Delhi High Court

Bharat Heavy Electrical Ltd vs Shri Ashutosh Engineering ... on 8 January, 2014

Author: Najmi Waziri

*      IN THE HIGH COURT OF DELHI AT NEW DELHI
                                      Date of Decision: 8th January, 2014
+            CM(M) 576/2011 with CM Nos.9336 & 11612/2011

       BHARAT HEAVY ELECTRICAL LTD.        ..... Appellant
               Through: Mr. Sudhir Nandrajog, Sr. Adv. with
                        Mr. Arvind Chaudhary, Advocate.

                          versus

       SHRI ASHUTOSH ENGINEERING INDUSTRIES & ORS.
                                           ..... Respondents

Through: Mr. K.G. Sharma, Advocate for R-1.

CORAM:

HON'BLE MR. JUSTICE NAJMI WAZIRI

% HON'BLE MR. JUSTICE NAJMI WAZIRI (Open Court)

1. This is a petition filed under Article 227 of the Constitution of India,

challenging the order of 21st March, 2011 passed by the Learned

Additional District Judge - 03 ("ADJ"), South District, Saket Courts

("impugned order") allowing Arb No. 131 of 2010 ("appeal"). The

appeal was filed under section 37 read with section 16 (2) of the

Arbitration and Conciliation Act, 1996 ("Act").

2. Shorn of irrelevant details the origin of the case can be traced to Civil

Suit no. 14-B of 2009, filed by the respondent no. 1 herein in the court

of the Additional District Judge, Raipur, Chhattisgarh against the

petitioner and respondents no. 2 to 5 herein, for recovery ("Suit").

Admittedly, the Suit was filed by the respondent no. 1 challenging the

action of the petitioner in encashing a bank guarantee issued by the

respondent no. 1 to the petitioner for an amount of Rs. 5,22,611/-

(Rupees five lakh twenty two thousand six hundred eleven only). The

said bank guarantee was issued in respect of certain purchase orders

placed by the petitioner on the respodnent no. 1.

3. Admittedly, the respondents no. 2 to 5, who are employees / officers

of the petitioner, are not parties to the purchase orders. It is also

admitted that the bank guarantee was not in favour of the respondents

no. 2 to 5 herein and could not have been encashed by them in their

personal capacity and they had only been corresponding with the

respondent no. 1 qua the alleged illegal action of encashment of the

bank guarantee.

4. The said amount of Rs. 5,22,611/- (Rupees five lakh twenty two

thousand six hundred eleven only) is said to have been

misappropriated by the petitioner and the respondents no. 2 to 5 when

the petitioner invoked the bank guarantee as aforesaid; which

invocation is supposed to have triggered the cause of action. It is an

admitted position that the petitioner entered appearance in the Suit and

raised a preliminary issue as to the jurisdiction of the Court to try the

suit in view of existence of arbitral clause/s in the purchase orders.

The respondent no. 1 sought to contend at that juncture that the matter

is not arbitrable inasmuch as the it has raised issues of fraud against

the petitioner and respondents no. 2 to 5.

5. The Suit was sent to the Lok Adalat, Raipur, Chhattisgarh. It is the

case of the respondent no. 1 that before the Lok Adalat, a joint

application for compromise was filed by the parties whereunder the

parties agreed to refer the controversy in the suit to arbitration. The

petitioner does not deny the factum of having filed the application or

of having agreed to refer the controversy in the suit to arbitration.

What the petitioner however denies is that the application for

compromise has been filed qua the entire controversy in the suit, as is

sought to be contended by the respondent no. 1. The application was

allowed by the Lok Adalat by its order dated 6 th September, 2009, the

respondent no. 1 proceeded to file its claim before the learned Sole

Arbitrator ("arbitrator"), praying for substantially the same relief as

in the Suit, against the petitioner and the respondent no. 2 to 5.

6. The petitioner entered appearance in the arbitral proceedings and filed

an application under Order I rule 10 of the Code of Civil Procedure,

1908 ("Code"). By the application, the petitioner sought deletion of

respondents no. 2 to 5 from the array of parties in the claim. It was

contended that the reference to arbitration was under the arbitral

clause/s in the puchase orders and that the said respondents are neither

party to the purchase orders, nor have they acted in their personal

capacity in dealing with the respondent no. 1, and that in any case the

proceeds from the encashment of the bank guarantee has admittedly

gone only to the petitioner. In reply to the application the respondent

no. 1 contended that the reference to arbitration is not under the

purchase order/s, but is under the order of 6th September, 2009 of the

Lok Adalat. The respondent no. 1 contended that the entire

controversy in the Suit has been referred to arbitration and inasmuch

as the suit included contentions and prayers against the respondents

no. 2 to 5, the reference is qua not just the petitioner, but also the

respondents no. 2 to 5.

7. The arbitrator, after considering the contentions of the parties, allowed

the application and directed deletion of respondents no. 2 to 5 from the

array of respondents in the arbitration. He reasoned:

7(i) The Suit was filed challenging the invocation of the bank

guarantee - itself issued under the purchase orders that contain the

arbitral clause/s - and the appropriation of monies therefrom by the

petitioner.

7(ii) The Suit was referred to Lok Adalat on the basis of an

application by the Petitioner.

7(iii) The Lok Adalat, by its order of 6th September, 2009, referred

the matter to arbitration.

7(iv) The claim in the arbitration is filed seeking recovery of the

same amount, on the same cause of action.

7(v) For an arbitration to commence, it has to be based on an

agreement between the parties who have a defined legal

relationship inter se.

7(vi) In the instant case, the relevant arbitral clause is the arbitral

clause found in the purchase orders, on the basis of which the Suit,

as well as the claim is filed.

7(vii) The respondents no. 2 to 5 are neither a necessary parties,

nor proper parties to the proceedings, inasmuch as the respondents

no. 2 to 5 are not party to the said arbitration agreement; (b)

inasmuch as they did not deal with the respondent no. 1 in their

personal capacity; and (c) inasmuch as the proceeds of the

encashment of the bank guarantee has not gone to them.

8. Impugning this decision of the arbitrator, the appeal was preferred by

the respondent no. 1 as aforesaid. In the appeal, the primary ground of

challenge was that the arbitral clause/s in the purchase orders are not

the relevant arbitration agreement qua the instant reference and the

reference has been entered into by the parties on the basis of the order

of 6th September, 2009 of the Lok Adalat, which referred all the

controversies between the parties including those against the

respondents no. 2 to 5. The petitioner herein, in reply, contended inter

alia that the compromise application was, in any case, filed only by

the petitioner and the respondent no. 1 and that the respondents no. 2

to 5 were not parties to the same.

9. The appeal was allowed by the impugned order. It, inter alia,

reasoned:

9(i) The Suit was filed against the respondent no. 2 to 5 as well as

the petitioners.

9(ii) The contract between the parties provides for resolution of

disputes by arbitration before GM/(TBG), BHEL, Bhopal or any

other person the sole arbitrator may nominate.

9(iii) Upon the Suit being referred to the Lok Adalat, a joint

application was filed by the parties seeking reference to arbitration

before GM (TBGMM), BHEL, Integrated Office Complex, Lodhi

Road, New Delhi.

9(iv) This application seeking reference to arbitration is not only of

disputes arising under the contract between the parties, but also qua

alleged unlawful encashment on the bank guarantee.

9(v) By the order of 6th September, 2009, the Lok Adalat allowed

this application and referred the parties before it to arbitration.

9(vi) Since on the date of passing of the order of 6 th September,

2009, the logical sequitur thereof is that the order of reference of 6 th

September, 2009 is qua all the respondents before the Lok Adalat,

including the respondents no. 2 to 5.

9(vii) The Suit had allegations of fraud and prayers against

respondents no. 2 to 5 as well, which cause of action still subsists

against them.

9(viii) The arbitrator has clearly misconducted the proceedings by

assuming that the reference was under the contracts between the

parties, when it was under the order of 6th September, 2009.

9(ix) Thus, the respondents no. 2 to 5 are necessary parties to the

arbitration proceedings and ought to not have been deleted.

10. Aggrieved by the same, the petitioner has preferred the instant petition

as aforesaid. Mr. Sudhir Nandrajog, learned Senior Counsel for the

petitioner submits that the impugned order is patently illegal and

contrary to the records. He submits that the order of 6 th September,

2009 of the Lok Adalat cannot bind the respondents no. 2 to 5, given

that they never appeared before the Lok Adalat, nor were they party to

the joint compromise application. He drew the attention of the Court

to the copy of the joint compromise application wherein only the

signature of the authorised representative of the petitioner is affixed

on behalf of the defendants. He submits that the said authorised

representative was not authorised by the respondents no. 2 to 5 to

represent them in their respective personal capacities in the

proceedings, and hence, in any case, the said representative could not

have agreed to any consent order on their behalf. He submitted that the

impugned order, to the extent that it refers to arbitration persons who

are not party to the purchase orders nor to the order of 6 th September,

2009, is patently illegal and without jurisdiction.

11. In reply, the learned Counsel for the respondent contended that there

is no infirmity in the impugned order. He submitted that the

compromise application was filed on behalf of all the parties before

the Lok Adalat, including and on behalf of the respondents no. 2 to 5.

He submitted that the order of 6th September, 2009, which was an

order passed with the consent of the parties on the basis of the joint

compromise application is binding on all parties to the Suit. It was

contended that the Suit in itself had allegations of fraud and breach of

trust - issues not directly arising out of the purchase orders - and

hence any agreement to refer to arbitration would include such

disputes over an above the issues arising out of the purchase order.

Given that the order of the Lok Adalat referred all parties to

arbitration, the logical sequitur thereof is that the respondents no. 2 to

5 were also referred to arbitration. Hence, he submitted, the impugned

order was not in error of law and ought not to be interfered with.

12. I have perused the impugned order, the documents on record and have

considered the submissions of the parties, and I am inclined to allow

the petition. The impugned order is clearly in excess of the learned

ADJ's jurisdiction as it has, in effect, compelled the respondents no. 2

to 5 to reslove their disputes with respondent no. 1 by arbitration,

when there was no agreement - as contemplated under section 7 of the

Act - on record before it. It is a well established rule of law that the

scope of a reference to arbitration has to be decided on the basis of the

terms of the arbitration agreement (see Hindustan Petroleum

Corporation Ltd v Pinkcity Motors, (2003) 6 SCC 503). The issue, in

the instant matter, however, is as to which document bears the relevant

arbitral clause as contemplated under section 7 of the Act.

13. It was in this background that the arbitrator, as earlier observed, had

held that the relevant agreement in the reference before him as

contemplated by section 7 of the Act is the arbitral clause/s found in

the purchase orders. On this basis, the arbitrator held that since

respondents no. 2 to 5 are not party to the same, they cannot be bound

by the arbitral clause/s therein; he thus directed that respondents no. 2

to 5 be deleted from the record. The learned ADJ, reversed this

finding and held that the relevant agreement for the purpose of

considering the scope of reference is the order of the Lok Adalat dated

6th September, 2009. Although the petitioner contended that this

finding is itself in error of law, this court does not deem it appropriate

to interfere with the same in exercise of its revision / supervisory

jurisdiction, being a possible interpretation, given the facts of the case.

14. However, the learned ADJ proceeded further to hold that since the

respondents no. 2 to 5 were parties to the Suit, the reference by the

order dated 6th September, 2009 is binding upon them as well. This,

the petitioner submits, is in error of law and is contrary to the records.

There is considerable force in this submission. It is evident from the

records before the learned ADJ that the joint compromise application

was executed on behalf of the defendants therein by a Mr. Swayam

Prakash, who is admittedly the authorised representative of the

petitioner. There is nothing on record to indicate that the respondents

no. 2 to 5 had authorised the said Mr. Swayam Prakash to represent

them before the arbitrator. In any case, the respondent no. 1 has

neither contended nor produced any document to show anything to the

contrary.

15. The Supreme Court, in the case of Indowind Energy Ltd v Wescare

(India) Ltd & Anr, (2010) 5 SCC 306, had occasion to consider the

issue of when an arbitral agreement can be said to exist between two

persons. It held:

12. An analysis of sub-sections (2), (3) and (4) of Section 7 shows that an arbitration agreement will be considered to be in writing if it is contained in: (a) a document signed by the parties; or (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, or (d) a contract between the parties making a reference to another document containing an arbitration clause indicating a mutual intention to incorporate the arbitration clause from such other document into the contract.

13. It is fundamental that a provision for arbitration to constitute an arbitration agreement for the purpose of Section 7 should satisfy two conditions: (i) it should be between the parties to the dispute; and (ii) it should relate to or be applicable to the dispute. (See Yogi Agarwal v. Inspiration Clothes & U [(2009) 1 SCC 372] .)

16. In the present case, the respondents no. 2 to 5 are not party to any

agreement embodied in a document with the respondent no. 1 agreeing

to refer their disputes to arbitration. Nor is it the case of the

respondent no. 1 that there has been an exchange of statements of

claims and defence in which it had alleged the existence of an

arbitration agreement and the same has been accepted and not denied

by the respondent no. 2 to 5 in their defence statement. It is also not

the case of the respondent no. 1 that any exchange of letters, telex,

telegrams, or other means of telecommunications referred to provide a

record of any arbitration agreement between the parties. Thus all that

remains to be seen is whether there is any document signed by the

parties as provided in clause (a) of sub-section 4 of section 7 of the