or the contract which contains the arbitration clause is itself expressly declared to be assignable. In my opinion, these propositions are incapable of support in the wide way in which they are stated; nor does any of the authorities quoted to us in support of them really touch the point.

THE question whether an arbitration clause prevents a contract from being assignable must depend on the

intention of the parties, and the nature of the contract will, of course, be very important. Quite apart from an arbitration clause, if the nature of the contract is one which makes it incapable of assignment, owing to its personal nature, there is no question, of course, of the assignability of the arbitration clause; but that an arbitration clause is assignable in its nature seems to me to be quite clearly contemplated by the Arbitration Act, 1889, S. 4, and it has been recognised in this Court in one of the authorities referred to, namely, Aspell v. Seymour (5).

As I have said, apart from this arbitration clause, the agreement in this case is, in my opinion, quite clearly assignable. That is because, on its true construction, it is an assignable contract, that being the intention of the parties gathered from the document when read in the light of its subject-matter and the surrounding circumstances. It seems to me that the result of that must necessarily be that the arbitration clause also follows the assignment of the subject matter of the contract. There is nothing, I conceive, in principle or authority which would prevent that from taking place.

THE consequence is that, in my opinion, this was a contract assignable by Mrs. Peacock and, as it was assigned by her in her conveyance to the present plaintiff, the benefit of the contract is now vested in him and he is entitled to sue upon it."

(15)...... In an assignable contract, when assignment was held to have been made, the assignee was, in the reported decision, held entitled to the benefit of the contract and entitled to sue upon it. It is difficult to understand how the ratio of this case helps Shri Sawhney."

21. In the case of Hindustan Steel Works Construction Ltd.

vs. Bharat Spun Pipe Co. Ltd., AIR 1975 Cal. 8, it was held in the

following words :

".........whether the contract is assignable or not depends upon the nature of the contract. A contract in the nature of a personal covenant cannot be assigned. Secondly, the rights under a contract can be assigned, but the obligations under a contract lawfully cannot be assigned. Thirdly, the intention about assignability would depend upon the terms and the language used in

a contract. Fourthly, and this is important for our purpose, existence of an arbitration clause per se does make neither the contract non-assignable or assignable. But in a particular case the arbitration clause may be so worded as to afford an indication about the contract being personal or not. But apart from that the existence of arbitration clause does not, in my opinion, affect either the rights or the assignability of the contract if it is otherwise assignable."

22. If a contract is assignable, an arbitration clause will follow

the assignment of the contract. (Khardah & Co. vs. Raymon & Co.,

AIR 1962 SC 1810, 1818). Where a contract is entered into by the sole

proprietor of a business in the business name, on his taking other

partners in the business, the firm could enforce the arbitration clause.

(Hindustan Steel Works Construction's case (supra)

23. It is not in dispute that various payments have been made by

the respondent nos. 1 and 2 to the present petitioner M/s. Bestech India

Pvt. Ltd. for the work done. Respondent nos. 1 and 2 have also issued

TDS certificate in favour of the petitioner herein. In the instant case,

there is an agreement executed between the present petitioner and

partnership firm dated 1st October, 2001 by which it was agreed that all

contracts, awards, obligations and undertakings of the running

partnership concern had become the obligation of the petitioner.

Hence, the arbitration agreement executed between the partnership

firm is enforceable by the present petitioner. Both can enter into

reference for arbitration. The petitioner rightly invoked the arbitration

clause.

24. The second contention of respondents No.1 and 2 is that by

sending the letter dated 4th April, 2005 to the petitioner, the respondents

have appointed Mr. Sushant Jain as the sole arbitrator to decide all the

disputes arising out of the contract. This fact has been disputed by the

petitioner as the petitioner in his affidavit dated 16th May, 2006 in Para

11 stated that no letter dated 4 th April, 2005 as allegedly sent by

respondents was ever received by the petitioner. It is stated that the

letter dated 4th April, 2005 is first time produced by respondents No. 1

and 2 along with the reply filed on 28th January, 2006.

25. Learned counsel for the petitioner during the course of the

argument has specifically asked the respondents' counsel to produce the

evidence/proof of service of the said notice. The respondent is unable to

produce any evidence in support of his contention. Hence, the

contention of the respondents has no force in absence of evidence and

specific denial of receipt of notice by the petitioner.

26. The third contention of the respondents No. 1 and 2 is that

separate notices ought to have been issued by petitioner to respondents

No.1 and 2 in accordance with law in order to invoke Section 11 of the

Act. The learned counsel for the petitioner submits that both the

respondents No. 1 and 2 have filed common reply through the same set

of lawyers. Both the respondents have been authorised through their

respective Board resolutions by the same person to take steps in relation

to the arbitration application. The petitioner had executed the civil,

plumbing and fire fighting works of both of them who were developing

the property equally and were half owners of the same. They were also

making the payments to the petitioner on ongoing basis during the

pendency of the agreement and also have common shareholders and

common directors. On the basis of these facts, they cannot raise a

dispute about the issuance of separate notices for appointment of an

arbitrator. The notice dated 28th February, 2005 for appointment of an

arbitrator was issued to both respondents No. 1 and 2 according to the

petitioner. I accept this contention of the petitioner and this court is of

the opinion that the objections raised by the respondents have no force.

27. The fourth and last submission of the respondent is that the

contract was executed in Gurgaon and work was also performed in

Gurgaon. Merely because the contract stipulates that courts at Delhi will

have the jurisdiction is not enough to invoke the jurisdiction of this

court by the petitioner. Learned counsel for the respondents in support

of his contention has referred to the decision reported in 2004(6) AD

(Delhi) 195 Engineers project (India) Ltd vs. Greater Noida

Industrial Development Authority & Ors and R.K. Constructions

vs. NTPC Ltd, 1996(2) AD, Delhi 123. On the other hand, learned

counsel for the petitioner referred to the judgment of this Court in the

case of Chunni Lal Vs. RPG Home Finance Pvt. Ltd. reported as 134

(2006) DLT 212. Learned counsel for the petitioner has referred to

clause 51 of the contract between the parties which stipulates that any

legal proceedings relating to this contract shall be limited to the courts

of law under the jurisdiction of Delhi courts. This Court while dealing

with petitions under Section 9 of the Arbitration & Conciliation Act,

1996, in respect of a construction contract, held after noting several

decisions including that of a Division Bench of this Court that even if

some part of the cause of action has arisen in Delhi, the Court should

abjure from exercising jurisdiction and it should be exercised by a court

having jurisdiction at the place where the substantial or predominant

part of the cause of action has arisen.

28. In view of the above, I am of the opinion that this court has

the territorial jurisdiction to entertain and try this petition in view of

clause 51of the contract.

29. The petition filed by the petitioner under Section 11(6) of the

Arbitration & Conciliation Act, 1996 is allowed. Mr. Justice C.L.

Chaudhary (D-15, Sector 20, Noida-201301, Phone No.95120-2542323)

is appointed as Sole Arbitrator. The learned Arbitrator shall decide all

questions raised by the parties. The parties would be at liberty to file

claim/counter claims before the Arbitrator arising from the OMP. The

parties would be at liberty to take all the pleas as may be available to

them in law before the Arbitrator against claims/counter claims of each

other. The arbitrator shall fix his own fee to be shared equally between

the parties. The parties are directed to appear before the Arbitrator on

30th April, 2009.

In view of the above, the petition is disposed of. Parties are

left to bear their own costs.

MANMOHAN SINGH, J.

April 06, 2009 SD