Gujarat Heavy Chemical Ltd vs National Research Corporation ...
2010 Latest Caselaw 5223 Del

*                  IN THE HIGH COURT OF DELHI AT NEW DELHI

+                              FAO.No.460/1998

%                                                 Reserved On: 09.11.2010
                                                   Decided On:18 .11.2010

GUJARAT HEAVY CHEMICAL LTD.                     .... Petitioner
                Through: Mr.Ashwani Kumar, Adv.

                                   Versus

NATIONAL RESEARCH CORPORATION INDIA & ANR. .... Respondents
                Through: Mr. Manu Nayyar, Mr. Amar Pal, Advs.
                         for R-1

CORAM:
HON'BLE MR. JUSTICE MOOL CHAND GARG

1.     Whether reporters of Local papers may be                 Yes
       allowed to see the judgment?
2.     To be referred to the reporter or not?                   Yes
3.     Whether the judgment should be reported in               Yes
       the Digest?

:      MOOL CHAND GARG,J.

1. This appeal has been filed by the appellant, M/s Gujarat Heavy Chemical Ltd. under Section 39 of the Arbitration and Conciliation Act, 1940 (for short „the Act‟) against the order dated 09.09.1998 passed by the learned Additional District Judge, Delhi in Suit No.87/1998.

2. The learned ADJ while deciding a petition filed by respondent No.1 under Section 20 read with Section 8 of the Act in the light of the controversy raised by the parties with respect to the applicability of clause 3(1) of the Licence Deed/Agreement dated 24.08.1973 executed between respondent No.1 and respondent No.2 providing for supply of know-how for manufacturing Bromine from Sea Bitterns and payment of royalty for a period of 14 years and the stand taken by the appellant who are the successor in interest of respondent No.2 having purchased their salt works and Bromine plant on 01.02.1985 framed the following issues:

1. Whether the dispute is referable to the Arbitrator? OPP

2. Relief.

3. An additional issue was also framed which reads as under:

Additional Issue:

No.1. Whether the respondent No.2 is bound by the Arbitration Agreement entered into between the petitioner and respondent No.1? OPP.

4. Learned ADJ taking note of the pleadings of the parties and the terms and conditions of the first agreement dated 24.08.1973 entered between the respondents as also clause 22 of the agreement entered into between the appellant and respondent No.2 dated 01.02.1985 came to the conclusion that the appellant was also bound by the agreement entered into between the respondents which contained arbitration clause for settlement of disputes between the parties and decided the additional issue in favour of respondent No.1.

5. Since the issue of royalty was the main reason for dispute but which required adjudication of the claim, it was held that the said issue regarding payment of royalty will have to be decided by the Arbitrator. Consequently, the disputes were directed to be referred to the Sole Arbitration of Chairman of respondent No.1-corporation who was also given power to appoint some other person as arbitrator and directing him to make the award within the statutory period.

6. The appellant has assailed the impugned judgment and order of the learned ADJ on the following grounds:

i) Because the learned trial Court gravely erred in ignoring that the licence agreement was unassignable nor it was the case of the respondent No.1 as petitioner in the trial Court that they had permitted the assignment. The respondent No.1 themselves pleaded that the transfer of licence agreement was illegal.

ii). Because the learned trial Court has not found that the appellant was a permitted assignee. In the absence of such a finding, the learned Trial Court erred in law in holding that the arbitration agreement was binding upon the appellant.

7. It was further submitted that the findings returned by the learned ADJ that the appellant is bound by the Arbitration clause incorporated in the Licence Deed/Agreement dated 24.08.1973 to which the appellant is not a party is contrary to law and is not sustainable and such finding suffers from an error apparent.

8. It is further submitted that the trial Court wrongly inferred that Royalty as claimed by the Corporation from Saurashtra Salt is covered by Clause 22 of Agreement dated 01.02.1985 executed between Appellant and Saurashtra Salt. The trial Court has erred in not differentiating between the „Royalty‟ payable to Corporation by Saurashtra Salt as per Licence Deed/agreement dated 24.8.1973 from „Royalty‟ contemplated in Clause 22 of Agreement dated 1.2.1985 between the Appellant and Saurashtra Salt. „Royalty‟ as referred to in the Licence Deed/Agreement dated 24.8.1973 is for the use of technical know-how passed on by the Corporation to Saurashtra Salt for manufacturing Bromine from sea bitterns. „Royalty‟ as referred to in the agreement dated 01.02.1985 between the Appellant and Saurashtra Salt pertained to the payment to be made to the Government in respect of the salt works. The „Royalties‟ as mentioned in the two distinct agreement are different and thus the finding that "admission of the fact comes from the „horse‟s mouth‟ is erroneous. The Appellant had never admitted any payment to be due from it to the Corporation.

9. It is also submitted that Trial Court has gravely erred in allowing the petition and directing appointment of an arbitrator when admittedly there is no Chairman of the Company who is the appointing authority in terms of the arbitration agreement incorporated in Licence Deed/Agreement dated 24.08.1973 executed between the Corporation and Saurashtra Salt. The trial Court has also erred in appointing the next senior officer of respondent No.1 as an arbitrator who, by no stretch of imagination can be said to be an independent arbitrator and learned trial Court had not invited, in the first instance, the parties to agree to the appointment of next senior officers as arbitrator, if at all, in the absence of Chairman, an independent arbitrator ought to have been appointed.

10. On the other hand, the learned counsel appearing for respondent No.1 has argued that in the light of clause 3(1) of the agreement entered into between respondents No.1 and 2 in 1973 and clause 22 of the agreement entered into between respondent No.2 and the appellant, it becomes apparent that while the royalty which was payable by

respondent No.2 to respondent No.1 in 1973 has been taken upon itself by the appellant in terms of agreement dated 01.02.1985 and the appellant also bound itself with all the liabilities of respondent No.2 qua respondent No.1 and, therefore, having acknowledged the payment of royalty and filing a return vide their letter dated 14.11.1986, the appellant cannot take a position to avoid its liability of payment of royalty and the method of referring the disputes to the Arbitrator.

11. While deciding issue No.1, the learned ADJ has taken note of a judgment delivered in the case of Patanjal & Anr. Vs. M/s Rawalpindi Theatres Pvt. Ltd., Delhi AIR 1970 Delhi 19 (V 57 C 4) wherein interpretation of a clause which would constitute arbitration agreement has been discussed. In this regard, it has been observed:

"In order to constitute a valid arbitration agreement, among other things, there should be a valid agreement, the terms of which are reduced to writing and the parties thereto should be adjournment-idem; in other words the agreement of the parties should be established so that they can be held to be bound by it though the written instrument or instruments, if there are more than one containing the terms of agreement, need not necessarily be signed by the parties bound by it. It is lawful to establish oral acceptance of the terms by the parties to the agreement, though the terms agreed must be reduced to writing. The subject matter of the reference and the authority of the arbitrator in the reference arising out of an agreement between the parties has, therefore, to be traced to the agreement of reference only. From the legal position just stated, it follows that third persons who are not parties to the arbitration agreement or to the contract containing an arbitration clause and not claiming under such parties are not bound by such agreement. And not being bound, they would, as a general rule, be disentitled to enforce the agreement.

The language of Section 20 of the Arbitration Act seems also to support this view. This section empowers the parties to an arbitration agreement, when differences have arisen, which are covered by it, to apply to a Court having jurisdiction praying that the agreement be field in Court, Indeed, it is also the general fundamental rule that only a person who is a party to the contract can sue on it. The existence of statutory or equitable exceptions to this rule do not impinge upon its general fundamental character, of course, if the subject matter of the arbitration agreement is capable of assignment then the assignee would step into the shoes of his assigner and be both bound by it and entitled to

enforce it, but for this purpose one has to look to the law relating to assignment of contractual rights and obligations and also to see whether in a given case, the assignee has exercised his right as such."

12. In the light of the aforesaid interpretation to a clause which may infer as a arbitration clause it would now become necessary to also refer to clause 3(1) of the original agreement which was entered into between the respondents and forming part of the licence deed which contemplates terms and conditions of the agreement which was entered into between them reads as under:

"3. The Grantee will, during the continuance of the licence observe and perform the covenants and provisions following that is to say:

(i) During the period of the said term the Grantee will pay to the Corporation for fourteen years a royalty at the rate of 1 ½ % on the next ex-factory sale price of the material manufactured by it in accordance with the said invention and marketed by it. Such royalties shall become due on the First of April and on the First of October in every year in respect of the articles manufactured and marketed or used by the Grantee during the preceding half year and shall be paid by the First day of May and First day of November of that year. In default of payment of such royalties on the due dates, the Grantee shall pay interest on the amount in default at the rate of Twelve percent per annum;-------------"

13. Clauses 3(vi) and 3(viii) are also relevant and read as under:

"3(vi) The Grantee will not, at any time, assign, mortgage, charge, grantee sub-licences in respect of or otherwise deal with or part with the possession or control of the licence hereby granted;

(vii) .....

(viii) The Grantee shall not directly or indirectly and either by itself or by its agents use the said invention otherwise than in accordance with these presents."

14. Clause 11 of the licence deed further provides as to how the disputes or differences which arise between the parties would be adjudicated by the Arbitrator and also deals with the power of the Chairman of respondent No.1 to appoint an Arbitrator. The said clause reads as under:

"If any dispute or difference arises between the parties hereto or their representatives or assigns with respect to their rights or liabilities or in regard to any other matter under these presents, save as to any matters the decision whereof is hereinbefore expressly provided for, the same shall be referred to the sole arbitration of the Chairman, National Research Development Corporation of India, and if he is unable or unwilling to act, to the sole arbitration of some other person appointed by him and willing to act as such arbitrator. Subject to the consent of the parties, the arbitrator shall have the power to enlarge the time for making the award. The reference to the Arbitration shall be deemed to be a submission within the meaning of the Arbitration Act, 1940 or any statutory modifications or re-enactment thereof and the rules made thereunder for the time being in force shall apply to such reference and this deed shall be deemed to be a submission to such arbitration. It is the condition of this clause that all hearings of the arbitration will take place at Delhi."

15. At the outset, I may observe that in the light of the power given to the Chairman as per clause 11, if the Chairman is not available or if he is not willing to act as an Arbitrator, he can appoint any other person who is willing to act as such Arbitrator. In the absence of the availability of the Chairman, the Court can then certainly pass an order under Section 8 appointing a person who could have been appointed by the Chairman and in that context the appointment of the Second-in- Command as an Arbitrator would not be violative of clause 11 of the Licence Deed.

16. The primary question still remains as to whether clause 3(1) constitutes an arbitration agreement between the appellant and respondent No.1 so as to give a jurisdiction to the named Arbitrator in clause 11 or a nominee of the named Arbitrator in clause 11 to act as an Arbitrator to decide the issue which appears to be the reason between the appellant and respondent No.1. To appreciate the controversy it becomes necessary to also take note of clause 22 of the agreement entered into between the appellant and respondent No.2 regarding sale of plant. The said clause reads as under:

""22.The Vendors shall pay the outings including Ground Rent, R(E)ducation Cess, local fund, annual lease rent, royalty, and any other Government levies in respect of the said property till the date of this agreement including arrears of such levies in dispute. Thereafter, i.e. after the date of

this agreement, all the outgoings including Ground Rent, Education Cess, Local Fund, annual lease rent, royalty, etc. in respect of the said property viz Salt Works, and Bromine/Bromides plant and all other outgoings in respect of the said properties agreed to be sold, payable to the Government or State or Statutory body and/or any other authority or authorities shall be paid and borne by the purchasers exclusively and the vendors shall be kept indemnified for all times to come in respect of the same."

17. It would also be proper to take note of the contents of the letter dated 14.11.1986 which has been written by the appellant to respondent No.1 which is an half yearly royalty return for the royalty payable to respondent No.1 by respondent No.2 for the period of 01.04.1986 to 30.09.1986.

"Gujarat Heavy Chemicals Ltd.

(Salt Division) Port Albert Victor Via Dungar 364 555 District Amreli (Gujarat)

Ref. No.GHCL/PAV:876:86-87/880 Dated:14 Nov.1986.

National Research Development Corporation of India 20-22, Zamroodpur Community Centre Kailash Colony Extension New Delhi 110 048

Dear Sir

Please find enclosed herewith our half year Royalty Return for the period ending 01.04.1986 to 30.09.1986. Kindly acknowledge the same.

Thanking You

Yours Faithfully, For Gujarat Heavy Chemicals Pvt. Ltd.,

Sd/-

(R.S. Singhania)

Encl.: As above.

       CC:     Shri R.R. Sorathia
               GHCL (Bromine Divn.)
               PAV."

18. It would also be proper to take note of the copy of reply dated 23.12.1986 which letter runs as follows:-

"This is in reference to your letter No.R-Accts/NRDC/G-142 dated 5th May, 1988 and your personal visit to our office on 26th May, 1988. The matter for payment of Royalty is under active consideration of the management. We shall communicate you the decision regarding lumpsum payment of `70,000/- within a short-time. This is without prejudice to our rights and contentions in the matter since we do not have privity of contract with you."

There is another letter dated 8th June, 1988 which runs as follows:

"At the outset, we would like to state that we do not have a privity of contract with NRDC. You had entered into an agreement with M/s Saurashtra Salt Works (P) Ltd. in August, 1973. In the correspondence exchanged with SSW you had revised the terms and conditions of the agreement. As per the revised terms and conditions of the agreement you had decided as under:

       1) Lumpsum Payment                     `75,000/-
       2) Recurring royalty                   Nil
       3) Nature of Licence                   Non exclusive
       4) Period of Licence                   14 years

You had requested Saurashtra Salt works to pay you a total amount of `70,000/- in lieu of recurring royalty from the effective date of agreement. Therefore, the only outstanding liability is of `70,000/-. Nothing else is payable as per the revised terms and conditions of the agreement with Saurashtra Salt Works Pvt. Ltd. Since we have acquired the assets of Salt and Bromine Division of Saurashtra Salt Works at Port Victor, we can request our management to consider payment of `70,000/- in consultation with SSW. If the offer is acceptable to you, please let us know so that we can initiate necessary action about the sharing of `70,000/- between SSW and ourselves."

19. Taking into consideration the language of clause 3(1) of the Licence Deed/agreement dated 24.08.1973 which was executed between the appellant and respondent No.1 and clause 11 which contains arbitration clause, it cannot be inferred that the liability to pay the royalty which is referred to in clause 3(1) and which has been undertaken upon itself by the appellant in terms of the agreement dated 01.02.1985 entered into between the appellant and respondent No.2, the Arbitration clause which is a mode of settlement which was agreed to between the respondents have been accepted by the appellant also.

A harmonious reading of the two clauses i.e. clause 3(1) of the Licence

Deed and clause 22 of the agreement dated 01.2.1985 entered into between the appellant and respondent No.2 would only convey that while the appellant having entered into an agreement dated 01.02.1985 with respondent No.2 in relation to the purchase of the plaint in question and having undertaking by itself to start manufacturing the product which used to be manufactured by respondent No.2 on the basis of the technology supplied by respondent No.1 to them has agreed to undertake the liability of respondent No.1 to pay royalty which was to be paid to respondent No.2 to the appellant; it cannot be said that the mode of adjudication of the said royalty which was agreed to by the respondents by way of an arbitration has also been accepted by the appellant. The stand of the appellant becomes crystal clear in their correspondence exchanged with respondent No.1 as noted above.

20. In these circumstances it was necessary for respondent No.1 to first seek adjudication of their claim which would naturally arise, even the issue of limitation and only thereafter to have claimed the royalty from the appellant on the basis of their agreement dated 01.02.1986 entered into between them and respondent No.2.

21. As such the findings returned by the learned ADJ with respect to additional issue No.1 framed by the learned ADJ on 05.08.1998 has to be reversed. Consequently, there being no arbitration agreement between the appellant and respondent No.1, the order passed by the learned ADJ referring the disputes to the second-in-command of the Chairman of respondent No.1 also cannot be sustained. Consequently, the appeal is allowed with no orders as to costs.

22. LCR be sent back forthwith.

MOOL CHAND GARG,J NOVEMBER 18, 2010 'anb'