Delhi High Court
Lucent Technologies Inc. vs Icici Bank Limited & Ors. on 13 October, 2009
Author: Gita Mittal
*IN THE HIGH COURT OF DELHI
IA Nos. 2758/2005, 3134/2005 & 5838/2006 in
CS(OS) No. 386/2005
%Date of decision: 13th October, 2009
Lucent Technologies Inc. ... Plaintiff
through: Mr. Arun Jaitley and Mr. Rajiv
Nayyar, Sr. Adv. with Mr. Darpan Wadhwa
and Mr. Rajat Sethi, Adv.
VERSUS
ICICI Bank Limited & Ors. ....Defendants
through: Mr. Rakesh Dwivedi, Sr. Adv. with
Ms. Nandini Gidwaney, Adv. for the
defendant no. 1
Mr. Sandeep Sethi, Sr. Adv. with Mr.
Subramonium Prasad, Adv. for the defendant
nos. 2 to 6
CORAM:
HON'BLE MS. JUSTICE GITA MITTAL
1. Whether reporters of local papers may be allowed to
see the Judgment? Yes
2. To be referred to the Reporter or not? Yes
3. Whether the judgment should be reported in the
Digest? Yes
GITA MITTAL, J
1. By this judgment I propose to decide IA Nos. 2288/2005,
3134/2005 & 5838/2006 (all under Order 39 Rule 1 & 2 of the Code of
Civil Procedure filed by plaintiff) and 2758/2005 (under Order 7 Rule
11 of the Code filed by defendant no.1).
2. On 4th March, 1998 the President of India acting through the
Deputy Director General (Basic Services), Ministry of Communication
of the Department of Telecommunications, awarded a non-exclusive
licence under section 4 of the Indian Telegraph Act, 1885 to Shyam
Telelink-defendant no. 2 herein, to establish, maintain and operate
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telephone service upto the subscriber's terminal connection in the
area of the "Rajasthan circle" for an initial period of 15 years.
3. The defendant no. 2 herein issued a letter of intent, dated 30th
August, 1999 to the then Tata Lucent Technologies Ltd. (subsequently
known as the 'Lucent Hindustan Technologies Pvt. Ltd.') for the
supply and delivery of all the equipment and performing services
necessary for it for the installation of the basic services telecom
network project in the territory of Rajasthan, thus expressing their
willingness to place orders for the equipment and services.
4. It is stated, that the letter of intent was issued on the plaintiff's
representation to provide a total financing solution as it would have
secured payment for the supply of the equipment. For this reason, in
the letter of intent, an undertaking was included under the heading
'Contract Financing' contained as clause 3 of the letter. The
defendant no. 2 has placed heavy reliance on the following clauses
3.1 & 3.2 in this letter of intent which reads as follows :-
"Clause 3 - Contract Financing -
3.1 Tata Lucent Technologies Ltd. (TLTL) along
with financial institutions and banks shall help STL
(Shyam Telelink Ltd.) to structure and affect a total
financing solution for the project.
3.2 Subject to the agreement on a mutually
acceptable term sheet and the conditions
precedent contained therein, if required, TLTL
through their sponsors will provide a credit
enhancement support to structure and effect the
debt for the project."
5. Pursuant to the above, the defendant no. 2 herein and Lucent
Hindustan Technologies Pvt. Ltd. entered into four contracts on 14th
December, 1999. These related to supply for indigenous equipment;
supply for imported equipment; a services contract and an outside
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plant construction contract (hereinafter referred to as `supply
contract). These contracts contained similar terms and conditions.
6. So far as the questions raised before this court are concerned,
one such supply contract may be considered as a typical contract. It
is clearly indicated that the contract has been entered into and
executed between M/s Shyam Telelink Limited (defendant no.2 herein
referred to as `Telelink') and M/s Tata Lucent Technologies Limited
(referred to as the "supplier").
7. Clause 4.1 of this supply contract stipulates that the supplier
along with financial institutions and banks shall help the defendant
no. 2 to structure and effect a total financing solution for the project,
and that the supplier through their sponsors would provide a credit
enhancement support to structure and effect the debt for the project.
8. Clause 7.1 described 'Lucent" to mean 'Lucent Technologies
International Inc', a company incorporated under the laws of the State
of Delaware. It was also clarified that Lucent is an affiliate of the
supplier.
9. In clause 5.6, it was represented to the defendant no. 2 that
Lucent had agreed to provide full support and back up to the supplier
to enable the supplier to fulfil its obligations under this contract and
that the supplier would provide to the defendant no. 2 such
documentation/confirmation from Lucent as may be reasonably
required.
10. The defendants submit that the conditions for contract financing
agreed to under the letter of intent dated 30th August, 1999 were
fundamental to the four contracts entered into between the parties.
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The submission is that for this reason, under clause 5 of the
supply contracts, Lucent Hindustan Technologies Pvt. Ltd. restricted
the purchasing options by the defendant no. 2 from other suppliers in
lieu of the onus taken by Lucent for providing a complete financial
solution.
11. It is pertinent to note, that Tata Lucent Technologies Ltd., now
Lucent Hindustan Technologies Pvt. Ltd., has not been impleaded as a
party/defendant to the present suit.
12. The other agreement which requires to be considered is dated
5th October, 2001 and is titled as a "Warrant Agreement" entered into
between M/s Shyam Telecom Limited; M/s Shyam International
Private Limited; M/s Shyam Telelink Private Limited and persons who
are named and cited as the "promoters" collectively referred to as the
`Shyam Group', as parties of the first part and M/s Lucent
Technologies Hindustan Private Limited as the parties of the second
part.
13. This agreement was entered into in terms of Clause 4 of the
afore-noticed contracts.
14. The defendant no. 2 appears to have approached the ICICI Bank
for financial facility.
15. By the letter dated 13th September, 2000, addressed by the ICICI
Bank to M/s Shyam Telelink Limited-defendant no.2 and copied to the
plaintiff herein, the ICICI Limited conveyed that it was "agreeable in
principle" to act as an exclusive provider/underwriter of the debt
requirement of Rs.4840.0 million for the basic telephony project, by
way of rupee loans, debentures, lease, bonds or any other
4
instrument". It was stated that this financial facility was subject to
the special terms and conditions set out in the enclosed term sheet
and base case business plan.
So far as the enclosed term sheet was concerned, the ICICI
Limited stated that the same was merely "indicative" and would be
finalized after the completion of due diligence and at the time of
document finalization. The ICICI Limited retained the right to specify
such other terms and conditions as may be required at the time of
definitive documentation.
The ICICI Limited also clearly indicated that its commitment and
agreement to provide the services described therein, were subject to
the agreement in the preceding paragraph and the satisfaction of
each of the conditions precedent, mentioned in the attached term
sheet, in a manner acceptable to it.
16. The letter that its contents as well as those of the term sheet and
any other information in connection therewith or any transaction
contemplated would be considered confidential and that any
information given by or on behalf of the ICICI or STL or Lucent
Technologies Inc would not be disclosed to any third parties without
the express written approval of the parties providing the information.
There was also a prohibition on assignment of the letter and it is
urged that the same was intended solely for the benefit of the parties
thereto. The terms of the letter required the plaintiff to communicate
its acceptance of the terms and conditions set out in the letter within
30 days from the receipt thereof.
The defendants also place reliance on the stipulations made by
5
the ICICI Bank-defendant no.1 herein, in the term sheet enclosed with
the letter dated 13th September, 2000. This document has to be
considered in its entirety and any single term cannot be read in
isolation.
17. It is noteworthy, that the term sheet enclosed with the ICICI
letter dated 13th September, 2000 proposed a title Governing Law and
Jurisdiction in the financing agreement, stipulating that it would be
governed by Indian law while courts at Delhi would have jurisdiction
in respect of all matters relating thereto. ICICI reserved a unilateral
right to approach any other alternate dispute resolution forum with its
venue at Delhi and all other parties were required to submit to such
forum.
18. On 27th September, 2000, the plaintiff wrote a letter to
defendant no. 1 stating that it would issue the proposed guarantee
and accepted the terms and conditions set out in the term sheet
whereby Lucent would provide guarantee upto 65% of the facility
subject to the settlement of the summary of terms and conditions of
the term sheet and negotiation of satisfactory documentation.
19. In the meantime, while negotiations were going on for the
Rs.484 crore financing facility, on 27th September, 2000 the ICICI and
the STL (defendant nos. 1 & 2) entered into an interim bridge loan
agreement for an amount of Rs.50 crores. The plaintiff was not a
party to this agreement. This loan of Rs.50 crores was secured by
STL by a number of securities such as deposit of title deeds,
mortgages by its director etc.
20. On the same date, at the request of STL, the plaintiff provided a
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letter of comfort dated 27th September, 2000 to the defendant no. 1 -
ICICI Ltd. confirming the acceptance of the terms and conditions of
the term sheet and, subject to satisfactory resolution of guarantee
terms and the guarantee structure and guarantee release mechanism,
committed issuance of an unconditional and irrevocable guarantee as
provided in the term sheet. In this letter, the plaintiff also accepted
that the defendant no. 1 was entering into an interim bridge loan
financing agreement with the defendant no. 2 permitting them to
avail credit to the maximum extent of Rs.500 million against security
mentioned in the bridge loan agreement. However, the plaintiff
clearly stated that the confirmation on the subject to satisfactory
negotiation and resolution of the terms of the financing agreements
and security documents as mentioned in the term sheet and the
plaintiff would proceed to the execution of the guarantee and other
document as would be required.
21. Again at the request of STL, on 30th November, 2000 plaintiff
wrote a further letter of comfort to defendant no. 1 stating their
acceptance to ICICI entering into a bridge loan financing agreement
with STL subject to satisfactory negotiation and resolution of the
financing terms of the agreement, the security documents, the
guarantee terms, the guarantee structure and the guarantee release
mechanism as provided in the term sheet. It was further stated that
the plaintiff would proceed with the execution of the guarantee and
other documents as required for completing the contemplated
transaction on the terms agreed upon.
22. Based on such letter of comfort given by the plaintiff dated 30th
7
November, 2000, the ICICI entered into a second interim bridge loan
financing agreement with the defendant no. 2 for credit upto
additional Rs.50 crores on 12th December, 2000.
23. The parties continued their negotiations and discussions. Since
the plaintiff is a foreign company, it required approval from the
Government of India before it could provide the proposed guarantee.
It is noteworthy that on the dates of the release of these amounts,
there was no statutory or regulatory approval for guaranteeing the
same to the plaintiff.
24. It is pointed out thereafter that by the letter dated 30th January,
2000 by defendant no. 2 and 12th January, 2001 from the plaintiff to
the Department of Economic Affairs, Ministry of Finance, Government
of India and to the Reserve Bank of India, the necessary statutory and
regulatory approvals were sought.
25. The Ministry of Finance, Government of India approved the
partial corporate guarantee facility from the plaintiff for partial credit
enhancement of their domestic borrowings of Rs.483.75 crores that is
up to 65% of the amounts sought from the ICICI only by its letter
dated 16th March, 2001. It is only with this letter that the terms and
conditions for the guarantee facility to be executed were approved by
the Government of India which approval was valid for a period of six
months from the date of the approval.
So far as the Reserve Bank of India was concerned, it granted
permission for availing the partial corporate guarantee facility by
Lucent only by its communication dated 22nd June, 2001, whereby it
was also mandated that the terms of the Government approval dated
8
16th March, 2001 be strictly complied with. The validity of the RBI
approval was coterminus with the Government of India approval.
26. The ICICI Bank has stated that in terms of the term sheet, the
plaintiff failed to maintain the minimum investment grade credit
rating or a credit rating equivalent to India's sovereign rating by
Standard and Poor and Moody's investor services and thereby
committed a default in terms of the term sheet. Accordingly, by a
letter dated 1st April, 2002, the defendant no. 1 wrote to the plaintiff
Lucent Technologies Inc; Lucent Technologies Asia Pacific Ltd and
Lucent Technologies Hindustan Pvt. Ltd. declaring an event of default
in terms of the term sheet. The ICICI Bank Ltd. stated that the Bridge
Loan Agreements were executed and the sum of Rs.100 crores was
disbursed to the defendant no. 2 relying upon the plaintiff's promise
to provide guarantees vide their letters dated 27th September, 2000
and 30th November, 2000; covenants, representations and warranties.
In view of the event of default, the plaintiff was called upon to pay the
sum of Rs.100 crores to the defendant no. 1.
27. By a response dated 9th April, 2002 sent to the ICICI, the plaintiff
disputed any guarantee obligations in terms of the term sheet. It was
stated that no guarantee had been executed by it and that the letters
dated 23rd September, 2000 and 30th November, 2000 did not create
any payment obligations.
28. The correspondence placed on record hereafter manifests a
contradiction in the case set up by the defendants. On 1st April, 2002,
the defendant no. 2 (STL) wrote a letter to (Lucent Technologies
Hindustan Pvt. Ltd.) referring to clause 3.3 of the warrants agreement
9
dated 5th October, 2001 stating that clause 3.3 reveals that it pertains
to discharge of obligation of Lucent to non-availment of facility and
should not be construed in terms of extension of time period for
meeting of conditions precedent. It further stated that the extension
of time period upto 31st December, 2002 as per clause 3.3 of warrant
agreement was an extension of period during which the obligation of
Lucent would continue to subsist and the urgent confirmation of
Lucent in the matter was sought. Thereafter on 4th April, 2002 a
letter was written by STL to ICICI Bank claiming that STL had been
approached by the plaintiff to approach ICICI on their behalf with a
request and proposal to revise the terms of sanction so as to make the
said term loan without recourse to the plaintiff and thus requesting
ICICI to consider amending the terms of sanction so as to delete the
clause pertaining to the guarantee of the plaintiff and make the said
loan without recourse to the plaintiff.
29. On 9th April, 2002, Lucent Technologies Inc. wrote a letter to
ICICI Ltd. in response to the letter dated 1st April, 2002 written by the
ICICI to Lucent Technologies Inc., Lucent Technologies Asia Pacific
Ltd. & Lucent Technologies Hindustan (Pvt.) Ltd., stating that no
guarantee had ever been executed by any of the Lucent entities and
stating that the letters of 27th September, 2000 and 30 th November,
2000 did not create any guarantee obligations on any Lucent entity
with respect to the bridge loans as alleged.
30. On 12th April, 2002, the ICICI wrote to the plaintiff now seeking
payment of Rs.100 crores or alternatively to provide a bank guarantee
for the assignment of the facility which was to the tune of Rs.484
10
crores from a 'AAA' rated bank.
31. A grossly belated response was sent by the ICICI on 27 th
December, 2002 in answer to the defendant no. 2's letter of 4th April,
2002 whereby the defendant no. 1 demanded compensation payment
of Rs.300 million from the plaintiff. The defendant no. 2 has urged
that the ICICI Bank had also informed it that the plaintiff had
approached the Bank with the intent to discuss a proposal whereby
the ICICI Bank was to discharge Lucent Inc of any and every
guarantee obligation pertaining to the term loan to the defendant no.2
and to sanction/disburse the term loan to Shyam Telelink without any
recourse to the plaintiff.
32. The defendant no. 2 alleges that Lucent Hindustan Pvt. Ltd. had
failed to discharge its financial obligation and responsibility for
providing the facilities under the warrant agreement and had also
committed breach of the other service and supply contracts dated 14 th
December, 1999.
33. In the meantime, by a communication dated 20th February, 2003
the defendant no. 2 notified Lucent Technologies Hindustan Pvt. Ltd.,
that disputes having arisen between them and on failure of the
attempts to settle the matter within 30 days, it reserved its right to
name its arbitrator. This letter was copied to the plaintiff as well as
the Lucent Technologies Asia Pacific Ltd.
The defendant no. 2 had notified Lucent Technologies Hindustan
Pvt. Ltd. that this communication was a formal notice under the
following contracts :-
"* Under clause 55.2 of the Service Contract dated
December 14, 1999
11
* Under clause 58.2 of the Supply contract
(imported equipment) dated December 14, 1999
* Under clause 55.2 of the Supply contract
(indigenous equipment) dated December 14, 1999
* Under clause 52.2 of the Outside Plant
Construction Contract dated December 14, 1999 and
* Under clause 9.4 of the Warrant Agreement."
34. This was followed up by a notice dated 24th March, 2003 from
the defendant no. 2, this time addressed to Lucent Hindustan
Technologies Pvt. Ltd. as well as the plaintiff, contending that as the
disputes remained unresolved over the last 30 days, it was nominating
Mr. Justice G.B. Patnaik (Retd. Chief Justice of India) as its arbitrator
to the proposed arbitral tribunal and called upon the addressees to
nominate their arbitrator as well so that the two arbitrators could
meet and select the third arbitrator.
The position taken in the letter of 20th February, 2003 was
reiterated and the details regarding the arbitration were mentioned.
35. It has been pointed out that in September, 2003, an arbitral
tribunal was constituted by Shyam Telelink Ltd. and Lucent
Technologies Hindustan Pvt. Ltd. comprising of Justice G.B. Patnaik, a
nominee of Shyam Telelink Ltd.; Justice A.K. Srivastava, a nominee of
Lucent Hindustan; and Justice G.T. Nanawati who was appointed as
the presiding arbitrator.
36. The plaintiff has contended that it had not nominated any
nominee as it disputed the factum of any concluded contract with the
parties.
37. At this stage the ICICI Bank addressed a letter dated 26th March,
2004 to the plaintiff and the defendant no. 2, contending that the
plaintiff was avoiding its obligations under the term sheet and was
12
disputing the same compelling it to invoke arbitral proceedings
against the plaintiff. In this letter it was stated that the defendant no.
1 had agreed to finance the project as the plaintiff had assured and
represented that it would guarantee the due repayment of the funds
disbursed and that it would execute a guarantee as required under
the contract. The blame for non-execution of the facility documents
was totally apportioned to the plaintiff. It was stated that despite
repeated assurances, the plaintiff had failed to specifically secure and
guarantee the bridge loan aggregating to Rs.100 crores advanced by
the ICICI Bank Ltd. and thus had failed to discharge its legally valid
and binding obligations under the contract; that it was contractually
required to take recourse to arbitration proceedings and it had
decided to initiate arbitration proceedings against the plaintiff. The
defendant no. 1 had stated that it was approaching the aforesaid
arbitral tribunal to adjudicate the disputes/claims between ICICI Bank
Ltd., Lucent Technologies Inc. and Shyam Telelink Ltd. It was stated
that the plaintiff and Shyam Telelink Ltd. 'can have no objection to
arbitration of the disputes by this forum as the same was constituted
at the behest of Shyam Telelink Ltd., Lucent Technologies Hindustan
Pvt. Ltd. and Lucent Technologies Inc.'
38. By a communication of the same date, i.e. 26th March, 2004, the
ICICI Bank Ltd. sought the consent of the said three arbitrators 'to
enter reference and adjudicate claims of the claimant' and the
disputes/claims between the claimant and the respondents'.
The ICICI Bank Limited also wrote that it had the 'right to
approach any alternate dispute forum' in Delhi and that this arbitral
tribunal was one such forum which was already hearing disputes from
related transactions between Shyam Telelink Ltd. and the Lucent
Technologies Hindustan Pvt. Limited. A copy of this letter was also
sent to Lucent Technologies Ltd., USA & Shyam Telelink Ltd.
39. In this letter of 26th March, 2004, the ICICI Bank stated that
despite the repeated assurances, the plaintiff had failed to
satisfactorily secure and guarantee the bridge loans aggregating to
Rs.100 crores advanced by the bank and have thus failed to discharge
their legally valid and binding obligations under the contract.
40. The plaintiff had responded by a letter dated 21st May, 2004 to
the defendant no.1 stating out that the `Governing Law and
Jurisdiction' clause in the term sheet which was relied upon by the
defendant no. 1 as the arbitration agreement, only specified a dispute
resolution mechanism for a proposed financing agreement which the
plaintiff had not entered into. The plaintiff consequently sought a
copy of such financing agreement as was relied upon by the defendant
no. 1 to which it was allegedly a party which contained the dispute
resolution/arbitration clause. It was stated that only thereafter would
the plaintiff respond to the defendant's assertions in the letter of 26th
March, 2004. A similar letter of the same date was also sent to the
three members of the tribunal calling upon them not to take any
steps pursuant to the bank's request until a copy of the financing
agreement with the arbitration clause as alleged is provided by the
bank. This letter was addressed to the tribunal without prejudice to
the plaintiff's right to contend inter alia that the tribunal has no
jurisdiction to act on the letter of the ICICI Bank Ltd. The plaintiff
also reminded the arbitral tribunal that by its letter of 9th February,
2004, an objection had been raised to the tribunal's assuming
jurisdiction over the plaintiff in proceedings pending before it
involving Shyam Telelink Ltd. and the Lucent Technologies Hindustan
Pvt. Ltd. to which the plaintiff was not a party. By a letter dated 15 th
of July, 2004, Lucent sent a reminder to the arbitral tribunal in this
behalf.
41. The plaintiff also filed formal objections dated 30th August, 2004
before the Arbitral tribunal, under section 16 of the Arbitration &
Conciliation Act 1996, objecting to the attempt of the ICICI Bank to
commence arbitration proceedings against it contending that there
was no agreement let alone an arbitration agreement between the
parties. It was stated that the formal objection was being filed
"without prejudice to its contention with respect to submission to
jurisdiction of the hon'ble tribunal". The plaintiff assailed the
defendant no. 1's submission that the term sheet created any binding
rights or obligations submitting that the proposed financing
agreement was never executed and that the ICICI Bank Ltd. had
failed to produce such agreement despite notice. The plaintiff's
further contention was that the "alternative dispute resolution forum"
and the clause relied upon by the ICICI Bank could be construed as
referring to the only alternative forum available to it, being the Debt
Recovery Tribunal, and that reference to such forum could not be
construed as one to any existing arbitral tribunal in India. It was
stated that in any case, the tribunal stood constituted by third parties
with regard to disputes between those parties and that the plaintiff
had no participation even in the constitution of the tribunal. The
plaintiff submitted that it had never consented, either expressly or
impliedly, to the constitution of the arbitral tribunal. The plaintiff also
pointed out that by its letters of 9th February, 2004, 1st April, 2004 and
15th July, 2004, it had objected to the jurisdiction of the tribunal and
requested it to adjudicate upon the same before proceeding further.
It was clearly stated that no such arbitration agreement had been
produced on record by either Shyam Telelink Ltd. or the ICICI Bank
Limited which could bind the plaintiff.
It is noteworthy, that there were no submissions on the merits of
the case in any of these objections.
42. The ICICI however filed a detailed reply dated 17th September,
2004 raising all kinds of contentions and submissions. In the
rejoinder dated 7th October, 2004, the plaintiff reiterated its earlier
stand. It was even that this should not, in any manner, be construed
as acceptance by the plaintiff of the maintainability of the
proceedings.
43. In the reference of Shyam Telelink Ltd., the arbitral tribunal
passed an order on 28th December, 2004 inter alia holding that in the
warrant agreement dated 5th October, 2001 entered into between
Shyam Telelink Ltd. and Lucent Technologies Hindustan Pvt. Ltd.,
clause 2.1(f) stated that a party to the agreement includes party's
affiliates and the respondent no. 2 (Lucent Technologies Inc) being an
affiliate of the respondent no. 1 would be governed by clause 9
dealing with the dispute resolution and the dispute not having been
resolved through negotiations, has to be settled by arbitration as
provided under clause 9.4. Reference was made to the other
documentation relied upon by the ICICI Bank Limited in this order
and it was held that it would not be appropriate for the tribunal to
delete the present plaintiff who was a key figure in the entire project
on whose assurance such a large scale project was undertaken and
the financial institutions like the ICICI Bank Limited also went ahead
in sanctioning the loans on the guarantee of respondent no. 2
(plaintiff herein) who was a global figure.
It was therefore held that the plaintiff would not be deleted from
the arbitration proceeding and the application for deletion filed by the
plaintiff was rejected.
44. So far as the objections filed by the plaintiff dated 30th August,
2004 in the reference by the ICICI Bank Limited were concerned, by
an order passed on 24th February, 2005, the arbitral tribunal rejected
the same holding that the plaintiff was bound by the clause described
as 'Governing Law & Jurisdiction' in the term sheet and that the
expression 'alternate dispute resolution forum' includes arbitration. It
was observed that a unilateral right had been conferred on the ICICI
Bank Ltd. to make a reference to any alternate dispute resolution
forum and it had chosen to approach the arbitral tribunal for the
purposes of convenience. It was held that the tribunal has jurisdiction
to entertain the application of the ICICI Bank Ltd.
Yet another order was passed by the Arbitral Tribunal dated 1 st
of March, 2005 holding that the plaintiff is a party to the four supply
contracts and the warrants agreement. The plaintiff entered
appearance in the proceedings between the defendant no. 2 and
Lucent Technologies Hindustan Private Ltd and without prejudice to
its rights nominated an arbitrator on the tribunal.
45. In this background, the plaintiff instituted the present suit on
21st March, 2005 seeking the following prayers :-
"(A) a decree of declaration declaring that :
(i) there is no contract or agreement between the
Plaintiff and defendant no. 1 as alleged in defendant no.
1's letters dated April 1, 2002 and April 12, 2002
addressed to the plaintiff, Lucent Technologies Asia
Pacific Limited and Lucent Technologies Hindustan
Private Limited, defendant no. 1's letter dated January
10, 2003 addressed to the plaintiff and Lucent
Technologies Asia Pacific Limited and defendant no. 1's
letter of notice dated March 26, 2004 addressed to the
plaintiff and defendant no. 2;
(ii) there is no contract or agreement between the
plaintiff and defendant no. 1 with respect to the matters
specified in defendant no. 1's letter of request dated
March 26, 2004 addressed to the Arbitral Tribunal;
(iii) no guarantee has been provided by the plaintiff to
defendant no. 1 as alleged by defendant no. 1 in respect
of the matters specified in the Letter of Notice and/or
the request letter;
(iv) the plaintiff's letters dated September 27, 2000
and November 30, 2000 do not create any guarantee
obligations or any other obligations with respect to the
plaintiff;
(v) the plaintiff is not a party to the bridge loan
agreements dated September 27, 2000 and December
12, 2000; and
(vi) the loan, guarantee and security documents in
connection with the term sheet attached to defendant
no. 1's letter dated September 13, 2000 have never
been finally negotiated or executed.
(B) a decree of permanent injunction prohibiting and
restraining the defendants and their respective agents,
officers and employees from :
(i) claiming in any proceedings that the plaintiff's
letter dated September 27, 2000 and November 30,
2000 constitute a guarantee of the plaintiff or create
any legal obligations of any nature whatsoever with
respect to the plaintiff;
(ii) seeking commencement of, acting upon or
continuing any proceedings against the Plaintiff
pursuant to defendant no. 1's letter of notice dated
March 26, 2004 and/or request letter dated March 26,
2004; and
(iii) commencing, acting upon or continuing any other
proceedings against the plaintiff with respect to the
matters specified in Defendant no. 1's letter of notice
dated March 26, 2004 and/or request letter dated
March 26, 2004;
(C) a decree of damages of an amount of Rs.21,00,00
(Rupees Twenty One Lakhs) or such other sum as this
Hon'ble Court may deem fit against the defendants;"
Alongwith the plaint, an application was filed being IA No. 2288
of 2005 seeking interim reliefs including a prohibition from
proceeding on the communication dated 22nd of March, 2004. For the
reason that proceedings before the Arbitral Tribunal were not
imminent, time was granted to the defendants to file their pleadings.
46. In the meantime, it is pointed out that Justice A.K. Srivastava,
the nominee arbitrator of Lucent Hindustan Technologies Pvt.
Limited resigned on 31st March, 2005 from the arbitral tribunal.
47. The plaintiff makes a grievance that thereafter, without any
consent from any party, on 11th April, 2005, the ICICI Bank
unilaterally constituted a new arbitral tribunal to hear the alleged
disputes between the plaintiff and ICICI Bank consisting of Justice
G.T. Nanawati, Justice G.B. Patnaik and Justice A.P. Chowdhary.
The plaintiff's submission is that the defendant no.1's reference
to the defendant no. 2-Lucent Technologies Hindustan Private Ltd.
tribunal thus stood abandoned and that this tribunal is not in
continuation of the proceedings before the earlier arbitral tribunal;
that the tribunal contains no nominee of the plaintiff or even of
Lucent Technologies Hindustan Private Ltd. and its appointment is a
unilateral act of the defendant no. 1 without the consent of any of the
disputing parties.
48. On these facts, the plaintiff filed IA No. 3134/2005 under order
39 rule 1 & 2 of the CPC on 23rd April, 2005 seeking interim orders
contending that the defendants were trying to abuse the process and
over reach this court. As the matter could not be concluded before
the commencement of the summer vacation, liberty was given to the
plaintiff to approach the court for interim orders if the arbitration
proceedings were commenced in the meanwhile.
Thereafter, acting on the request of ICICI, the arbitral tribunal
and the ICICI Bank met for the first time on 13th May, 2006 and fixed
a schedule for the arbitration proceedings.
49. In this background, on 17th May, 2006, the plaintiff filed IA
No.5838/2006 seeking an interim injunction against the defendants
from seeking commencement of acting upon or continuing any
arbitration proceedings against the plaintiff as prayed for in the
earlier application. The ICICI Bank's counsel made a statement on
17th July, 2006 before this court that no further steps would be taken
in the arbitration proceedings until hearing before the court is
concluded. This statement has been continued, awaiting further
orders of the court.
50. It is noteworthy, that the various issues which have been raised
before this court had not arisen for consideration before the Arbitral
Tribunal and the orders dated 28th December, 2004 and 24th February,
2005 were not required to go into the various issues which have been
raised herein.
51. The plaintiffs and defendants are at variance with regard to the
construction of the events which transpired after the letter dated 13th
September, 2000 sent by the defendant no. 1.
52. The submissions made by both sides raise some important issues
which for convenience, are summed up as follows:-
(I) Whether a concluded contract of guarantee between the
plaintiff and the defendant no.1 had come into existence
binding the plaintiff to guarantee and securing the proposed
loan of Rs.484 crores and/or the two bridge loans?
[Discussion from para 53].
(II) Whether the clause stipulating the "Governing Law and
Jurisdiction" in the term sheet or any other stipulation in the
documents constituted an arbitration agreement between the
plaintiff and the defendant no.1? [Discussion from para 115].
(III) Assuming that there is a valid arbitration agreement between
the parties, whether Section 5, 8(3) & 16(5) of the Arbitration
& Conciliation Act, 1996 constitute a legal bar to the
maintainability of the civil suit and the plaint is liable to be
rejected under Order 7 Rule 11 of the Code of Civil
Procedure? [Discussion from para 160].
(IV) Whether the action of the plaintiff in filing an objection
before the Arbitral Tribunal challenging the existence of an
arbitration agreement and exercise of jurisdiction by it,
without prejudice to its rights and contentions, amounts to
acquiescing in the arbitration and estops the plaintiff from
assailing the execution validity and bindingness of an
arbitration agreement and the arbitral proceedings?
[Discussion from para 209].
(V) Whether the plaintiff is entitled to an interim injunction
prohibiting further proceedings by the arbitral tribunal in the
reference commenced on the request of the defendant no.1?
[Discussion from para 230]. &
(VI) Whether the provisions of the Recovery of Debts due to Banks
& Financial Institutions Act would override the provisions of
the Arbitration & Conciliation Act, 1996 and an exclusive
remedy to banks is provided thereunder? [Discussion from
para 264].
I
53. The first issue for consideration therefore is whether a contract
of guarantee had come into existence binding the plaintiff to
guarantee and secure the proposed loan of Rs.484 crores or the
advancement of the two bridge loans of Rs.50 crores each totalling to
Rs.100.00 crores.
54. The plaintiff has urged at some length, that the term sheet
merely indicated some terms for the proposal of the grant of Rs.484
crores financial facility, but the same were not final and did not create
any binding rights and obligations. It is contended, that the plaintiff
did not execute any documents at all and that the term sheet
specifically stipulated `facility documents' to be executed which
postulated that a financing agreement to be also entered into. It has
been contended by Mr. Arun Jaitley, learned senior counsel appearing
for the plaintiff, that there was no resolution of the terms on which
the plaintiff was to execute the guarantee, and that the plaintiff did
not execute any documents or guarantee any financial facility which
were granted by the defendant no. 1. There was no satisfaction of the
documents as stipulated in the term sheet, so much so, that even the
conditions precedent to execution of financing agreements by the
defendant no. 2 were not executed.
On the request of Shyam Telelink, the plaintiff provided a 'letter
of comfort' merely stating that the plaintiff would issue the proposed
guarantee in future at the time of the proposed facility of Rs.484
crores being finalised 'subject to the terms and conditions stated in
the term sheet and satisfactory documentation.'
55. It is argued that in the letter dated 27th September, 2000, it was
clearly stated that the plaintiff would issue the proposed
unconditional and irrevocable guarantee subject to satisfactory
resolution of the guarantee terms and the guarantee structure and
the guarantee release mechanism as provided in the term sheet. The
submission is that the plaintiff agreed to the proposal subject to the
negotiations and entering into an agreement to the satisfaction of the
plaintiff which event never occurred.
56. So far as the bridge loan is concerned, while the negotiations for
Rs.484 crores financial facility were going on, the ICICI Bank and
Shyam Telelink entered into an interim bridge loan agreement for an
amount of Rs.50 crores. The plaintiff denies that it was a party to this
agreement and submits that this is manifested by the fact that the
Rs.50 crores facility bridge loan was secured by the Shyam Telelink
by other securities including deposit of title deeds etc as well as
personal guarantees given by defendant nos. 3 to 6.
57. The plaintiff has submitted that for the reason that it had not
provided any guarantee for the bridge loan, the ICICI Bank charged
additional interest for this bridge loan.
It is argued that the letter of comfort dated 30th November, 2000
was issued again confirming that subject to satisfactory negotiations
and resolution of the financing terms of the agreement, the security
documents, the guarantee terms, the guarantee structure and the
guarantee release mechanism as provided in the term sheet, they
would proceed to execute the guarantee and other documents as
required for completing the contemplated transaction.
It is contended that the bridge loan agreement dated 12th
December, 2000 was the same as the earlier one; was granted on
identical securities from the promoters and affiliates of the defendant
no. 2 and that the plaintiff was not a party to this agreement as well.
The plaintiff has submitted that it did not provide any guarantee for
this bridge loan.
58. In the instant case, no final terms and conditions which were
agreed upon by the parties as postulated in ICICI's letter dated 13th
September, 2000 are available on record. No formal documentation
has been executed even though the same was stipulated. The
plaintiff has urged that the same was essential and went to the root of
the matter and consequently, no concluded contract could be held to
have come into existence.
59. The plaintiff has contended that consequently, no liability could
be fastened on it with regard to the disputes which have arisen with
M/s Shyam Telelink Limited or with regard to any other matter
without execution of the financial agreements and the other formal
documents.
It has been urged that for this reason as well, the stipulation
contained in "Governing Law and Jurisdiction clause" in the term
sheet would not govern any dispute relating to the bridge loan which
stood alone on independent terms and conditions.
60. The defendants have urged to the contrary that the execution of
the formal document was a mere formality and nothing more. The
defendants would contend that the conduct of the plaintiff and its
communications thereafter amounted to an unequivocal acceptance of
the terms and conditions set out in the term sheet by the ICICI as well
as commitment to unconditionally and irrevocably guarantee financial
facilities by the defendant no. 1.
Placing reliance on several judicial precedents noticed in detail
hereafter, it is urged that it would be a question of construction as to
whether the execution of a further contract is a condition of the term
of the bargain or whether it is a mere expression of the desire of the
parties as the manner in which the transaction already agreed to will
in fact go through. The submission is that failure to execute formal
documents cannot be a ground for denial of a concluded contract
between the parties.
61. Mr. Rakesh Dwivedi, learned senior counsel for defendant no. 1
and Mr. Sandeep Sethi, learned senior counsel appearing for
defendant nos. 2 to 6 submit that the plaintiff was the beneficiary of
the bridge loan and the entire amount of Rs.100 crores was forwarded
by the defendant no. 2 to the plaintiff towards the supplies effected by
it and as such, it was the sole beneficiary of the two bridge loans.
62. Mr. Sethi, learned senior counsel for the defendant no. 2 also
relies on a communication dated 30th January, 2001 addressed by it to
the Department of Economic Affairs, seeking permission for securing
the guarantee by the plaintiff to a maximum of 65% of the total
requirement.
It is also contended that the plaintiff confirmed acceptance of
the terms and conditions of the term sheet and a demand was made
by the plaintiff to issue a secured corporate guarantee subject to the
terms and conditions of the term sheet.
63. The defendants have urged at length that the plaintiff not only
accepted the terms and conditions set down by the defendant no. 1,
but acted upon the same in terms of the contract and as such is
estopped from going back on the contract. It is also contended that
the plaintiff persuaded the defendants and the Government of India to
believe that they would execute the formal financing agreements.
64. Learned senior counsel appearing for defendants point out that
the term sheet enclosed with the letter dated 13th September, 2000
described the plaintiff as a guarantor and even nominated its counsel
who was to carry out the due diligence on the borrower-Shyam
Telelink Ltd. on behalf of the guarantor, to prepare the financing
agreements and to review the project agreements. It is urged that the
term sheet contained a specific stipulation which enabled the ICICI
Bank-defendant no. 1 to consider the provision of a bridge loan
against the proposed facilities with full security interests including an
unconditional and irrevocable guarantee from Lucent Technologies
Inc, USA in a form and manner satisfactory to the lead arranger i.e.
the ICICI Bank.
The further submission is that so far as the security and
documents were concerned, the term sheet contained an
unconditional and irrevocable guarantee by the guarantor to pay up to
65% of all amounts due under the facilities (the guarantee) subject to
the satisfaction of the guarantor (plaintiff herein) on the guarantee
structure. The guarantee was stated to be subject to the guarantee
release mechanism clause provided in the term sheet.
So far as the clause for invocation of the guarantee was
concerned, the term sheet provided that the same could be invoked in
the event of a default; breach of financial covenants; breach of
borrower's and guarantor's representations and warranties.
65. The contention is that the term sheet also recorded
representations and warranties of the guarantor. It noticed in clause
5, that the guarantee was inter alia in full force and effect and
constituted valid, binding and enforceable obligations of the
guarantor; that the guarantor shall seek RBI approval for giving the
unconditional and irrevocable guarantee to the lenders in a form and
manner satisfactory to the lenders prior to the signing of the
guarantee agreement and also that the guarantor shall undertake to
arrange funds to meet the obligation of the guarantee in case of
enforcement of security for events of default as mentioned in the
term sheet and also receipt of and compliance with all requisite
statutory approvals for the guarantee.
66. The defendants have urged that the terms and conditions set out
in the term sheet were conditions precedent for sanction of the debt
requirement of the project and were not negotiable, and that once the
plaintiff and defendant no. 2 sent their acceptance within 30 days of
the term sheet, the terms and conditions thereof were binding upon
them subject to the negotiation of other and further covenants over
and above the terms and conditions set out in the term sheet and
formal documentation of the terms and conditions thereof.
It is argued at some length that the warrant agreement dated 5th
October, 2001 between the defendant no. 2 and Lucent Hindustan
Technologies Pvt. Ltd.; and the discussions with the ICICI Bank for
release of the guarantee by the plaintiff, all establish that a binding
promise between the plaintiff and defendant No.1 had emerged and
only minor details were to be worked out. The submission is that for
this reason, the defendant no.1's claim for specific performance
requiring the plaintiff to execute guarantees for the bridge loan is
maintainable.
67. Learned senior counsel have urged that the plaintiff accepted
that ICICI would enter into an interim bridge loan agreement with the
defendant no. 2 and for this reason issued a letter of comfort and
undertaking. The plaintiff also gave an undertaking to file an
application with the Ministry of Finance (External, Commercial,
Borrowing Division) for permission to issue their guarantee in
accordance with the term sheet within 15 days from the date of the
letter of comfort. The plaintiff also furnished a letter of comfort dated
30th November, 2000 in this behalf.
68. Based on the letter of comfort given by the plaintiff dated 30th
November, 2000 that ICICI entered into a second interim bridge loan
financing agreement with the defendant no. 2 for credit up to
additional Rs.50 crores.
69. The question which has arisen for consideration relates to the
construction and legal impact of what has been termed 'a letter of
comfort'. No statutory definition of this expression and document is
available. Such communication also known as 'letter of intent' or
'letter of support' has been the subject of judicial interpretation
before courts in different jurisdiction. Such documents are of
widespread use in commercial transaction.
In the literal sense, Black's Law Dictionary defines a 'letter of
intent' as a letter customarily implied to reduce to writing 'a
preliminary understanding of parties who intend to enter into a
contract, or to intend to take some other action.'
The expression 'letter of intent' is defined by Chitty on
Contract in its 26th Editiion in para 116 on page 114 thus :-
"LETTER of intent: There is as yet no clear
authority on the legal effect of the practice whereby
the parties to a transaction exchange "letters of
intent" on which they act pending the preparation of
formal contracts. The terms of such letters may, of
course, negative contractual intention. But where
this is not the case, it would be open to the courts to
hold the parties bound by the terms of such letters,
especially if the parties had acted on those terms for
a long period of time or if they had expended
considerable sums of money in reliance on them......"
At page 180, Chitty on Contracts further deals with letters of
intent and letters of comfort. It is emphasized by the learned author
that there is no clear authority on the legal effect of the practice
whereby the parties to a transaction exchanged a "letter of intent" on
which they act, pending the preparation of formal contracts. At page
181, it is stated that "where the language of such a document does
not negative contractual intention, it is open to the courts to hold the
parties bound by the document; and they will, in particular, be
inclined to do so where the parties have acted on the document for a
long period of time or have expended considerable sums of money in
reliance on it. The fact that the parties envisage that the letter is to
be superseded by a later, more formal, contractual document does
not, of itself prevent it from taking effect as a contract".
70. In a judgment (1971) 222 E.G. 169 Turriff Construction Ltd.
vs. Regalia Knitting Mills, the letter of intent was held to be a
collateral contract to pay for the preliminary work.
In yet another pronouncement reported at 1986 (1) Lloyd's
Rep. 378 Wilson Smithett & Co. (Sugar Co.) v. Bangladesh
Sugar Industries Limited, the court held that the letter of intent
had contractual significance.
71. The defendant no.1 has also placed reliance on the "Law of
Contract", Butterworths Common Law Series wherein it is
pointed out that a letter of comfort may be offered to a potential
creditor as an alternative to a guarantee, as a means of re-assuring
the creditor that the credit will be repaid. It refers to the typical
letter of comfort, generally provided by a company when credit is
advanced to its subsidiary and it contains a statement of the parents'
support for the subsidiary. The effect of such a letter will depend on
the precise form of wording used. At page 327 of this text it is
mentioned that:-
"A letter of intent may expressly state that it is
not to have contractual effect. In Drake and
Scull Engineering Limited Vs. Higgs and Hill
Northern Limited, another building contract
case, the parties had reached agreement on all
terms apart from day rates when a letter of
intent was issued. However, the letter expressly
stated that there should be no binding contract
between the parties until contracts were
formalised. The court held that in accordance
with its terms the letter was therefore not
contractual, with the result that on the facts the
employer was not entitled to deduct liquidated
damages which would have been payable under
agreed contract terms. However, it is submitted
that it will take clear words to prevent a letter of
intent being regarded as an offer or acceptance
of a contract if all important terms have been
agreed and one party commences performance
in reliance on the letter."
The judgment in Drake and Scull Engineering Limited Vs.
Higgs and Hill Northern Limited is reported at 1994 (11) Const.
L.J. 214.
72. Butterworths' Law of Contract has also drawn attention to the
famous case on the subject, Kleinwort Benson Limited Vs
Malaysian Mining Corporation Bhd. The judgment of the trial
court is reported at (1988) 1 All ER 714 which was reversed in appeal
by the judgment reported at (1989) 1 All E.R. 785.
In this case, the plaintiffs made a loan to a company on the
strength of a letter of comfort from its parent-the defendants, which,
following the normal form of such letters, contained (i) a statement
that the defendants were aware of the loan to their subsidiary, (ii) an
undertaking not to give up control of the subsidiary and, finally, (iii) a
statement that: 'it was the defendant's policy to ensure that the
business of the subsidiary is at all times in a position to meet its
liabilities to the plaintiff under the loan agreement'. When the
subsidiary went into liquidation, the creditors sought payment of the
debt from the parent company on the basis of the letter of comfort,
which the defendant refused to pay. The case turned on the
construction of the words quoted above. The defendants argued that
those words had no contractual effect on the alternate bases that (a)
on their proper construction they contained only a statement of
present intention, rather than a promise as to the future and (b) that
if the words were construed as promissory, they were not intended to
create legal relations. The plaintiff succeeded in the court of first
instance which held that the circumstances in which the letter of
comfort was given, feasibly created the presumption of a legal
agreement since the transaction was of a commercial nature.
73. However, the court of appeal unanimously overturned this
decision which judgment is reported at (1989) 1 All ER 785. The
court of appeal held that the crucial question was not whether the
party intended to create legal relations, but whether the words in
question were promissory at all, and the court accepted the
contention that they contained no warranty to the future but merely a
statement of the defendant's present policy. The court accepted the
contention that the defendants would be liable in a tort of deceit if
the intentions were not genuinely held at the time, the statement was
made and that they might incur liability in negligence, if the policy
was subsequently changed and the plaintiffs were not notified. The
words therefore imposed upon the defendant, at best, a moral rather
than a legal obligation.
74. Factors which influenced the court's decision in Kleinwort
Benson's case included the fact that the parties were of equal
bargaining power, that the defendants had expressly declined to give
a legally binding guarantee, and that the plaintiffs had, apparently,
agreed to accept a letter of comfort instead on the basis that the rate
of interest on the loan would be higher than would have been
charged, had the defendants provided a guarantee.
75. It would also be useful however to consider the principles laid
down by the Australian courts reported at Banque Brussels
Lompart S.A. (BBL) Vs. Australian National Industries reported
at (1989) 21 NSW LR 502.
76. The Judge in this case, Sir Rogers, C.J., was strongly critical of
the approach of the court of appeal in the Kleinwort Benson case, as
excessively technical and commercially unrealistic, and favoured the
view that commercial agreements should be given commercial effect.
In this behalf, it was held by the Chief Justice that:-
"the whole thrust of the law today is to attempt
to give proper effect to commercial transactions.
It is for this reason that uncertainty, a concept
so much loved by lawyers, has fallen into
disfavour as a tool for striking down commercial
bargains. If these statements are appropriately
promissory in character, courts should enforce
them when they are uttered in the course of
business, and there is no clear indication that
they are not intended to be legally enforceable."
77. In the Banque Brussels Case (supra), holding that the letter had
contractual force, the court had observed that:-
"There should be no room in the proper flow
of commerce for some purgatory where
statements made by business men, after hard
bargaining and made to induce another
business person to enter into a business
transaction would, without any express
statement to that effect, reside in a twilight
zone of merely honourable engagement. The
whole thrust of the law today is to attempt to
give proper effect to commercial
transactions..... If these statements are
appropriately promissory in character, courts
should enforce them when they are uttered in
the course of business, and there is no clear
indication that they are not intended to be
legally enforceable."
So far as the letter of comfort is concerned, the court laid down
the following principles which give valuable guidance on the subject.
The Learned Chief Justice of Australia held that:-
"1. In determining whether a letter of comfort
gives rise to contractual obligations;
(a) the ordinary rules of construction and
interpretation relating to contracts apply;
(b) the overriding test is that of the intention
of the parties as deduced from the document
as a whole, seen against the background of
the practices of the particular trade or
industry and in the events surrounding its
inception;
(c) the prima facie presumption that in
respect of commercial transactions there is
an intention to create legal relations applies,
and the onus of proving the absence of such
intention rests with the party who asserts
that no legal effect is intended.
2. In the circumstances, and taking into account
the negotiations leading to the final version of the
letter of comfort, and a close textual analysis of its
terms, the letter of comfort contained 2
enforceable contractual promises, breach of which
gave rise to a liability in damages where the
shares .... were sold without the plaintiff being
given 90 days' notice."
The Australian court was of the view that it would be inimical to
the effective administration of justice in commercial disputes, that a
court should use a "finely tuned linguistic fork"
78. The principles in English law so far as a letter of intent are
concerned were authoritatively summarised in the pronouncement
reported in 33 PC 29 Hatzfeld Wildenburg v. Alexander thus :-
"It appears to be well settled by the authorities
that if the documents or letters relied on as
constituting a contract contemplate the execution of
a further contract between the parties, it is a
question of construction whether the execution of the
further contract is a condition of term of the bargain
or whether it is a mere expression of the desire of the
parties as to the manner in which the transaction
already agreed to will in fact go through. In the
former case there is no enforceable contract either
because the condition is unfulfilled or because the
law does not recognise a contract to enter into a
contract. In the latter case there is a binding
contract and the reference to the more formal
document may be ignored."
79. Based on the consideration of several judicial pronouncements
including those noted hereinabove, Butterworths has clearly stated
that there is no absolute rule as to whether a letter of comfort can or
cannot create a legal relationship.
80. A similar issue arose for consideration before the Supreme Court
of India in the pronouncement reported at (1999) 1 SCC 1
Rickmers Verwaltung GNBH vs. Indian Oil Corporation Ltd.
wherein the parties were at loggerheads over the construction to be
placed on the correspondence between them. The appellant was
submitting that a concluded contract had come into existence and
that though no agreement had been formally signed between the
parties, yet the contemporaneous correspondence exchanged
between them went to show that a binding contract came into
existence. On a construction of the various documents placed before
the court, the court laid down the following binding principles which
would guide adjudication herein :-
"13. In this connection the cardinal principle to
remember is that it is the duty of the court to construe
correspondence with a view to arrive at a conclusion
whether there was any meeting of mind between the
parties, which could create a binding contract between
them but the Court is not empowered to create a
contract for the parties by going outside the clear
language used in the correspondence, except insofar as
there are some appropriate implications of law to be
drawn. Unless from the correspondence it can
unequivocally and clearly emerge that the parties were
ad idem to the terms, it cannot be said that an
agreement had come into existence between them
through correspondence. The Court is required to
review what the parties wrote and how they acted and
from that material to infer whether the intention as
expressed in the correspondence was to bring into
existence a mutually binding contract. The intention of
the parties is to be gathered only from the expressions
used in the correspondence and the meaning it conveys
and in case it shows that there had been meeting of
mind between the parties and they had actually reached
an agreement, upon all material terms, then and then
alone can it be said that a binding contract was capable
of being spelt out from the correspondence.
14. From a careful perusal of the entire correspondence
on the record, we are of the opinion that no concluded
bargain had been reached between the parties as the
terms of the standby letter of credit and performance
guarantee were not accepted by the respective parties.
In the absence of acceptance of the standby letter of
credit and performance guarantee by the parties, no
enforceable agreement could be said to have come into
existence. The correspondence exchanged between the
parties shows that there is nothing expressly agreed
between them and no concluded enforceable and
binding agreement come into existence between them.
Apart from the correspondence relied upon by the
learned single Judge of the High Court, the fax messages
exchanged between the parties, referred to above, go to
show that the parties were only negotiating and had not
arrived at any agreement. There is a vast difference
between negotiating a bargain and entering into a
binding contract. After negotiation of bargain in the
present case, the stage never reached when the
negotiations were completed giving rise to a binding
contract. The learned single Judge of the High Court
was, therefore, perfectly justified in holding that Clause
53 of the Charter Party relating to Arbitration had no
existence in the eye of law, because no concluded and
binding contract ever came into existence between the
parties. The finding recorded by the learned single Judge
is based on a proper appreciation of evidence on the
record and a correct application of the legal principles.
We find no merit in this appeal. It fails and is dismissed
with costs."
81. In this context, learned counsel for the defendant no.1 has also
placed reliance on a decision of the court of appeals of Texas,
Houston (First District) reported at 729 SW 2d 768 Texaco Inc Vs.
Pennzoil Co. wherein similar issues had arisen for consideration. In
this pronouncement, several prior pronouncements of various courts
were considered. The principles laid down certainly throw valuable
light on the subject. Placing reliance on the judgment reported as
Winston Vs. Mediafare Entertainment Corporation 777 F.2d
78, 80 (2d Cir. 1985), it was observed that if the parties do intend
to contract orally, the mere intention to commit the agreement to
writing does not prevent contract formation before execution of that
writing. However, this would not be if either party communicates the
intent not to be bound before a final formal document is executed,
then no oral expression of agreement to specific terms will constitute
a binding contract.
The court articulated the following factors which would help
determine whether the parties intended to be bound only by a formal,
signed writing :-
"(1) whether a party expressly reserved the
right to be bound only when a written
agreement is signed; (2) whether there was
any partial performance by one party that the
party disclaiming the contract accepted; (3)
whether all essential terms of the alleged
contract had been agreed upon; and (4)
whether the complexity or magnitude of the
transaction was such that a formal, executed
writing would normally be expected."
82. A similar document termed as a letter of intent arose for
consideration before a learned Single Judge of this court. In the
judgment reported at AIR 1993 Delhi 32 Wellman Hindustan
Limited vs. M/s NCR Corporation, the court held that the law as it
stands is that term of a letter of intent may negative contractual
intention but it would be open to the courts to hold that the parties
are bound by the terms of such letters. This would be especially if the
parties had acted on these terms for a long period of time or if they
had expended considerable sums of money in reliance on them.
83. In this case, based on such conduct of the parties, the court had
held that the plaintiff would suffer irreparable loss and damage if the
defendant was not restrained from breaching such terms and had
granted an interim injunction in favour of the plaintiff.
84. Learned counsel for the defendant no.1 has also placed reliance
on yet another judgment from the New South Wales Supreme Court
reported at ACN 089 347 562 entitled Gate Gourmet Australia
Pty Limited (in liquidation) Vs. Gate Gourmet Holding A.G.
Company Number CM - 020.3.003.945-1 & Ors. reported at (2004)
NSW SC 149 wherein the court was called upon to consider as to
whether a letter of comfort so supports credit legal obligations. The
"letter of support" executed by Gate Gourmet International A.G. was
in the following terms:-
"This is to confirm that the parent entity, Gate
Gourmet International AG, will provide the
financial support that may be necessary to
enable Gate Gourmet (Holdings) Pty Limited
and its controlled entities to meet its financial
commitments as and when they fall due. This
guarantee will not be withdrawn before Gate
Gourmet (Holdings) Pty Limited and its
controlled entities have sufficient means to
meet their obligations without the support of
the parent entity."
85. On a strict construction of a letter placed before the court in
Gate Gourmet Australia Limited (Supra), it arrived at a conclusion
that its terms were clear and unequivocal and it provided that the
Swiss parents will provide the financial support that may be
necessary to enable the Australian holding company and its controlled
entities to meet their financial commitment as and when they fall due
and that the letter would not be withdrawn before the Australian
holding company and its controlled entities have sufficient means to
meet their obligations without the support of the Swiss parents. The
statements were unconditional and no qualification thereto could be
discerned even by reference to the circumstances surrounding the
making representations. The representations also related to matters
in the future and consequently created a binding obligation.
86. The New South Wales Supreme Court had relied upon the
pronouncement reported at Commonwealth Bank of Australia
Vs. TLI Management Pty Limited (1990) V.R. 510 wherein the
relevant letter of comfort read as follows:
"We hereby acknowledge that the Commonwealth
Bank of Australia has agreed to make temporary
credit facilities totalling two hundred and fifty
thousand Australian dollars $A250,000 available
to Hovertravel Australia Pty Ltd which represents
payments for ongoing operating costs and
salaries.
We confirm that the company will complete
takeover arrangements (subject to shareholders'
approval) of Hovertravel Ltd as soon as legally
possible. These arrangements include the
injection of sufficient capital to repay the
temporary facility as mentioned above to takeover
date or within 30 days of this date. "
Construing this letter, the court had held as follows:-
"[I] n the circumstances the draft did not, in my
judgment, contain words conveying to the
defendant the idea that, by having it engrossed
and signed, the defendant would be undertaking a
contractual obligation. It would have been very
simple, if that had been intended, to have used
words of promise, such as "we agree", "we
undertake", or even "we promise". The words "we
confirm that we will . . ." were, in the
circumstances, at least ambiguous. What was
stated in the remainder of the sentence beginning
with those words was in essence a statement of no
more than was already known or believed by the
plaintiff to be the defendant's intention ... "
87. It was further held that many of the other words contained in the
letter were vague and uncertain [at 516]:
"The difficulty is accentuated by the relative
vagueness of many of the words - for example,
"complete", "takeover arrangements" and "as
soon as legally possible". What would constitute a
breach of such an undertaking? The second
sentence adds to the imprecision of the first. If the
"arrangements" include "the injection of sufficient
capital" etc., what are the other arrangements?
What is "sufficient capital to repay the temporary
facility as mentioned above"? And what is meant
by "injection"? It is far from clear that what is
meant is the deposit of money to the bank
account."
88. It was, therefore, held that the legal status of the letter was
merely that of a "serious acknowledgment by the defendant of its
understanding of the commercial position between the plaintiff and
its customer, and a serious statement confirming the defendant's
intention with respect to the parent of the customer......."
89. Another judgment relied upon was rendered in Australian
European Finance Corporation Ltd. Vs. Sheahan (1993) 60
SASR 187 wherein the relevant letter of comfort read as follows:-
"RE DUKE PACIFIC FINANCE LIMITED
This company which is 100% owned by The
Duke Group Limited will continue to be supported
by this company so long as necessary.
In the event that any subordinated loans are
required to ensure the company's requirements
under the necessary legislation or licensing
requirements, these will be provided.
I confirm that such support as is necessary will be
given to this company and its subsidiaries."
On a construction of this letter and after the reference to several
academic works authorities and judicial precedents, the court
concluded thus:-
"...I am not persuaded that the vague words of
the first and third sentences contain a contractual
promise. Support can mean many different
things, and I do not know what support "so long
as is necessary" or "as is necessary" means. They
are "woolly" expressions to say the least. The
second sentence is even more ambiguous, and the
evidence contained no attempt to explain it. I
construe it as mere padding, as is the addition of
the words "and its subsidiaries" at the end of the
third sentence.
I am not persuaded that the parties intended that
the letter would amount to a legally enforceable
security. At most it contains a non-promissory
statement of intention."
90. So far as the present plaintiff was concerned, it was required to
issue a letter of comfort in favour of the ICICI Limited in a form
acceptable to ICICI Limited for obtaining the RBI approval and
furnishing guarantee for the entire financial assistance of Rs.484.00
million upon execution of the facility agreement and other security
documents in terms of the letter of intent dated 13 th September, 2000.
It is noteworthy that the description of the facility agreement in the
clause in the term sheet does not include any bridge loan agreements
or guarantees thereto.
91. The letter dated 13th September, 2000 from the ICICI and the
term sheet enclosure therewith suggests that the defendant no. 1 was
treating it as only an agreement in principle and the terms stated
therein as indicative of the basis on which it would advance financial
assistance to the defendant no. 2. The specific terms on which the
documents would be executed were yet to be negotiated to the
satisfaction of all parties. Several covenants and stipulations which
were conditions precedent to the execution of the document were yet
to be completed. Even the date of commencement of the agreement
was clearly stipulated as the date of execution of the documents.
92. So far as the construction of the respective obligations was
concerned, in the letter dated 13th September, 2000 the ICICI Limited
had clearly stated that the communication should not be construed as
giving rise to any binding obligation on its part unless M/s Shyam
Telelink Limited & M/s Lucent Technologies, USA communicated their
acceptance of the terms & conditions within 30 days from the receipt
of this letter and unless the underwriting agreement, rupee loan
agreement, general conditions, guarantee agreement, personal
guarantee agreements, various undertakings and any other
documents as may be specified by ICICI Limited relating to the above
facility, are executed by Shyam Telelink Ltd in such form, as may be
required by ICICI Limited within four months from the date of this
letter or such further period as may be allowed by ICICI Limited in its
absolute discretion. The ICICI Limited also reserved to itself the right
to amend or modify the letter as well as the term sheet in line with
advice received from its legal counsel "during the course of document
finalization".
93. Certain details mentioned in the term sheet which was enclosed
with the communication dated 13th September, 2000, are important.
While M/s Shyam Telelink Limited was described as the "borrower",
the ICICI Limited was defined as the "lead arranger" while Lucent
Technologies Inc incorporated, USA as the guarantor. The suppliers
included not only M/s Lucent Technologies Hindustan Pvt. Limited,
India but others including Cincom System India Private Limited. The
facility agreed to be advanced by the ICICI Limited was underwriting
of the entire debt requirement of the project aggregating Rs.4.84
billion.
Importantly, the "agreement date" that was stipulated in the
term sheet was "the date on which the facility documents are signed
by the borrower, the lead arranger and the guarantor".
The `facility documents' were defined to include the `project
agreements' and the `financing agreement'.
So far as the "financing agreement" was concerned, it was
stipulated that "the facilities will be subject to negotiations, execution
and delivery of definitive financing agreements to be entered into by
the borrower, the sponsors and the guarantor, as the case may be,
relating to the facilities including but not limited to the security
documents, loan agreements, lease facility agreements, guarantee
agreements etc. satisfactory to the lead arranger".
The term sheet stipulated "interest" which the facility would
carry. It was stipulated that the entire debt facility would carry an
interest rate of ICICI LTPLR plus 3% per annum payable quarterly
plus applicable interest tax prevalent on the date of each
disbursement. The ICICI LTPLR as on date was stipulated as being
12.5% per annum payable quarterly.
It is pointed out that this term sheet also stated that the lender
would consider to provide a bridge loan against the proposed facilities
with full security interests including an unconditional and irrevocable
guarantee from M/s Lucent Technologies Inc, USA in a form and
manner satisfactory to the lead arranger.
Extensive security and documents were listed in the term sheet
including an unconditional and irrevocable guarantee by the
guarantor to pay upto 65% of all amounts due under the facilities
which was to be subject to the satisfaction of the guarantor on the
guarantee structure.
94. The ICICI Limited had stipulated mandatory conditions
precedent to execution of the financing agreements. These conditions
inter alia included regulatory and statutory approvals for borrowings,
security structure and Lines and permission for guarantee and 14
other conditions.
95. The defendants have emphasised that it was stipulated in the
term sheet that the guarantor i.e. Lucent Technologies Inc would
maintain a minimum investment grade credit rating or a credit rating
equivalent to India's sovereign rating by Standard and Poor and
Moody's, whichever is higher, at all times during the effective tenure
of the guarantee under the facilities and also maintain its corporate
existence and its right to carry on the operations. The guarantee was
to rank at least pari-passu to all present and future unsecured
indebtedness of the guarantor.
As per letter dated 13th September, 2000, the same was not to be
considered to give rise to binding obligations on the part of the ICICI
which were to arise only upon execution of 'the Underwriting
agreement, Rupee loan agreement, General conditions, Guarantee
agreement, Personal Guarantee agreements, various undertakings
and any other documents as may be specified by ICICI'. In the term
sheet it was mentioned that one of the conditions precedent to
execution of financing agreement included regulatory and statutory
approvals for borrowings.
96. In the instant case, the defendant no.1 is asserting that the
plaintiff had executed valid guarantees to secure financial facilities
advanced by it to the defendant no.2. A contract of guarantee is a
contract to perform the promise, or discharge the liability of a third
person in case of its default, as defined under Section 126 of the
Indian Contract Act, 1872. As per Section 127 of the said Act,
anything done or any promise made, for the benefit of the principal
debtor, may be sufficient consideration to the surety for giving the
guarantee.
97. So far as the reliance on the plaintiff's letter dated 27th
September, 2000 referring to the loan is concerned, the plaintiff
thereby stated that Lucent Technologies Inc 'shall accept the terms
and conditions set out in the term sheet' whereby Lucent will provide
guarantee up to 65% of the facility, 'subject to the terms and
conditions of the term sheet and negotiation of satisfactory
documentation'.
98. It is evident that settlement of the final terms and negotiation of
documentation was yet to take place. The letter dated 27th
September, 2000 from the plaintiff by itself therefore cannot be
treated as an unequivocal or absolute acceptance of the terms of the
term sheet.
99. The plaintiff has also urged at some length that the bridge loan
agreement dated 27th September, 2000 entered into by the defendant
no.1 with the defendant no.2 and the second agreement dated 12th
December, 2000 were entered into and executed independent of the
main financing agreement. The same was entered into on terms and
conditions without a guarantee from the plaintiff and for this reason,
the ICICI Limited advanced the bridge loan on a stipulated interest
rate which was higher than the interest rate stipulated under the
financing agreement.
100. The defendants also rely on the letter dated 30th November,
2000 addressed by the plaintiff to the ICICI Ltd. to assert that a
concluded contract can be made out by the correspondence
exchanged between the parties. This letter noted that the process of
finalisation of documentation for the main term facility was underway
and was likely to be executed in the month of December, 2000. The
plaintiff stated therein that it accepted that the ICICI enter into an
interim bridge loan financing agreement with the defendant no. 2
permitting them to avail credit up to an additional Rs.500 million over
and above an amount availed earlier; that the necessary application
to the Ministry of Finance for approval of the 'proposed guarantee' by
Lucent Technologies Inc is expected to be made in the next week.
The plaintiff confirmed that 'subject to the satisfactory negotiation
and resolution of the financing terms of the agreement', the security
document, the guarantee terms, the guarantee structures and the
guarantee release mechanism as provided in the term sheet', it would
'proceed with the execution of the guarantee and other documents as
required for completing the contemplated transaction on the terms
the parties had agreed upon.
The communication at one place shows that negotiation and
resolution of the financing terms of the agreement and the guarantee
terms etc was yet to take place while at another place a reference is
made to terms agreed upon. This communication is to be read
against the stipulations made by the defendant no. 1 itself in the
letter dated 13th September, 2000 and read together from these
communications, it is not possible to hold that there was a firm
contract which had come into place between the parties.
101. It has been urged by Mr. Dwivedi, learned senior counsel for the
defendant no. 1 that the plaintiff had addressed a letter dated 12th
January, 2001 to the Department of Economic Affairs in the Ministry
of Finance wherein also it had confirmed acceptance of the terms and
conditions of the term sheet and had stated that it was committed to
issuing a secured guarantee. The submission is that the bridge loan
as well as the arbitration agreement are part of the term sheet and
that this letter itself showed that even according to the plaintiff a
concluded contract had come into existence.
It is further contended that the defendant no. 1 had addressed a
letter dated 30th January, 2001 wherein it had enclosed a copy of the
confirmation letter from the plaintiff. The submission is that the
government approval in the letter dated 16th March, 2001 to the
proposal was based on this confirmation by the plaintiff.
102. This submission however fails to consider the nature of the
communication by the plaintiff confirming the terms and conditions
which were set out in the term sheet. As discussed hereinabove, the
same were inchoate and subject to negotiation; finalisation of
documents and their execution. The letter dated 12th January, 2001
also merely stated that it was 'committed to issuing' a secured
guarantee which manifests the factual position that the secured
guarantee had not been executed. When the term sheet is considered
in the light of the stipulations contained therein, it is obvious that the
terms and conditions were yet to be finalised.
The plaintiff further points out that its letter dated 12th January,
2001 to the Government of India seeking approval clearly stated that
it would issue the proposed guarantee 'subject to satisfactory
documentation'.
103. It is noteworthy that Shyam Telelink Ltd.-defendant no. 2
addressed a letter as late as on 4th April, 2002 to the defendant no. 1
seeking revision of the terms of sanction of the term loan for Rs. 484
crores sanctioned by the letter dated 13th September, 2000. The
defendant no. 2 wrote in no uncertain terms, that the sanction letter
had a clause whereby the loan was to be guaranteed by the plaintiff.
It was stated that on account of downgrading of the rating of Luccent
Technologies Inc., the defendant no. 1 had asked it to provide
alternate guarantee of appropriate rating in respect of bridge loans.
The defendant no. 2 informed the ICICI bank that it had been
approached by Lucent to approach ICICI with a request and proposal
that the terms of the sanction be revised so as to make the term loan
without recourse to Lucent. The defendant no. 2 accordingly
requested the ICICI Bank to delete the clause pertaining to guarantee
of Lucent Inc. and to make the said loan without recourse to Lucent
Inc.
104. It is trite that it is the express intent of the parties which
controls the rule of contract formation rather than mere form. In the
instant case, the matter relates to financing of a loan which was to the
tune of Rs. 484.00 million rupees. Even the bridge loans are to the
tune of Rs.100.00 crores. Certainly, the magnitude of the facility as
well as the intricacies of the documents were of such a nature which
would militate against an informal transaction for advancing of the
loan or any part thereof. Such informal transaction without the
formality of a formal binding legal documentation was also not
contemplated by the parties. Every communication shows considered
assessment and evaluation and there is repeated reference to legal
advice. So much so, that even the guarantee to be executed by the
plaintiff was required to be supported by a letter/confirmation from
the legal consultant of the party. In addition thereto, the defendant
no. 1 had itself stipulated the effective date on which the agreement
between the parties would come into existence as being the date of
execution of the financing agreement. Conscious of the fact that
several terms and conditions were required to be considered and
statutory and regulatory sanction was also required, the defendant
no.1 had itself clearly stipulated the same in the letter dated 13 th
September, 2000
105. In the judgment reported at 147 F Supp. 193, 204 (S.D.N.Y.
1956) Banking & Trading Corporation Vs. Reconstruction
Finance Corporation, affirmed in 257 F. 2d 765 (2nd Cir. 1958),
the court had stated that "if the agreement is expressly subject to the
execution of a formal contract, this intent must be respected and no
contract found until then".
106. Having regard to the unequivocal expression of the intent in the
term sheet, it is evident that the defendant no.1 had itself intended
not to be bound by any stipulation or covenant before the signing of a
formal documents.
107. The letter dated 13th September, 2000 as well as the term sheet
propose finalisation of binding terms after acceptance of the proposal
in this communication and negotiation of the documentation unlike
the facts in the case of Banque Brusals (supra). The letters of comfort
were not unconditional or unequivocal in the creation of the liability
of the plaintiff. The plaintiff had clearly made them "subject to
completion of specific formalities". There is certainly a difference
between a transaction being subject to various requirements and the
formation of the agreement itself being dependent upon completion of
such matters.
108. It is noteworthy that in the letter dated 30th January, 2001 was
sent by Syam Telelink Ltd. to the Department of Economic Affairs,
Ministry of Finance seeking approval for the secured Lucent
guarantee covering up to a maximum of 65% of the total requirement,
the defendant no. 2 had stated that the Lucent guarantee is proposed
to be secured on a pari-passu basis with the domestic lenders. This
communication suggests that even defendant no. 2 was not treating
the matter as concluded.
109. In Texas Inc Vs. Pennzoil Co. 729 SW 2d 768 (Supra), the
court placed reliance on a pronouncement reported at 301 N.Y. 110,
92, N.E. 2D 914 (1950) F.W. Berk & Co. Vs. Derecktor. In this
matter, the very acceptance of the plaintiff's order by the defendants
was made subject to the occurrence of certain events. The court
defined the phrase "subject to" as being the equivalent to "conditional
upon or depending on" and held that making the acceptance of an
offer subject to a condition was not the kind of assent required to
make it a binding promise. However, making the acceptance of an
offer conditional or expressly making an agreement itself conditional
is a much clearer expression of an intent not to be bound than the use
of the more ambiguous word "transaction".
110. My attention is drawn to the pronouncement of the Apex Court
reported at (2006) 1 SCC 751 Dresser Rand S.A. Vs. Bindal Agro
Chem Limited wherein the court had held that the parties agreeing
upon the terms subject to which a contract will be governed when
made, is not the same as the entering into the contract itself.
Similarly, agreeing upon the terms which will govern a project
without the order being placed, is not the same as placing the
projects order. A prelude to the contract should not be confused with
the contract itself. In this case, the court was of the view that the
letters of intent made it clear that if the projects order was not placed
and a letter of credit was not issued by a particular date, the other
party was at liberty to alter the price and the delivery schedule. The
court therefore held that it may not be possible to treat the letter of
intent as the projects order. It was further held thus:-
"Agreeing upon the terms subject to which offer is
to be made and accepted, is itself a complicated
and time-consuming process. But, reaching an
agreement as to the terms subject to which a
purchase will be made, is not entering into an
agreement to purchase."
32. Parties agreeing upon the terms subject to
which a contract will be governed, when made, is
not the same as entering into the contract itself.
Similarly, agreeing upon the terms which will
govern a purchase when a purchase order is
placed, is not the same as placing a purchase
order. A prelude to a contract should not be
confused with the contract itself. The purpose of
Revision 4 dated 10-6-1991 was that if and when a
purchase order was placed, neither the "General
Conditions of Purchase" of BINDAL, as modified
by Revision 4. But when no purchase order was
placed, neither the "General Conditions" of
Purchase" nor the arbitration clause in the
"General Conditions of Purchase" became
effective or enforceable. Therefore, initialling of
Revision 4" by DR and BINDAL on 10-6-1991
containing the modifications to the General
Conditions of Purchase, did not bring into
existence any arbitration agreement to settle
disputes between the parties."
111. It is an admitted position between the parties that so far as the
documentation of the facility agreement and the execution of any
formal financing agreement and documents are concerned,
correspondence was exchanged between the ICICI and the legal
consultants from October, 2000 onwards. However, no formal
financing agreement was ever executed. As pointed out by the
plaintiff several conditions' precedent, which were not even defined,
could be changed by the plaintiff, defendant no. 1 or defendant no. 2
and these conditions' precedent were never completed.
112. In the meantime, the defendant no.2 entered into a warrant
agreement dated 5th October, 2001 with Lucent Technologies
Hindustan Private Limited also pursuant to which, upon satisfaction of
the terms of the agreement, Lucent Hindustan Technologies Pvt.
Limited was to be issued securities of an affiliate of Shyam Telelink
Limited - defendant no. 2.
113. From the above discussion the following facts emerge :-
(i) Lucent Technologies Inc (the plaintiff) is not a signatory to
any of the agreements.
(ii) the letter dated 13th September, 2000 was a proposal made by
the ICICI Bank to STL with a copy enclosed to the plaintiff. It
states that the defendant no. 1 was "agreeable in principle" to
advance financial facility to it which was "subject to the
special terms and conditions set out in the term sheet". The
term sheet was stated to be only "indicative" and "will be
finalised after the completion of due diligence and at the time
of "documents finalisation". ICICI retained the right to
specify other terms and conditions as may be required at the
time of definitive documentation.
(iii) The facility agreement and financing agreement, which was to
contain the clause for dispute resolution, has not been
executed till date and has not even come into existence even.
(iv) The letter dated 13th September, 2000 clearly stated that the
demand of ICICI was subject to the satisfaction of each
conditions precedent mentioned in the term sheet. The ICICI
notified the parties that the communication should not be
construed as giving rise to "any binding obligation" (including
the guarantee agreements) which executed.
(v) The term sheet uses several expressions which show that the
ICICI itself did not treat the contract as final. It was subject
to satisfaction of several conditions precedent and to
execution of financing agreements. So far as the covenant of
the guarantor was concerned, its obligations were to subsist
during the tenure of the guarantees under the financing
agreements. The date was stipulated as the date on which the
facility documents are signed by the parties; the term sheet
specified "facility documents" to include the "project
agreements" and the "financing agreement". It was further
stipulated that the facilities would be "subject to negotiation,
execution and delivery" of definitive financing agreements "to
be entered into by the borrower, the sponsor and the
guarantor". The documents included guarantee agreements
and other documents.
(vi) Under the heading "Security & Documents", the term sheet
mentioned that "subject to the satisfaction of the guarantor"
on the guarantee structure, it would execute all documents in
relation to creation and perfection of the security and the
unconditional and irrevocable guarantee by the guarantor to
pay 65% of all amounts due under the facilities".
(vii) A specific clause was mentioned as a condition precedent to
execution of financing agreements which included a pre-
condition of regulatory and statutory approvals inter alia the
permission for guarantee; legal opinion by the guarantor's
counsel covering all matters with regard to incorporation and
existence of the guarantors and the legality, validity and
enforceability of the guarantee. As per the term sheet, the
stipulation regarding Governing Law & Jurisdiction as
referred to in the context of the "financing agreement alone"
and not in respect of all matters related thereto which
included guarantee agreements. No final terms and
conditions or the agreement came into existence nor as any
such agreement been placed before this court.
114. Applying the legal principles laid down in the several judgments
noticed hereinabove, the circumstances and documents do not
indicate that the parties intended to create any legal relations. The
very terms of the letter dated 13th September, 2000, the term sheet
enclosed therewith and the response of the plaintiff as contained in
letters of comfort dated 27th September, 2000 and 30th November,
2000 are a strong indicator in this regard. Both use phrases and
concepts having clear technical legal significance and do not manifest
any intent that a final and concluded contract had been entered into.
In view of the above discussion, it, therefore, has to be held that the
communications placed before this court do not contain the kind of
assent required to make for a binding contract.
II
115. The second question which is required to be answered in the
present case is as to whether the clause stipulating the 'Governing
Law and Jurisdiction' in the term sheet or any other stipulation in
the documents amounted to an arbitration agreement which would
bind the plaintiff and the defendant no.1.
116. A further question has been raised as to whether the arbitral
tribunal appointed at the instance of M/s Shyam Telelink Limited and
Lucent Technologies Hindustan Pvt. Ltd. under its contracts dated
14th December, 1999 could be considered as an "alternate dispute
resolution forum" within the meaning of the expression as contained
in the term sheet enclosed by the ICICI with its letter of 13 th
September, 1999, which would have jurisdiction to examine the
dispute at the instance of ICICI Limited.
117. An examination of this issue necessitates a look at the relevant
dispute resolution clauses in the various documents relied upon by
the parties. In the order of chronology, these are the supply
agreements dated 14th of December, 1999; the term sheet enclosed
with the letter dated 13th September, 2000 and the warrant
agreement dated 5th of October, 2001.
118. The supply contracts dated 14th December, 1999 between Shyam
Telelink & Tata Lucent Technologies Ltd. contains a "disputes
resolution and arbitration" mechanism in clause 55 (which is clause
58 in one of the supply contract) and states thus:-
"55 DISPUTES RESOLUTION AND
ARBITRATION
55.1 If any dispute, difference,
controversies or claims of any kind whatsoever
shall arise between the Parties in connection with
or arising out of this Contract including any
question regarding its existence, validity or
termination of the execution of the works,
whether before or after the termination,
abandonment or breach of this Contract, the
Parties shall seek to resolve any such dispute or
difference by mutual consultation. PSC will make
their best endeavor to resolve disputes,
differences, controversies or claims by mutual
deliberation. In case of failure, the issues will be
escalated to the respective CEOs of the parties.
CEOs shall strive to resolve all such disputes,
differences, controversies, or claims.
55.2 If the parties fail to resolve such dispute or
difference, controversy, or claim by mutual
consultation, then either party may give the
other, a formal notice in writing that the dispute,
difference, controversy, or claim exist specifying
its nature, the point(s) in issue and its intention to
refer such disputes, difference, controversies, or
claims to arbitration under the Arbitration and
Conciliation Act, 1996."
(Emphasis supplied)
119. These contracts at the same time contain a clarification that
"party" shall mean either Shyam Telelink Ltd. ('STL' for brevity)
(defendant no. 2) or the supplier i.e. Tata Lucent Technologies Ltd.
('TLT' for brevity) who are together referred to as "parties".
120. As noticed above, the supply agreements had stated that the TLT
(supplier) through their sponsors would provide "credit enhancement
support to structure and effect the debt for the project". In clause
5.6, TLT (supplier) was stated to have represented that the plaintiff
had agreed to provide full support and back up to the supplier to
enable it to fulfil its obligations under the contract. The agreement
contained a clarification that Lucent was an affiliate of the supplier.
As per the definition contained in the agreement, the `the affiliate' of
the party was defined to mean the company or the person who is
either controlled by the respective party or who controls the
respective party either by way of a significant shareholding, voting
rights or technical collaboration.
121. It is trite that terms of the contract have to be strictly construed.
So far as Clause 55 of one of the 4 "Supply Contracts" entered into by
M/s Shyam Telelink Ltd. and M/s Tata Lucent Technologies Ltd. on
14th December, 1999 is concerned, it is clear and unequivocal that it
relates to any disputes arising between the parties. The parties have
been clearly defined as M/s Shyam Telelink Limited and M/s Tata
Lucent Technologies Limited. The agreements clearly recognise the
independent identity of the plaintiff and the supplier. There is no
dispute that the plaintiff or the ICICI Bank are not a party to these
contracts. The nature of the mechanism stipulated also shows that
the same would not take into its embrace any party other than these
two.
No party has asserted before this court that there is any
ambiguity in the stipulations contained in Clause 55 afore-noticed, the
same being clear and unequivocal. It is noteworthy that the
arbitration between STL and Lucent Hindustan Technologies Pvt. Ltd.
was commenced by Shyam Technology Ltd. based on these clauses.
122. It is not the defendant no. 1's contention that the arbitration
which it has invoked against the plaintiff is based on the mechanism
detailed in clause 55 of these agreements dated 14th December, 1999.
In this background, clause 55 of the contracts dated 14th December,
1999 does not create or constitute an arbitration agreement between
the plaintiff and the defendant no.1.
123. The warrants agreement dated 5th October, 2001 between M/s
Shyam Telecom Ltd., Shyam Telelink Ltd., Shyam International etc
and persons who are named and cited as promoters on the one hand
and Lucent Hindustan Technologies Pvt. Ltd. on the other, also
provides a mechanism for dispute resolution in Clause 9 which reads
as follows :-
" CLAUSE 9
DISPUTE RESOLUTION
9.1 Except as otherwise specifically provided in
this Agreement, the following provisions apply if any
dispute or difference arises between the Parties
arising out of or relating to this Agreement. (The
'Dispute').
9.2 A Dispute will be deemed to arise when one
Party serves on the other Party a notice stating the
nature of the Dispute (a 'Notice of Dispute').
9.3 The Parties hereto agree that they will use all
reasonable efforts to resolve between themselves,
any Dispute through negotiations.
9.4 Any Disputes and differences whatsoever
arising under or in connection with this Agreement
which could not be settled by Parties through
negotiations, after the period of thirty (30) Business
Days from the service of the Notice of Dispute, shall
be finally settled by arbitration in accordance with
the Arbitration and Conciliation Act, 1996 and :
a. All proceedings shall be conducted in
English and a daily transcript in English shall be
prepared.
b. There shall be three (3) arbitrators, one to
be selected by Shyam Group, one to be selected by
Lucent and the third to be selected by the two
arbitrators appointed by Shyam Group and Lucent,
who shall serve as Chairman of the Arbitration
Panel; and
c. The venue of arbitration shall be in New
Delhi, India."
The dispute resolution mechanism contained in clause 9 of this
agreement was also confined to the 'parties' which as per the
agreement included only the defendant no. 2 and Lucent Technologies
Hindustan Pvt. Ltd. It is noteworthy, that the Shyam Group on the
one hand and the Lucent Technologies Hindustan Pvt. Ltd. on the
other, (referred to as Lucent in the agreement) were parties to the
contract.
So far as the governing law, jurisdiction and indemnity is
concerned, the same is stipulated in Clause 10 and also relates to the
parties to the agreement.
124. The plaintiff has submitted that funds were not arranged
internationally and this agreement was not acted upon. The plaintiff
and the defendant no. 1 were not parties to this agreement also.
Be that as it may, clause 9 of the warrants agreement dated 5 th
October, 2001 in any case does not create or constitute an arbitration
agreement between the plaintiff and defendant no. 1.
125. It has been argued by the defendants, that the clause
"Governing Law and Jurisdiction" in the term sheet enclosed with the
letter dated 13th of September, 2000 amounted to a valid arbitration
agreement which binds the plaintiff. This clause as contained in the
term sheet enclosed with the ICICI letter dated 13th September, 2001
requires to be considered in some detail and reads as follows :-
"Governing Law and Jurisdiction
The Financing Agreement shall be governed by and
construed in accordance with Indian law. The
courts at Delhi shall have jurisdiction in respect of
all matters related to the Financing Agreements.
The Lenders reserve their right to approach any
other alternate dispute resolution forum with it
venue at Delhi, and the Borrower, the Sponsors and
the Guarantor, as the case may be, shall submit to
such forum."
126. Mr. Dwivedi, learned senior counsel has submitted, that so far as
the arbitration is concerned, it is an alternate dispute redressal
mechanism in the context of the courts ordinarily deciding civil
disputes and consequently in view of the above, all disputes between
the parties, whether under the contract or otherwise, can be referred
to an arbitral tribunal. For this reason, it has been urged that the
clause in the instant case includes dispute redressal by arbitration
and confers a right on the lenders that is the ICICI to approach any
arbitral tribunal.
In this behalf, reliance has been placed on the judgment of the
Apex Court reported at (1999) 7 SCC 339 State of J & K vs. Dev
Dutt Pandit and (2003) 1 SCC 49 Salem M. Advocate Bar
Association, TN Vs. Union of India.
127. It is further contended that the power conferred on it is wide
enough to even unilaterally appoint the arbitral tribunal or to
approach an existing arbitral tribunal. For the reason that the
defendant no. 1 has approached the arbitral tribunal, it is urged that
the plaintiff was precluded from bringing the present suit or from
challenging the existence, validity or bindingness of the arbitration
agreement. It has been urged that the provisions of the Arbitration
and Conciliation Act, 1996 prohibit such an examination by any civil
court and in this behalf my attention is drawn to the provisions of
sections 5, 16 and 34 of the Arbitration and Conciliation Act, 1996, by
the defendants.
128. The plaintiff on the other hand has contended that even the
envisaged due diligence before entering into a formal agreement was
not over and that the matter was at the stage of negotiations only. A
clause providing `Governing Law and Jurisdiction' would bind the
parties only if such clause was incorporated in a formal and final
financing agreement arrived at between the parties. A submission
has also been made, that reference to the jurisdiction of the courts at
Delhi negates the existence of an arbitration agreement.
129. Mr. Arun Jaitley, learned senior counsel for the plaintiff, has
contended that even assuming that this clause was binding, the same
does not constitute an arbitration agreement between the parties.
The clause confers a unilateral right on the ICICI Bank to approach an
alternate dispute resolution forum without any such right being
available to the plaintiff. The clause also does not stipulate as to what
would be the nature of the alternate dispute resolution mechanism
and there is no indication at all that arbitration is the suggested
mode.
130. I have considered the rival contentions on this issue.
131. In para 23, of the judicial pronouncement reported at (1999) 7
SCC 339 State of J & K Vs. Dev Dutt Pandit relied upon by the
defendants, the Apex Court has observed that arbitration is
considered to be an important alternative disputes redressal process
which is to be encouraged because of the high pendency of cases in
the courts and costs of the litigation. It was further observed that
arbitration has to be looked upto with all earnestness so that the
litigating public has faith in the speedy process of resolving their
disputes by this process. There can be no dispute with these
observations.
132. The other judgment relied upon by the defendants is reported at
(2003) 1 SCC 49 Salem M. Advocate Bar Association, TN Vs.
Union of India wherein the court was concerned with a challenge to
the amendments made to the Code of Civil Procedure by the
Amendment Act 46 of 1999. The court noted that one of the amended
provisions which was brought in by the legislature is to be found in
Section 89 of the Code, which provides for settlement of disputes
outside court where it appeared to the court that there existed
elements of a settlement which may be acceptable to the parties. This
amendment enabled the court to formulate the terms of a possible
settlement and give them to the parties for their observations;
reformulate the terms and to refer the same for arbitration or
conciliation or mediation or judicial settlement including settlement
through Lok Adalat. The Apex Court observed Section 89 describes
the alternate disputes mechanism to include arbitration and the
prescripted other modes.
133. There can certainly be no dispute with the principle that the
arbitration is one of the several methods of alternative disputes
redressal ('ADR' for brevity) statutorily recognized by incorporation of
Section 89 and amendment of the Code of Civil Procedure. The
plaintiff has also not disputed this submission.
134. It is noteworthy that the "Governing Law and Jurisdiction"
clause which is under consideration applies only to the Financing
Agreement. It stipulates that Indian law would govern the financing
agreements which were to be executed while courts at Delhi would
have jurisdiction in respect of all matters relating thereto.
The clause as contained in the term sheet vested the jurisdiction
in courts at Delhi in respect of all matters relating to the financing
agreements.
135. As stipulated in the term sheet, the date of the financing
agreement was the date on which the agreements were signed and
executed. Terms and conditions on which the financing agreements
were to be entered into were yet under negotiation and finalisation.
Formal execution thereof has not been effected till date. The date of
the financing agreement as stipulated in the term sheet, was the date
on which the agreements were signed and executed.
136. The reading of the clause would show that the ICICI Limited
had reserved the absolute and unilateral right to approach any other
alternative dispute resolution forum with its venue at Delhi.
137. The other parties to the term sheet did not have any right to
approach such forum for a dispute resolution at their instance. The
borrower, sponsor and the guarantor, as the case may be, were
required to "submit to such forum".
138. There is yet another difficulty. The first part of the clause makes
a reference to 'court' while the later part refers to 'alternate dispute
redressal'. The factual position which therefore emerges can be
summed up as follows :-
(i) the clause "Governing Law & Jurisdiction" only stipulated that
the substantive law which would govern any dispute
resolution would be Indian laws.
(ii) So far as the territorial jurisdiction was concerned, the parties
agreed to confine the jurisdiction to courts at Delhi.
(iii) The clause refers to 'courts at Delhi' as well as an 'alternate
dispute resolution forum'.
(iv) 'Alternate dispute resolution' includes recourse to methods as
arbitration, mediation, conciliation all of which are based on
consent of both parties. It is not confined to arbitration. No
specific consent for invoking arbitration of the plaintiff is
available.
(v) ICICI Bank has treated this clause as conferring an absolute
unilateral power on it to take recourse to arbitration without
the consent of the other side. So much so, it has conferred
upon itself the absolute right even to decide the nature of the
alternate dispute forum without the consent of the other side.
(vi) It is an admitted position, that so far as the facility documents
and the financing agreements are concerned, the parties had
not executed the same. The present disputes have arisen at a
stage prior thereto.
(vii) it is most important to note that the bank has claimed that it
was not only given a right to create the tribunal but a sole
right is conferred upon the defendant no. 1 to take recourse
to the dispute resolution. This in fact tantamounts to saying
that the plaintiff is precluded from raising disputes or making
claims upon the other side.
139. The first question which therefore arises in the present case is,
that even if it were to be held that the parties had agreed to dispute
redressal by the alternative mode, then whether arbitration was the
mechanism which has been agreed upon.
The essential ingredients of a valid arbitration are statutorily
prescripted in section 7 of the Act of 1996 in the following terms :-
7. Arbitration agreement.-(1) In this Part,
"arbitration agreement" means an agreement by the
parties to submit to arbitration all or certain disputes
which have arisen or which may arise between them in
respect of a defined legal relationship, whether
contractual or not.
(2) An arbitration agreement may be in the form of an
arbitration clause in a contract or in the form of a
separate agreement.
(3) An arbitration agreement shall be in writing.
(4) An arbitration agreement is in writing if it is
contained in--
(a) a document signed by the parties;
(b) an exchange of letters, telex, telegrams or other
means of telecommunication which provide a record of
the agreement; or
(c) an exchange of statements of claim and defence in
which the existence of the agreement is alleged by one
party and not denied by the other.
(5) The reference in a contract to a document
containing an arbitration clause constitutes an
arbitration agreement if the contract is in writing and
the reference is such as to make that arbitration clause
part of the contract.
140. This law mandates a clear agreement by the parties to submit to
arbitration their disputes in respect of a defined legal relationship.
141. In para 10 of the pronouncement in Salem Advocate Bar
Association (supra), the Supreme Court has observed that there is a
requirement that the parties to the suit must indicate the forum of
alternate dispute redressal which they would like to resort to during
the pendency of the trial of the suit. Consent of the parties is
required, not only to agreement to the alternate dispute redressal
mechanism but also to the forum.
It therefore requires to be seen as to whether it was so here.
142. The judicial pronouncement reported at AIR 2000 SC 1379
Willington Associates Ltd. vs. Kirit Mehra throws valuable light
on the several issues raised by the defendant no. 1. In this case, the
agreement contained a reference to courts as well as to arbitration.
In clause 4 of the agreement relied upon in this case Willington
Associated Ltd. (supra), the parties had agreed that if any dispute
arises in connection with the agreement, only courts in Bombay would
have jurisdiction to try and determine the suit. Clause 5 of the same
agreement recorded that it was also agreed by and between the
parties that any dispute or difference arising in connection with the
agreement 'may' be referred to arbitration. The petitioner had
contended that the word 'may' in clause 5 had to be construed as
'shall'. The Apex Court was of the view that the parties had used the
word 'may' not without reason. Clause 4 showed the desire of the
parties that in case of disputes, the civil courts at Bombay are to be
approached by way of a suit. Clause 5 merely enabled the parties that
they need not necessarily go to the civil court by way of a suit but can
also go before an arbitrator. For this reason, it was held that the
parties did not intend that arbitration is to be the sole remedy and
that the 'parties agreed that they can also' go for arbitration in case
the aggrieved party does not wish to go to a civil court by way of a
suit.
In para 25 of the said pronouncement, it was held that the words
'may be referred' used in clause 5 read with clause 4 led to the
conclusion that clause 5 is not a firm or a mandatory arbitration
clause and, that, it postulated a fresh agreement between the parties
that they would go to arbitration.
143. I find that in Willington Associates Ltd. (supra), the Apex Court
also considered section 7 of the Arbitration & Conciliation Act which
provides the essentials of an arbitration agreement. The statute
mandates that an arbitration agreement means an agreement by the
parties to submit to arbitration all or certain disputes which have
arisen or which may arise between them in respect of a defined legal
relationship whether contractual or not.
The Apex Court referred to a pronouncement of the Rajasthan
High Court reported at AIR 1971 Rajasthan 258 B. Gopal Das vs.
Kotah Straw Board wherein the clause relied upon read as follows :-
'that in case of any dispute arisen between us, the
matter may be referred to arbitrator mutually agreed
upon and acceptable to you and us'
The Rajasthan High Court held that fresh consent for arbitration
was necessary.
144. In the present case, the 'Governing Law & Jurisdiction' clause is
an amalgamation of clause 4 and 5 which were considered by the
Apex Court in Willington Associates Ltd. (supra).
145. Alan Redfern & Martin Hunter in Law and Practice Of
International Commercial Arbitration (Fourth Edition) have
discussed similar clauses in agreements in Chapter 3 para 69 at page
166 of the text. The learned authors have considered clause in
agreements from the angles of uncertainty and lack of mutuality as
well. The same may usefully be referred to in extenso. The principles
which govern construction of arbitration agreements have been stated
as follows:-
"(b) Uncertainty
Similarly, as regards uncertainty, the courts of
most countries generally try to uphold an arbitration
provision, unless the uncertainty is such that it is
difficult to make sense of it. The same is true of
institutions. By way of example, the ICC has in the
past accepted the following vague and imprecise
formulations as references to the ICC International
Court of Arbitration: "the official Chamber of
Commerce in Paris, France", "the Arbitration
Commission of the Chamber of Commerce and
Industry of Paris", and "a Commission of Arbitration
of French Chamber of Commerce, Paris" Y. Derains &
E. Schwartz, A Guide to the New ICC Rules of
Arbitration (1st ed., 1998).
From time to time, however, courts and
institutions are confronted with clauses which simply
fail for lack of certainty. Examples are :
"In the event of any unresolved dispute, the
matter will be referred to the International Chamber
of Commerce."
"All disputes arising in connection with the
present agreement shall be submitted in the first
instance to arbitration. The arbitrator shall be a well-
known Chamber of Commerce (like the ICC)
designated by mutual agreement between both
parties."
"Any and all disputes arising under the
arrangements contemplated hereunder.... will be
referred to mutually agreed mechanisms or
procedures of international arbitration, such as the
rules of the London Arbitration Association."
"For both parties is a decision of Lloyd or Vienna
stock-exchange binding and both will subjugate to the
International Chamber of Commerce."
The problem with the first example is that, even
if the broad reference to the International Chamber of
Commerce is taken to be a reference to the ICC's
International Court of Arbitration in Paris, the clause
by itself does not stipulate whether the unresolved
dispute is to be settled by arbitration or by
conciliation or by some other procedures. The second
example provides for arbitration, but fails to provide
for the appointment of an arbitral tribunal. Even if
the parties agreed upon "a well-known Chamber of
Commerce" as arbitrator, this would be of no avail,
since arbitrators must be individuals. Moreover, it is
unclear in this clause what is meant by "in the first
instance". The third example requires the future
agreement of the parties on "mutually agreed
mechanisms or procedures". The fourth is simply
meaningless."
146. The learned authors refer to such a clause as a "pathological
arbitration clause". Relying on International Chamber of Commerce
Arbitration by Craig Park and Paulson (third edition) two more
instances (termed as "the more flagrant examples") have been
pointed out which are as follows :-
"In case of dispute (contestation), the parties
undertake to submit to arbitration but in case of
litigation the Tribunal de la Seine shall have exclusive
jurisdiction."
and :
"Disputes hereunder shall be referred to arbitration,
to be carried out by arbitrators named by the
International Chamber of Commerce in Geneva in
accordance with the arbitration procedure set forth in
the Civil Code of Venezuela and in the Civil Code of
France, with due regard for the law of the place of
arbitration."
The latter clause is given as an example of a
"disastrous compromise" which might lead to
extensive litigation (unrelated to the merits of the
dispute) to sort out any contradictions in the various
laws stated to be applicable."
147. As noticed above, the "Governing Law & Jurisdiction" clause
contains both options as noticed above a reference to 'court' as well
as the alternate dispute resolution forum in the later. It needs no
elaboration that the alternate dispute resolution forum does not
necessarily mean arbitration and can even refer to mediation or
conciliation or expert determination. The clause is similar to the
fourth illustration set out by Martin Hunter in the extract of the text
noticed above.
148. The clause relied upon by the defendant no. 1, does not set out
as to whether the dispute resolution is to be mediation or concilation
or arbitration or settlement through Lok Adalat. As a result, even if it
were to be held that there was an agreement for dispute redressal to
be by the alternative mechanism, it is apparent that there was no
agreement with regard to the method of the alternative dispute
redressal and that there was no agreement that the mechanism of
arbitration would be resorted to for dispute redressal.
The clause does not state which is the mode of dispute
resolution to be followed and would not be enforceable on grounds of
uncertainty.
149. This clause also requires to be considered from the angle of the
requirements of mutuality in a valid arbitration agreement. In the
first part of the clause "Governing Law and Jurisdiction" relied upon
by the defendant no. 1, refers to Indian Law and it is stated that the
courts at Delhi will have jurisdiction in respect of all matters relating
to the financing agreements. It further states that only the ICICI Ltd.
reserves a right to approach any "other alternate dispute resolution
forum". It is evident that there was no agreement to refer disputes to
arbitration even at the instance of defendant no. 1. It is evident that
no consent of the other party to agree to refer disputes to arbitration
is postulated and that the defendant no. 1 unilaterally reserved the
right to approach any other "alternate dispute resolution forum" and
that the others i. e. the borrower, sponsors and the guarantor shall
submit to such a forum.
150. An arbitration agreement is required to be consensual between
the parties thereto. The clause stipulated by the ICICI Limited gives
no option at all to the other parties.
151. It was held in [1947] 2 All ER 260 Woolf v. Collis Removal
Service and in [1986] OB 868, Pittalis v. Sherefetin that an
arbitration agreement need not give rise to mutual obligations to
refer disputes to arbitration and an agreement to arbitrate can be
expressed as conferring a right upon one party only to refer disputes
to arbitration.
152. In [1983] 1 Lloyd's Rep 424 Messiniaki Bergen, the charter
party provided that disputes were to be decided by the English Courts
but gave either party an option to refer disputes to arbitration in
London. On a construction of this clause, it was held that the courts
will give effect to an option to arbitration. Some clauses confer an
option upon parties to choose either court or arbitration. Such a
clause will be treated as a `choice of court' agreement prior to the
exercise of the option. The option can be exercised at any time prior
to the commencement of court proceedings by the counterparty.
153. Yet another important facet which requires to be examined is
the fact that arbitration results in ouster of the jurisdiction of courts.
Such ouster can be only by a clause which is clearly unconditional and
unequivocal.
154. I find that the arguments laid before the learned Single Judge in
the judgment dated 15th May, 1991 reported at (1995) 33 DRJ 672
entitled Bhartia Cutler Hammer Ltd. vs. AVN Tubes Ltd. throw
valuable light on these very issues. It is noteworthy that the
agreement which was considered by the court gave a right of
reference to arbitration and appointment of arbitrator to only one
party while the decision of the arbitrator was made final and binding
on both parties. The court held that such agreement is unilateral and
lacks mutuality of contract and as such was not enforceable in a court
of law. The arbitration clause in this case reads as follows :-
"18.ARBITRATION Without prejudice to the above
Clause 17, of the contract the Company, M/s. Avn
Tubes Limited, reserves its right to go in for
arbitration, if any dispute so arisen is not mutually
settled within 3 months of such notice given by the
Company to the Contractor. And, the award of the
Arbitrator, to the appointed by the Company, M/s.
AVN Tubes Limited, shall be final and binding on both
the Company and the Contractor."
The several questions which have also been urged before this
court were raised as follows :-
Mr. Banati contends that by no stretch of imagination
this clause can be called bilateral. In fact the remedy
of this clause shows that the defendant kept to himself
the power to refer its disputes only to Arbitration. But
no such power of invoking the Arbitration clause are
given to plaintiff. This clause is one sided, it reserves
the right of arbitration only to defendant company.
This shows that the contractor, i.e. the present
plaintiff has no right to invoke the provisions of Clause
18. The right is only reserved by the defendant M/s
Avn Tubes Limited. Such a clause cannot be called an
arbitration clause. He has placed reliance on the
decision of Court of Appeal in the case Baron v.
SUNDERLAND Corporation reported in All England
Report 1966(1) 349(351). In the case before the Court
of Appeal, the question for consideration was that if
there was a want of mutuality, can such an agreement
be called an arbitration agreement? The answer given
was in the negative. therefore. What the Court of the
appeal held was that in order to invoke the arbitration
clause, there has to be mutuality. But in the case in
hand, the right had been reserved by the defendant of
taking its disputes only to arbitration and nowhere the
right was given to the contractor i.e. the plaintiff for
invoking the arbitration clause. therefore, apparently
this clause suffers for want of mutuality. He has then
placed reliance on the decision of the Calcutta High
Court in the case of Union of India v. Ratilal R. Taunk
reported in 2nd 1966(2) Calcutta, Page 527. In the
case before the Calcutta High Court, a contractor had
instituted a suit for recovery against the UOI pleading
therein that the contract agreement was voidable
because of mutual mistake of facts and alternatively it
was voidable as it was based on mis-representation.
UOI took up the plea that the suit was not
maintainable because of arbitration clause embodied
in the contract document. The question before that
Court was whether an arbitration agreement is
unilateral if one of the party only had the option to
refer the disputes and differences to arbitration;
whether such option can be validly accepted in law at
the instance of other parties. It was held that
according to Section 2(a) of the Arbitration Act. When
an arbitration agreement gives an option or liberty to
only one of the parties to agree to submit, present or
future differences to arbitration, it is not an
arbitration agreement, there must be an unqualified
or unconditional agreement in favor of all the parties
to exercise the option to submit present or future
differences to arbitration. In order to be valid and
binding, such agreement must be bilateral and not
unilateral. Mr. Banati, therefore contended that this
arbitration clause 18 is unilateral because by this
clause defendant reserved to itself the right to go in
for arbitration. This clause does not confer any right
on the plaintiff/contractor to invoke this clause.
therefore such a clause cannot be called an arbitration
clause. There is no binding arbitration agreement
between the parties nor the Court can stay the suit on
the basis of clause 18. Relying on the Calcutta
decision Mr. Banati contended that even if defendant
has chosen to invoke the provisions of this clause, still
such a clause would be void for want of mutuality. On
the other hand Ms. Kumkum Sen appearing for the
defendant contended that there is no question of want
of mutuality in this case. The parties agreed to refer
their disputes arisen between them to arbitration,
therefore, no fresh consent was necessary. To
strengthen her argument. She placed reliance on the
Division Bench judgment of this Court in the case of
P.C. Aggarwal, Appellant v. K.N. Khosla and others,
respondents MANU/DE/0048/1974. Relying on the
observation in that case, Ms. Sen contended that the
consent by the plaintiff had been given in advance for
submission to arbitration. This consent makes this
clause bilateral and not unilateral this consent was
given in advance it can be now acted upon. The
defendant has infact already acted upon the same.
The previous consent will bind the plaintiff
throughout."
Upon consideration of the various submissions, the court held as
follows:-
The language used in Clause 18 clearly show it is
one sided. Only disputes of defendants could be
referred to Arbitration. The term arbitration
agreement has been defined in the act which
presupposes that the parties must agree mutually that
in case of any dispute having arisen between them, the
have the option to invoke the said clause. Therefore,
the point for consideration before the Division Bench
was not as in this case. In this case right is only given
to the defendant to invoke the arbitration clause
without any option to plaintiff. That being so this
clause 18 cannot be called bilateral. Prior giving of
consent for such a clause would not make it bilateral.
The facts of this case are somewhat similar to the facts
of Calcutta High Court which decision will squarely
apply to the facts of this case. In view of my above
observation I am of the opinion such a clause as clause
18 cannot be called an arbitration clause. On the basis
of clause 18 suit cannot be stayed. Clause 18 is not a
valid arbitration clause hence the application of the
defendant deserve dismissal."
155. The judgment of the learned Single Judge was assailed by way of
an appeal and affirmed by the Division Bench in the pronouncement
reported at 1992 (2) Arb.L.R. 8 A.V.N. Tubes Ltd. vs. Bhartia
Cutler Hammer Ltd. The Division Bench concluded that the
cumulative effect of the three portions of the clause reproduced above
was that the right to go in for arbitration; raising of disputes and the
right to appoint the arbitrator was given only to AVN Tubes ltd. which
amounted to the same being a unilateral agreement. For this reason,
it was held that such an agreement was not enforceable in law.
156. These very principles have been reiterated in the
pronouncements of this court reported at 2005 (116) DLT 559
Emmsons International vs Metal Distributors and the Division
Bench's decision reported at UOI vs. Bharat Engineering ILR 1977
Delhi 57.
157. In view of the above discussion, it follows that such a unilateral
right as is conferred on the ICICI-defendant no.1 by the clause
"Governing Law & Jurisdiction" is void also for reason that it is
contrary to section 28 of the contract Act. Therefore, assuming that
the clause relied upon constituted an arbitration agreement, in the
light of the binding principles noticed above, it has to be held that the
same is also not enforceable in law for lack of mutuality as well as
uncertainty.
158. Even if there was a valid arbitration agreement between the
parties, another question which begs an answer is as to whether the
arbitral tribunal as constituted, by two other parties, would be
covered under the forum referred to in the clause. In the instant
case, the defendant no.1 has approached a tribunal constituted by the
defendant no.2 and the Lucent Technologies Hindustan Pvt. Limited
for resolving the disputes which have arisen between them. The
plaintiff was not a party to the constitution of this tribunal. This
tribunal is also concerned with disputes between the two parties who
have constituted it.
159. The very expression alternate dispute redressal forum, would be
indicative of the fact that the reference contained therein was to a
platform or agency which was engaged in dispute redressal in the
nature of the Indian Council of Arbitration; Mediation & Conciliation
Centres or such like bodies.
However, in view of the decision on the other aspects, it is not
necessary for me to deal with this aspect.
III
160. On behalf of the defendants, it is urged that in view of the
provisions of section 5, 8(3), 16(5) and 13 (4) of the Arbitration Act,
that in view of this statutory prohibition, the suit is legally barred. It
is to be noted that IA No. 2758/2005 has been filed by the defendant
no. 1 under Order 7 Rule 11 CPC praying for rejection of the plaint on
this ground.
161. This brings me to the third issue that assuming the existence of
a valid arbitration agreement between the parties, whether section 5,
8(3) and 16(5) of the Arbitration and Conciliation Act, 1996 constitute
a legal bar to the maintainability of the suit once the arbitrators have
entered upon the arbitration and, as a consequence, the plaint is
liable to be rejected under Rule 11 of Order 7 of CPC.
162. On behalf of the defendants, reliance is placed on the
pronouncements reported at (2002) 2 SCC 388 Konkan Railway
Corpn. Ltd. vs. Rani Construction Ltd., (2004) 3 SCC 447 Secur
Industries Ltd. vs. Godrej & Boyce Manufacturing Co. Ltd. &
Anr. ;(2005) 8 SCC 618 SBP & Co. vs. Patel Engineering, on
Babar Ali vs. UOI 2000 (2) SCC 178 ; (2002) 1 SCC 203
Kalpana Kothari vs. Sudha Yadav ; CDC Financial vs. BPL
Communications (2003) 12 SCC 140 and a judgment dated 19th
September, 2005 passed in CS(OS) No. 30/2005 Krishna Finfold
Pvt. Ltd. vs. Sitaram by a learned Single Judge of this court upheld
by the Division Bench in FAO(OS) No. 335-36/2005 by the order dated
21st October, 2005. It is stated that the challenge to these orders was
rejected by the Supreme Court and Special Leave Petition (Civil)
22555-56/2006 was dismissed on 13th February, 2007.
163. Mr. Rakesh Dwivedi, learned senior counsel for the defendant
no. 1 has urged that once arbitration has commenced, the only
provisions permitting court intervention are sections 9, 14(2), 27 and
section 37(2)(b) of the Arbitration Act, 1996 and that the court cannot
intervene in any other circumstance while the arbitration is pending.
In support of this submission reliance is placed on the
pronouncements reported at (2005) 8 SCC 618 S.B.P. & Company
vs. Patel Engineering ; (2003) 12 SCC 140 C.D.C. Financial &
B.P.L Communications; AIR 2000 P&H 276 Pappu Rice Mills vs.
Punjab State Coop. Supply & Marketing Federation and 2003
Arb.L.R. 470 United India Insurance Co. vs. Sundaram Finance
Ltd.
164. In reply, extensive submissions have been made by Mr. Arun
Jaitley, learned senior counsel appearing for the plaintiff, that so far
as the existence of an arbitration agreement is concerned, the courts
are given primacy under Section 8 of the Arbitration & Conciliation
Act, 1996. It is pointed out that on the issue with regard to the
validity of an arbitration with regard to enforcement of foreign
awards again courts are given primacy under Section 45 of the
statute. It has been urged that inasmuch as, even if there is a valid
existing and binding agreement, yet a party to the arbitration
agreement, seeking redressal of a dispute may elect not to invoke the
dispute redressal mechanism by way of arbitration and may take
recourse to the remedy of a civil suit or civil proceedings before the
courts. For this reason, it is urged that the submission that the
provisions of Arbitration & Conciliation Act, 1996 bars the remedy of
a suit to parties to an arbitration agreement, is misconceived.
165. It has further been urged, that the right to maintain a suit is
granted under the statute and therefore can be taken away only by a
specific statutory prohibition and no such statutory provision is in
force.
166. It is well settled that an application for rejection of a plaint has
to be decided on demurer. For the purposes of consideration of this
question, it may be assumed that there exists a valid and legal
arbitration agreement and further that a suit has been filed in respect
of claims which are the subject matter of such agreement.
167. Inasmuch as the defendants have contended that the present
suit is barred in terms of section 5, 8 and 16 of the Arbitration Act,
1996, it would be useful to refer to the relevant provisions which read
as follows:-
"5 - Extent of judicial intervention - Notwithstanding
anything contained in any other law for the time being in
force, in matters governed by this Part, no judicial
authority shall intervene except where so provided in this
Part.
"8 - Power to refer parties to arbitration where
there is an arbitration agreement -
(1) A judicial authority before which an action is
brought in a matter which is the subject of an
arbitration agreement shall, if a party so applies not
later than when submitting his first statement on the
substance of the dispute, refer the parties to
arbitration.
(2) The application referred to in sub-section (1) shall
not be entertained unless it is accompanied by the
original arbitration agreement or a duly certified copy
thereof.
(3) Notwithstanding that an application has been made
under sub-section (1) and that the issue is pending
before the judicial authority, an arbitration may be
commenced or continued and an arbitral award made."
"16 - Competence of arbitral tribunal to rule on its
jurisdiction -
(1) The arbitral tribunal may rule on its own jurisdiction,
including ruling on any objections with respect to the
existence or validity of the arbitration agreement, and for
that purpose, -
(a) an arbitration clause which forms part of a
contract shall be treated as an agreement independent of
the other terms of the contract; and
(b) a decision by the arbitral tribunal that the
contract is null and void shall not entail ipso jure the
invalidity of the arbitration clause.
(2) A plea that the arbitral tribunal does not have
jurisdiction shall be raised not later than the submission of
the statement of defence; however, a party shall not be
precluded from raising such a plea merely because that he
has appointed, or participated in the appointment of, an
arbitrator.
(3) A plea that the arbitral tribunal is exceeding the scope
of its authority shall be raised as soon as the matter
alleged to be beyond the scope of its authority is raised
during the arbitral proceedings.
(4) The arbitral tribunal may, in either of the cases
referred to in sub-section (2) or sub-section (3), admit a
later plea if it considers the delay justified.
(5) The arbitral tribunal shall decide on a plea referred
to in sub-section (2) or sub-section (3) and, where the
arbitral tribunal takes a decision rejecting the plea,
continue with the arbitral proceedings and make an
arbitral award.
(6) A party aggrieved by such an arbitral award may
make an application for setting aside such an arbitral
award in accordance with section 34."
168. So far as interpretation of the statutory provisions are
concerned, the legal position has been succinctly stated in a plethora
of judicial pronouncements, the relevant ones placed before this court
are considered hereafter.
169. The nature of the remedy which is available to a person who is
claiming existence of an arbitration agreement with regard to the
subject matter of a suit filed against him as well as the manner in
which it is to be approached in view of the statutory scheme need to
be examined before proceeding any further.
170. The Bombay High Court had occasion to consider an issue with
regard to a plea of identity of the subject matter before in the suit
before the court with that of the arbitration agreement. The court
was also concerned with the requirements of section 8 of the
Arbitration Act in this case. The judgment rendered by the Bombay
High Court is reported at AIR 2002 Bom.8 entitled Garden
Finance Ltd. vs. Prakash Industries Ltd. In para 9 of the
pronouncement, the court has authoritatively answered these issues
thus :-
"9. It is clear from these observations that one of the
aspect to be considered by the Court while
considering the application for referring the parties
to arbitration is that the subject matter of the action
is the same as the subject matter of the arbitration
agreement. Now, this requirement will involve
reference to the contents of the plaint as also to the
arbitration agreement and the manner in which the
applicant wants the Court to read the averments
made in the plaint as also the recital in the
arbitration agreement. It is obvious that the Plaintiff
who has brought the action would also have the right
of audience on such an application. In order to afford
the Plaintiff a complete opportunity of being heard on
an application under Section 8 of the Arbitration Act.
In my opinion, it would have to be held that the party
which seeks to refer the dispute to the Arbitrator has
to make a written application for that purpose, so
that the Plaintiff, who has instituted the suit, knows
exactly the grounds on which the reference is sought.
In the present case, though the Defendant has been
served with this suit long back, there is no written
application made. During the course of hearing,
yesterday, when this aspect was pointed out, the
learned Counsel stated that he should be given one
day's time to make an application. Though the
hearing of the matter did not conclude yesterday,
and the Defendant got time which he was seeking to
make an application, even today no such application
has been made. Thus, there is no application made
under Section 8 for referring the dispute to the
arbitration and therefore as there is no application
made for referring the dispute to the arbitration,
provisions of Section 5 do not come into play and do
not operate. It is further to be seen that even if it is
assumed that an oral application for referring the
parties to Arbitrator can be entertained, it is clear
from the observations of the Supreme Court quoted
above in its judgment in P. Anand's case that one of
the essential requirement is that the subject matter
of the action is the same as the subject matter of the
arbitration agreement. Thus, according to the
Supreme Court in order that under Section 8 matter
can be referred to arbitration, there has to be
identity of the subject matter of the suit and the
arbitration agreement. As pointed out above, the
subject matter of the suit is two agreements namely
the agreement of lease of equipment between the
Plaintiff and the Defendant No. 1 as also the
agreement of guarantee between the Plaintiff and the
Defendant No. 2, whereas, the subject matter of the
arbitration agreement is only the lease agreement
and not the guarantee agreement. Therefore, it
cannot be said that there is an identity of subject
matter of the suit and the arbitration agreement. In
this view of the matter, in my opinion, section 5 of
the Arbitration Act would also not come in the way of
this Court entertaining the present suit."
171. Perusal of the pronouncement in (2004) 3 SCC 447 Secur
Industries Ltd. v. Godrej Boyce Manufacturing Co.Ltd. &
another, relied upon by the defendant, would show that there was no
dispute to the existence, validity or bindingness of an arbitration
agreement. The suit had been brought by the respondent no. 1 inter
alia for a declaration that the claimed petition filed by the appellant
before the Council, (the statutory arbitrators) was ultravires of the
provisions of the Act and therefore it is legal, null and void. In this
background, the court construed the provisions of the Arbitration Act,
1996 and held that if a suit is filed in a matter which is the subject
matter of an arbitration agreement, it is incumbent on the court to
refer the parties to arbitration under section 8(1) of the 1996
enactment.
The core issue thus was that the suit had been filed in respect of
a matter which is the subject matter of an arbitration agreement. The
arbitration agreement is also required to be placed before the court in
accordance with section 8 of the 1996 Act. In view of the fact that the
the subject matter of the present suit is a claim by a party who has no
right to invoke the remedy of alternate dispute redressal under the
"governing law and jurisdiction" clause, it is evident that there is no
identity of subject matter of the two proceedings. The principles laid
down in this authoritative pronouncement would therefore not apply
to the instant case.
172. In (2000) 2 SCC 178 Babar Ali vs. UOI, also relied upon by
the defendant, the court rejected a challenge to the vires of the
Arbitration Act of 1996 and held that merely because the court could
consider the question of jurisdiction of an arbitrator only after the
passing of the award, it cannot be a ground for contending that such
an order under section 16(5) is not subject to any judicial scrutiny and
that it was open for the legislature to lay down the time and manner
of the judicial scrutiny.
It is necessary to note that this judgment did not arise in the
factual background placed before this court.
168. So far as the pronouncement reported at (2002) 1 SCC 2003
Kalpana Kothari vs. Sudha Yadav is concerned,the court held as
follows:-
"8. ........ In striking contrast to the said scheme
underlying the provisions of the 1940 Act, in the
new 1996 Act, there is no provision corresponding
to Section 34 of the old Act and Section 8 of the
1996 Act mandates that the Judicial Authority
before which an action has been brought in respect
of a matter, which is the subject-matter of an
arbitration agreement, shall refer the parties to
arbitration if a party to such an agreement applies
not later than when submitting his first statement.
The provisions of the 1996 Act do not envisage the
specific obtaining of any stay as under the 1940
Act, for the reason that not only the direction to
make reference is mandatory but not withstanding
the pendency of the proceedings before the
Judicial Authority or the making of an application
under Section 8(1) of the 1996 Act, the arbitration
proceedings are enabled, under Section 8(3) of the
1996 Act to be commenced or continued and an
arbitral award also made unhampered by such
pendency. We have to test the order under appeal
on this basis."
(Emphasis supplied)
From the above, it is apparent that the court was considering
the power of the court under section 34 of the Arbitration Act of 1940
as against the powers of the court while considering an application
under section 8 of the Act of 1996. This judgment would also show
that recourse to section 8 of the Arbitration Act, 1996 was mandatory
if a party was claiming that there was an arbitration agreement based
whereon the court is required to consider whether the subject matter
of the suit is covered under the claimed agreement. No such
application has been filed in the present proceedings.
173. In (2003) 12 SCC 140 CDC Financial Services (Mauritius)
vs BPL Communication Ltd. & Ors., the arbitrator was appointed
in proceedings under section 11 of the Arbitration Act, 1996. The
orders passed by the arbitrator were repeatedly challenged by way of
writ petitions under article 226 of the Constitution of India before the
high court which intervened in the matter. In this background, the
court observed that in view of sections 5 of the 1996 enactment,
courts are restrained from interferring with the arbitration except in
the manner provided in the 1996 statute and that the orders passed
by the court would amount to a violation of this mandate. This
position was not disputed by the respondents and therefore the orders
passed by the High Court were set aside. The judgment was
rendered in the facts of the case.
There can be no dispute with the principles laid down by the
Apex Court or the legislative mandate. At the same time, the legal
principles have to be applied to the facts of the case.
174. In a landmark pronouncement reported at (2003) 5 SCC 531
Sukanya Holdings Pvt. Ltd. vs. Jayesh H. Pandya & Anr. the
Supreme Court has clearly held that the Arbitration Act does not oust
the jurisdiction of the civil court to decide the dispute in a case where
parties to the arbitration agreement do not take the steps stipulated
under section 8 aforenoticed. In this behalf, the court considered the
statutory provisions and held thus :-
"12. For interpretation of Section 8, Section 5 would
have no bearing because it only contemplates that in the
matter governed by Part-I of the Act, judicial authority
shall not intervene except where so provided in the Act.
Except Section 8, there is no other provision in the Act
that in a pending suit, the dispute is required to be
referred to the arbitrator. Further, the matter is not
required to be referred to the arbitral tribunal, if-(1) the
parties to the arbitration agreement have not filed any
such application for referring the dispute to the
arbitrator; (2) in a pending suit, such application is not
filed before submitting first statement on the substance
of the dispute; or (3) such application is not
accompanied by the original arbitration agreement or
duly certified copy thereof. This would, therefore, mean
that Arbitration Act does not oust the jurisdiction of the
Civil Court to decide the dispute in a case where parties
to the Arbitration Agreement do not take appropriate
steps as contemplated under Sub-sections (1) & (2) of
Section 8 of the Act.
13. Secondly, there is no provision in the Act that when
the subject matter of the suit includes subject matter of
the arbitration agreement as well as other disputes, the
matter is required to be referred to arbitration. There is
also no provision for splitting the cause or parties and
referring the subject matter of the suit to the arbitrators.
14. Thirdly, there is no provision - as to what is required
to be done in a case where some parties to the suit are
not parties to the arbitration agreement. As against this,
under Section 24 of the Arbitration Act, 1940, some of
the parties to a suit could apply that the matters in
difference between them be referred to arbitration and
the Court may refer the same to arbitration provided
that the same can be separated from the rest of the
subject matter of the suit. Section also provided that the
suit would continue so far as it related to parties who
have not joined in such application.
15. The relevant language used in Section 8 is--"in a
matter which is the subject matter of an arbitration
agreement". Court is required to refer the parties to
arbitration. Therefore, the suit should be in respect of 'a
matter' which the parties have agreed to refer and which
comes within the ambit of arbitration agreement. Where,
however, a suit is commenced - "as to a matter" which
lies outside the arbitration agreement and is also
between some of the parties who are not parties to the
arbitration agreement, there is no question of
application of Section 8. The word 'a matter' indicates
entire subject matter of the suit should be subject to
arbitration agreement.
16. The next question which requires consideration is--
even if there is no provision for partly referring the
dispute to arbitration, whether such a course is possible
under Section 8 of the Act? In our view, it would be
difficult to give an interpretation to Section 8 under
which bifurcation of the cause of action that is to say the
subject matter of the suit or in some cases bifurcation of
the suit between parties who are parties to the
arbitration agreement and others is possible. This would
be laying down a totally new procedure not
contemplated under the Act. If bifurcation of the subject
matter of a suit was contemplated, the legislature would
have used appropriate language to permit such a course.
Since there is no such indication in the language, it
follows that bifurcation of the subject matter of an action
brought before a judicial authority is not allowed."
Thus, application of section 8 requires that there should be a
valid arbitration agreement between the parties to the suit and the
entire subject matter of the suit should be covered thereunder, there
can be no bifurcation of either the parties or the subject matter of the
suit.
175. Somewhat similar to the factual narration in the instant case
with regard to the challenge to the maintainability of the suit on the
ground that there was an arbitration agreement raised before this
court was considered in the judgment reported at 105 (2003) DLT
467 : MANU7/DE/0514/2003 Akshay Kapur & Ors. vs. Rishav
Kapor & Ors. The defendant had filed an application under section 8
of the Arbitraiton & Conciliation Act and it was further contended that
principles of waiver, acquiescence and estoppel read with section 5 of
the Act of 1996 were attracted since the plaintiff had participated in
the arbitral proceedings with full knowledge and without any demur
whatsoever. On a detailed consideration of the entire law, the court
had laid down the clear distinction between the jurisdictional
dispensation under the Arbitration Act, 1940 and the 1996 regime. It
was observed that the ambit of section 8 under the 1996 Act is much
wider than the section 34 of the 1940 Act. Reliance was placed on the
pronouncement of the Apex Court in AIR 2002 SC 404 Kalpana
Kothari vs. Sudha Yadav & Ors. wherein the Apex Court has observed
that in striking contrast to the said scheme under the Act of 1940,
there is no provision corresponding to section 34 of the new Act.
Section 8 of the 1996 Act mandates that the judicial authority before
which an action has been brought in respect of a subject matter which
is the subject matter of an arbitration agreement, shall refer the
parties to arbitration if a party to such an agreement applies not later
than when submitting his first statement. The provisions of the 1996
statute do not envisage the specific obtaining of any stay for the
reason that not only the direction to make the reference is mandatory
but notwithstanding the pendency of the proceedings before the
judicial authority or the making of an application under section 8(1) of
the 1996 Act, under section 8(3) the arbitration proceedings are
enabled to be commenced or continued and an arbitral award also
made unhampered by such pendency. On the very issue raised before
this court challenging the maintainability of the suit including the
pleas of estoppel against the present plaintiff, the observations of
Vikramjit Sen, J in this judgment throw valuable light and read as
follows:-
"10. Significantly, before referring the parties to
arbitration under Section 8 of the present Act, the Court
must be satisfied that the action pending before it is 'the
subject of an arbitration agreement'. If the Court or
judicial authority comes to the contrary conclusion, it
must continue and conclude the proceeding before it. To
my mind, therefore, a little change has been brought
about by the amending Act. It also seems to me that while
it is no longer possible for a party to have the arbitrability
of a dispute decided by a Court, the same position can be
brought about through the device of a legal action such as
the present suit. In the regime of the 1940 Act it was felt
that such questions could not be left to the Arbitrator to
decide and rule upon; he could not be a judge in his own
cause, so to speak. Since the intention of the legislature to
ensure the continuance of arbitral proceedings is palpably
present, giving the Arbitrator the untrammelled power to
decide all questions touching upon his jurisdiction, I
would have readily read down the opening words of
Section 8 to achieve this objective. But such an
interpretation would do violence to and would be
irreconcilable with the plain meaning of the words used
therein, and thereforee I shall refrain from undertaking
such an exercise. The essence of the erstwhile Section 34,
as extracted in the Kothari case (supra) makes the
judgment's ratio relevant even in respect of the new Act.
Xxx xxx
12. The phrase 'which is the subject matter of an
agreement' is not a mere surplasage and has been
carefully cogitated upon in numerous precedents
including P. Anand Gajapathi Raju and Others vs . P.V.G.
Raju (died) and others, MANU/SC/0281/2000 :
[2000]2SCR684 where it was observed that (i) if the
agreement was entered into during the pendency of an
appeal it should be given effect to; (ii) in the absence of
such agreement there is no provision enabling Court to
refer the parties to arbitration; (iii) that if a reference is
made the civil action comes to an end; and (iv) that the
language of Section 8 is peremptory, enjoining that a
reference be made by the judicial authority. It has also
been held that it is impermissible to draw an inference
about the existence of an agreement to arbitrate upon
disputes, or it come to such a conclusion because of
acquiescence of parties, especially since it must be
reduced to writing as spelt out in Section 7(3) of the Act.
The situation would appreciably be different if this
question had been heard and disposed of in unequivocal
and clear terms by the learned Arbitrator. In such an
event the Plaintiff would have to challenge the finding
after the Award is published."
176. In a case reported at 123 (2005) DLT 532 Bharti
Televentures Ltd. vs. DSS Enterprises Pvt. Ltd. & Ors., this court
had occasion to consider the impact of section 8 of the Arbitration Act
of 1996. The court considered several judicial precedents including
the above judicial precedent. It was held on the subject that section
8 of the Arbitration & Conciliation Act, 1996 introduced into the
statute, the doctrine of election of remedies i.e. resolution of disputes
either through arbitration or through civil action. It was held that in
case a defendant was desirous of compelling the plaintiff to the
dispute resolution mechanism which the parties had chosen by way of
arbitration, it was necessary to comply with the statutory
requirements of section 8 of the Arbitration & Conciliation Act. Such
intention is statutorily required to be declared right at the inception
of the proceeding before the civil court. The consideration of the law
on the subject and the findings returned lend guidance on the issue
raised by the defendant and deserve to be considered in extenso. The
consideration by the court was in the following terms :-
"16. Section 8 of the Arb. & Con. Act introduces into the
statute the doctrine of election of remedies, i.e., the
resolution of disputes either through arbitration or
through civil action. In Food Corporation of India v.
Sreekanath Transport, MANU/SC/0377/1999, the FCI had
filed a civil suit despite the existence of an exclusion
clause in the Agreement. The Apex Court took the view
that FCI had relinquished or abandoned its right of
proceedings pursuant to the said clause. The decision in
Magna Leasing Limited v. NEPC Micon Limited and Anr.,
has already been relied upon by me in Raj & Associates
and Anr. v. Videsh Sanchar Nigam Limited and Ors.,
2004 (2) Arb. L.R. 614 (VSNL case). The situation turned
out to be the reverse of that which is normally
encountered; the Plaintiff had filed a suit which it
subsequently attempted to withdraw with the intention of
pursuing its remedy through arbitration. The second
Defendant, RITES, had invoked Section 8, whilst
simultaneously objecting to its impleadment on the
strength of Section 230 of the Contract Act, and its
contention had been upheld. VSNL had filed a Counter
Claim, and the Plaintiff was refused leave to conditionally
withdraw the suit, observing that it had elected not to
take recourse to arbitration for adjudication of its claims.
My attention had not been drawn to the fortifying opinion
of the Division Bench in Pran Nath Panjan v. State of
Jammu & Kashmir, AIR 1972 J & K 11, found in these
words -
"But where the party himself chooses to invoke the
jurisdiction of the civil court, submits to it, does not avail
of the arbitration clause ... he cannot afterwards claim
the benefit of the arbitration clause and ask the Court to
enforce the said clause against the second party".
17. Section 8 of the Arb. & Con. Act came up for
consideration in P. Anand Gajapathi Raju and Ors. v.
P.V.G. Raju (Dead) and Ors., MANU/SC/0281/2000 and it
was laid down that the party seeking to enforce the
arbitration clause must file/move an application for this
purpose. This is also the expressed view of the Apex
Court in Sukanya Holdings (Supra). In Sudarshan Chopra
and Ors. v. Company Law Board and Ors., 2004(2) Arb.
L.R. 241(P&H) (DB) the Division Bench of the Punjab &
Haryana High Court rejected the argument that the
Arbitrator alone was competent under Section 16 of the
Arb. & Con. Act to opine on the existence of an
arbitration agreement. It also appears that the Court
thought it necessary to file a formal application under
Section 8 of the Arb. & Con. Act. In Global Marketing
Direct Limited v. GTL Limited and Anr., 2004(3) Arb. L.R.
56 (Bombay) the learned Judge had noted the need to file
an application under Section 8 where Part I of the Arb. &
Con. Act applied whilst recording that there was no such
formality in Section 45. It was also observed that the civil
court would continue to have jurisdiction until it decided
that issue. Reliance on Food Corporation of India and
Anr. v. Yadav Engineer and Contractor, AIR 1982 SC
1302, may have become anachronistic since the wordings
of this Section are dissimilar to those employed in
Section 34 of the Arbitration Act, 1940; the former
speaks of a "first statement on the substance of the
dispute" whilst the latter had referred to the "written
statement" and sub-section (2) of the former explicitly
contemplates an "application". It is obvious that the
Court was not satisfied that a case for its interference
had been made out in Brawn Laboratories Limited v.
Fittydent International GMBH and Anr.,
MANU/DE/0181/2000, which conversely implies that
where a case is disclosed the court can interfere in the
arbitration proceedings. In Akshay Kapur and Ors. v.
Rishav Kapur and Ors., MANU/DE/0514/2003, I have
expressed the opinion that on the filing of a Section 8
application this Section would apply only if the suit is
directly covered by the arbitration clause. I had
entertained the suit for declaration and injunction
pertaining to a Valuation Report as it was distinct from
the disputes that were to be decided through the aegis of
arbitration. In Vijay Vishwanath Talwar v. Mashreq Bank,
PSC and Ors., MANU/DE/1300/2003, my learned Brother
R.C. Chopra, J. has similarly declined to dismiss a civil
suit in respect of an arbitration clause which allegedly
had been agreed to under duress and coercion. In Jagson
International Ltd. v. Frontier Drilling,
MANU/DE/0604/2004 Chopra, J. similarly dismissed an
application under Order XXXIX of the CPC, allowed the
Defendant's application under Section 45 of the Arb. &
Con. Act, after observing that the difference in the
language of that Section and Section 8 was conspicuous
and was of significance. My learned Brother was of the
opinion that a party should not be blindly sent to a
foreign land until the Arbitration Agreement was found
not to be null and void, inoperative or incapable of being
performed. On facts it was found that the Plaintiff was
attempting to wriggle out of the Arbitration commitment
on frivolous grounds. This conclusion was arrived at after
consideration of the decision of the Apex Court in
Ganpati Raju (supra), Pinkcity (supra), Sukanya (supra);
and Haryana Telecom Ltd. v. Sterlite Industries (India)
Ltd., MANU/SC/0401/1999, in which it has been opined
that Section 8 of the Arb. & Con. Act envisages the
reference to the Arbitrator of only those disputes which
the Arbitrator is competent or empowered to decide. In
Shivnath Rai Har Narain v. Italgrani Spa,
MANU/DE/0705/2001, it has held that where the factum
of existence of the agreement is in dispute this question
should be decided by the Court as a preliminary issue
whenever Part II of the Arb. & Con. Act is attracted. If
enquiries of this nature are envisaged in Section 8, a
fortiori it is mandatory under Section 45 of the Arb. &
Con. Act. Whereas in the former the Court's scrutiny
should be calculated to return a prima facie finding, in
the latter it should be in greater detail, short of deciding
contentious issues of fact going to the root of the
disputes."
177. In 85 (2000) DLT 2004 Braun Laboratories Ltd. vs.
Fittydent International GMBH & Anr., a plea was raised that an
arbitration agreement was invalid as it was contained in an
agreement which was entered into subject to requisite approval of the
Government of India and/or the Reserve Bank of India as the case may
be and such permission was not granted. On this issue, the court had
observed that under the Act of 1996, there is no bar on the arbitral
tribunal to rule on its jurisdiction including ruling on its objection
with regard to validity of the arbitration agreement and for that
purpose an arbitration clause which forms a part of a contract shall
be treated as an agreement independent of the other terms of the
contract; and a decision by the arbitral tribunal that the contract is
null and void shall not entail ipso jure the invalidity of the arbitration
clause.
No such question arises in the present case.
178. Sections 8 and 16 of the Arbitration Act have to be harmoniously
construed. Sections 8 and 16 are independent proceedings. While
Section 16 confers jurisdiction upon an arbitral tribunal to rule on its
own jurisdiction with respect to the existence or validity of the
arbitration agreement as well, a similar power is conferred under
section 8 upon a judicial authority before whom an action is brought
in a matter which is the subject matter of an arbitration agreement.
179. The absolute proposition urged by the defendant that in the
event of there being a valid arbitration agreement between the
parties, the dispute resolution can only be by way of a recourse to
arbitration, is not supported by the weight of judicial authority. There
is another perspective to this aspect. In several cases, it has been
held that a party's claim to get the matter adjudicated through
arbitration may stand waived by way of the conduct in the
proceedings.
180. In this behalf, the pronouncement reported at 2001 (59) DRJ
463 Palinder Singh Bedi vs. The National Rifle Association of
India & Anr. is relevant. The court held that from the conduct of the
defendants in the suit, it had to be held that their right to move an
application to get the matter adjudicated through arbitration stands
waived. In para 11 of the pronouncement, it was held that under
section 8 of the Act of 1996, the party had to make an application in
the court, alleging existence of an arbitration agreement 'not later
than submitting his statement on the subsistence of the dispute'. No
application had been made. As the defendants did not choose to file
the application under section 8, the court could deal with the matter
notwithstanding the existence of an arbitration clause. The
defendant's conduct in seeking repeated adjournments for filing the
written statement was also construed as amounting to a waiver of the
right to get the matter adjudicated through arbitration under section
8 of the Act. The court rejected the defendant's application for stay of
the suit.
181. In a pronouncement by a learned Single Judge of this court
reported at 2004 (1) Arb.L.R. 399 (Delhi) Vijay Vishwanath
Talwar vs. Mashreq Bank, PSC & Ors., the court was required to
consider the defendant's application under section 8 read with section
5 of the Act wherein the defendant prayed for reference of the parties
to arbitration. Placing reliance on the pronouncement of the Apex
Court in Sukanya Holdings Pvt. Ltd.(supra) it was held that the
alleged arbitration agreement appears to have been signed under
pressure, coercion and duress and that the entire subject matter of
the suit was not covered by the arbitration agreement. For this
reason, the court dismissed the application filed by the defendant.
182. The defendants have submitted that section 8 applies only to the
pre-reference stage and has no applicability if the arbitrator has
entered into arbitration. For this reason, it is contended that no
application is necessary.
This submission however fails to take into consideration the
express provisions of the statute. Section 8 of the Arbitration &
Conciliation Act, 1996 mandates that the court would refer the parties
to arbitration. It is not a direct reference of disputes to arbitration. If
the arbitration has not commenced and an application under section
8 of the Arbitration Act is brought by a defendant in the suit which is
filed, the court while allowing the application, would simply dismiss
the suit leaving the parties with the option to arbitrate, which is their
chosen forum of dispute resolution. In such an eventuality, the party
who brought the application may decide not to arbitrate as there is no
compulsion upon it to do so. This would leave the other party in a
difficulty which was clearly not the intent of the legislature.
183. Learned senior counsel appearing for the plaintiff has pointed
out yet another situation which may result if the argument advanced
on behalf of the defendants were to be accepted. As per the
provisions of section 21, arbitration is deemed to commence only
when one party requests that the dispute be referred to arbitration.
This would result in the untenable position that the power of the civil
court could be ousted merely by sending a request for arbitration
without arbitrators having been actually appointed or the reference
having been entered upon by any arbitrators.
184. In (2005) 8 SCC 618 SBP & Co. vs. Patel Engineering relied
upon by the defendants, the Apex Court was concerned with the
nature and scope of the power of the Chief Justice under section 11 of
the Act of 1996. The court held that it could not be accepted that
there was exclusive conferment of jurisdiction on the arbitral tribunal
to decide the existence or validity of the arbitration agreement. In
this behalf, in para 19 it was held thus :-
"19. 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. Section 8 of the Act
contemplates a judicial authority before which an action
is brought in a matter which is the subject of an
arbitration agreement, on the terms specified therein, to
refer the dispute to arbitration. A judicial authority as
such is not defined in the Act. It would certainly include
the court as defined in Section 2d(e) of the Act and
would also, in our opinion, include other courts and may
even include a special tribunal like the Consumer Forum
(see Fair Air Engineers (P) Ltd. v. N.K. Modi). When the
defendant to an action before a judicial authority raises
the plea that there is an arbitration agreement and the
subject-matter of the claim is covered by the 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 is difficult to
contemplate that the judicial authority has also to act
mechanically or has merely to see the original
arbitration agreement produced before it, and
mechanically refer the parties to an arbitration.
Similarly, section 9 enables a court, obviously, as
defined in the Act, when approached by a party before
the commencement of an arbitral proceeding, to grant
interim relief as contemplated by the section. When a
party seeks an interim relief asserting that there was a
dispute liable to be arbitrated upon in terms of the Act,
and the opposite party disputes the existence of an
arbitration agreement as defined in the Act or raises a
plea that the dispute involved was not covered by the
arbitration clause, or that the court which was
approached had no jurisdiction to pass any order in
terms of Section 9 of the Act, that court has necessarily
to decide whether it has jurisdiction, whether there is an
arbitration agreement which is valid in law and whether
the dispute sought to be raised is covered by that
agreement. There is no indication in the Act that the
powers of the court are curtailed on these aspects. On
the other hand, Section 9 insists that once approached
in that behalf, "the court shall have the same power for
making orders as it has for the purpose of and in
relation to any proceeding before it". Surely, when a
matter is entrusted to a civil court in the ordinary
hierarchy of courts without anything more, the
procedure of that court would govern the adjudication."
185. Learned senior counsel for the defendant no. 1 has placed
reliance on the observations of the Apex Court in para 32 of this
judgment. However these observations need to be read in the context
of the issue which was raised before the Apex Court which was with
regard to the power of the Chief Justice while considering the matter
under section 11 of the Act. From the above, it is evident that the
court has rejected the plea that the Arbitration & Conciliation Act,
1996 confers exclusive jurisdiction to rule on this issue on the arbitral
tribunal or that it excludes the jurisdiction of the court to do so.
186. Section 8(3) of the Arbitration Act, 1996 permits continuation of
the arbitration proceedings which pre-supposes pendency of the
arbitration.
187. So far as the scope of section 16 is concerned, the issues raised
by learned counsel for the defendant no. 1 stand authoritatively
answered by the pronouncements of the Apex Court reported at AIR
2000 SC 1379 Willington Associates Ltd. vs. Kirit Mehta,
wherein an objection was raised with regard to jurisdiction of the
court to examine an issue raised by the party with regard to the
existence of an arbitration agreement in a proceedings under section
11 of the Arbitration & Conciliation Act. In that case also the
petitioner placed reliance on section 16 of the Arbitration &
Conciliation Act to urge that only the arbitral tribunal can decide
about the 'existence' of the arbitration clause. On this issue, the court
pointed out that such an interpretation put on section 16 was
unacceptable inasmuch the legislature had used the expression 'may
rule', enabling the arbitral tribunal to rule on its own jurisdiction. It
was held that the jurisdiction of the Chief Justice or his designate
while considering an application under section 11 for reference to
arbitration would not stand excluded from consideration of such an
objection.
188. The pronouncement of the Bombay High Court reported at AIR
1999 Bom 118 United India Assurance Co. Ltd. vs. Kumar
Texturisers relied upon by the defendant does not consider the
authoritative pronouncements of the Apex Court which have been
noted hereinabove. The case before the Bombay High Court is also
distinguishable on the facts of the present case. The principles laid
down by the Apex Court bind this court. It is therefore not open to
the defendants to deny the jurisdiction of this court to consider the
issue with regard to the existence, validity and bindingness of an
alleged agreement covering the subject matter of the dispute which
has not even been placed before this court.
189. Apart from the above submissions, reliance is placed on
pronouncements reported at (2003) 1 SCC 557 Saleem Bhai &
Ors. vs. State of Maharashtra & Ors.; (1986) Supp. SCC 315
Azhar Hussain vs. Rajiv Gandhi; (2004) 3 SCC 137 Sopan
Sukhdev Sable & Ors. vs. Assistant Charity Commissioner &
Ors. and (1994) 1 SCC 502 Svenska Handelsbanken & Ors. vs.
Indian Charge Chrome Ltd. & Ors.
190. Mr. Sandeep Sethi, learned senior counsel for the defendant no.
2 has in addition submitted that on a reading of the plaint, it is
evident that by way of the present suit, the plaintiff has laid a
challenge to the orders passed by the arbitral tribunal. It is submitted
that the same is expressly barred. Placing reliance on the
pronouncement of the Apex Court in (1977) 4 SCC 467 T.
Arivandandam vs. T.V. Satyapal & Anr. and (2005) 5 SCC 548
N.V. Srinivasa Murthy & Ors. vs. Mariyamma (Dead) By
Proposed LRs. & Ors., it is urged that this court has to examine the
essence of the plaint.
191. In (1977) 4 SCC 467 T. Arivandandam vs. T.V. Satyapal &
Anr., the court was considering the conduct of a petitioner indulging
in a series of legal proceedings to avoid an eviction order passed
against him and had ultimately filed a suit. In this background, the
court held that a meaningful reading of the plaint, rather than a
formal reading is required to be carried out in order to ascertain the
nature of the pleading. In the intant case, this principle is applied.
192. In (2005) 5 SCC 548 N.V. Srinivasa Murthy & Ors. vs.
Mariyamma (Dead) By Proposed LRs. & Ors., the court again
carefully examined the plaint to ascertain the foundation of the suit
which was held to be barred by limitation as well as under the
provision of Order 2 Rule 2 of the CPC. No such objection is raised
herein.
The pronouncement of the Apex Court reported at (2003) 1
SCC 557 Saleem Bhai & Ors. vs. State of Maharashtra & Ors. is
law for the principle that for the purposes of deciding an application
under clauses (a) and (d) of rule 11 order 7 CPC, the averments in the
plaint are germane; the pleas taken by the defendants in the written
statement would be wholly irrelevant at that stage and therefore a
direction to file the written statement without deciding the
application under order 7 rule 11 CPC cannot but be a procedural
irregularity touching the exercise of jurisdiction of the trial court.
No such issue arises for consideration in the present case.
193. The defendants also seek to derive strength from the
pronouncement of the Apex Court in (1986) Supp. SCC 315 Azhar
Hussain vs. Rajiv Gandhi. In this case, the court was concerned
with rejection of an election petition and it was held that the purpose
of conferment of such powers is to ensure that a litigation which is
meaningless and bound to prove abortive should not be permitted to
occupy the time of the court and exercise the mind of the respondent.
The sword of damocles need not be kept hanging over his head
unnecessarily without point or purpose. Even in an ordinary civil
litigation, the court readily exercises the power to reject a plaint if it
does not disclose any cause of action. There can be no dispute about
the principles laid down.
194. In (2004) 3 SCC 137 Sopan Sukhdev Sable & Ors. vs.
Assistant Charity Commissioner & Ors. the court had reiterated
the well settled principle that order 7 rule 11 of the CPC makes
available an independent remedy to the defendant to challenge the
maintainability of the suit itself, irrespective of his right to contest the
same on merits. The law ostensibly does not contemplate a particular
stage when the objections can be raised and also does not say in
express terms about the filing of a written statement. It casts a duty
on the court to perform its obligation in rejecting the plaint when the
same is hit by any of the infirmities provided in the four clauses of
rule 11, even without the intervention of the defendant. This settled
principle also cannot be disputed. The question is whether such
infirmities exist in the instant case.
195. It is a fundamental principle of law that where there is a right,
there is a remedy. Section 9 of the Code of Civil Procedure confers a
general right of suit to an aggrieved person except where the
cognizance of the suit is barred either expressly or impliedly.
So far as exclusion of the jurisdiction of a civil court is
concerned, the principles in this behalf were laid down by
Hidayatullah, C.J. In (1968) 3 SCR 662 Dhulabhai vs. State of
M.P. as follows :-
"(1) Where the statute gives a finality to the orders of
the special tribunals the Civil Court's jurisdiction
must be held to be excluded if there is adequate
remedy to do what the Civil Courts would normally do
in a suit. Such provision, however, does not exclude
those cases where the provisions of the particular Act
have not been complied with or the statutory tribunal
has not acted in conformity with the fundamental
principles of judicial procedure.
(2) Where there is an express bar of the jurisdiction of
the court, an examination of the scheme of the
particular Act to find the adequacy or the sufficiency
of the remedies provided may be relevant but is not
decisive to sustain the jurisdiction of the civil court.
Where there is no express exclusion the examination
of the remedies and the scheme of the particular Act
to find out the intendment becomes necessary and the
result of the inquiry may be decisive. In the latter
case it is necessary to see if the statute creates a
special right or a liability and provides for the
determination of the right or liability and further lays
down that all questions about the said right and
liability shall be determined by the tribunals so
constituted, and whether remedies normally
associated with actions in Civil Courts are prescribed
by the said statue or not.
(3) Challenge to the provisions of the particular Act as
ultra vires cannot be brought before Tribunals
constituted under that Act. Even the High Court
cannot go into that question on a revision or reference
from the decision of the Tribunals.
(4) When a provision is already declared
unconstitutional or the constitutionality of any
provision is to be challenged, a suit is open. A writ of
certiorari may include a direction for refund if the
claim is clearly within the time prescribed by the
Limitation Act but it is not a compulsory remedy to
replace a suit.
(5) Where the particular Act contains no machinery
for refund of tax collected in excess of constitutional
limits or illegally collected a suit lies.
(6) Questions of the correctness of the assessment
apart from its constitutionality are for the decision of
the authorities and a civil suit dies not lie if the orders
of the authorities are declared to be final or there is
an express prohibition in the particular Act. In either
case the scheme of the particular Act must be
examined because it is a relevant enquiry.
(7) An exclusion of the jurisdiction of the Civil Court is
not readily to be inferred unless the conditions above
set down apply.
This court further clarified that non-compliance
with the provisions of the statute meant non-
compliance with such fundamental provisions of the
statute as would make the entire proceedings before
the appropriate authority illegal and without
jurisdiction. The court also stressed the relevance
and significance of the machinery provided by the
relevant special statute for rectifying any errors and
irregularities."
196. Learned senior counsel appearing for the defendant no. 2 has
pointed out that these principles have since been followed in (1993)
3 SCC 161 Shiv Kumar Chadha vs. Municipal Corporation of
Delhi and (1994) 6 SCC 572 Srikant Kashinath Jituri & Ors. vs.
Corporation Of The City Of Belgaum.
There can be no dispute at all with the principles laid down with
utmost clarity. However the issues which have been raised in these
cases do not arise here for the reason that in the present case, there
is no statutory provision restricting or prohibiting the right of the
plaintiff to approach a civil court.
197. A party seeking to curtail this general right of suit has to
discharge the onus of establishing his right to do so and the law
curtailing such general right has to be strictly complied with. Prior to
the Act of 1996 taking effect, in order to enable a defendant to obtain
an order staying the suit apart, from other conditions mentioned in
section 34 of the Arbitration Act, 1940 he was required to present his
application praying for stay before filing his written statement or
taking any other step in the proceeding.
198. In a pronouncement reported at (2002) 5 SCC 510 ITI Ltd. vs.
Siemens Public Communications Network, the primary question
before the Supreme Court was whether a revision petition under
section 115 of the Code of Civil Procedure lies to the High Court as
against an order made by a civil court in an appeal preferred under
section 37 of the Arbitration Act, 1996. The court was called upon to
consider the submission that when the code is specifically made
applicable, a second appeal is statutorily barred under the Act, can it
be said that a right of revision before the High Court would still be
available to an aggrieved party? If so, whether on the facts and
circumstances of this case, such a remedy by way of revision is an
alternate and efficacious remedy or not?
The appeal made directly to the Supreme Court was dismissed
by the court holding that the jurisdiction of the civil court to which a
right to decide a lis between the parties has been conferred, can only
be taken away by a statute in specific terms and such exclusion of
right cannot be easily inferred because there is always a strong
presumption that the civil courts have the jurisdiction to decide all
questions of a civil nature. Therefore, if at all there has to be an
inference, the same should be in favour of the jurisdiction of the court
rather than the exclusion of such jurisdiction and there being no such
exclusion of the Code in specific terms, except to the extent stated in
Section 37(2), we cannot draw an inference that merely because the
Act has not specifically provided that the CPC would be applicable, by
inference it should be held that the Code is inapplicable.
199. This general principle apart, the issue is now settled by the
judgment of a three judge bench of the Court in the case of Bhatia
International v. Bulk Trading S.A. and Anr. in C.A. No. 6527/2001
-- decided on 13.3.2002 where in, while dealing with a similar
argument arising out of the present Act, this Court held that :
"While examining a particular provision of a
statute to find out whether the jurisdiction of a
Court is ousted or not, the principle of universal
application is that ordinarily the jurisdiction may not
be ousted unless the very statutory provision
explicitly indicates or even by inferential conclusion
the Court arrives at the same when such a
conclusion is the only conclusion."
The Arbitration and Conciliation Act, 1996 does not contain any
such provision.
200. As back as in AIR 1973 SC 2071 the State of Uttar Pradesh
& Anr. vs. Janki Saran Kailash Chandra & Anr., the Apex Court
had held that mere existence of an arbitration clause in an agreement
does not by itself create any obligation on the court to stay the suit or
to give any opportunity to the defendant to consider the question of
enforcing the arbitration clause. The right to institute a suit in some
court is conferred on a person having a grievance of a civil nature,
under the general law. The arbitration agreement does not by itself
operate as a bar to a suit in the court.
201. Section 8 of the Arbitration Act of 1996 does not prohibit the
right of a party to maintain a suit in express terms. It also confers
primacy on the court to determine the question with regard to
existence of an arbitration agreement.
202. On the other hand, section 45 placed in Part II of the statute
concerned with Foreign Awards mandates that :
"45. Power of judicial authority to refer
parties to arbitration.
Notwithstanding anything contained in Part
I or in the Code of Civil Procedure, 1908 (5 of
1908), a judicial authority, when seized of an
action in a matter in respect of which the
parties have made an agreement referred to in
section 44, shall, at the request of one of the
parties or any person claiming through or under
him, refer the parties to arbitration, unless it
finds that the said agreement is mill and void,
inoperative or incapable of bring performed."
It would therefore appear that if there is a valid and operative
agreement referred to in section 44 which is capable of being
performed, then section 45 would prohibit the maintainability of the
suit. Section 45 does not apply to the present case.
The legislature has drawn a careful distinction while drafting
section 8.
No such prohibition to the maintainability of a suit is to be found
in section 8 of the Act of 1996. Section 4 statutorily recognises that a
party may waive its option for dispute resolution by arbitration.
203. Section 16 does not impact the requirement or consideration of
an application under section 8 at all. It also contains no prohibition
of the remedy of a civil suit to even a party to the arbitration
agreement.
204. Even assuming that an application under section 8 was brought
before this court, in view of the clear principles laid down by the Apex
Court in Patel Engineering (supra), it has to be held that this court
has to consider and decide the application in the light of the statutory
provisions. The defendant would be first required to place the
arbitration agreement relied upon on record, establish its validity and
bindingness and that the subject matter of the suit was the subject of
such agreement.
205. In this behalf, the pronouncement of the Apex Court reported at
(1994) 1 SCC 502 Svenska Handelsbanken & Ors. vs. Indian
Charge Chrome Ltd. & Ors. sets down the applicable legal
principles. In para 53 of the judgment, the Supreme Court held that
even after entering into an arbitration clause, any party may institute
legal proceedings. It is for the other party to seek stay of the suit by
showing the arbitration clause and satisfying the terms of the
provisions of law empowering the court to stay the suit. It is
noteworthy that this judgment was rendered in the context of the
Arbitration Act, 1940. However the principles laid down therein
would hold good even for the purposes of consideration of the
question under the later legislation. The Apex Court placed reliance
on authoritative texts and the pronouncement of the House of Lords
and in paras 51 and 52 of the judgment, the Apex Court had held
thus:-
"51. When parties agree to have their disputes settled
by arbitration it does not mean that both have bound
themselves not to go to court to have the disputes
settled. At page 163 of Russel on Arbitration,
Twentieth Edn. it is stated that "a party to a contract to
refer disputes to arbitration has a perfect right to bring
an action in respect of those disputes, and the court has
jurisdiction to try such disputes. Any provision to the
contrary would be an ouster of the jurisdiction of the
Courts.
52. Lord Macmillan in the House of Lords decision in
Heyman v. Darwins Ltd. pointed out as under :-
"I venture to think that not enough attention has
been directed to the true nature and function of an
arbitration clause in a contract. It is quite distinct from
the other clauses. The other clauses set out the
obligations which the parties undertake towards each
other hinc inde. But the arbitration clause does not
impose on one of the parties an obligation in favour of
the other. It embodies the agreement of both parties
that, if any dispute arises with regard to the obligations
which the one party has undertaken to the other, such
dispute shall be settled by a tribunal of their own
constitution."
53. It may be that even after entering into an
arbitration clause any party may institute legal
proceedings. It is for the other party to seek stay of the
suit by showing the arbitration clause and satisfying the
terms of the provisions of law empowering the court to
stay the suit......."
206. In the instant case, it has been held that the clause relied upon
by the defendant no. 1 as an arbitration agreement is not so. The
claim by the plaintiff is not the subject matter of the arbitral
proceedings. The only step taken by the plaintiff was to have filed
objections in the arbitration proceedings under protest and reserving
its rights and contentions. These proceedings are not a remedy
elected by or at the instance of the plaintiff. Section 5 and 8 of the
Act of 1996 are not attracted or applicable. In view of the above
discussion it has to be held that sections 5, 8 and 16 of the Arbitration
& Conciliation Act, 1996 do not operate as a bar to the maintainability
of the present suit.
207. The several prayers made in the present suit have been set down
above. No right is available to the plaintiff to seek relief before any
alternate dispute redressal mechanism. The plaintiff has sought inter
alia the relief of declaration with regard to existence of any
agreement with the defendants.
There is yet another aspect to the argument led by the
defendants before this court. The clause under consideration confers
a unilateral right on the defendant no. 1 to seek dispute redressal by
the alternate mode. The defendant no. 1 has claimed also an
absolute, unqualified and unilateral right to chose the mode of
alternate dispute redressal to appoint an authority which would
intervene in the matter. The plaintiffs have challenged the legality of
such conferment. This aspect is not being considered here for the
reason that the same impacts also consideration of the prayer for
injunction by the plaintiff.
Accordingly, this issue is considered as part of the discussion on
question no. 5.
208. It is well settled that in view of section 8 of the Arbitration &
Conciliation Act, there is no option at all to a party claiming existence
of an arbitration agreement but to move an application filed along
with a copy of the arbitration agreement which would be required to
withstand a scrutiny by the court. Such scrutiny entails an
opportunity to the other side to contest validity and bindingness
thereof. Despite objection by the plaintiff, the defendants have not
made any application under section 8 of the Arbitration and
Conciliation Act of 1996. This court is also not being called upon to
decide on the merits or the legality of an order passed by the arbitral
tribunal. No tenable legal bar to the maintainability of the present
case is pointed out. Therefore the prayer for rejection of the plaint
under Rule 11 of Order 7 of the Code of Civil Procedure has to be
rejected.
IV
209. The fourth question arises from the objections raised by the
defendants. It is to be seen as to whether action of the plaintiff in
filing an objection before the Arbitral Tribunal challenging the
existence of an arbitration agreement and exercise of jurisdiction by
it, without prejudice to its rights and contentions, amounts to
acquiescing in the arbitration and estops the plaintiff from assailing
the execution validity and bindingness of an arbitration agreement
and the arbitral proceedings?
210. The defendant no. 1 submits that the plaintiff having elected to
make the objections, is precluded from maintaining the present suit
and that it has to abide by the procedure provided by the Arbitration
& Conciliation Act, 1996. However, it is not contended that this
court is bound by the decisions taken by the arbitral tribunal.
211. The defendants have asserted that the plaintiff's conduct in filing
the objections before the arbitral tribunal as indicative of such
intention and conduct which would preclude it also on grounds of
estoppel and acquiescence from filing the present suit.
212. Mr. Jaitley, learned senior counsel has submitted that the filing
of objections to jurisdiction of the Arbitral Tribunal "without prejudice
to its contentions" would not preclude the plaintiff from bringing the
present suit. The submission is that the plaintiff had unequivocally
conveyed that it was not acceding to the jurisdiction of the arbitral
tribunal and that it had not waived its right to bring and maintain the
present suit by filing the objections. The objections were filed as the
applicant had no option but to bring the fact to the notice of the
tribunal that no agreement had been executed between the parties let
alone any arbitration agreement and that the proceedings which had
been unilaterally initiated at the instance of the defendant no.1 were
without jurisdiction. Consequently there is no act on the part of the
plaintiff which in any manner prejudices the plaintiffs or could be
construed as a waiver of the right of the plaintiff to maintain the
present suit.
213. The principles governing the plea of estoppel are statutorily
prescribed in section 115 of the Indian Evidence Act. It requires that
a person, by a declaration, act or omission, should have intentionally
caused or permitted another person to believe a thing to be true and
to act upon such belief. Having so conducted himself, such person
shall not be allowed to deny the truth of that thing in any suit or
proceeding between himself and such person.
214. Some light on this issue is thrown by the consideration of the
provisions under the earlier statutory regime as it contained statutory
prescription with regard to "step in the proceedings". Under the
Arbitration Act, 1940 the court was empowered under section 34 to
stay the legal proceedings which had been commenced by a party to
an arbitration agreement against any other party to the agreement; if
such legal proceeding was in respect of a matter agreed to be
referred to arbitration. The applicant seeking the stay had to be a
party to the legal proceedings and the applicant should have taken no
steps in the proceedings after appearance. The power under section
34 to stay the proceedings was not enforced as a matter of course. In
a particular case having regard to the circumstances, the court may
be satisfied that the matter should not be referred to arbitration.
215. It is noteworthy that the present statute does not contain any
provision akin to section 34 of the Act of 1940. Instead the legislature
has incorporated section 4 in the Arbitration & Conciliation Act, 1996
on the statute book which reads as follows :-
"4. Waiver of right to object - A party who knows
(a) any provision of this Part from which the parties
may derogate, or
(b) any requirement under the arbitration agreement,
has not been complied with and yet proceeds with the
arbitration without stating his objection to such non-
compliance without undue delay or, if a time limit is
provided for stating that objection, within that period
of time, shall be deemed to have waived his right to so
object. "
The conduct of the parties is thus made relevant statutorily.
216. Several judgments have considered the aspect as to whether a
person had taken a step in the proceedings in the civil court so as to
manifest an intention to abandon the remedy before the arbitrator.
217. The principles laid down by the courts as to what would
constitute such conduct 'steps in the proceedings' as display the
intention of the party to have its rights determined in such
proceedings, can lend guidance to the present consideration.
The conduct of the plaintiff in filing the objections before the
arbitrator has to be tested on these principles.
218. It was held in several judgments that in order to constitute such
a 'step', it must be of such a nature as to lead the court to the
conclusion that the party prefers to have his rights and liabilities
determined by the civil court rather than by the domestic forum upon
which the parties might have agreed. Each and every step taken in
the proceeding cannot come in the way of the party seeking to
enforce the arbitration agreement by obtaining stay of the
proceedings. The party must have displayed an unequivocal intention
to proceed with the legal proceedings and to abandon the right to
have the matter disposed of by arbitration. It was stated that it
should not be a subjective, but should be an objective test; the
participation in the proceeding should raise a presumption that the
applicant/defendant had actual or constructive knowledge of his right
and that he had acquiesced in the method of dispute resolution
adopted by the plaintiff. Of course, such presumption has been held
to be rebuttable and was not absolutely irrefutable.
219. In the case in hand, the conduct of the plaintiff in filing the
objection has to be construed as to whether it exhibits an unequivocal
intention of abandoning the civil remedy and tantamounts to acceding
to the jurisdiction of the arbitrator.
220. The legal position has been stated with utmost clarity in the
pronouncement of the Apex Court reported at AIR 1982 SC 1392
Food Corpn. Of India & Anr. vs. Yadav Engineer & Contractor .
The court held that unless the step alleged to have been taken by the
party seeking to enforce the arbitration agreement is such as would
display an unequivocal intention to proceed with the suit and
acquiesce in the method of resolution of dispute adopted by the other
party, namely, filing of the suit and thereby indicated that it has
abandoned its right under the arbitration agreement to get the
dispute resolved by arbitration, any other step would not disentitle
the party from seeking relief under section 34.
The Apex Court clarified that making an application for any
purpose in the suit, such as vacating stay, discharge of the receiver or
even modifying the interim orders, if treated as a 'step in the suit' for
the purposes of Section 34 of the 1940 statute, would work hardship
and would be inequitous to the party who is willing to abide by the
arbitration agreement and yet be forced to suffer the inequity of ex-
parte orders. Such applications would not come in the way of the
party seeking to enforce the arbitration agreement by obtaining stay
of the proceedings. The step must be such as would clearly and
unambiguously manifest the intention to waive the benefit of the
arbitration agreement and to acquiesce in the proceedings.
Therefore, contesting the application for interim injunction or for
appointment of receiver or for interim relief by itself without anything
more would not constitute such step as would disentitle the party to
an order of stay of the civil proceeding.
221. In AIR 1989 SC 635 Rachappa Gurudappa, Bijapur vs.
Gurudiddappa Nurandappa & Ors., it was stated that in order to be
precluded from being entitled to a stay of the suit to enable the
arbitration to proceed, the party must not have evinced an intention
to have the matter adjudicated by the court.
222. Similar reservation of its rights by a party and the legal impact
of 'without prejudice' participation have been the subject matter of
judicial consideration and the subject matter of several
pronouncements which can be usefully considered. In (1978) 3 SCC
113 Superintendent (Tech 1) Central Excise IDD Jabalpur &
Ors. vs. Pratap Rai, the effect of the term 'without prejudice' was
construed thus :-
"6. .....The Appellate Collector has clearly used the
words "without prejudice" which also indicate that the
order of the Collector was not final and irrevocable.
The term 'without prejudice' has been defined in
Black's Law Dictionary as follows :
Where an offer or admission is made 'without
prejudice', or a motion is denied or a bill in equity
dismissed 'without prejudice', it is meant as a
declaration that no rights or privileges of the party
concerned are to be considered as thereby waived or
lost, except in so far as may be expressly conceded or
decided. See also, Dismissal without Prejudice.
Similarly, in Wharton's Law Lexicon the author while
interpreting the term 'without prejudice' observed as
follows :
The words import an understanding that if the
negotiation fails, nothing that has passed shall be
taken advantage of thereafter; so, if a defendant offer,
'without prejudice', to pay half the claim, the plaintiff
must not only rely on the offer as an admission of his
having a right to some payment.
The rule is that nothing written or said 'without
prejudice' can be considered at the trial without the
consent of both parties-not even by a judge in
determining whether or not there is good cause for
depriving a successful litigant of costs.... The word is
also frequently used without the foregoing
implications in statutes and inter parties to exclude or
save transactions, acts and rights from the
consequences of a stated proposition and so as to
mean not affection', 'saving' or 'excepting'.
7. In short, therefore, the implication of the term
'without prejudice' means (1) that the cause or the
matter has not been decided on merits, (2) that fresh
proceedings according to law were not barred."
(underlining supplied)
223. Yet another pronouncement which considers the impact of
participation under protest has been reported at (2004) 2 SCC 663
Chairman & MD, NTPC Ltd. vs. Reshmi Constructions, Builders
& Contractors
"34. Yet again in Rush & Tompkins Ltd. v. Greater
London Council and Anr. [(1988) 1 All ER 549]:
"The rule which gives the protection of privilege to
'without prejudice' correspondence 'depends partly on
public policy, namely the need to facilitate compromise,
and partly on 'implied agreement' as Parker LJ stated in
South Shropshire DC v. Amos [1987] 1 All ER 340 at 343,
[1986] 1 WLR 1271 at 1277. The nature of the implied
agreement must depend on the meaning which is
conventionally attached to the phrase 'without
prejudice'. The classic definition of the phrase is
contained in the judgment of Lindley LJ in Walker v.
Wilsher (1889) 23 QBD 335 at 337:
'What is the meaning of the words "without prejudice"? I
think they mean without prejudice to the position of the
writer of the letter if the terms he proposes are not
accepted. If the terms proposed in the letter are
accepted a complete contract is established, and the
letter, although written without prejudice, operates to
alter the old state of things and to establish a new one.'
Although this definition was not necessary for the facts
of that particular case and was therefore strictly obiter,
it was expressly approved by this court in Tomlin v.
Standard Telephone and Cables ltd. [1969] 3 All ER 201
at 204, 205, [1969] 1 WLR 1378 at 1383, 1385 per
Danckwerts LJ and Ormrod J. (Although he dissented in
the result, on this point Ormrod J agreed with the
majority.) The definition was further cited with approval
by both Oliver and Fox LJJ in this court in Cutts v. Head
[1984] 1 All ER 597 at 603, 610, [1984] Ch. 290 at 303,
313. In our judgment, it may be taken as an accurate
statement of the meaning of 'without prejudice', if that
phrase be used without more."
224. A pronouncement of the Apex Court reported at (1994) 5 SCC
570 : MANU/SC/0823/1994 Sukalu Ram Gond vs. State of M.P.
& Ors., considers an issue similar to the instant case. The reference
to the arbitrator in this case was confined to the petitioner and one
Sh. Vinod Jain. An issue was raised as to whether the arbitrator,
could have gone into the liability of the 5th respondent Anoop Chand
Setia and made him liable to pay the amount indicated in the award
without the order of reference being amended. It was argued that the
5th respondent had participated in the award proceedings with an
objection. Therefore he was bound by the award. In this behalf, the
Apex Court had ruled thus :-
" xxx xxx xxx xxx
An award derives its force from the original contract.
Parties to the contract, by consent, refer their dispute for
settlement to a tribunal of their choosing, instead of to a
court. Therefore, there should exist an agreement showing
consent to refer a dispute for settlement by the arbitrator.
In cases where the arbitrator enters into the consideration
of the matters which are not referred to him or over which
he has no jurisdiction to try, the question is not one of
waiver or estoppel but of authority. The question is
whether a person, not a party to a reference but who
participated in the award proceeding with objection and
continued to participate in the proceedings under protest,
as was done in this case, whether is bound by the award?
Our answer is no. He is not bound by the award, as being
without authority. After taking objection to the authority
of the arbitrator and making protest, unless a proper
reference was made by this Court, the arbitrator does not
get the authority and jurisdiction to make the award
against a non-party to the contract. In the Law of
Arbitration by Justice Bachawat, p. 19, it is stated that "to
constitute an arbitration agreement, there must be an
agreement, that is to say, the parties must be ad
idem...agreement must be made by the free consent of the
parties". Admittedly, there is no such agreement or
consent given by 5th respondent. His participation in the
award at best after protest, would protect his interest or a
witness and no more. It settled law that acquiescence
does not confer jurisdiction."
These very principles would apply to the reverse situation as in
the instant case.
225. Mr. Rakesh Dwivedi, learned senior counsel for the defendant
no. 1 has relied on the judgment reported at (2003) 2 SCC 251
Narayan Pd. Lohia vs. Nikunj Kr. Lohia & Ors., in support of this
objection. In this pronouncement, the court held that unless an
objection with regard to composition of an arbitral tribunal is made
before the tribunal itself within the time prescribed under section
16(2), there would be a deemed waiver of this objection under section
4 of the statute.
This judgment in fact supports the plaintiff as it emphasises the
legal requirement that under Section 16, an objection as to
jurisdiction has to be taken at the earliest.
226. The plaintiff has placed before this court its repeated objections
before the arbitral tribunal challenging the existence of the
arbitration agreement and its jurisdiction. It was submitted that all
such objections were under protest and without prejudice to the
primary contentions of the applicant that there was no arbitration
agreement between the parties. The provisions of section 4 are
therefore clearly not attracted.
227. From the above discussion, it is apparent that in order to waive
the right to file a suit, a party should have unequivocally displayed its
intention to accede to the jurisdiction of the arbitrator and to
participate in the proceedings. Other than filing of the objections to
jurisdiction, the defendants have been unable to point out any such
act. There is no material at all to show that the plaintiff has
acquiesced in the proceedings. It only wrote letters under protest
and filed objections without prejudice to its contentions that there
was no arbitration agreement and that the proceedings before the
arbitral tribunal were without jurisdiction.
228. Section 115 of the Indian Evidence Act, 1872 prescribes a
general principle. In the light of the above discussion, it is clearly not
attracted to the instant case. Furthermore, the right to file a suit
can be defeated only by a specific statutory prohibition which takes
away such right and not by any general principle of law. So far as
the doctrine of election has no applicability as the arbitral
proceedings is not a dispute redressal forum or a remedy either
available to or elected by the plaintiff.
229. Failure to file the protests and objections of the nature as was
done would have certainly attracted a plea under section 4 of the
1996 statute. It therefore cannot be held that the plaintiff has
acquiesced in the arbitration proceedings. It also cannot be held that
the plaintiff has waived either its objections or its right to seek
redressal of its grievance in any other proceedings by filing such
application objection before the arbitral tribunal to the existence,
validity and bindingness of the arbitration agreement.
V
230. Lastly, it becomes necessary to examine the plaintiff's prayer for
grant of interim injunctions during the pendency of the suit.
The submission that the plaintiff would stand estopped from
bringing or maintaining the present suit is not sustainable and is
hereby rejected.
231. It is now necessary to consider the submission of the defendants
that the plaintiff is disentitled to grant of any injunction and that an
injunction against proceeding with the arbitration, if granted as
prayed, would be against public policy being contrary to statutory
provisions. It has further been contended that balance of convenience
is in favour of the defendants. According to the defendants, the
present suit is a parallel proceedings to the arbitration which is not
permissible. In support of these submissions, reliance has been
placed on the pronouncement of the Apex Court in (1983) 4 SCC
625 Cotton Corporation of India Vs. United Industrial Bank
Limited & Ors. and the pronouncements in (2004) 3 SCC 447
Secur Industries Ltd. v. Godrej & Boyce Manufacture Co.Ltd. &
Anr. and AIR 2004 P&H 276 Pappu Rice Mills v. Punjab State
Co-operative Supply & Marketing Federation.
232. The prayer for grant of injunction by the plaintiff is also opposed
on factual grounds. It is urged that an amount of Rs.100 crores has
been advanced by the defendant no.1 to the defendant no.2 which is
public money and that the plaintiff had stood guarantee for the same.
It is urged that having regard to the amount involved, it would
militate against grant of any injunction to the plaintiff.
A detailed consideration of the impact of the documents relied
upon by the parties and the correspondence exchanged has been
carried out hereinabove.
233. So far as the pronouncement in Cotton Corporation of India
Limited (Supra) is concerned, the Apex Court held that the court
had no jurisdiction either under Section 41(b) of the Specific Relief
Act, 1963 or under its inherent powers under Section 151 CPC to
grant a temporary injunction restraining a person from instituting any
proceedings which such person is otherwise entitled to institute in a
court not subordinate to that from which the injunction is sought. On
the facts of the case, it was held that the debtor bank was not entitled
to an interim injunction restraining the creditor corporation from
presenting a winding up petition against the bank before the
Company Judge in the high court. These findings were based on the
consideration that the equitable principle underlying Section 41(b) of
the Specific Relief Act governing grant of injunctions is that access to
court in search of justice according to law is the right of a person who
complains of an infringement of its legally protected interest and a
fortiori. Therefore no other court can by its action impede access to
justice except the superior court which can injunct a person by
restraining him from instituting or prosecuting a proceeding before a
subordinate court. A subordinate court is precluded from granting an
injunction restraining any person from instituting or prosecuting any
proceedings in a court of coordinate or superior jurisdiction.
234. So far as availability of a legal remedy for enforcement of
claimed interest in the instant case is concerned, it has been held
hereinabove that prima facie the plaintiff in fact has no remedy other
than by way of a civil suit for relief and redressal of its grievances and
claims. It has also been held that there is no bar against the plaintiff
prosecuting the present suit for pursuing its claims against the
defendant. In this view of the matter, the principles laid down by the
Apex Court in the afore-noticed judgment would in fact support the
plea of the plaintiff who is seeking legal redressal for its grievances.
235. The instant case relates to matters of funding of hundreds of
crores of rupees and not to small sums of money. Banks
enforce the highest degree of financial discipline. It is apparent that
in the instant case, the disbursement appears to have been effected
under the shield of the bridge loans without execution of the
documentation by either the loanee or the guarantors.
236. In view of the controversy raised, it is also necessary to examine
the submission from yet another angle and that is whether an
agreement between Shyam Telelink Ltd. and Lucent Technologies
Hindustan Pvt. Ltd. would bind the plaintiff. The plaintiff has
described itself as a US Corporation and has clearly disassociated
itself from the four contracts dated 14th December, 1999 and the
warrant agreement dated 5th October, 2001 entered into between
Shyam Telelink - defendant no. 2 and M/s Lucent Technologies
Hindustan Pvt. Ltd.
237. The plaintiff has also submitted that the reliance of the ICICI
bank on the conditions precedent mentioned in the warrant
agreement is misconceived. It is pointed out that the dates of the
letters referred to by the ICICI Bank also do not correspond to the
dates of the letters of comfort on record.
238. Admittedly, the plaintiff is a company incorporated under the
laws in the United States of America, while the Lucent Hindustan
Technologies Pvt. Ltd. is a company incorporated and registered in
India under the provisions of the Companies Act, 1956. The
defendants however have contended, that Lucent Hindustan
Technologies Pvt. Limited is a wholly owned subsidiary of the Lucent
Technologies Inc-the plaintiff herein.
Other than this submission, there is no allegation that the
incorporation of Lucent Hindustan Technologies Pvt. Ltd. was a
fraudulent cover for the plaintiff.
239. M/s Lucent Technologies Hindustan Private Limited is a
"supplier" of products to the Shyam Telelinks Ltd. It is noteworthy
that no commercial relationship between the plaintiff and M/s Shyam
Telelink Ltd. to whom the financial facilities are being advanced to by
the ICICI Limited has been pointed out. So far as the M/s Lucent
Technologies Hindustan Private Limited is concerned, it has been
described as an 'affiliate' of the plaintiff. The plaintiff has urged that
Lucent Technologies Hindustan Pvt. Ltd. is its 'indirect subsidiary'.
240. It is well settled that in law a company is a legal entity distinct
from its members (1897 AC 22 Salomon vs. A. Salomon Co. Ltd.).
However by the process of lifting or piercing of the corporate veil,
the court assumes that such entity is a sham to perpetuate fraud,
avoid liability, to avoid effect of statute and to avoid obligations under
an agreement. Certain situations when piercing of the corporate veil
is permitted were illustratively pointed out by the Supreme Court in
AIR 1986 SC 1370 Life Insurance Corporation of India vs.
Escorts Ltd. thus:-
(i) where statute itself contemplates lifting the veil;
(ii) where fraud or improper conduct is to be prevented;
(iii) where a taxing statute or benefiting tax is sought to be evaded;
and
(iv) where group companies are inextricably connected as to be part
of one concern.
In State of U.P. vs. Renusagar Power Co. MANU/SC/0505/1988 it
was suggested that whenever a corporate entity is abused for unjust
and inequitable purchase, the court would not hesitate to lift the veil
and look into relatives so as to identify the persons who are guilty and
liable therefor.
241. It can also be pierced when the corporate personality is found to
be opposed to justice, convenience and interest of revenue or
workman or against public interest. (Ref: MANU/SC/0138/1966 : AIR
1967 SC 819 C.I.T. Vs Sri Meenakshi Mills Ltd.; MANU/SC/0236/1985
: (1985) 4 SCC 114 Workmen vs. Associated Rubber Industry Ltd.; ;
MANU/SC/0564/1995 : (1995) 1 SCC 478 New Horizons Ltd. vs. UOI;
MANU/SC/0505/1988 : (1988) 4 SCC 59 State of U.P. vs. Renusagar
Power Co.; MANU/SC/0265/1978 : (1978) 4 SCC 257 Hussainbhai vs.
Alath Factory Thezhilali Union ; MANU/SC/0215/1999 : (1999) 3 SCC
601 Secy. HSEB vs Suresh.)
No such submissions are made before this court.
242. While the plaintiff is a company incorporated in the USA; the
other company stands registered at India. Different obligations were
imposed on the two companies under the different contracts. The
letter dated 13th of September, 2000 and the term sheet refer to the
plaintiff alone as the guarantor. The defendant no. 1 is claiming
against the plaintiff in such capacity and has not asserted a claim
against the plaintiff for any liability incurred by Lucent Technologies
Hindustan Pvt. Ltd.
243. Lucent Technologies Hindustan Pvt. Limited is not a party to the
present suit. Nothing has been placed before this court to support a
view that the constitution or nature of the activities of Lucent
Hindustan Technologies Pvt. Ltd. would ipso facto render the plaintiff
responsible for its contractual liabilities and commitments.
244. The two companies stand incorporated and registered in two
jurisdictions under the laws in force in the two countries. No legal
provision or principle is pointed out that all companies which may be
affiliates or subsidiaries of holding company are one legal entity. It is
certainly not permissible to hold that a contract with any one of such
companies would create contractual obligations with or bind the other
companies. If this were to be accepted, it would tantamount to
obliterating the legal and independent existence and identity of a
statutorily recognised legal person and effecting a merger of the
affairs of different companies without due process.
245. The facts in the instant case show that both defendant nos. 1 and
2 are conscious of and have recognized the legal status of the plaintiff
and Lucent Technologies Hindustan Pvt. Ltd. in the various
agreements as well as the communication dated 13th of September,
2000. Therefore whether the Indian company is an affiliate or an
indirect subsidiary of the plaintiff, would not impact the issues raised
in the present case.
246. The plaintiff points out that in clause 3 of the bridge loan
agreement, it was stipulated that M/s Shyam Telelink Limited shall
pay to ICICI Limited interest on the principal amount of the bridge
loan at the rate of 1% above the rate which was stipulated on the term
sheet as well. It has further been pointed out, that in clause 6 of the
bridge loan agreement, the ICICI Limited had stipulated extensive
securities required by it from the defendant nos. 2 to 6 which included
deeds of hypothecation, mortgages by deposits of title deeds and
personal guarantees from the promoters/directors of the company,
corporate guarantees and pledge of shares etc by the defendant no. 1.
It is important to note that the letter dated 30th November, 2000 does
not contain any reference to guarantee for the bridge loan, but refers
to the main loan alone. There is not even an attempt to explain the
reasons for these guarantees or the separate terms. Nothing is
placed which suggests the plaintiff's consent to these terms. It is trite
that the liability of the surety is co-extensive with that of the principal
debtor, unless it is otherwise provided by the contract. Section 128 of
the Indian Contract Act, 1872 so stipulates in absolute terms.
247. My attention is drawn to the terms of the bridge loan dated 27 th
September, 2000 and 12th December, 2000. It appears that the
amount of the bridge loans became repayable on 15th September,
2001 and 15th December, 2001 respectively. As on the date of filing of
the suit, more than five years had lapsed since the date on which
these loans became repayable. No steps to take action or recover any
amounts against the guarantees provided by the defendant no.2 or
any one else appear to have been taken.
Neither the plaintiff nor the ICICI Bank were a party to the
warrant agreement dated 5th of October, 2001. There is nothing to
suggest the plaintiff's consent to the warrant agreement arbitration
agreement or to the appointment or constitution of the arbitral
tribunal. No statutory or regulatory permission was sought for
execution of the guarantee for the bridge loans.
248. The plaintiff has submitted that the defendant no.1 is acting in
collusion with the defendant no.2 and other defendants in the action
which has been taken.
249. It now becomes necessary to consider the plea taken by the
defendant nos.1 & 2 that this court has no jurisdiction to interdict
prosecution of the legal remedy for dispute redressal of arbitration by
way of an interim injunction.
250. As discussed hereinabove, in the present case the defendant
no.1 relies on the governing law and jurisdiction clause to claim
entitlement to invoke arbitration.
251. Mr. Sethi, learned senior counsel appearing for the defendant
no. 2 has placed strong reliance on a pronouncement of this court
reported at 138 (2007) DLT 104 Triad India vs. Tribal Co-
operative Marketing & Development Federation of India Ltd. &
Anr. in support of the submission that the respondent having filed the
objection before the learned arbitral tribunal had no option other than
to follow the procedure prescribed under section 34 of the Arbitration
Act.
In view of the above discussion with regard to the nature of the
clause titled Governing Laws & Jurisdiction and the factual position
before this court, this submission on behalf of the defendant no. 2 has
to be rejected.
252. It has been considered at length that this clause confers a
unilateral and exclusive right to the defendant no.1 alone to initiate
any alternate dispute redressal mechanism for the purposes of
consideration of the objection taken by the defendants to the prayer
for injunction on this ground. It has been held hereinabove that this
clause did not amount to an arbitration agreement. However, even if
it has been so, the legal permissibility of conferment to such
unilateral right has to be considered. It becomes necessary to
consider the legal permissibility of conferment of such unilateral
rights.
253. An incident of a unilateral right being claimed by the defendant
no. 1 to approach an arbitral tribunal and compulsion to the other
side to submit to the jurisdiction of such forum and the impact of the
proceedings conducted by such tribunal fell for consideration before
the Apex Court in the pronouncement reported at (2005) 9 SCC 686
Dharma Prathishthanam vs. Madhok Construction Pvt. Ltd. It
was held by the court that an arbitrator or an arbitral tribunal under
the scheme of the 1940 Act is not a statutory body. It is a forum
chosen by the consent of the parties as an alternate to the resolution
of disputes by the ordinary forum of law courts. The essence of
arbitration without assistance or intervention of the court is
settlement of the dispute by a tribunal of the own choosing of the
parties. The law of arbitration does not make the arbitration an
adjudication by a statutory body but it only aids in implementation of
the arbitration contract between the parties which remains a private
adjudication by a forum consensually chosen by the parties and made
on a consensual reference. What confers jurisdiction on the
arbitrators to hear and decide a dispute is an arbitration agreement
and where there is no such agreement, there is an initial want of
jurisdiction which cannot be cured even by acquiescence. The
arbitrators derive their jurisdiction from the agreement and consent.
The legal position on this issue was succinctly stated by the Apex
Court thus :-
"12. On a plain reading of the several provisions
referred to hereinabove, we are clearly of the opinion
that the procedure followed and the methodology
adopted by the respondent is wholly unknown to law
and the appointment of the sole arbitrator Shri Swami
Dayal, the reference of disputes to such arbitrator and
the ex parte proceedings and award given by the
arbitrator are all void ab initio and hence nullity, liable
to be ignored. In case of arbitration without the
intervention of the Court, the parties must rigorously
stick to the agreement entered into between the two.
If the arbitration clause names an arbitrator as the
one already agreed upon, the appointment of an
arbitrator poses no difficulty. If the arbitration clause
does not name an arbitrator but provides for the
manner in which the arbitrator is to be chosen and
appointed, then the parties are bound to act
accordingly. If the parties do not agree then arises the
complication which has to be resolved by reference to
the provisions of the Act. One party cannot usurp the
jurisdiction of the Court and proceed to act
unilaterally. A unilateral appointment and a unilateral
reference - both will be illegal. It may make a
difference if in respect of a unilateral appointment and
reference the other party submits to the jurisdiction of
the arbitrator and waives its rights which it has under
the agreement, then the arbitrator may proceed with
the reference and the party submitting to his
jurisdiction and participating in the proceedings
before him may later on be precluded and estopped
from raising any objection in that regard."
(Emphasis supplied)
The Apex Court placed reliance on an earlier pronouncement
reported at (1979) 3 SCC 631 UOI vs. Prafulla Kr. Sayal wherein also
the court had occasion to consider the matter of a unilateral
appointment of an arbitrator. The observations of the Apex Court in
para 17 of Dharma Prathishthanam (supra) provide valuable guidance
and read thus :-
"17. In Union of India v. Prafulla Kumar Sanyal,
this Court observed that an order of reference can
be either to an arbitrator appointed by the parties
whether in the agreement or otherwise or where the
parties cannot agree upon an arbitrator, to an
arbitrator appointed by the Court. If no such
arbitrator had been appointed and where the parties
cannot agree upon an arbitrator, the Court may
proceed to appoint an arbitrator itself. Clearly one
party cannot force his choice of arbitrator upon the
other party to which the latter does not consent. The
only solution in such a case is to seek an
appointment from the Court."
254. The Apex court agreed with the views of several high courts to
the effect that reference to an arbitrator out of court must be by both
the parties together and cannot be by one party alone; failing the
consent, the parties or either of them must approach the court by
making an application in writing. The clear and binding legal
principle laid down by the court is that reference to a sole arbitrator
has to be a consensual reference and not a unilateral reference by one
party alone to which the other party cannot or does not consent.
255. My attention is also drawn to the pronouncement reported at
AIR 1954 SC 340 Cr. PC Kiran Singh & Ors. vs. Chaman Paswan
& Ors. in support of the contention that the proceedings before the
arbitral tribunal are without jurisdiction and that such invalidity
strikes at the very authority of the tribunal to pass any order. It has
been contended that even if the plaintiff had consented to such
proceedings being continued, the defect in the jurisdiction would not
be cured by such consent. In this regard, in para 6 of the
aforenoticed pronouncement, the Apex Court has observed thus ;-
"6. ........It is a fundamental principle well-established
that a decree passed by a Court without jurisdiction is a
nullity, and that its invalidity could be set up whenever
and wherever it is sought to be enforced or relied upon,
even at the stage of execution and even in collateral
proceedings. A defect of jurisdiction, whether it is
pecuniary or territorial, or whether it is in respect of the
subject-matter of the action, strikes at the very authority
of the Court to pass any decree and such a defect cannot
be cured even by consent of parties."
256. No dispute redressal mechanism was made available to the
plaintiff under the "The Governing Law and Jurisdiction" clause. No
consent at all of the parties to arbitration as a dispute redressal
mechanism has been pointed out. The plaintiff has been vehemently
protesting to the maintainability of the proceedings before the arbitral
tribunal.
257. Law recognises a unilateral right to choose an arbitrator.
However, such right cannot be confused with a unilateral right to
refer the matter to arbitration.
258. In view of the above discussion and the principles laid down by
the Apex Court in Dharma Prathishthanam vs. Madhok
Construction Pvt. Ltd. (Supra), a unilateral appointment and a
unilateral reference are both illegal.
259. In Kiran Singh & Ors. vs. Chaman Paswan & Ors. (Supra)
the Apex Court has clearly declared the well established principle that
even a decree passed by court without jurisdiction is a nullity and its
invalidity could be set up whenever and wherever it is sought to be
enforced or relied upon. The Apex Court also held that such nullity
and invalidity can be asserted even in collateral proceedings.
260. It needs no further elaboration that a defect of jurisdiction with
regard to the subject matter of the action strikes at the root of the
jurisdiction of even a court. Consent by parties can also not cure such
defects.
261. The prayer for interim relief is also opposed by the defendant on
the plea that the suit is barred in terms of Sections 5, 8 & 16 of the
Arbitration Act. It has been held to the contrary hereinabove.
262. The submission on behalf of the defendants that the relief of
declaration in the suit amounts to an appeal against the order dated
24th February, 2005 of the learned arbitral tribunal fails to take into
consideration the principles laid down by the Apex Court in Dharma
Prathishthanam vs. Madhok Construction Pvt. Ltd. (Supra);
Kiran Singh & Ors. vs. Chaman Paswan & Ors. (Supra) and this
court in Emmsons International vs Metal Distributors (Supra)
and UOI vs. Bharat Engineering ILR 1977 Delhi 57. In view of
the principles laid down in these precedents, a unilateral
appointment of arbitrators and unilateral reference are both illegal.
It is not disputed that the instant case reflects such appointment. The
plaintiff has not waived its objections to he arbitral proceedings.
These binding and authoritative judicial pronouncements do not
appear to have been placed before the Arbitral Tribunal.
263. An important question which would also have bearing on the
relief admissible to the plaintiff. A further question is raised as to
whether the Recovery of Debts due to Banks & Financial Institutions
Act, 1993 restrict the remedy available to the defendant no. 1 to the
Debt Recovery Tribunal.
264. Placing reliance on the provisions of Sections 17, 18 & 19 of the
Recovery of Debts due to Banks & Financial Institutions Act, 1993,
(the RDB Act hereafter for brevity) it is urged by learned Senior
Counsel for the plaintiff that Debt Recovery Tribunal is the only
alternate dispute redressal forum available to the defendant no.1.
Reliance has been placed on the pronouncement on (2000) 4 SCC
406 Allahabad Bank Vs. Canara Bank & Anr. (Para 21 at page
420) and 121 (2005) DLT 241 (DB) Kohinoor Creations & Ors.
Vs. Syndicate Bank in support of this submission.
265. In view of the discussion on the other issues raised herein for the
purposes of the injunction applications it is really not necessary to
decide this issue. However, it has been urged on behalf of the
defendant no. 1 that IA No. 2758/2005 under Order 7 Rule 11 of the
Code of Civil Procedure be treated as an application under section 8
of the Arbitration & Conciliation Act, 1996. It therefore becomes
necessary to examine the jurisdiction of the arbitration tribunal to
examine the claims of the ICICI Bank. The submission of the
defendant no. 1 and the plaintiff's contentions on this issue are
therefore taken up for consideration.
266. For the purposes of understanding this submission, it becomes
necessary to examine the relevant provisions of the Recovery of
Debts due to Banks & Financial Institutions Act, 1993 (`RDB Act' for
short) which read as follows :-
"Jurisdiction, powers and authority of Tribunals
17. (1) A Tribunal shall exercise, on and from the
appointed day, the jurisdiction, powers and authority
to entertain and decide applications from the banks
and financial institutions for recovery of debts due to
such banks and financial institutions.
(2) An Appellate Tribunal shall exercise, on and from
the appointed day, the jurisdiction, powers and
authority to entertain appeals against any order
made, or deemed to have been made, by a Tribunal
under this Act.
2[Power of Chairperson of Appellate Tribunal.
17A. (1) The Chairperson of an Appellate Tribunal
shall exercise general power of superintendence and
control over the Tribunals under his jurisdiction
including the power of appraising the work and
recording the annual confidential reports of Presiding
Officers.
(2) The Chairperson of an Appellate Tribunal having
jurisdiction over the Tribunals may, on the application
of any of the parties or on his own motion after notice
to the parties, and after hearing them, transfer any
case from one Tribunal for disposal to any other
Tribunal.]
Bar of jurisdiction.
18. On and from the appointed day, no court or other
authority shall have, or be entitled to exercise, any
jurisdiction, powers or authority (except the Supreme
Court, and a High Court exercising jurisdiction under
articles 226 and 227 of the Constitution) in relation to
the matters specified in section 17.
3[Application to the Tribunal.
19. (1) Where a bank or a financial institution has to
recover any debt from any person, it may make an
application to the Tribunal within the local limits of
whose jurisdiction--
(a) the defendant, or each of the defendants where
there are more than one, at the time of making the
application, actually and voluntarily resides, or carries
on business, or personally works for gain; or
(b) any of the defendants where there are more than
one, at the time of making the application, actually
and voluntarily resides, or carries on business, or
personally works for gain; or
(c) the cause of action, wholly or in part, arises :"
267. It is apparent from a bare reading of the statutory provisions
that a debt recovery tribunal is constituted under Section 17 of the
Act to decide the applications of banks and the financial institutions
for recovery of debts due to them. As per section 19 only the banks
and financial institutions can make an application to the Debt
Recovery Tribunal to recover their debts.
268. The question which arises as to whether the Recovery of Debts
Act would interdict enforcement of an arbitration agreement, and
which statutory provision would apply and prevail over the other?
269. So far as the jurisdiction of such tribunal is concerned, in
(2000) 4 SCC 406 Allahabad Bank Vs. Canara Bank & Anr. , the
question of a special law vis-a-vis a general law and a special law vis-
a-vis another special law was raised. An issue was raised as to
whether permission of the company court was required before filing a
petition for recovery of money against it before the Debt Recovery
Tribunal ('DRT' for brevity), if prior winding up proceedings were
pending against a company, the Apex Court had authoritatively laid
down the scope thereof as follows:-
"21. In our opinion, the jurisdiction of the
Tribunal in regard to adjudication is exclusive.
The RDB Act requires the Tribunal alone to
decide applications for recovery of debts due to
Banks or Financial Institutions. Once the
Tribunal passes an order that the debt is due,
the Tribunal has to issue a certificate under
Section 19(22) (formerly under Section 19(7)) to
the Recovery Officer for recovery of the debt
specified in the certificate. The question arises
as to the meaning of the word 'recovery' in
Section 17 of the Act. It appears to us that
basically the Tribunal is to adjudicate the
liability of the defendant and then it has to issue
a certificate under Section 19(22). Under
Section 18, the jurisdiction of any other court or
authority which would otherwise have had
jurisdiction but for the provisions of the Act, is
ousted and the power to adjudicate upon the
liability is exclusively vested in the Tribunal.
(This exclusion does not however apply to the
jurisdiction of the Supreme Court or of a High
Court exercising power under Articles 226, 227
of the Constitution). This is the effect of Sections
17 and 18 of the Act."
(Emphasis supplied)
As per the principles laid down, the effect of sections 17 & 18 of
the Recovery of Debts due to Banks & Financial Institutions Act,
1993 is to confer exclusive jurisdiction on the DRT and the only
exception is the constitutional jurisdiction of the Supreme Court and
the High Court under Articles 226, 227 thereof.
270. It needs no elaboration that what can be referred to the
arbitrator is only such matters which the arbitrator is legally
competent and empowered to decide.
In (1999) 5 SCC 688 Haryana Telecom Ltd. vs. Sterlite
Industries Ltd., the court was concerned with an application under
section 8 of the Arbitration Act, 1996 in a winding up petition. The
court observed that :
"The power to order winding up of the company is
contained under the Companies Act and is conferred on
the court. An arbitrator, notwithstanding any
agreement between the parties, would have no
jurisdiction to order winding up of the company. That
could obviously not be referred to the arbitration and,
therefore, the High Court, in our opinion was right in
rejecting the application."
271. A similar issue with regard to the maintainability of a claim for
probate of a Will referred by consent of the parties to arbitration was
raised in JT 1993 (2) SC 34 Chiranjilal Shrilal Goenka
(deceased) through LRs vs. Jasjit Singh & Ors. The Supreme
Court observed that it was only the probate court which could decide
the question and that consent of parties could not have conferred
jurisdiction nor there was any estoppel against the statute.
272. In (1981) 1 SCC 315 entitled Life Insurance Corporation of
India vs. D.J. Bahadur, an objection was raised before the tribunal
constituted under the Life Insurance of India Act, that leave of the
Company Court under section 446 of the Companies Act was required
as a condition precedent to filing a claim before the tribunal to
recover amounts. The Supreme Court rejected the objection holding
that for certain cases, an Act may be general and for certain other
purposes, it may be special and the court cannot blur a distinction
when dealing with the finer points of law. It was further held that in
view of section 41 of the LIC Act, the Company Court has no
jurisdiction to entertain and adjudicate upon any matter which the
tribunal is empowered to decide or determine under the LIC Act. The
Apex Court held that the provisions of section 446(1) of the
Companies Act would not operate on the proceedings before the
tribunal.
273. A Division Bench of this court in the pronouncement reported at
121 (5) Delhi Law Times 241 Kohinoor Creations & Ors. Vs.
Syndicate Bank was called upon to consider the question as to
whether the provisions of Arbitration & Conciliation Act, 1996 being
the later Act would override those of the Recovery of Debts Due to
Banks & Financial Institutions Act, 1993. It was noted that both
statutes contain a non-obstante clause. The issue before the court
was whether the non-obstante clause in section 5 of the Arbitration
Act, 1996 would override section 34 of the Act. The Syndicate Bank
had filed a petition against the petitioner before the High Court.
The petitioner filed an application under Section 8 of the Arbitration
& Conciliation Act, 1996 invoking the arbitration agreement between
the parties contained in the export credit agreement contending that
the disputes between the parties are required to be referred to
arbitration. This application was summarily rejected by the Debt
Recovery Tribunal which order was assailed before the Appellate
Tribunal constituted under the statute of 1993. The petitioner did
not succeed and laid a challenge to the orders passed against it
before this court. Placing reliance on the afore-noticed
pronouncement of the Apex Court in Allahabad Bank Vs. Canara
Bank (supra), this court also considered the issue that both the
statutes contained a non-obstante clause and the legislature had
omitted to provide any provision that the earlier statute of 1993
would continue to apply despite the non obstante clause of the later
statute. It was held that a harmonious interpretation has to be taken
recourse to in order to resolve such conflicts. The court also placed
reliance on the pronouncement of the Supreme Court in (1993) 2
SCC 144 Maharashtra Tubes Limited Vs. State Industrial
Investment Corporation of Maharashtra. On a detailed
consideration of the statutory provisions and the scheme of the two
enactments, the Division Bench had held thus:-
"10. The RDB Act of 1993 establishes the
Tribunals for expeditious adjudication under the
Recovery due to Banks and Financial Institutions,
if the debt is more than 10 lakhs. Section 17
empowers the Tribunal to entertain and decide
applications of these Banks and Financial
Institutions in this regard. Section 18 ousts the
jurisdiction of any Court or authority which
otherwise would have had the jurisdiction of
adjudicating all such claims except that of the
Supreme Court and the High Court under Articles
226 and 227 of the Constitution. Section 31
empowers transfer of all pending suits and
proceedings before courts/authorities to the DRT
including execution proceedings. Section 34
provides that provisions of the RDB Act would
have overriding effect notwithstanding anything
inconsistent contained in any law for the time
being in force or any instrument having effect by
virtue of any law other than this Act. Sub-Section
(2) of this section saves some enactments but not
the Arbitration Act from the purview of this Act.
..............
13. The RDB Act of 1993 establishes the Tribunals
for expeditious adjudication under the Recovery
Due to Banks and Financial Institutions, if the
debt is more than 10 lakhs. Section 17 empowers
the Tribunal to entertain and decide applications
of these Banks and Financial Institutions in this
regard. Section 18 ousts the jurisdiction of any
court or authority which otherwise would have
had the jurisdiction of adjudicating all such claims
except that of the Supreme Court and the High
Court under Articles 226 and 227 of the
Constitution. Section 31 empowers transfer of all
pending suits and proceedings before
Courts/authorities to the DRT including execution
proceedings. Section 34 provides that provisions
of the RDB Act would have overriding effect
notwithstanding anything inconsistent contained
in any law for the time being in force or any
instrument having effect by virtue of any law
other than this Act. Sub Section (2) of this Section
saves some enactments but not the Arbitration
Act from the purview of this Act. ........
14. A survey of these provisions and the
appreciation of their true import leaves no scope
for doubt that the adjudication of the recovery
claims by the Banks and Financial Institutions and
the recovery of the amount by execution of the
certificates passed by the DRT fall within the
exclusive jurisdiction of the Tribunal ousting the
jurisdiction of any other court or authority to go
into or deal with such claims."
(underlining supplied)
274. In para 18, the Division Bench observed that it had been held in
the pronouncements of the Apex Court that even a special statute
could be treated as a general statute while referring to the tussle
between the overriding provisions of the Companies Act and the RDB
Act. The Apex Court had observed that for certain purposes an Act
may be general and certain other purposes, it may be special, and the
court cannot blur a distinction when dealing with a final point of law.
After a detailed discussion, the Division Bench had thereafter held
thus:-
"19. Given regard to all this, we find no difficulty
in taking the view that the RDB Act would prevail
over the Arbitration Act even though it was the
later Act. This is so for variety of reasons. Firstly
because if the RDB Act conferred exclusive
jurisdiction on the Tribunals established by it to
adjudicate upon and execute the recovery claims
of the Bank and other financial institutions to the
exclusion all other Courts and authorities except
the Supreme Court and the High Court, which
position is laid down and affirmed by the
Supreme Court, then the Arbitrator assuming this
jurisdiction under Section 8 of the Arbitration Act
could not be countenanced despite the
mandatory nature of its provisions. Otherwise the
established exclusiveness of the DRT's
justification under the RDB Act would be eroded
and compromised which would be contrary to the
legislative intent behind the DRB Act because on
a simple logic. If the DRT enjoys the exclusive
jurisdiction to try the recovery claims of the
Banks & Financial Institutions, it so enjoys
against all forums established by various statutes
which would include the Arbitrator under the
Arbitration Act also, the only exception made in
this regard being the Supreme Court and the
High Court.
20. The exclusiveness of the DRT's jurisdiction is
all the more fortified by the provisions of Section
34 of the RDB Act. This Section gives all
pervasive overriding effect to the provisions of
the RDB Act as against any inconsistent provision
in any law for the time being in force. It was
amended in 2000 to exempt several enactments
from the purview of the RDB Act. The Arbitration
Act of 1996 which was in force at the time of
amendment does not figure in this list of statutes
which leave no scope for doubt that it was not
intended to be so exempted and its
inconsequential provisions were intended to be
overridden by the provisions of the RDB Act.
We are unable to accept the submission that the
amendment of 2000 made in Section 34 of RDB
Act was inconsequential and that the exclusion of
the Arbitration Act, 1996 in the list of exempted
statutes through this amendment made no
difference. On the contrary this amendment
provides a vital clue to the legislative intent that
the RDB Act was to prevail upon inconsistent
provisions of all laws in force on that date except
the statutes enlisted therein."
(Emphasis supplied)
275. In Solitaire India Limited Vs. Fair Growth Financial
Services Limited. (II) 2001 SLP 81 = (2001) 3 SCC 71 it was
held that on a harmonious interpretation of the two statutes, the
Special Court Act, 1992 would prevail over the Sick Industrial
Company (Special Provisions) Act, 1985. The court observed that the
legislature intended that the public monies should be recovered first
even from sick companies.
276. The position that a Special Act could also be treated as a
General Act in certain circumstances, was further reiterated by the
Supreme Court in Allahabad Bank Vs. Canara Bank case (Supra).
It is noteworthy that the Supreme Court held that the principle of
purposive interpretation which was applied by it in favour of the
jurisdiction and powers of the company court in the earlier judgment
in (1984) 4 SCC 657 Sudershan Chits India Limited Vs. O. Sukumaran
Pillai and other cases, cannot be invoked in the present case against
the Debt Recovery Tribunal in view of the superior purposes of the
RDB Act and the special provisions contained therein. A view was
taken upon applying this principle that the process of the Debt
Recovery Tribunal was superior because it intended to provide a
speedy and summary remedy for recovery of thousands of crores of
rupees which was due to banks and to financial institutions.
The Apex Court considered the provision that Section 17 and 18
of the RDB Act dealing with adjudication of the debt due to banks and
so far as the exclusivity of the jurisdiction of the Debt Recovery
Tribunal was concerned, the court held thus :-
"21. In our opinion, the jurisdiction of the Tribunal in
regard to adjudication is exclusive. The RDB Act requires
the Tribunal alone to decide applications for recovery of
debts due to Banks or Financial Institutions. ..........Under
Section 18, the jurisdiction of any other court or authority
which would otherwise have had jurisdiction but for the
provisions of the Act, is ousted and the power to adjudicate
upon the liability is exclusively vested in the Tribunal. (This
exclusion does not however apply to the jurisdiction of the
Supreme Court or of a High Court exercising power under
Articles 226, 227 of the Constitution). This is the effect of
Sections 17 and 18 of the Act.
22. We hold that the provisions of Section 17 and 18 of
the RDB Act are exclusive so far as the question of
adjudication of the liability of the defendant to the
appellant Bank is concerned."
277. It is not disputed that the ICICI Bank Limited is entitled to
initiate proceedings for recovery of its claim, if any, against the
plaintiff and the defendants before the Debt Recovery Tribunal which
it has not opted to do so.
278. As per the correspondence placed on record, the defendant no.1
has asserted a money claim against the plaintiff by letters and raised
a demand for such sum against it.
279. On behalf of the ICICI Bank, it is contended, that the clause
relating to "Governing Law & Jurisdiction" noticed above was
comprehensive and covered all kinds of disputes with regard to the
financing agreements, as is indicated from the expression 'in respect
of all matters related to the financing agreements', and that it was not
confined to recovery but would also cover non-performance of mutual
obligations.
280. The clause refers to courts at Delhi and an alternate dispute
redressal forum. Such an alternate dispute redressal forum has been
statutorily made available to a banking institution under the
provisions of the Recovery of Debts Due to Banks & Financial
Institutions Act, 1993 under which the banking and financial
institutions are empowered to approach the Debt Recovery Tribunal
for dispute redressal and their claims.
281. So far as the Recovery of Debts Due to Banks & Financial
Institutions Act was concerned, the submission on behalf of the
defendants is that it provides for an alternate dispute resolution
forum in the form of the Debt Recovery Tribunal and the Appellate
Tribunal. It is contended that the tribunal is a forum akin to the tax
tribunals, the rent control tribunal and the service tribunals having
specific jurisdiction limited jurisdiction.
A submission has been made on behalf of the defendants, that
the alternative dispute redressal forum would not cover a statutory
court or tribunal or forum having a limited jurisdiction and
consequently, the submission that Debt Recovery Tribunal would not
be covered under the dispute redressal mechanism agreed upon by
the parties.
It has been held hereinabove that some of the alternate dispute
redressal mechanisms have been statutorily recognised under Section
89 of the CPC. However, the clause relied upon by the defendant in
the instant case does not specify any mechanism. A specific exclusive
jurisdiction so far as the Recovery of Debts due to Banking &
Financial Institution is concerned, has been statutorily created under
the RDB Act which has to be enforced.
282. There can be no dispute that the Arbitration & Conciliation Act,
1996 is a general Act. So far recovery of debts to banks is concerned,
the Recovery of Debts due to Banks & Financial Institutions Act,
1993 is a special statute enacted for a specific object which provides
exclusive jurisdiction with regard to claims by banks. The judgments
noticed hereinabove lay down the binding principle that the Recovery
of Debts Due to Banks and Financial Institutions Act, 1993 overrides
the provisions of the Arbitration & Conciliation Act, 1996 and that no
consent of the other side is necessary for the bank to invoke its
remedy under this statute and to seek dispute redressal by the debt
recovery tribunal.
283. As a result of the above factual and legal position, even if it were
held that there was a valid arbitration agreement, consideration of
the claim relating to recovery of money of the defendant no. 1, would
be beyond the jurisdiction of the arbitrators, as exclusive jurisdiction
with regard to recovery of debts by banks and financial institutions is
conferred on the debt recovery tribunal under the Recovery of Debts
due to Banks & Financial Institutions Act, 1993.
284. The "Governing Law and Jurisdiction" clause does not provide
any specific alternate dispute redressal mechanism to the plaintiff. In
view of the above discussion, even if IA No. 2758/2005 is treated as
an application under section 8 of the Arbitration & Conciliation Act,
1996, no relief can be granted therein to the defendant no.
1/applicant.
285. For the foregoing reasons, even if it were held that there is a
valid and binding arbitration agreement whether the plaintiff cannot
be non-suited for the reason that the proceedings for recovery by the
ICICI Bank before the arbitration tribunal are without jurisdiction.
286. The defendant no. 1 has made different claims against the
plaintiff. It has been pointed out that by a letter dated 1st April, 2002
stated that an event of default having occurred, the plaintiff was
required to pay Rs.100 crores within seven days, by the letter dated
12th April, 2002, the ICICI called upon the plaintiff to pay an amount
of Rs.100 crores or to provide a bank guarantee for the entire sum of
Rs.484 crores. By a letter dated 27th December, 2002 of defendant
no. 2, the ICICI sought compensation payment of Rs.30 crores. On
26th March, 2004, ICICI stated that the plaintiff had failed to
satisfactorily secure and guarantee the bridge loan of Rs.100 crores
and breached the contract contained in the term sheet. It was
contended that there was a legal obligation under the term sheet on
the plaintiff to provide the guarantee.
287. In the application being IA No. 2758/2005 under Order 7 Rule
11 filed by defendant no. 1 dated 8th April, 2001, in para 17, it is
urged that the proceedings have been initiated to recover Rs.100
crores. This obviously is premised on the plea that there was a valid
guarantee.
288. In the written submissions placed before this court, ICICI has
asserted that it is claiming directions to the plaintiff to execute the
guarantee for the bridge loans. It has also been stated that an event
of default has occurred.
Nothing is pointed out which even remotely suggests ouster of
the jurisdiction of civil courts in the documents relied upon by the
ICICI Bank.
289. It has been argued on behalf of the defendants that the prayers
made in the plaint are the subject matter of consideration before the
arbitral tribunal and further that though couched differently,
however the plaint really makes a challenge to the order dated 24th
February, 2005 passed by the arbitral tribunal.
290. So far as the facts placed before this court are concerned, a suit
has been brought by the plaintiff complaining that there is no
agreement at all with the defendants. The plaintiff has also
contended arbitration agreement with the defendants with regard to
the subject matter of the suit. Declaratory relief in this behalf as
prayed.
291. The plaintiff was not a party to the reference which was a
unilateral act on the part of the defendant no. 1. The plaintiff has no
right under the clause relied upon by the defendant no. 1 to seek
redressal of its grievances before the arbitral tribunal.
292. The plaintiff in the instant case has sued for not only a
declaration, but for injunctions as well as damages against the
defendants. As discussed hereinabove, the clause relied on by the
defendants to submit that the arbitral tribunal alone has jurisdiction
over these matters confers no right upon the plaintiff to seek dispute
redressal. The reliefs sought by the plaintiff in the plaint are beyond
the scope of the arbitration. The submissions made on behalf of the
defendants do not consider this aspect.
The defendants have opted to neither file any application under
section 8 of the Arbitration & Conciliation Act, 1996 nor placed any
valid arbitration agreement before this court.
293. There is yet another facet to this contention. Assuming that the
ICICI Bank had not approached the arbitral tribunal for dispute
redressal. Would a clause of this nature, even if it amounts to an
arbitration agreement, preclude a civil suit at the instance of the
plaintiff which has been conferred no right thereby to seek dispute
redressal before the alternate dispute redressal forum?
In such an eventuality, could the plaintiff be left high and dry
without any mechanism for seeking redressal of, or adjudication of its
disputes and claims? The answer is clearly in the negative.
294. It therefore has to be held that there is no legal prohibition to
the maintainability of the suit. The plaintiff is legally entitled to seek
its reliefs by way of the present suit.
There is therefore no merit in IA No. 2758/2005 which is hereby
dismissed.
295. It is also pointed out that the plaintiff had not sought any
statutory or regulatory approval for the guarantee of the bridge loan
and the bridge loans were disbursed even before any statutory or
regulatory sanction was received. The submissions made by the
defendants fail to consider the impact which the rejection of the
applications seeking approval of the proposal for guarantees. Could
the defendant no. 1 have then contended that the plaintiff was still
liable to it for the disbursements which it has so effected? The
defendant no.1 claims to have reacted for the sole reason that the
plaintiff's credit ratings fell below the stipulated ratings. In view of
the detailed discussion hereinabove, the plaintiff has made out a
prima facie case for grant of injunction.
296. So far as the remedy available to the defendant no.1 is
concerned, it has been held that prima facie there is no arbitration
agreement between the parties. Even if the Governing Law &
Jurisdiction clause was considered to be an arbitration agreement,
such unilateral conferment is illegal and void. In view of the binding
judicial pronouncements noted above, any proceedings premised on
such an arbitration agreement are without jurisdiction and illegal.
The plaintiff cannot be legally compelled to defend itself in such
proceedings.
On the other hand, the plaintiff has asserted that it is based in
USA and a compulsion to prosecute the proceedings before the
arbitral tribunal which are without jurisdiction, would work
irreparable loss and damage to it. There is force in such submission.
297. In addition thereto no alternate remedy is available to the
plaintiff for settlement of its disputes.
Balance of convenience, interest of justice and equity are in
favour of the plaintiff and against the defendants.
In view of the above, it is directed that the defendants shall
stand restrained from continuing the arbitration proceedings detailed
in IA Nos. 3134/2005 and 5838/2006. The defendants shall also
stand restrained from commencing any other arbitration proceedings
based on the clause titled "Governing Law and Jurisdiction" in the
term sheet which has been enclosed with the letter dated 13th
September, 2000 from the defendant no. 1.
It is made clear that the above discussion contains a prima facie
view on the factual aspects of the matter.
IA No. 3134/2005 and 5838/2006 shall stand allowed and IA No.
2758/2005 is disposed of in the above terms.
GITA MITTAL
JUDGE
October 13, 2009.
sd/aa/kr
