Delhi High Court
Shakti Nath And Ors. vs Alpha Tiger Cyprus Investment ... on 8 May, 2017
* IN THE HIGH COURT OF DELHI AT NEW DELHI
Reserved on: 26.04.2017
Pronounced on: 08.05.2017
+ FAO(OS)(COMM) 53/2017, C.M. APPL.8314, 8316 & 15671/2017
SHAKTI NATH AND ORS. ..... Appellants
Through : Sh. Salman Khurshid and Sh. Sandeep
Sethi, Sr. Advocates with Sh. Vijay Nair, Sh.
Manoranjan Sharma, Sh. Prashant Jain, Ms.
Sanyogita Jain, Ms. Alpana Malhotra, Ms. Mitali
Chauhan and Ms. Gargi Srivastava, Advocates.
versus
ALPHA TIGER CYPRUS INVESTMENT NO.3 LTD. AND ORS.
..... Respondents
Through : Sh. Sanjeev Puri, Sr. Advocate with Sh.
Rohit Puri and Sh. Ruchin Midha, Advocates, for
Respondent Nos. 1 and 2.
CORAM:
HON'BLE MR. JUSTICE S. RAVINDRA BHAT
HON'BLE MR. JUSTICE YOGESH KHANNA
MR. JUSTICE S. RAVINDRA BHAT
%
1. The present appeal is directed against an order rejecting a challenge to
a majority Award dated 20.01.2015 passed by the Chairman of the Arbitral
Tribunal (hereafter "tribunal") and one of its members.
2. The material facts are that M/s. Sarv Mangal Real Tech Pvt. Ltd.
("Sarv Mangal") was allotted a plot of land measuring 1,00,450 sq. metres
by New Okhla Industrial Development Authority (hereafter "Noida"), i.e
Plot No. 1, Sector-140A, Noida, Uttar Pradesh by a lease deed dated
14.01.2008. IT Infrastructure Park Private Limited (hereafter "ITIPPL"), the
third respondent, with its registered office at D-922, New Friends Colony,
New Delhi had an agreement with Sarv Mangal for co-development of an
SEZ for Information Technology/Information Technology Enabled Services
in respect of the allotted land in the ratio of 45:55. Sarv Mangal executed a
sub-lease deed dated 04.03.2008 in favour of ITIPPL in respect of a portion
of the allotted land, i.e., land measuring approximately 45,202 sq.mts
(hereafter "Galaxia Land").
3. The first two respondents (hereafter "the Investors") are corporate
entities incorporated under the laws of Cyprus engaged in the business of
investment in the real estate sector. In relation to the Galaxia Project Land, a
Share Holders Agreement ("SHA") and a Share Subscription and Purchase
Agreement ("SSPA"), both dated 21.03.2008 were executed between M/s
Shakti Nath and the other petitioner/appellants (collectively, "Shakti" or
"promoters" hereafter) and the Investors. As on 16.09.2008, the Investors
and Shakti, held 50% shareholding each in the ITIPPL, who had evinced
intention to enter into a commercial relationship with the former (the
promoter, Shakti). This was for the development of the proposed SEZ for
Information Technology/Information Technology Enabled Services. The
investors had also entered into agreements with the promoters for
development of other projects, viz., the Technika Project and the Technova
Project. However, the investors exited from the agreements in respect of
those two projects in January and May, 2010. The present litigation,
therefore, is concerned with implementation of the Galaxia Agreements tied
to the conduct of the investors vis-a-vis the Technika and Technova Projects.
4. It is a matter of record that parties terminated the agreement dated
11.07.2009 in terms of which the SHA and SSPA were brought to an end. On
02.07.2009, the parties entered into a Restated Share Holders Agreement
("RSHA") and a Restated Share Subscription and Purchase Agreement
("RSSPA") which substituted the earlier SHA and SSPA. These are referred
to as the "Amended Galaxia Agreements". The RSHA visualized inter alia
that the first stage of the Galaxia Project would be completed no later than
two years from the closing date; the promoters, i.e Shakti could have two
nominee directors on the Board of Directors of the third Respondent. The
conditions also stipulated affirmative votes of either Shakti's representative
or of a nominee director in order for such decisions to be effective (known as
"major decisions"). Under the RSHA (Clauses 4.1 and 4.2) the promoters
agreed to be bound to arrange for a Term Loan Facility of at least `113.50
crores ("Term Loan Facility‟) for the third respondent from any of the
nationalized banks or other lenders as was agreed by the Investors. They
acknowledged ` 13.47 crores would be paid by the third respondent to Noida
towards the remaining cost of the project land and the balance would be
utilized to part finance the construction of the first stage of the project. The
terms and conditions of the Term Loan Facility were to be subject to the
written approval of the Investors. Clause 4.2 also obliged the promoters to
(on the date of payment of the share subscription money by the Investors to
the third Respondent) provide a bank guarantee issued by a bank approved by
the Investors to the third Respondent in the format given in Schedule VII of
the Agreement for ` 13.47 crores- (this was equivalent to the remaining cost
of the project land payable by the third Respondent to Noida). The object of
this was to guarantee that in case the Promoters failed to ensure execution of
the Facility Agreement and disbursal of the first installment of a sum not less
than ` 13.47 crores of the Term Loan Facility on or before 31.08.2009 (called
"Long Stop Date") or such later date as may have been agreed to by investors
in their sole discretion, then the bank would pay the said amount to the third
respondent on demand. The Promoters acknowledged and agreed that the
execution and delivery of the bank guarantee was a material inducement to
the investors in executing the agreement. Clause 5.1.1 of the RSHA, obliged
the promoters to fulfill two conditions to the satisfaction of the investors on
or before the Long Stop Date. One was the execution of the Facility
Agreement; the other was the disbursal of the first installment of the Term
Loan Facility of an amount not less than ` 13.47 crores by the lender to the
third respondent on the terms and conditions set forth in the Facility
Agreement and the sanction letter. The parties confirmed that the time frames
specified in Clause 5.1.1 were that "time is of the essence under this
agreement." The conditions were not subject to delays due to force majeure
(Clause 23.20) or any delays or time taken to obtain any government
approvals and the time limits would not be extended for any reason
whatsoever.
5. Clause 5.2 of the RSHA, embodied "Put Option Rights". Clause 5.2.1
stated that in the event the conditions subsequent were not fulfilled by the
Long Stop Date, the Investors "shall have the right, though not the
obligation, to require the Promoters, to acquire all but not less than all of
the shares held by the Investors (put option shares) and the Promoters shall
be required to purchase such put option shares within 30 (thirty) business
days of being required to do so by the Investors through notice in writing
(Put Option Notice)." The price at which the Investors would sell the put
option shares to the Promoters "shall be equal to the Investors Capital plus a
post tax IRR of 19% on the Investors Capital ("Put Option Price") and the
Promoters shall be bound and obligated to pay the Put Option Price to the
Investors." It was further stipulated that upon exercise of the put option as set
out in the clause, the Promoters "shall have the irrevocable obligation" to
purchase the put option shares held by the Investors and pay the put option
price within 30 business days of the put option notice ("Put Option
Settlement Period"). If the promoters were unable to remit the put option
price to the Investors for any regulatory reason, the entire put option price
"shall be paid by the Promoters to such other person as may be nominated
or designated by the Investors to receive such Put Option Price." Upon
receipt of such put option price, the Investors "shall hand over the share
certificates pertaining to the Put Option Shares to the Promoters." Under
Clause 2.4 of the RSHA, the Investors were obliged to repay the remaining
amount of the Investors' share subscription money to the third respondent
and the Investors' purchase consideration to the Promoters within 10 days
from the date of receipt (by the Investors) of all documents evidencing the
fulfillment of the conditions precedent to closing to the complete satisfaction
of the Investors. Clause 15 provided the composition of the Board of
Directors and that the Investors were entitled to appoint the Chairman of the
Board as well as the Chief Financial Officer, whereas one of the Promoter's
nominee directors would be appointed as the Managing Director. Under
Clause 3.3 of the RSSPA, the Investors were to remit an amount of ` 11
crores to Sarv Mangal to acquire 10,000 Class A shares held by the third
respondent (Promoters Sale Shares). Under Clause 3.4 of the RSSPA, the
Investors were to pay ` 34 crores for the subscribed shares to the third
Respondent. Both the RSHA and the RSSPA stipulated that upon purchase
and subscription of further shares, the ratio of the shareholding of the
Investors and the Promoters would continue to be 50:50.
6. The promoters alleged that the investors failed to take steps to execute
the Facility Agreement. However, the investors willingly extended the Long
Stop Date from 31.08.2009 to 10.10.2009. But the investors did not take any
action in furtherance of the sanction letters "to enable the execution of the
Facility Agreement or further extend the Long Stop Date after 10th October,
2009". By the time the investors brought in the Investors' Share Subscription
Money (in mid December), the Long Stop Date had long expired. On
31.08.2009, parties had by an Agreement agreed to extend "the period for the
fulfillment of the conditions precedent in the [RSHA] and the [RSSPA] for a
further period of 25 (Twenty Five) days and accordingly the Conditions
Precedent to Closing shall be fulfilled by the' Promoters, to the complete
satisfaction of the Investors, on or before 25 September 2009". The Parties
also extended the Long Stop Date under the [RSHAl] for a further period of
40 (forty) days; the extended Long Stop Date was 10.10.2009.
7. On 08.12.2009, amendments were carried out to the RSHA through a
Supplemental Agreement ("SA"). The promoters alleged (before the tribunal)
that they were coerced into consenting to the SA as the payment of the
Investors' Purchase Consideration and the Investors' Share Subscription
Money was made a condition precedent to execution of such documents.
According to the promoters the SA substantially modified the RSHA. Clause
5.1 obliged the Investors to remit the Investors' Share Subscription Money
into an Escrow Bank Account which was to be operated by their authorized
representatives (of the Investors). This, according to the promoters, was a
significant departure and variation from the mode and manner of operation of
the designated Bank Account contemplated by the RSHA. Clause 5.2 of the
SA provided that the designated Bank account would be operated by two
joint signatories, one each to be nominated by the Investors and the
Promoters. The SA- according to the promoters, dispensed with their
obligation of providing a bank guarantee to guarantee payment of
lease rentals of ` 13.47 crores under Clause 4.1 of the RSHA. Clause 3.4 read
with Clause 5.2 of the SA obliged only the ITIPPL to secure the Term Loan
Facility. Under the SA, the investors were sole signatories of the bank
account of ITIPPL, referred to by the parties as the HSBC account.
8. The Investors thereafter paid a sum aggregating to ` 11 crores to the
Promoters towards Investors Purchase Consideration alluded in Clause 3.3 of
RSSPA. The Investors also paid a sum of ` 34,00,27,747 towards Investors
Share Subscription Money for issue and allotment of the shares of ITIPPL in
terms of Clause 3.4 of RSSPA. Thus, a sum of ` 34,00,27,747 was paid to
the bank account of ITIPPL. The Investors' stated position was that they had
invested a total sum of `45,00,27,747 towards the Galaxia Project and the
payments were made as under:
(a) ` 55 lakhs to ITIPPL;
(b) ` 4.73 crores to the promoters
(c) ` 5.72 crores to the promoters; and
(d) ` 34,00,27,747 (Rupees thirty four crores twenty seven hundred and forty
seven only) to ITIPPL.
9. On 17.12.2009, the Promoters received confirmation that ` 4.50 crores
was transferred from the designated bank account to them in partial
repayment of the Promoters' Loan. The same day, their counsel through an
email- to the Investors- purported to terminate the SHA, SSPA, RSHA,
RSSPA, the termination agreement and all documents connected to them. On
06.02.2010, the Investors sent their notice of invocation of arbitration to the
Promoters nominating a former Chief Justice of India as their Arbitrator. On
18.02.2010, the Investors sent a request to the International Chamber of
Commerce ("ICC Court") for commencement of arbitration. The Promoters
informed that they proposed another former Chief Justice of India as their
nominated arbitrator. By its letter dated 26.02.2010, the ICC confirmed
receiving the request for arbitration. The ICC Secretariat wrote to the
Investors about their nominee as arbitrator and that he would be invited to
complete a statement of acceptance, availability and independence. A similar
letter was written by the ICC Secretariat on the same day to the promoters.
After this, preliminary modalities towards confirmation of the nominee
arbitrators, their acceptance, the acceptance of the nominees by either party,
etc commenced thereafter.
10. On 01.04.2010, ICC wrote to the parties reminding them of the time
limit for the coordinators to jointly nominate the Chairman of the AT. On
14.04.2010, counsel for the Petitioners wrote to the ICC for grant of
extension of time to file a reply. Here again, there was no objection raised as
regards the nomination of M1 as an Arbitrator by the Respondents. One
more reminder was sent to the parties by the ICC for two nominated
Arbitrators to appoint a third Arbitrator. At that stage, on 28.05.2010, a
Settlement Agreement was entered into between the Respondents and the
Petitioners, Clause 2.3 of which reads as under:
"2.3 Notwithstanding anything to the contrary as may be
contained in this Agreement or as may be otherwise agreed
between the parties herein, it is clearly agreed and understood
between the parties that in the event that all the entire Galaxia
Consideration or any part thereof is not received by the
Investors within the timelines stipulated hereinabove, for any
reason whatsoever, or in the event any of the Promoters have
failed to fulfil any of their obligations herein or if the
Promoters have committed a breach of the terms of this
Agreement or if any other act or omissions that has such effect
is committed or omitted, then without prejudice to any other
rights of the Investors under the Galaxia Agreements, the
Investors shall have the right, to be exercised in their sole and
absolute discretion, to recommence the Galaxia Arbitration in
accordance with the provisions of the Galaxia Agreements.
It is jointly and severally, agreed and acknowledged by the
Promoters that in such an event, as stated above, the Investors
shall be entitled to all rights that ensue in their favour under
this Agreement or otherwise including the right to claim and to
forthwith receive the entire outstanding amount of or any such
otherwise payable to and claimed by the Investors. The
Promoters unambiguously and unequivocally acknowledge
and declare that the amounts agreed to be paid to the
Investors, i.e., the entire Galaxia Consideration, in terms of
this Agreement are undisputed and payable to the Investors."
11. Clause 2.3 was to be read with Clause 1.1.8 which stated that either `
45 crores had to be paid to the Investors under Sections 1.1.6 (i) and 1.16
(ii), or the sum of ` 50 crores which was required to be paid under Sections
1.1.6 (iii) and Section 1.1.7 would be referred to as the Galaxia
Consideration. Following this, on 15.06.2010, a joint letter was addressed to
the ICC by which the parties agreed to suspend the ICC administered
arbitration in terms of the SA. Later, alleging non-compliance of the
settlement, the investors asked for commencement of arbitral proceedings.
12. In the light of this development, when the ICC wrote to the parties
requiring confirmation of appointment of the two arbitrators, on 21.02.2011,
the Promoters wrote to the ICC reiterating that the arbitration proceedings
should be kept in abeyance. On 11.03.2011, ICC confirmed the appointment
of the two arbitrators. On 21.04.2011, the Chairman of the AT was
appointed. Thereafter, the Promoters, on 21.05.2011 sought to challenge the
nominee arbitrator of the Investors, arguing that he did not possess the
special qualification required to act as Arbitrator. The Investors pointed out
that the said challenge was time-barred since the said nominee was appointed
as an Arbitrator on 06.02.2010. The ICC rejected the challenge on
30.06.2011. An application was filed by the Promoters in which an order was
passed directing them to continue paying Noida the lease rentals till such
time that the order was modified by the AT. Much later, in August, 2012, the
nomination of the arbitrator of the Investor was again challenged before the
tribunal, which was rejected on 23.01.2013 on the ground that the appropriate
forum to deal with this application was the ICC Court. The Promoters,
undaunted by these failures, once again challenged the appointment of the
Investors' nominee as arbitrator, before the ICC court, which again rejected
the application on 14.03.2013.
13. On 20.01.2015, the tribunal, by its majority award held in favour of
the Claimant/Investor and directed the following:
(a) payment of ` 45,00,27,747 (Rupees Forty Five Crores Twenty Seven
Thousand Seven Hundred and Forty Seven Only) together with simple
interest thereon at a rate of 18% p.a. from 31.01.2011 to the date of the Final
Award by the promoters to the investors;
(b) payment of simple interest at a rate of 15% per annum on all sums
awarded to the Claimants in the Award from the date following the date of it,
till date of payment by the promoters to the investors;
(c) it further held that the respondent Promoters were not entitled to
repayment from the Claimants of lease rental already paid by them to the
NOIDA Authority and also that Claimants were not under an obligation to
share future lease rental;
(d) the Promoters were to bear their own legal and other costs and are to
pay the costs of the arbitration comprising of:
i)Fees and expenses of the Arbitral Tribunal and the ICC administrative
expenses fixed by the ICC Court in the total amount of USD $ 900,000.00;
ii)a sum of ` 2,39,08,082.00 towards the Claimants' legal fees;
iii)Costs of the hearing venue in the amount of` 6,57,635.00;
iv)a sum of ` 1,274,931.00 in respect of the Claimants' other costs and
expenses.
14. After the publication of the award, the Promoter challenged it on the
appointment of the Investor's nominee as well as on the merits. The learned
single judge, in the impugned order, repelled this challenge, under Section
34 of the Arbitration and Conciliation Act, 1996, in the following terms with
respect to appointment of the arbitrator:
"45. The parties are bound by what was agreed between them.
In terms of Section 13(4) read with Section 13 (5) of the Act
where a challenge to the Arbitrator fails, then the arbitration
continues. The aggrieved party has to wait for the
pronouncement of the Award. If it is adverse to such party,
then in the petition under Section 34 of the Act such party can
also question the rejection of its challenge to the Arbitrator.
While it may be disadvantageous to such party if the reasons
for the rejection of the challenge are not made known, such
party is nevertheless bound also by the rules governing the
arbitration which too has been agreed between the parties. In
the present case, with the parties have agreed that the
arbitration will be governed by the ICC Rules. They are bound
by the relevant clause in the ICC Rules that dispense with the
ICC Court having to give reasons for rejection of their
challenge to M1 and the Chairman of the AT.
46. The Court is not satisfied with the submission of the
Petitioners that under clause 23.22 of the RSHA, to the extent
the provisions of the clause are inconsistent with ICC Rules,
the said clause would prevail and that in terms of Section
16 (5) of the Act, the challenge to the competence and
jurisdiction of the AT must be decided by the AT itself. Apart
from the fact that that does not appear to be a point raised
before the AT or the ICC Court, the Petitioners appear to be
under a misconception as to the applicable law governing
arbitration on which the parties agreed. It was explicit that the
ICC Rules that would apply. Clause 23.22 of the RSHA is in a
very different context of the law governing the subject matter
of the said agreement and does not affect the challenge
procedure which continues to be governed by the ICC Rules.
47. In Northern Railway Administration, Ministry of Railway,
New Delhi v. Patel Engineering Company Limited (supra), it
was explained that due regard had to be given to the
qualifications in the agreement. However, that was not a case
where the parties themselves waived such a requirement as in
the present case. With the Petitioners having themselves
nominated M1 whose qualifications were no different from M2,
it is plain that neither party chose to adhere to what the
agreement required as regards the qualification of the
Arbitrator. Likewise, the decisions in Supriya Kumar Saha v.
Union of India (supra) and Alcove Industries Limited v.
Oriental Structural Engineers Limited (supra) are clearly
distinguishable on facts. In Union of India v. M.P. Gupta
(supra), the question was whether a sole Arbitrator could have
been appointed when the provision required two gazetted
Railway officers to be appointed as arbitrators. The facts here
are different inasmuch as the Petitioners have themselves
nominated M2 who did not strictly fulfil the qualifications and
did not raise an objection on that score even after receiving his
declaration which made it clear that he did not possess the
requisite qualification.
48. The Petitioners would be barred in terms of Article 33 of
the ICC Rules from raising any objection as to the constitution
of the AT since they chose not to adhere to that requirement in
respect of their own nominee i.e. M2. In Rail India Technical
and Economic Services Limited v. Ravi Constructions (supra),
the Supreme Court explained the consequences of such waiver.
It was observed there that:
"even if there is any violation or irregularity, by subjecting
itself to the jurisdiction of Arbitrator, without challenging his
appointment, RITES is also barred under the principles of
estoppel and waiver from challenging the award of the
Arbitrator on the ground that the Arbitrator was not appointed
in terms of the appointment procedure."
49. Consequently, this Court rejects the submission of the
Petitioners that the AT was improperly constituted thereby
vitiating the impugned Award."
15. By the impugned judgment, the learned single judge negatived the
challenge to the award on its merits. The relevant observations and findings
of the single judge are as follows:
"51. In this regard, it is required to be noticed that according
to the Petitioners a sum of Rs.45,00,27,747 was indeed
brought in by the Respondents for the various projects. The
Petitioners themselves do not dispute that the following
amounts were paid:
********* ***********
52. The Petitioners have also not disputed that out of the above
Rs. 45 crores a sum of Rs. 11 crores was transferred on 17th
December, 2009 into the accounts of the Petitioners directly
and on the same date the Petitioners terminated the RSHA and
the RSPSA leading to invocation of the arbitration clause and
also seeking interim reliefs under Section 9 of the Act. The
fact remains, therefore, that notwithstanding the amount that
may have been utilised by the Petitioners, they did owe to the
Respondents the amount transferred to Respondent No. 3
company upon failure to meet the obligations under the
Galaxia Agreements. The findings of the AT in this regard are
consistent with the various clauses of the agreement.
53. The contention of learned counsel for the Petitioners that
the Award was an attempt by the Respondents to enforce the
put option rights under Clause 5.2 of the RSHA is contrary to
the facts on record. It is plain that it was not the put option
that was exercised by the Respondents. It requires to be
noticed in this context that the right available to the
Respondents under Clause 18.3.2 of the RSHA i.e., claiming
damages for breach of contract under Section 73 of the Indian
Contract Act ("ICA‟) was "in addition to and not in
substitution for" any remedy available to the Respondents in
respect of an event as set out in Clause 18.3 of the RSHA. In
fact, before the AT, the Respondents had made it clear that the
relief they were seeking was not pursuant to the exercise of the
put option but damages for breach of contract.
54. As regards Clause 23.18.1 of the RSHA it is the Petitioners
who benefitted from the said clause in the agreement and,
therefore, cannot now be heard to question its validity. Even
assuming it is invalid, it is severable and the remaining
agreement would continue to bind the parties.
Award not an attempt to enforce the put option
55. It is next contended that the AT has failed to appreciate the
impact of RBI Circular No. 4 of 2014 dated 15th July, 2014
and the Gazette Notification in respect of Foreign Exchange
Management (Transfer or Issue of Security by a person
resident outside India) (12th Amendment) Regulations, 2014
dated 10th July, 2014. It is pointed out that RBI Circular No. 4
of 2014 dated 15th July, 2014 concerns the transfer of shares
and enforcement of "put option". In terms thereof, the transfer
of shares shall be at prices worked out as per internationally
accepted methodology. The governing principle is that a non-
resident investor is not guaranteed any assured exit price and
shall exit at the fair price as may be computed.
56. As regards the amount invested by the Respondents, it is
submitted by the Petitioners that the selling of the Galaxia
Project land was the only method by which the investment
could be returned as was ordered by this Court in OMP
No.99/2011 in Alpha Tiger Cyprus Investments No. 3 v. Shakti
Nath and that the auction has been arranged on 11th April,
2017.
57. The Respondents on the other hand point out that they were
not exercising the put option. They were exercising their right
to recover damages. Clause 18.3.2 of the RSHA makes it
explicit that it is open to the Respondents to either enforce the
"put option" under clause 18.3 of the RSHA or claim damages
for breach of contract under Section 73 of the ICA.
58. There is no merit in the contention that the impugned
Award is an attempt by the Respondents to enforce the put
option rights under Clause 5.2 of RSHA. The pleadings make it
clear that the Respondents did not choose to enforce the "put
option." The Petitioners were bound by the clauses of the
contract. In the decision of State of Haryana v Jage Ram AIR
1980 SC 2018, the Supreme Court observed that "those who
contract with open eyes must accept the burdens of the
contract along with its benefits."
59. The AT examined the Respondents‟ claim as one for
damages. The directions issued by the AT did not touch on the
aspect of exercise of put option by the Respondents. With the
Respondents not exercising the option of the "put option" but
claiming damages for breach of the contract under Section 73
of the ICA, the question of any violation of RBI Circular No. 4
of 2014 in relation to exercise of "put option" did not arise.
There is, therefore, no merit in the contention of the Petitioner
that the impugned Award, if implemented, would lead to
violation of FEMA/RBI guidelines or any of the circulars
thereunder.
60. It is then submitted that the AT had re-written the Galaxia
Agreements since it had ignored the inviolable and non-
derogable binding terms of the contract documents operating
between the parties. The submissions of the Petitioner in this
regard are vague. It has not been pointed out in what manner
the majority of the AT has re-written the contract. On the other
hand, the majority Award has commented on the breach of the
agreements by the Petitioners.
61. The award of interest appears to be in consonance with the
RSHA and the Act. Given the long history of litigation and the
several attempts of the Petitioners to frustrate the arbitration
proceedings, the costs had to follow the Award and that is what
has been done by the majority Award.
62. No ground has been made out by the Petitioners to
demonstrate that the impugned majority Award suffers from
any legal infirmity attracting Section 34 of the Act."
16. The appellant/Promoters argued that Investors failed to act in a bona
fide manner to give effect to the Galaxia Agreements. Mr. Salman Khurshid,
learned senior counsel urged that the funds brought in by the Investors for the
Galaxia Project were utilised for the ostensible purchase of the Technova
Project and `25 crores was remitted back into the Investors account. He
contended that in December 2009, the Investors transferred `34,00,27,747
into an escrow bank account opened for the purposes of funding the Galaxia
Project. This escrow account remained under the Investors' control.
Furthermore `25 crores was transferred by the Investors from the escrow
account to VC Solutions, the promoters' affiliate, (developer of the Technova
Project) further to an agreement signed between the parties.
17. The Promoters, according to its counsel, were under economic
coercion of the Investors to buying back their shares in the Technova Project
as a result of which `25 crores was remitted back to their account. It was
alleged that the Investors intentionally withheld a substantial portion of funds
from the Galaxia Project, rendering the development and performance of the
project impossible and later terminated the Galaxia Agreements.
18. It was also argued that the award, in effect was nothing but an
enforcement of the "Put option" clause. Mr. Khurshid argued that the tribunal
and the learned single judge failed to appreciate or overlooked that the
condition was unenforceable and opposed to public policy, as it was contrary
to the directives of the Reserve Bank Circular, i.e No. 4/2014 dated
15.07.2014 which required such options to be worked out only in accordance
with internationally accepted methodology. Counsel submitted that the said
option in the present case did not fulfill such conditions; therefore, the
imposition of interest rates that matched with the put option clause in effect
amounted to its enforcement, which was contrary to public policy.
19. Mr. Khurshid next argued that the arbitral tribunal and the single judge
failed to act according to law. He said that the award was contrary to public
policy of the country for the simple reason that it is based on a principle of
damages that does not accord with law: i.e Section 73 of the Indian Contract
Act, 1872. It was argued that the obligation of the arbitrators to adhere to the
said provision has been repeatedly emphasized in several Supreme Court
rulings, notably Oil and Natural Gas Commission vs Saw Pipes, (2003) 5
SCC 705 and Kailash Nath Associates v. DDA (2015) 4 SCC 136.
20. Mr. Sanjeev Puri, learned counsel appearing for the Investors, resisted
the appeal and urged that the single judge correctly interpreted the law after a
complete analysis of the circumstances of this case. He emphasized that the
amount ` 45 crores and a sum of ` 11 crores was concededly transferred by
the Investors. The Promoters did not show any inclination to fulfill their part
of the bargain. Furthermore, they did not even pay NOIDA the ground rent
for substantial periods and allowed encroachers to occupy the land. The
Investors had to move the court, under Section 9; local commissioners were
appointed who established that the Promoters brought the encroachers into
the land. Given all these facts, the Investors were of the opinion that no
purpose would be served in granting further time to the Promoters to repay
the money. The arbitral award upheld the claim, in accordance with law.
Analysis and Findings
21. Section 34 of the Act deals with applications for setting aside an
arbitral award. Of relevance are Sections 34(2)(a)(v), which allow for the
setting aside of an award when the arbitral procedure was "not in accordance
with [Part I of the Arbitration Act], and Section 34(2)(b)(ii), when the arbitral
award is in conflict with the public policy of India. In addition, Section 28(1)
of the Act enacts that (in arbitrations which are not international commercial
arbitrations), the arbitrator shall decide the dispute "in accordance with the
substantive law for the time being in force in India." S. 28(3) requires the
arbitrator to "decide in accordance with the terms of the contract." The
Supreme Court in its landmark 2003 judgment Oil and Natural Gas
Commission vs Saw Pipes (supra) explained these provisions. In that case, the
Court clarified that when Section 34(2)(a)(v) states that the arbitral procedure
must be in accordance with Part I, it means that the mandatory requirements
of Section 28 must be followed by the arbitral tribunal, and failure to do so
entails a setting aside of the award (paragraph 12). Therefore, the Court held:
"If the award is contrary to the substantive provisions of law or
the provisions of the Act or against the terms of the contract, it
would be patently illegal, which could be interfered under
Section 34. However, such failure of procedure should be
patent affecting the rights of the parties." (paragraph 14)
The Court also held that "public policy", under S. 34(2)(b)(ii), was to be
given a "broad meaning", and included situations where an award was
"patently illegal":
"Illegality must go to the root of the matter and if the illegality
is of trivial nature it cannot be held that award is against the
public policy. Award could also be set aside if it is so unfair
and unreasonable that it shocks the conscience of the Court.
Such award is opposed to public policy and is required to be
adjudged void." (paragraph 30)
22. In ONGC (supra), the Supreme Court set aside the arbitral award on
the ground that the tribunal had failed to consider Sections 73 and 74 of the
Contract Act, and relevant precedents, in awarding damages. What is "patent
illegality" has been clarified in subsequent cases. Let us consider some of
them. In Hindustan Coal Ltd. vs Friends Coal Carbonisation, (2006) 4 SCC
445, the Court set aside an arbitral award which - in the opinion of the Court
- was clearly contrary to the wording of the price-escalation clause in the
contract between the parties. The Tribunal had calculated price-escalation
based on the price of a certain grade of coal, whereas a different grade was
actually being used at the time. The Court held:
"But on account of apparent error in the Award, the
calculation of escalation has been done with reference to the
prevailing price of superior quality of coal (washery grade I)
and the base price of inferior quality of coal (washery grade II)
instead of calculating escalation with reference to the
prevailing price of the superior quality of coal (washery grade
I) and the base price of superior quality of coal (washery grade
I). In fact, when queries by us, the learned Counsel for
respondent could not explain with reference to contrary terms,
how the base price of washery grade II coal could be applied to
calculate the escalation in coke price produced by using
washery grade I coal."
23. J.G. Engineers vs Union of India, (2011) 5 SCC 758, is a case where
the Court refused to set aside an award on the ground that the arbitrator had
erred on questions of fact, holding that factual conclusions were within the
domain of the tribunal. The Court held:
"Once it is held that the issues relating to who committed
breach and who was responsible for delay were arbitrable, the
findings of the arbitrator that the contractor was not
responsible for the delay and that the termination of contract is
illegal are not open to challenge."
Similarly, in MSK Projects vs State of Rajasthan, (2011) 10 SCC 573, the
Supreme Court noted that:
"If the dispute is within the scope of the arbitration clause, it is
no part of the province of the court to enter into the merits of
the dispute on the issue not referred to it. If the award goes
beyond the reference or there is an error apparent on the face
of the award it would certainly be open to the court to interfere
with such an award."
A survey of the several judgments reveals that Section 34 authorizes a very
narrow jurisdiction to set aside the arbitral tribunal's award. Firstly, the court
does not act as if it were an appellate court, re-visiting the evidence and
undertaking an extensive factual review of the merits of the dispute with the
mandate to cure or correct the errors (Ref Sumitomo Heavy Industries v
ONGC Ltd 2010 (11) SCC 296 and Kwality Manufacturing Corporation v
Central Warehousing Corporation 2009 (5) SCC (Civ) 406).The Court can
set aside an award if it finds that the tribunal has made an error on the face of
the contract, or provided a "patently illegal" interpretation of the law.
Equally, if the arbitrator commits an error in the construction of the contract,
that is an error within his jurisdiction (Ref MSK Projects (I) (JV) Ltd. v. State
of Rajasthan 2011 (10) SCC 573; G. Ramachandra Reddy v Union of India
2009 (6) SCC 414; McDermott International Inc. v. Burn Standard Co. Ltd.,
(2006) 11 SCC 181 and Renusagar Power Co. Ltd. v. General Electric Co.
1984 (4) SCC 679). In Mc Dermott International (supra), the Supreme Court
clarified the Court's inherent limitation by reason of Section 34 in such
matters:
"112. It is trite that the terms of the contract can be express or
implied. The conduct of the parties would also be a relevant
factor in the matter of construction of a contract. The
construction of the contract agreement is within the jurisdiction
of the arbitrators having regard to the wide nature, scope and
ambit of the arbitration agreement and they cannot be said to
have misdirected themselves in passing the award by taking
into consideration the conduct of the parties. It is also trite that
correspondences exchanged by the parties are required to be
taken into consideration for the purpose of construction of a
contract. Interpretation of a contract is a matter for the
arbitrator to determine, even if it gives rise to determination of
a question of law. (See Pure Helium India (P) Ltd. v. ONGC
[(2003) 8 SCC 593] and D.D. Sharma v. Union of India
[(2004) 5 SCC 325]).
113. Once, thus, it is held that the arbitrator had the
jurisdiction, no further question shall be raised and the court
will not exercise its jurisdiction unless it is found that there
exists any bar on the face of the award."
24. Unless the Tribunal commits a patent error of law in adjudicating upon
a question submitted to it, the Court will not intervene (J.G. Engineers Pvt.
Ltd v Union of India 2011 (5) SCC 758). The expression "patently" illegal
was explained as an error "which is, on the face of it, patently in violation of
statutory provisions cannot be said to be in public interest. Such
award/judgment/decision is likely to adversely affect the administration of
justice." (Union of India v. Col. L.S.N. Murthy 2012 (1) SCC 718). J.G.
Engineers (supra) said that patent illegality is one which goes "..to the very
root of the matter and not a trivial illegality.." The Supreme Court had
recognized the high threshold of error of law in Mc Dermott International,
(supra) where it was emphasized that the illegality should go to "the root" of
the matter. Oil and Natural Gas Commission v Western Geco 2014 (9) SCC
263 outlined what is contrary to "public policy" in an award, warranting
interference under Section 34:
"all such fundamental principles as providing a basis for
administration of justice and enforcement of law in this
country." In particular, a court could assess whether a
tribunal: (i) has applied a "judicial approach", i.e. has not
acted in an arbitrary manner; (ii) has acted in accordance with
the principles of natural justice, including applying its mind to
the relevant facts; and (iii) has avoided reaching a decision
which is so perverse or irrational that no reasonable person
would have arrived at it.."
The law was succinctly re-visited and the correct principles re-stated in a
recent decision reported as Associate Builders v Delhi Development Authority
2015 (3) SCC 49.
25. In this case, the Arbitral Tribunal considered all the documents
adduced by the parties and by the majority award held that the events that led
to extension of the "long stop date" of the Restated Share Holder's Agreement
(RSHA) on account of the promoter's failure to fulfill the condition precedent
which included provision for the term loan facility. Significantly, the
Tribunal noticed that the promoters did not lead any evidence suggesting that
they had requested the investors to pass an affirmative vote in respect of the
purported sanction letters. The submission of the promoters that sanction
letters existed and that the parties were aware of it because of the 31.08.2009
agreement, was rejected. The Arbitral Tribunal went to cite the terms of the
said agreement and then held that the remittance by the investors of their
share subscription money did not amount to confirmation that the sanction
letters were adequate or sufficient. In the light of these facts, the Tribunal
concluded that the promoter's obligation to arrange for the term loan facility
continued and that they had failed to fulfill that condition which led to the
notice of 17.12.2009, terminating all agreements relating to the Galaxia
Project. Most importantly, the Arbitral Tribunal was of the opinion that since
the parties' arrangement stood terminated, the promoters could not have it
both ways, i.e. on the one hand accept the investor's performance and on the
other hand, reject it by terminating the RSHA and retaining the investment.
It, therefore, held that the termination of the restated Galaxia agreements on
17.12.2009 coupled with the intention of keeping the investor's amounts
constituted a breach of that agreement.
26. The Tribunal also examined the promoter's objections that no damages
were payable under Section 73 of the Contract Act. It was held that the
damages arose directly from the actions of the promoters. It rejected the
promoter's submission that return of the investment was contingent upon
success of the Galaxia Project. It also significantly overruled the submission
by the promoters based upon clause 6.3, holding that it only determined how
any proceeds earned from Galaxia could be distributed but was not connected
with interest rates. It, at the same time, accepted the promoter's argument and
clause 23.22.3 of the RSHA which prescribed the rate of base interest in
respect of all sums awarded, both at 15% per annum. It also referred to
Section 31(7)(a) of the Act to stipulate that 15% per annum was a reasonable
rate. It consequently directed and awarded a sum of `45,00,27,747 with
simple interest @ 18% per annum on that amount from 31.03.2011 to the
date of the final award; future interest @ 15% till date of payment, was also
awarded.
27. In the light of the analysis by the Tribunal of the circumstances,
particularly with respect to the stipulations under the contract, the Court is
unpersuaded by the appellant/promoter's argument in that the interest rates
awarded are nothing but a disguised affirmation of the put option clause. This
argument was pressed into service before the Tribunal which explained - on
the basis of Section 31(7) that an arbitral tribunal has autonomy to award a
specific rate of interest; in the event of default, the statutory rate would apply.
There cannot be any doubt in the circumstances of the present case that the
investors had been ploughing substantial amounts towards Galaxia project
venture. As to the reasons why that project could not materialize into a
successful commercial venture, the Tribunal by majority award returned
elaborate and substantial findings. Those findings could not have been
interfered with under Section 34 as they are based upon appreciation of the
evidence such as documents and depositions. The promoter/objector could
not point to any important finding that could be termed unreasonable or
shocking the judicial conscience. As far as the rule of damages is concerned,
this Court is of the opinion that the Tribunal as well as the learned Single
Judge were correct in their conclusions that the award did nothing more than
directing the return of the amounts that belonged to the investors given that
the arrangement had terminated. The rate of interest awarded in these
circumstances could not be said to be disproportionate or excessive, so as to
attract jurisdiction under Section 34.
28. For the above reasons, this Court is of the opinion that there is no merit
in the appeal. FAO(OS)(COMM)53/2017 is accordingly dismissed.
S. RAVINDRA BHAT
(JUDGE)
YOGESH KHANNA
(JUDGE)
MAY 8, 2017
