M/S Maruti Clean Coal & Power Ltd. vs Kolahai Infotech Pvt. Ltd. & Ors.
2009 Latest Caselaw 784 Del

* IN THE HIGH COURT OF DELHI AT NEW DELHI

                      Order reserved on: 03.03.2010
%                     Order delivered on: 10.03.2010


+             I.A.1659/2010 in CS (OS) 2241/2009


       M/S MARUTI CLEAN COAL & POWER LTD.
                                         ...........Plaintiff
                     Through: Mr.Sandeep    Sethi,    Senior
                              Advocate    with     Mr.Sanjay
                              Kumar and Mr. Kartik Nayar,
                              Advocates.

                      Versus


       KOLAHAI INFOTECH PVT. LTD. & ORS.
                                    ..............Defendants
                    Through: Mr.Rajiv Nayar, Sr.Adv. with
                              Mr.Darpan Wadhwa and
                              Mr.Kailash Gahlot, Advocates
                              for defendant no.1.
                              Mr.Neeraj Kishan Kaul, Sr.Adv.
                              with Mr.Kamal Mehta,
                              Advocate for defendants no.2 &
                              3.
                              Mr.Jayant Nath, Sr.Adv. with
                              Mr.Manish Kumar, Advocates
                              for the defendant no.4.
                              Mr.Kailash Vasudev, Sr.Adv.
                              with Mr.B.C.Pandey, Advocate
                              for defendant no.5.

CORAM:
HON'BLE MS. JUSTICE INDERMEET KAUR

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

    2. To be referred to the Reporter or not?

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



CS(OS) No.2241.2009                        Page 1 of 38
 INDERMEET KAUR, J.

1. This is an application filed by defendant no.1 under Section 8

of the Arbitration and Conciliation Act (hereinafter referred to as

„the said Act‟) wherein a prayer is made that in terms of the

arbitration clause contained in the Shareholders Agreement

(hereinafter referred to as „SHA‟) dated 4.4.2008, the present suit

is liable to be dismissed as the subject matter of the present suit is

a dispute which can be adjudicated by the arbitrator alone.

2. Reference has been made to clause 21 of the said SHA which

contains the arbitration clause. Aforementioned SHA is an

admitted document between the parties. It was executed on

4.4..2008 at Raipur, Chhattisgarh between the plaintiff,

defendants no.1, 4 to 7; there are six signatories to the said

agreement. As per this document, the plaintiff company is

engaged in coal benefication at Korba District, Chhattisgarh.

Defendants no.1, 4 to 7 had agreed to join as promoters of the

company and to take shareholders equity stake to the extent of

19% each in the company. They were to participate in the

management and the business of the company. Each party would

nominate two directors each on the Board of the company with the

right to recall and substitute nominees. No business meeting

could be transacted by the Board unless a quorum is present;

quorum shall not be constituted unless at least one Director

nominated by each party is present. No decision could be taken by

the Board on fundamental issues without the affirmative vote of all

the Directors present in the meeting which fundamental issue also

included contracts worth more than Rs.25 lakhs. No change or

amendment in the charter documents of the company could take

place unless there was an affirmative vote of the shareholders of

the company present at the meeting. The termination clause

contained in clause 17 recites that on the occurrence of a

termination event; the non-defaulting shareholder shall have the

right to acquire the entire shareholding of the defaulting

shareholder in the company. The confidentiality clause is

contained in article 18. The arbitration clause is contained in

article 21. Article 21.5 stipulates the place of arbitration shall be

Raipur, Chhattisgarh and the language of the arbitration shall be

english. Under article 21.6, the award rendered shall be final and

conclusive. In addition, the parties agreed that none of them shall

have the right to commence or maintain a suit or legal proceeding

concerning a dispute hereunder until the dispute has been

determined in accordance with the arbitration procedure provided

for herein and only after the enforcement of the award rendered in

such arbitration. Clause 21.7 refers to the irrevocable consent by

the parties giving no option to any party to withdraw therefrom.

Clause 21.8 stipulates that the arbitration clause shall survive and

remain in effect even if the agreement fails to come into force or is

cancelled or otherwise terminated for any reason. Clause 22.4 is

the survival clause and states inter alia that notwithstanding

anything contained in this Agreement, the provisions of Articles

13, 14 to 18, 21 and articles 22.3 and 22.5 shall survive the

termination of this agreement for any reason whatsoever. The

governing law for disputes or claims arising out or in connection

with its subject matter would be the laws of India. This is

stipulated in article 24.

3. These aforenoted articles have been highlighted by the

applicant to substantiate his submission that in terms thereof

there is a complete exclusion and in terms of this exclusivity

clause the civil courts are barred from entertaining any dispute

arising out of this agreement; such disputes have to be decided by

the arbitrator who is required to adjudicate in Chhattisgarh as per

the Indian laws; the award has to be in english; even if the

arbitration agreement fails for whatosoever reason the survival

clause protects the arbitration clause and notwithstanding any

eventuality differences and claims arising out of or in connection

with this arbitration agreement have to be referred to the

Arbitrator alone.

4. Attention has been drawn to the averments made in the

plaint. Admittedly the relief claimed cannot exceed the prayers

made in the plaint; there is no relief claimed against defendants

no.2 & 3 who have been arrayed as parties to the suit in their

capacity only as directors of defendant no.1. They have been

impleaded only for the single and sole purpose to oust the

arbitration clause; their presence in no manner is required in the

suit and this is clear from the averments made in the plaint. No

relief whatsoever has been sought against them. The mandatory

injunction prayed for in prayer „b‟ seeks a transfer of the shares by

defendants no.1 to 3 in favour of the plaintiff; defendants no.2 and

3 are admittedly not holding any shares; they are only the nominee

directors of defendant no.1; even assuming the relief prayed for by

the plaintiff is granted in his favour, defendants 2 & 3 would have

no role in the said relief as the shares to be transferred to the

plaintiff are those of defendant no.1 alone; even in that eventuality

defendant no.2 and 3 who are only superficial parties would have

no role to play.

5. The subject matter of the disputes as envisaged in the plaint

i.e. the grievance of the plaintiff that defendant no.1 did not

withdraw the pending litigations against the plaintiff in terms of its

promise and undertaking; further that defendant no.2 had

breached certain confidentiality clauses and had bid for the same

tender in which the plaintiff was interested are all disputes

essentially arising out of and in connection with the SHA itself;

these differences and disputes are in no manner separate or

distinct from the arbitration agreement; they are a part and parcel

of it; no part of it can be severed from the other; they can only be

adjudicated upon by arbitration.

6. Attention has been drawn to the provisions of Section 8 of

the said Act and the observations of the Apex Court in the

judgment reported as Branch Manager, Magma Leasing and

Finance Limited and another vs. Potluri Madhavilata and Another

(2009) 10 SCC 103. It is submitted that Section 8 is in the form of

a legislative command to the court and once the prerequisite

conditions as aforestated are satisfied, the court must refer the

parties to arbitration. As a matter of fact, on fulfillment of the

conditions of Section 8, no option is left with the court and the

court has to refer the parties to arbitration.

7. Learned counsel for defendant no.1 has in anticipation of an

argument to be addressed by the plaintiff on the applicability of

the law as laid down in Sukanya Holdings (P) Ltd. vs. Jayesh H.

Pandya and Another (2003) 5 SCC 531 has sought to distinguish

the facts of the said case from the instant case. It is pointed out

that in that case there were two distinct and separate cause of

action and the purchasers of the 23 flats admittedly were not

parties to the partnership deed containing the arbitration clause

and as such the relief claimed holding these sale agreements to be

null and void could not be gone into in the arbitration proceedings.

8. Reliance has been placed upon Virender Yadav vs. Aerosvit

Airlines & Ors. 153 (2008) DLT 250. It is submitted that in this

case a coordinate bench of this court had distinguished the facts of

Sukanya Holdings‟s case (supra) in similar facts where defendant

no.3 had been added as a party only to negative and defeat the

arbitration clause; the court upholding the contention of the

applicant had held that defendant no.3 being only an agent of

defendant no.1 was acting through him and there was no

independent claim staked against him; even if he was not a party

to the partnership agreement, the cause of action against all the

defendants being so inextricably intertwined, it could not be said

that same can be bifurcated. The arbitration agreement

containing the arbitration clause was held applicable to both the

principal and the agent as the cause of action was the same

against all the defendants. Facts of Sukanya‟s Holdings (supra)

being that the other 23 defendants having been sued in their

independent capacity and not being a party to the partnership

agreement; the application under Section 8 of the said Act had

rightly been rejected.

9. On behalf of defendants no.2 and 3 it has been submitted

that there is no role ascribed to either of them. They have been

arrayed as per the memo of parties in their capacity as directors of

defendant no.1. On a reading of the entire plaint, no case is made

out against them. The relief claimed, even if decreed in favour of

the plaintiff, ousts the role of defendants no.2 and 3 even if the

case of the plaintiff is taken to its highest level. The averments

made in the plaint only draw out inferences of misrepresentation

made by defendant no.2 namely Anil Sehrawat; he had, as per the

averments in the plaint, breached the confidentiality clause of the

SHA (although admittedly he was not a party to the SHA). In terms

of this breach he had made communications with the Gujarat State

Electricity Corporation Ltd. (GSECL) who had floated a tender for

beneficiation of coal. Plaintiff had made a bid; as per the

communication of the GSECL, defendant no.2 Anil Sehrawat vide

communication dated 10.9.2009 intimated the GSECL that the

offer submitted by the plaintiff is without a proper authorization.

These acts of defendant no.2 were against the interest of the

company. It is submitted that even taking all these submissions to

be the gospel truth, they were at best breaches of the clauses as

contained in the SHA. They were disputes, differences and claims

arising out of and in connection with the said SHA. Fraud has been

pleaded in the plaint yet no specifics of the alleged fraud has been

detailed. Such contracts even if based on a plea of fraud would be

a voidable contract under Section 19 of the Indian Contract Act; it

would not be void ab initio. It is submitted that the plaintiff has

even otherwise not made any prayer to declare either the SHA to

be void/non est or its arbitration clause; defendants no.2 and 3 are

neither necessary nor property parties; they were admittedly not

signatories to the SHA; they had only been appointed as nominee

directors of defendant no.1 and this is also clear from the role

ascribed to them in the memo of parties; they were not

shareholders; they had no individual role to play. At best, they can

be witnesses in the present proceedings.

10. Under Section 16 (1) (b) of the said Act, even if the

arbitrator declares the Arbitration agreement/contract to be null

and void it would not ipso jure make the arbitration clause to be

invalid. Learned senior counsel for defendant no.2 and 3 has

placed reliance upon Brawn Laboratories Limited vs. Fittydent

International GMBH and another 2000 (3) RAJ 420 (Del). It is

submitted that there has been a sea-change in the arbitration law

and Section 16 of the said Act has given it its due recognition. It is

submitted that in view thereof even assuming that the SHA is to be

treated as non est, the arbitration clause would not be invalidated

and it would still be within the competence of the Arbitrator to

decide the validity of the same.

11. Reliance has been placed upon a judgment of House of

Lords, Opinions of the Lords of Appeal for Judgment in Premium

Nafta Products Limited (20th Defendant) and others vs. Fili

Shipping Company Limited (14th Claimant) and others (2007)

UKHL 40 to further substantiate this argument that the arbitration

clause is severable and distinct from the main argument.

12. In National Insurance Company Limited vs. Boghara Polyfab

Private Limited (2009) 1 SCC 267, the Supreme Court had held

that an arbitration clause is a collateral term of a contract

distinguished from its substantive terms; it has been given a

statutory recognition under Section 16 (1) (a) of the present Act.

13. In Ramesh Hirachand Kundanmal vs. Municipal Corporation

of Greater Bombay and others (1992) 2 SCC 524 the question as to

whose presence before the court would be necessary to enable the

court to effectively and completely adjudicate and settle all the

questions in the suit was dealt with. It quoted with approval the

observations of Wynn-Parry, J. in Dolllfus Mieg et Compagnie S.A.

v. Bank of England.

"The test is „May the order for which the plaintiff is asking directly affect the intervener in the enjoyment of his legal rights."

14. The dual test of a necessary party was laid down in Kasturi

vs. Iyyamperumal and Others (2005) 6 SCC 733 while expounding

the provisions of Order 1 Rule 10 (2) CPC.

15. In W.P.I.L. vs. NTPC Ltd. 2009 (1) Arb.L.R. 378 (Delhi) while

distinguishing the facts of Sukanya Holdings‟s (supra) it was held

that the defendants in the present case had been arrayed as

defendants no.3 to 5 only to circumvent and possibly defeat the

arbitration clause. There was no dispute between the plaintiff and

them; in any event if any statement of any such party is required in

arbitral proceedings, their officials or employees can be cited as

witnesses.

16. In A.B.C. Laminart PVt. LTd. vs. A.P. Agencies, Salem (1989)

2 SCC 163 on the question of jurisdiction, the Supreme Court had

held that an ouster clause in a contract excludes the jurisdiction of

all other forums except the agreed upon forum.

17. It is submitted that the ratio of aforestated judgments and a

reading of the law as enunciated above when read in context of the

various aforenoted clauses of the SHA clearly show that it was the

Chhattisgargh courts alone which would have the jurisdiction to

adjudicate upon all or any dispute arising out of the aforenoted

SHA.

18. The plaintiff has controverted this stand. The background as

contained in the plaint has been built up. It is submitted that SHA

dated 4.4.2008 had been entered into by the plaintiff with the

defendants in estranged circumstances. Plaintiff was not able to

start his business of a coal washery in spite of having been granted

land, in the year 2002 by Government of Chhattisgarh. The

plaintiff could not get the necessary consent and as such in spite of

his having made an enormous investment of Rs.55 crores in the

said project he could not commence business. This was primarily

and largely for the frivolous allegations which had been instituted

against him by the Aryan Group of Companies of which defendant

no.1 is an active company.

19. Attention has been drawn to a judgment of the Apex court

reported in T.N.Godavarman Thirumulpad vs. Union of India and

Others 2006 (5) SCC 28. The Apex court while dismissing the

public interest litigation filed by one Deepak Aggarwal who was

held to be merely a name lender of the Aryan Group of Companies

who had challenged the allotment of 16 hectare of land leased out

by the State of Chhattisgarh to M/s Maruti Clean Coal and Power

Limited (plaintiff herein), had noted the 13 litigations pending

inter se between the parties i.e. between Maruti Coal Company

and the Aryan Group.

20. It is further submitted that false and fraudulent

representations had been made by defendant no.1 to the plaintiff.

Defendant no.1 had misrepresented that the Aryan Group of

Companies would withdraw all pending litigations pending against

the plaintiff; these promises had not been adhered to. Plaintiff has

reserved its right to file criminal proceedings against the

defendant in the appropriate forum. In terms of the SHA the first

defendant and its nominee directors were bound to act in the best

interest in the company yet they chose to do otherwise. Defendant

no.2 intimated GSECL vide letter dated 10.9.1999 that the offer

made by the plaintiff company for a tender of benefication of coal

was without due authorization by the plaintiff; this act of

defendant no.2 was against the interests of the company. In

October, 2009 GSECL replied to the plaintiff‟s letter stating that

defendant no.2 had alleged that the Articles of Association of the

company provided that a unanimous decision of the Board in a

contract of more than 25 lakhs is required but there was no such

unanimous decision. These acts of the defendant no.1 and his

nominee directors were not befitting the role of a director of a

company; they had reached the heights of malafide. In these

circumstances, the plaintiff has little option but to declare the SHA

to be non binding and void ab initio. Emphasis had been laid on

paras 8, 29, 35, 44 and 49 of the plaint.

21. Attention has been drawn to the provisions of Section 14 of

the Indian Contract Act, 1973 defining „free consent'. An

agreement obtained by fraud is voidable under Section 17 of the

Indian Contract Act and once this option has been exercised by the

applicant, the said contract becomes void ab initio.

22. Under Section 2 (g) of the Contract Act, 1872

"An agreement not enforceable by law is said to be void."

Under Section 2 (i) of the Contract Act

"An agreement which is enforceable by law at the option of one or more of the parties thereto, but not at the option of the other or others, is a voidable contract."

23. In N.Radhakrishnan vs. Maestro Engineers and Others

(2010) 1 SCC 72 the court while dealing with an application under

Section 8 (2) of the said Act had held that where the disputes

related to serious allegations inter se between the parties

involving complicated questions of fact, adjudication of the same

can only be done by oral and documentary evidence. In this case

while quoting with approval the ratio laid down in Haryana

Telecom Ltd. v. Sterlite Industries (India) Ltd. (1999) 5 SCC 688 it

had been held that the disputes which are referable to the

arbitrator are only those disputes which the arbitrator is

competent or empowered to decide.

24. In National Textile Corporation (Guj.) Ltd. vs. State Bank of

India and others 2006 7 SCC 542 while quoting with approval the

observations of the Supreme Court in UOI vs. Kishori Lal Gupta

and Brothers AIR 1959 SC 1362 the following principles had been

deduced:

"(1) an arbitration clause is a collateral term of a contract as distinguished from its substantive terms; but nonetheless it is an integral part of it; (2) however comprehensive the terms of an arbitration clause may be, the existence of the contract is a necessary condition for its operation; it perishes with the contract (3) the contract may be non est in the sense that it never came legally into existence or it was void ab initio; (4) 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 thereunder; (5) in the former case, if the original contract has no legal existence, the arbitration clause also cannot operate, for along with the original contract, it is also void; in the latter case, as the original contract is extinguished by the substituted one, the arbitration clause of the original contract perishes with it; and (6) between the two falls many categories of disputes in connection with a contract, such as the question of repudiation, frustration, breach, etc. In those cases it is the performance of the contract that has come to an end, but the contract is still in existence for certain purposes in respect of disputes arising under it or in connection with it. As the contract subsists for certain purposes, the arbitration clause operates in respect of these purposes."

25. It is submitted that in this case, the plaintiff has all along

alleged that the SHA itself is a document which is void ab initio;

the plaintiff having entered the contract under misrepresentation

and a fraud played upon him by the defendant that they would

perform all their obligations on their side which included their

obligations to withdraw all pending litigations; none of this was

complied with; the contract being a non est document under

Section 17 of the Contract Act it is clear that it is neither

enforceable and nor it can be implemented. Such a question

cannot be decided by the arbitrator; it falls to be decided in the

realm of a civil court.

26. In Damodar Valley Corporation vs. K.K.Kar 1974 1 SCC 141

the Supreme Court had reiterated that where the plea set up is

that the entire contract itself is void, illegal and fraudulent, the

entire contract along with the arbitration clause becomes non est;

this is clearly so in the instant case; not only does the SHA but all

the articles including article 21 containing the arbitration clause

must necessarily fall.

27. It is further submitted that the seven judges Bench judgment

reported in SBP & Co. vs. Patel Engineering Ltd. and Another

(2005) 8 SCC 618 had while noting the complementary nature of

Section 8 and Section 11 of the said Act held inter alia as follows:

"It is also not possible to accept the argument that there is an exclusive conferment of jurisdiction on the Arbitral Tribunal, to decide on the existence or validity of the arbitration agreement. ... .... ... When the defendant to an action before a judicial authority raises the plea that there is an arbitration agreement and the plaintiff or the person who has approached the judicial authority for relief, disputes the same, the judicial authority, in the absence of any restriction in the Act, has necessarily to decide whether, in fact, there is in existence a valid arbitration agreement and whether the dispute that is sought to be raised before it, is covered by the arbitration clause."

It had further been held that

"Section 16 is said to be the recognition of the principle of Kompetenz-Kompetenz. The fact that the Arbitral Tribunal

has the competence to rule on its own jurisdiction and to define the contours of its jurisdiction, only means that when such issues arise before it, the Tribunal can, and possibly, ought to decide them. This can happen when the parties have gone to the Arbitral Tribunal without recourse to Section 8 or 11 of the Act."

28. It is submitted that when the arbitration agreement is itself

under challenge, it is necessary for the court as a prelude to

decide whether any such arbitration agreement in fact exists or

not; the question of referring the disputes to arbitration can only

arise subsequently. In such a case evidence is required to be

recorded to decide about the existence of the validity of the

arbitration agreement. Section 16 is excluded in such an

eventuality.

29. Counsel for the plaintiff has sought to distinguish the

judgments relied upon by the defendants. The Supreme Court in

the Magma Leasing case (supra) had in fact held that where the

dispute is as to whether the contract itself is void, the arbitration

clause cannot operate for its operational force depends upon

existence of the contract and its validity; such a dispute falls

outside the arbitration clause, if the agreement itself is

superseded the arbitration clause falls with it. The case of W.P.I.L.

(supra) relied upon by the defendants is under appeal. In the

judgment of the Lords of Appeal in the Premium Nafta Products

Ltd. case (supra) it had in fact been held that if the main

agreement and the arbitration agreement are contained in the

same document and one of the parties claims that he never agreed

to anything in the document and that his signatures was forged,

that will be an attack on the validity of the arbitration agreement;

in such a case the entire agreement along with the arbitration

clause must perish. The National Insurance Company Ltd. (supra)

was a case of accord and satisfaction; principles of Section 11 and

Section 16 of the said Act were under consideration. In the instant

case allegations leveled in the plaint are specifically of a fraud; the

observations in the case of Kishori Lal Gupta had also been quoted

with approval; if the contract ceases to have effect, the arbitration

clause contained in the agreement must necessarily cease as an

arbitration clause is a collateral term of the contract and an

integral part of it.

30. Attention has been drawn to clause 21.8 of the SHA. It is

stated that this severability make reference to article 13 and not to

article 21 and this has been misrepresented by the defendants.

Clause 22.4 protects the survival clause in the case of the

termination of a contract which is not so in this case. Allegations

of fraud do not lead to the termination of the contract; such a

contract is void ab initio.

31. It is for the plaintiff to decide who are the necessary parties.

Doctrine of „dominus litis‟ enables the plaintiff to choose the

parties who are necessary to the reliefs claimed by him. Acts of

defendants no.2 & 3 as nominee Directors of defendant no.1 were

against the interest of the company. Defendant no.2 by his

communication to the GSECL hampered the progress and

development of the business of the plaintiff company; he had

clandestinely sought to inform the GSECL that the plaintiff was

not authorized to bid for the tender which had been advertised by

the GSECL.

32. Submissions of the defendants that the plaintiff has not

chosen to get the SHA or the arbitration agreement to be declared

as null and void is of no consequence. In Sanjay Kaushish vs. D.C.

Kaushis and others AIR 1992 Delhi 118, a coordinate bench of this

court has held that where a particular document has been

declared to be void, a suit seeking substantive relief is

maintainable without seeking any declaration that the said

document is void. The present suit is maintainable. In Shri Roshan

Lal Gupta vs. Shri Parasram Holdings Pvt. Ltd. and Anr.

MANU/DE/0146/2009 this principle has been reiterated; a civil

court will have the jurisdiction to entertain a suit emanating from

a transaction which is the subject matter of an arbitration

agreement.

33. The judgment of Sukanya Holdings (supra) squarely applies

to the instant case; defendant no.2 and 3 are admittedly not

parties to the arbitration agreement; relief sought against them

cannot be decided by the arbitrator; causes of action cannot be a

split; the entire gamut of the claims raised by the plaintiff relate to

the grievances of the plaintiff not only against defendants no.1, 4

to 6 (parties to the SHA) but also to defendants no.2 & 3 who are

not parties to the SHA.

34. These arguments of the plaintiff have been supported and

supplanted by defendants no.4 to 6. It is stated that the plaintiff

along with defendants no.4 and 6 are shareholders of 81% equity

in the plaintiff company; admittedly, the best interests of the

company have been defied by the contesting defendants i.e.

defendants no.1 to 3; on the misrepresentations made by the said

defendants, plaintiff had entered into the SHA; the fact that these

were misrepresentations is evident from the fact that the cases

agreed to be withdrawn have not been withdrawn; on the other

hand defendants no.2 has sent malicious letters to the GSECL

acting as a co-competitor with the plaintiff and harming the

interest of the plaintiff.

35. In rejoinder it is stated that the legal position as has been

sought to be pleaded is based on a fallacy and misunderstanding

of the law. The Arbitration and Conciliation Act 1996 has made a

substantial progress from the earlier law as contained in the Act of

1940. The severability clause is contained in the Section 16 of the

said Act. Section 16 (1) (b) postulates a situation that even where

the Arbitral Tribunal has declared the agreement between the

parties to be null and void it would not ipso jure make the

arbitration clause to be invalid. The judgment of Kishore Lal

Gupta (supra) was passed in the year 1959 which proceedings

were under the old Act. A co-joint reading of the clause 21.6, 21.7

and 21.8 of the SHA clearly show that the arbitration clause

contained in the SHA was sacrosanct and binding in all

eventualities between the parties; parties had given an irrevocable

consent to the SHA and no party was entitled to withdraw such a

consent or to state that it was not bound by this article i.e. article

contained in Section 21 which is the article of arbitration. Further

the parties had agreed that none of them will have any right to

commence or maintain a civil suit or any other legal proceedings

except in accordance with the arbitration procedure provided

hereunder. Further this article is severable from the SHA and

shall survive and remain in effect even if the SHA fails or is

cancelled or terminated for any reason. The exclusive jurisdiction

of the court would be the Chhattisgarh court. Provisions of

Section 16 (1) (B) as contained in the Statute recognize this

principle of severability. In National Textile Corporation case

(supra) the provisions of the Arbitration Act 1996 were not in

issue; from where the distinction has been made between a

termination of contract with a contract which is void on the ground

of fraud has not been explained. Magma Leasing case (supra) had

quoted with approval the observations of the Supreme Court of

United States in the judgment reported as Buckeye Check Cashing

Inc. v. John Cardegna (2000) 546 US 1 that Prima Paint rule

permits a court to enforce an arbitration agreement in a contract

that the arbitrator later finds to be void.

36. In N.Radhakrishanan case (supra) serious issues relating to

misappropriation of accounts and malpractices on the part of the

respondents had been made. These were substantive questions

relating to facts where detailed material evidence both

documentary and oral needed to be produced by the parties on the

question of fraud and malpractices raised therein which in the

facts of the said case was held necessarily to be tried by a court

and not by the Arbitrator. These related to the manipulation of

accounts and the fraud committed by one party by cheating the

other party of his dues. There is no such allegation in the instant

case. At best the allegations which are levelled in the plaint are

breaches committed by defendant no.2 who had become a

nominee director of defendant no.1 in terms of the SHA; they have

no other independent role. The observations relied upon by the

plaintiff in the judgment of the Lord of Appeals in the Premium

Nafta case (supra) related to a case where the arbitration

agreement was under challenge on the ground of forgery; that the

said agreement was a forged agreement and had never been

entered into by the parties. There is no such averment in the

plaint. The SBP and Co. case (supra) has only re-affirmed the

principle that the disputes raised must be covered by the

arbitration clause.

37. Reliance by the plaintiff on the PIL proceedings is misplaced;

in this case it had only been held that the PIL is not maintainable

as it was an individual interest of the Aryan Group which was

involved. There was no public interest; even otherwise these

observations have been overridden by the SHA which had been

signed between the parties subsequently on 4.4.2008.

38. Plaintiff cannot take advantage of the typing error of the

reference to clause 13 in Article 21.8. There has to be a

harmonious construction of a document; it has to be read sensibly.

Article 21.8 clearly makes reference to this article and being a

part of article 21 it has to be read as a part of the said article only.

Submissions of the plaintiff on the plea of dominus litis are again

misplaced. It cannot override the statutory provisions as

contained under Order 1 Rule 10 of the CPC; who is a necessary

and proper party has to be decided by the court. Defendant no.2

and 3 have been sued in their capacity as directors of defendant

no.1. At the cost of repetition, they have been impleaded only to

defeat the arbitration clause and to come within ambit and scope

of Sukanya Holdings (supra). The relief of declaration that the

SHA and the arbitration clause to be declared null and void has

not been sought; even assuming that the present application of the

applicants is dismissed and the suit is decreed in favour of the

plaintiff, court will have no power to declare either the SHA or the

arbitration clause as null and void as there is no such prayer.

39. Admittedly there is an arbitration clause, parties had by

express agreement agreed not to file any civil proceedings, the

exclusive jurisdiction of the court for any dispute arising out of and

in connection with this SHA being Chhattisgargh court,

jurisdiction of the Delhi Court is excluded. These facts had not

been brought to the notice of the court at the time when the ex-

parte injunction had been obtained by the plaintiff in his favour,

this is an active concealment. Attention has been drawn to the

legal notice dated 23.11.2009 sent by the plaintiff one day prior to

the filing of the suit. Para 14 to 17 clearly speak of the breaches

committed by the defendant (applicant herein) in terms of the SHA

i.e. relating to the confidentiality clause. It has never been the

averment of the plaintiff that the SHA itself is forged or a

fabricated document or that the plaintiff had not put his signatures

on the said document. A mere allegation of fraud without

substantiating it with any further details or instances would not by

itself be sufficient to state that the said SHA has become void.

40. Arguments have been heard. Record has been perused.

41. The whole case centers around the SHA dated 4.4.2008. This

document running into 47 pages has 24 articles. There are six

signatories to the said document i.e. plaintiff, defendant no.1, 4 to

6. It is not the case of either party that this document has not been

signed by the respective parties; it has not been pleaded that the

signatures on the document are forged, fabricated or not of the

party concerned. The document is admitted; defendant no.1 has

an equity stake of 19% in the plaintiff company. Defendants no.2

and 3 are not shareholders. They have no stake in the company;

they have been arrayed as is evident from the memo of parties

only in their capacity as nominee directors of defendant no.1. This

is in terms of article 7.2 which authorizes each party to the

agreement to nominate two directors each on the board of the

company. The very fact that the plaintiff has recognized

defendants no.2 and 3 as the directors of defendant no.1 shows

that the plaintiff has in fact acted upon this SHA.

42. The prayers in the plaint have been perused. They inter alia

read as follows:

"a. declare that the shares issued to the Defendant no.1 pursuant to the Shareholders Agreement dated 4th April 2008 are void and of no effect; that they be cancelled or b. issue a mandatory injunction directing Defendant Nos.1 to 3 to transfer the shares held by the Defendant No.1 in Plaintiff Company at a fair valuation not exceeding the face value of the shares or as determined by this Hon‟ble Court to Defendant Nos.4 to 7."

43. The first prayer is that the shares issued to defendant no.1

pursuant to this SHA be declared to be void/cancelled. This relief

is sought against defendant no.1 alone. The second prayer seeks a

mandatory injunction directing defendants no.1 to 3 to transfer the

shares held by defendant no.1 to the plaintiff company at a fair

value not exceeding the face value of the shares to defendants no.

4 to 7. This prayer makes it amply clear that there is no relief

claimed against defendant no.2 to 3. Shares are held by defendant

no.1 and defendants no.2 and 3 have no role in the transfer of

these shares from defendants no.1 to defendants no.4 to 7. In

these circumstances, the role of defendants no.2 and 3 as parties

to the suit becomes questionable. Averments in the plaint have

also been perused. There is not a single averment made against

defendant no.3. Against defendant no.2 Anil Sehrawat it has been

averred that on 23.9.2009 GSECL had informed the plaintiff

company that one of its directors namely Anil Sehrawat had vide

letter dated 10.09.2009 intimated GSECL that the offer submitted

by the plaintiff is without any proper authorization. The GSECL

had floated a tender for the supply of beneficated coal where the

plaintiff had made a bid. Further in October 2009, GSECL replied

to the plaintiff‟s letter 26.09.2009 stating that Anil Sehrawat had

vide his letter dated 10.09.2009 alleged that the Articles of

Association of the plaintiff company provide that a unanimous

decision is required to enter into a contract of more than Rs. 25

lakhs. The consent of the other directors was required which had

not been obtained. It has been averred that these communications

by Anil Sehrawat to GSECL were against the interest of the

company and demonstrated his ill-will towards the plaintiff and his

intention to divert these business opportunities to its rival namely

the Aryan Group. These acts are malafide. In view thereof the SHA

is liable to be declared as not binding and void ab initio.

44. Admittedly defendants no.2 & 3 have been nominated as

directors of defendant no. 1 in terms of article 7.2 of the SHA.

Defendant no. 1 has acquired 19% equity in the plaintiff company

in terms of article 3. Article 8.4 stipulates that no business shall be

transacted unless a quorum is present and a quorum shall not be

constituted unless at least one director nominated by each party is

present during the meeting. Under Article 8.13 no decision of the

board on any fundamental issue shall be taken without the

affirmative vote of all the directors present in the meeting. Under

Article 8.14 the fundamental issues include contacts worth more

than Rs. 25 lakhs. This is contained in Article 8.14.15. It is not in

dispute that the tender floated by GSECL inviting bids for supply

of beneficated coal was a contract of more than Rs. 25 lakhs.

Admittedly affirmative vote of all the directors present in the

meeting had not been obtained when the plaintiff had submitted

its offer/tender bid to the GSECL. Under Article 9.2 any decision of

the shareholders on fundamental issues shall require an

affirmative vote of all the shareholders present in the meeting

which included a change or amendment to the Charter documents.

The Charter document includes the Articles of Association of the

company. The plaintiff in his communication dated 13.10.2009 had

clarified that this restriction was not in relation to contracts

proposed to be taken up by the plaintiff company i.e. washing of

coal and such a contract did not require the unanimous decision of

the Board of directors.

45. A wholesome reading of the SHA clearly shows that these

are all disputes and claims arising out of and in connection with

the SHA. The various articles in the SHA have specified and dealt

with each of these contingencies; whether the offer of GSECL

inviting tender bids required the unanimous consent of all the

directors/shareholders of the plaintiff and whether the act of the

plaintiff in making this offer was in conformity with article 8 of the

SHA is essentially a dispute arising out of and in relation to the

said SHA. Whether in these circumstances the letters if any

addressed by defendant no. 2 to GSECL were for the reason that

the plaintiff was not acting in terms of the binding terms of the

SHA is again a dispute arising out of and in connection with the

SHA. Whether there was a breach of the confidentiality clause i.e.

article 18 is again a breach committed in terms of the SHA.

Whether the Articles of Association amended in terms of the Board

meeting dated 15.10.2009 was a violation of article 9.2.1 which

required that changes in the Charter document could only be by

an affirmative vote of all the shareholders of the company again

requires an interpretation of the relevant article of the SHA. The

appointment of defendants no. 2 & 3 as directors of defendant no.

1 and the claim of the plaintiff that they ceased to be directors

with effect from September 2009 would again require the

expounding of article 7.8 of the SHA which states that no director

shall be removed during the term for which he shall be elected

without the consent of the shareholder that has recommended his

appointment. Defendant no. 1 had recommended the appointment

of defendants no. 2 & 3; such a consent had not been withdrawn

by defendant no. 1. This is again a dispute arising out of and in

connection with the SHA.

46. Article 21 is the arbitration clause; Article 21.1 stipulates

that the parties shall attempt to resolve their disputes arising in

connection with this agreement by arbitration. The Arbitral

Tribunal would comprise of 3 arbitrators; 1 to be appointed by

each party and the 3rd party shall be appointed by the other 2

arbitrators. Under article 21.5 place of arbitration is Raipur,

Chhattisgarh and language of the agreement is english. Under

article 21.6 the award rendered shall be final and conclusive. In

addition the parties agreed that none will have the right to

commence or maintain a suit or legal proceedings until the

disputes had been determined in terms of the arbitration

procedure. Article 21.7 constitutes the irrevocable consent by the

parties to which no party is entitled to withdraw. Article 21.8

states that this article meaning thereby that article 21 is severable

from the rest of this agreement and shall survive and remain in

effect even if the agreement itself fails or is cancelled or is

otherwise terminated for any reason. Article 22 contains the

miscellaneous provisions of which article 22.3 is the clause for

severability. It stipulates that if any of the provision of this

agreement become or are held to be invalid ineffective or

unenforceable the other provisions shall remain in force. Clause

22.4 is the non-obstante clause, it states that notwithstanding

anything contained in this agreement, the provisions of the article

13 to 18 and article 21 and clauses 22.3 and 22.5 shall survive the

termination of this agreement for any reason whatsoever. This is

the survival clause.

47. Admittedly, this document is signed by all the signatories

aforestated including the plaintiff, defendant no. 1 and defendants

no. 4 to 7. This execution of this document is not under challenge.

The case of the plaintiff that this document has been prepared

under fraud and misrepresentation, as already noted above, are all

differences and disputes relating to the interpretation of the

various articles and clauses of the SHA.

48. Allegation of Fraud:

The facts in the N.Radhakrishnan case (supra) are distinct.

This case as discussed supra related to allegations of

misappropriation of funds, manipulation of accounts and cheating

by one party against the other which required a detailed, oral and

documentary evidence. The Supreme Court had further quoted

with approval the observations reported in the case of Abdul Kadir

Shamsuddin Bubere v. Madhav Prabhakar Oak AIR 1962 SC 406

as follows:

"There is no doubt that where serious allegations of fraud are made against a party and the party who is charged with fraud desires that the matter should be tried in open court, that would be a sufficient cause for the court not to order an arbitration agreement to be filed and not to make the reference."

This principle in fact enures for the benefit of the

applicant/defendant. Fraud has been alleged against the

applicant/defendant but he is not desirous that the matter should

be tried in the civil court.

49. Severability of Arbitration Clause:

This arbitration clause contained in Article 21 is severable

from the rest of the SHA and even if the SHA fails or is terminated

for any reason whatsoever the survival clause protects the

arbitration clause which shall remain unaffected, intact and

binding upon the parties in all eventualities whatsoever. Statutory

recognition of this principle of severability has been enunciated in

Section 16 (1) (b) of the said Act which is a substantial progress

from the earlier law as contained in the 1940 Act. As such even

assuming that the SHA fails for one reason or the other which is

not so in the instant case as the plaintiff has himself relied upon

SHA and impleaded defendants no.2 and 3 as parties/nominee

directors of defendant no.1 only in terms of the SHA. Plaintiff has

fully relied upon the SHA and accordingly sued defendants no.2

and 3. The severability clause and the survival clause protect and

shelter the arbitration clause in all contingencies and

eventualities; whatever may come the arbitration clause will be

upheld. Under Section 16, the Arbitral Tribunal is clothed with full

powers to rule on its own jurisdiction including objections with

respect to the existence or validity of the arbitration agreement.

In the National Insurance Corporation Case (supra) the Supreme

Court has reiterated that the principle that the original contract

having no sanction the arbitration clause must also be held to be

inoperative has now to be read subject to the provisions of Section

16 of the said Act. In the Premium Nafta case (supra) the Lord of

Appeals had inter alia held:

"17. The principle of separability enacted in section 7 means that the invalidity or rescission of the main contract does not necessarily entail the invalidity or rescission of the arbitration agreement. The arbitration agreement must be treated as a "distinct agreement" and can be void or voidable only on grounds which relate directly to the arbitration agreement. Of course there may be cases in which the ground upon which the main agreement is invalid is identical with the ground upon which the arbitration agreement is invalid. For example, if the main agreement and the arbitration agreement are contained in the same document and one of the parties claims that he never agreed to anything in the document and that his signature was forged, that will be an attack on the validity of the arbitration agreement. But the ground of attack is not that the main agreement was invalid. It is that the signature to the arbitration agreement, as a "distinct agreement" was forged. Similarly, if a party alleges that someone who purported to sign as agent on his behalf had no authority whatever to conclude any agreement on his behalf, that is an attack on both the main agreement and the arbitration agreement.

18. On the other hand, if (as in this case) the allegation is that the agent exceeded his authority by entering into a main agreement in terms which were not authorized or for improper reasons, that is not necessarily an attack on the arbitration

agreement. It would have to be shown that whatever the terms of the main agreement or the reasons for which the agent concluded it, he would have had no authority to enter into an arbitration agreement. Even if the allegation is that there was no concluded agreement(for example, that terms of the main agreement remained to be agreed) that is not necessarily an attack on the arbitration agreement. If the arbitration clause has been agreed, the parties will be presumed to have intended the question of whether there was a concluded main agreement to be decided by arbitration".

50. The court had referred to it is earlier judgment in Prima

Paint Corp. v. Flood & Conklin Mfg. Co. 388 U.S.395 wherein it

was observed:

"Prima Paint and Southland answer the question presented here by establishing three propositions. First, as a matter of substantive federal arbitration law, an arbitration provision is severable from the remainder of the contract."

51. Pre-requisites of Section 8:

Magma Leasing case (supra) has spelt out a mandate to the

courts whereupon if the conditions as contained in Section 8 of the

said Act are satisfied, there is little option left with the court but to

make a reference to the Arbitral Tribunal.

52. On an analysis of Section 8 of the said Act it was held that

for its applicability the following conditions must be satisfied:

(a) that there exists an arbitration agreement;

(b) that action has been brought to the court by one party to the arbitration agreement against the other party;

(c) that the subject matter of the suit is same as the subject matter of the arbitration agreement;

(d) that the other party before he submits his first statement of the substance of the dispute, moves the court for referring the parties to arbitration; and

(e) that along with the application the other party tenders the original arbitration agreement or duly certified copy thereof.

53. All the aforestated conditions contained in Section 8 stand

satisfied. Admittedly, article 21 contains the arbitration clause in

the SHA. SHA is an admitted document. It has admittedly been

executed between the parties. The subject matter of the disputes

raised in the plaint are all claims and differences arising out of the

express terms of the SHA. The subject matter of the suit is the

same as the subject matter detailed and entailed in the SHA. The

present application has been filed by defendant no.1 before

submitting his first statement to the substance of the dispute. The

original arbitration agreement has also been placed on record.

The parties to the present suit are the same as those of the

arbitration agreement.

54. Necessary Parties:

Defendants no.2 and 3 are superfluous parties; they have no

role to play. No relief has been claimed against them; they have

arrayed as parties to the suit only in their capacity as nominee

directors of defendant no.1; even assuming that the suit of the

plaintiff is decreed, defendants no.2 and 3 would have no role to

play; the transfer of shares sought from defendant no.1 are shares

of defendant no.1; defendants no.2 and 3 have no stake in the

company. They have been impleaded only to defeat the arbitration

clause and to somehow get over the judgment of the Sukanya

Holdings case (supra). The facts of the said case were that the

parties had entered into an partnership agreement dated

30.4.1992 for carrying on business to develop land. In the course

of their business on 7.4.1998 five Flats were sold to the creditors

of the partnership firm in order to repay their loans; the deed of

conveyance dated 23.6.1999 was executed between the

partnership firm and the said parties in respect of these flats.

Thereafter one of the parties filed a suit for dissolution of the

partnership firm and rendition of accounts as also challenging the

conveyance deeds executed by the partnership firm in favour of

one of the purchasers. Application under Section 8 of the said Act

was filed; this was kept pending. Thereafter, a fresh suit was filed

for dissolution of the said firm, accounts and other reliefs

including the relief for setting aside the transfer of the suit flats in

favour of the various defendants; the first suit stood withdrawn. In

the subsequent suit an arbitration petition under Section 8 of the

said Act was filed. This application was opposed; it was contended

that the subject matter of the suit is not between the contracting

parties and the relief claimed is not only against the parties to the

arbitration agreement but against those 23 parties who are

purchasers/so-called tenants of the disputed flats. The Supreme

Court upholding the judgment of the High Court held that Section

8 of the said Act was inapplicable. It was held that the suit apart

from the relief of dissolution and accounts also claimed other

reliefs. 23 defendants in the suit were not parties or partners in

the partnership firm and as such the terms of the partnership deed

including the arbitration clause were not binding upon them; only

part of the subject matter could at the most be referred to

arbitration. Further, there is no power conferred on the court to

add parties who are not parties to the agreement in the arbitration

proceedings. The Court also negatived the alternative prayer for

referring part of the subject matter in respect of those parties who

are parties to the partnership agreement to arbitrator which

contains the arbitral clause. The Court arrived at the conclusion

that such procedure is a not contemplated under the Act. The

object and purpose of the Act is to avoid multiplicity of

proceedings and not to allow two forums simultaneously to

proceed with the matter. Admittedly, these transactions of the sale

of the said flats had no connection with the partnership dispute;

distinct relief had been claimed against other parties who were not

parties to the partnership agreement. It was in these

circumstances that the court had held that the cause of action

cannot be split and part disputes alone cannot be referred to

arbitration. The relief seeking cancellation of the sale deeds

against the independent purchasers cannot be granted by the

Arbitrator. It was only the civil proceedings which could

adjudicate this dispute. Facts of Sukanya Holdings‟s case (supra)

are inapplicable and clearly distinguishable.

55. In the Kasturi case (supra) the Supreme Court had evolved a

dual test to determine as to who is a necessary party. The court

has held:

"....two tests are to be satisfied for determining the question who is a necessary party. Tests are - (1) there must be a right to some relief against such party in respect of the controversies involved in the proceedings; (2) no effective decree can be passed in the absence of such party."

By the application of the said test it is clear that defendants

no.2 and 3 are neither a necessary and nor a proper party. The

decree if passed in favour of the plaintiff can effectively be

executed even in their absence; no relief has been sought against

either defendant no.2 or defendant no.3. The inescapable

inference drawn is that defendants no.2 and 3 have been included

in the suit as defendants only to circumvent and defy the

arbitration clause.

56. Principle of dominus litis which states that the plaintiff is the

person to whom the suit belongs; he is not bound to sue every

possible claimant; he may chose to implead only those persons

against whom he wishes to proceed; this question however has to

be decided on the touchstone of order 1 Rule 10 and has to be

subject to it.

57. There are no disputes pending between the plaintiff and

defendants no.2 and 3. They are not signatories to the SHA. They

have been nominated as the directors of defendant no.1 which

nomination has also been disputed by the plaintiff. At best they

can be cited as witnesses. Cause of action against all the

defendants is one and the same. It is not split or bifurcated. The

disputes raised by the plaintiff all relate to the interpretation of

the clauses of the SHA. They all fall within its ambit and scope.

58. In ABC Laminart Pvt. Ltd. (supra) it has inter alia been held

as follows:

".. ..... it can be reasonably deduced that where such an ouster clause occurs, it is pertinent to see whether there is ouster of jurisdiction of other courts. When the clause is clear, unambiguous and specific accepted notions of contract would bind the parties and unless the absence of ad idem can be shown, the other courts should avoid exercising jurisdiction. As regards construction of the ouster clause when words like „alone‟, „only‟, „exclusive‟ and the like have been used there may be no difficulty. Even without such words in appropriate cases the maxim „expressio unius est exclusion alterious‟ -- expression of one is the exclusion of another - may be applied."

Facts of the instant case clearly exclude the operation of all

or any other legal proceeding except the disputes to be decided by

the forum of arbitration.

59. The application of defendant no.1 is allowed. Disputes

between the plaintiff and defendants be referred to arbitration in

terms of the shareholders agreement dated 4.4.2008 containing

the arbitration clause in article 21. Parties are directed to

approach the concerned court for a referral of their disputes in

terms thereof for adjudication. It is made clear that any

observations hereunder would not affect the merits of the case.

Application is disposed of in the above terms.

(INDERMEET KAUR) JUDGE

MARCH 10, 2010 rb