Chloro Controls India Pvt. Ltd. Vs. Severn Trent Water Purification Inc. & Ors.
[Civil Appeal No. 7134 of 2012 arising out of SLP (C) No.8950 of 2010]
[Civil Appeal Nos. 7135-7136 of 2012 arising out of SLP (C) No.26514-26515 of 2011]
Swatanter Kumar, J.
1. Leave granted.
2. The expanding need for international arbitration and divergent schools of thought, have provided new dimensions to the arbitration jurisprudence in the international field. The present case is an ideal example of invocation of arbitral reference in multiple, multi- party agreements with intrinsically interlinked causes of action, more so, where performance of ancillary agreements is substantially dependent upon effective execution of the principal agreement. The distinguished learned counsel appearing for the parties have raised critical questions of law relatable to the facts of the present case which in the opinion of the Court are as follows:
a. What is the ambit and scope of Section 45 of the Arbitration and Conciliation Act, 1996 (for short 'the 1996 Act')?
b. Whether the principles enunciated in the case of Sukanya Holdings Pvt. Ltd. v. Jayesh H. Pandya [(2003) 5 SCC 531], is the correct exposition of law?
c. Whether in a case where multiple agreements are signed between different parties and where some contain an arbitration clause and others don't and further the parties are not identically common in proceedings before the Court (in a suit) and the arbitration agreement, a reference of disputes as a whole or in part can be made to the arbitral tribunal, more particularly, where the parties to an action are claiming under or through a party to the arbitration agreement?
d. Whether bifurcation or splitting of parties or causes of action would be permissible, in absence of any specific provision for the same, in the 1996 Act?
3. Chloro Controls (India) Private Ltd., the appellant herein, filed a suit on the original side of the High Court of Bombay being Suit No.233 of 2004, for declaration that the joint venture agreements and supplementary collaboration agreement entered into between some of the parties are valid, subsisting and binding. It also sought a direction that the scope of business of the joint venture company, Respondent No. 5, set up under the said agreements includes the manufacture, sale, distribution and service of the entire range of chlorination equipments including the electro-chlorination equipment and claimed certain other reliefs as well, against the defendants in that suit.
The said parties took out two notices of motion, being Notice of Motion No.553 of 2004 prior to and Notice of Motion No.2382 of 2004 subsequent to the amendment of the plaint. In these notices of motion, the principal question that fell for consideration of the learned Single Judge of the High Court was whether the joint venture agreements between the parties related only to gas chlorination equipment or whether they included electro-chlorination equipment as well. The applicant had prayed for an order of restraint, preventing Respondent Nos. 1 and 2, the foreign collaborators, from acting upon their notice dated 23rd January, 2004, indicating termination of the joint venture agreements and the supplementary collaboration agreement.
A further prayer was made for grant of injunction against committing breach of contract by directly or indirectly dealing with any person other than the Respondent No.5, in any manner whatsoever, for the manufacture, sale, distribution or services of the chlorination equipment, machinery parts, accessories and related equipments including electro-chlorination equipment, in India and other countries covered by the agreement. The defendants in that suit had taken out another Notice of Motion No.778 of 2004, under Section 8 read with Section 5 of the1996 claiming that arbitration clauses in some of the agreements governed all the joint venture agreements and, therefore, the suit should be referred to an appropriate arbitral tribunal for final disposal and until a final award was made by an arbitral tribunal, the proceedings in the suit should be stayed.
The learned Single Judge, vide order dated 28th December, 2004, allowed Notice of Motion No.553 of 2004 and consequently disposed of Notice of Motion No.2382 of 2004 as not surviving. Against this order, an appeal was preferred, which came to be registered as Appeal No.24 of 2005 and vide a detailed judgment dated 28th July, 2011, a Division Bench of the High Court of Bombay set aside the order of the learned Single Judge and dismissed both the notices of motion taken out by the plaintiff in the suit.
4. Notice of Motion No.778 of 2004 was dismissed by another learned Single Judge of the High Court of Bombay, declining the reference of the suit to an arbitral tribunal vide order dated 8th April, 2004. This order was again assailed in appeal by the defendants in the suit and another Division Bench of the Bombay High Court, vide its judgment dated 4th March, 2010, allowed the Notice of Motion No.778 of 2004 and made reference to arbitration under Section 45 of the 1996 Act.
5. The judgments of the Division Benches, dated 4th March, 2010 and 28th July, 2011, respectively, have been assailed by the respective parties before this Court in the present Special Leave Petitions, being SLP(C) No.8950/2010 and SLP(C) No.26514-15/2011, respectively. Thus, both these appeals shall be disposed of by this common judgment.
6. Before we notice in detail the factual matrix giving rise to the present appeals and the contentions raised, it would be appropriate to illustrate the corporate structure of the companies and the scope of the agreements that were executed between the parties to these proceedings. Corporate Structure of the Companies who are parties to lis
7. In order to describe the corporate structure with precision we will explain it diagrammatically as follows:
SEVERN TRENT (DEL) INC.
Formerly known as SEVEREN TRENT U.S. INC.; Name Changed in May 1992
SEVERN TRENT SERVICES (DEL) INC.
R-1 - CAPITAL CONTROL CO. INC.
Acquired 80% on 15.05.1990 and 20% on 31.03.1994.
NAME CHANGED ON 1.4.2002 TO SEVERN TRENT WATER PURIFICATION INC.
(GAS CHLO. & HYPOGEN Product Lines)
R-2 - CAPITAL CONTROL
(DELAWARE) CO. INC.
Formed on 21.09.94
EXCEL TECHNOLOGIES
INT'L CORP.
Acquired in 1998
Original OMNIPURE and SANILEC Manufacturer Appellant
CHLORO CONTROLINDIA PVT. LTD. MERGED INTO ON 31.03.2003
Shareholders Agreement JVCAPITAL CONTROL (INDIA) PVT LTD.(ON 14.11.1995 a new Joint Venture)
R-5 - GAS CHLORINATORS & HYPOGEN
Distributorship and Knowhow Agreement
ODN,B.V. DENORA NORTH AMERICA, INC.GROUPO DE NORA
Original Seaclor and Seaclor Mac Manufacturer
JVSERVEN TRENT DE NORA LLC - SEPT, 2001
PRODUCTS CURRENTLY OFFERED ARE OMNIPURE,SANILE
7 SEACLOR
R-3 - TITANORCOMPONENTS LTD.
Distributes SEACLOR MAC
Product Line
R-4 - HI POINT SERVICES PVT LTD
OMNIPURE, SANILEC Before 1998
Independent Distributor of EXCEL TECHNOLOGIES since prior to Severn Trent's Acquisition of EXCEL TECHNOLOGIES
Currently, Independent Distributor for SEVERN TRENT DENORA
Distributes Omni pure and Sanilec Products in India
8. Severn Trent, U.S., Inc. was a company existing under the laws of the State of Pennsylvania, United States of America (for short, 'U.S.A.'). This name came to be changed, in 1992, to Severn Trent (Delaware) Inc., which is the principal parent company. This company owned a 100 per cent subsidiary, Severn Trent Services (Delaware) Inc., U.S.A. Severn Trent Services (Delaware) Inc. owned Capital Control (Delaware) Co. Inc. which was formed on 21st September, 1994. On or about 14th May, 1990, Severn Trent Services PLC, U.K., an erstwhile state-owned water authority, privatized in 1989, expanded its business into the U.S.A. by acquiring 80 per cent shares in Capital Control Co. Inc. on 15th May 1990 and a further 20 per cent on 31st March 1994.
It is in this period that the joint venture agreements with the appellant were negotiated, with the consent of the Severn Trent group, which was, by that time, a majority shareholder in Capital Control Co. Inc. Subsequently, the name of Capital Control Co. Inc was changed to Severn Trent Water Purification, Inc. (Respondent No.1), with effect from 1st April, 2002. The Severn Trent Water Purification Inc./Capital Control Co. Inc. then came to be merged with Capital Control (Delaware) Co. Inc. (Respondent No. 2), on 31st March, 2003. As a result thereof, Capital Control (Delaware) Co. Inc. ceased to exist. As per the pleadings of the parties, reference to Capital Control Co. Inc. includes reference to Capital Control Co. Inc. as well as Capital Control (Delaware) Co. Inc.
9. The appellant is a company carrying on business under that name and style for the manufacture of chlorination equipments and incorporated under the Indian laws by Madhusudan Kocha (Respondent No.9 herein) and his group (for short, the "Kocha Group"). This company had been negotiating with Respondent No. 1 for entering into a joint venture agreement, to deal with the manufacture, distribution and sale of gas chlorination equipment and "Hypogen" electro- chlorination equipment Series 3300, etc. This led to the execution of joint venture agreements between the appellant and Respondent No. 1. The joint venture agreements were signed between these companies for constituting a joint venture company under the name and style of Capital Control (India) Pvt. Ltd., with 1,50,000 equity shares of Rs. 10 each and 50 per cent shareholding with each party. These agreements being prior to the merger of Capital Control (Delaware) Co. Inc. with Capital Control Co. Inc. and also prior to the change of name of Capital Control Co. Inc. to Severn Trent Water Purification Inc., 50 per cent of the shares allotted to the foreign collaborators were to be equally divided between Capital Control (Delaware) Co. Inc. and Capital Control Co. Inc. These joint venture agreements were executed between the parties on 16th November, 1995, as already noticed. However, the joint venture company had been incorporated on 14th November, 1995 itself.
10. In the year 1998, Excel Technologies International Corporation came to be acquired by Severn Trent Services (Delaware) Inc. This company was dealing in the manufacture of "Omnipure" and "Sanilec", distinct brands of chlorination products. Later, Excel Technologies entered into a joint venture agreement with De Nora North America Inc. and floated another joint venture company, Severn Trent De Nora LLC in September, 2001 for dealing in the products "Omnipure", "Sanilec" and "Seaclor Mac". It may be noticed that "Seaclor Mac" was a product dealt with and distributed by Titanor Components Ltd., Respondent no.3, and whose original manufacturer was Groupo De Nora; the latter is the parent company of the De nora North America Inc. The distribution rights in respect of all these three products were given by the joint venture company Severn Trent De Nora LLC to Hi Point Services Pvt. Ltd., Respondent No. 4, for independent distribution of the products for Severn Trent De nora LLC, in India.
11. This corporate structure clearly indicates that Severn Trent Services (Del.) Inc. is the holding company of the companies which have entered into the joint venture agreements, for floating both the company's Capital Controls (India) Pvt. Ltd., as well as "Severn Trent De Nora LLC". The disputes have actually arisen between Chloro Controls (India) Pvt. Ltd. and the Kocha Group on the one hand, and Severn Trent Water Purification Inc., the erstwhile Capital Control (Delaware) Co. Inc. and Capital Control Co. Inc. on the other. Details of Agreements
S. No.
Date of Agreement
Details of Agreement
Parties to the Agreement
Whether contains arbitration clause
1
16.11.1995
Shareholders Agreement
1. Capital Controls (Delware) Company, Inc. (Respondent No.2) 2. Chloro Controls India Pvt. Ltd. (Appellant) 3. Mr. M.B. Kocha (Respondent No.9)
Yes
2
16.11.1995
International Distributor Agreement
1. Capital Controls Company Inc., (Colmar) now Severn Trent Water Purification Inc.(Respondent No.1) 2. Capital Controls (India) Private Ltd. (Respondent No.5)
No
3
16.11.1995
Managing Directors' Agreement
1. Capital Controls (India) Private Ltd.(Respondent No.5) 2. Mr. M.B. Kocha (Respondent No.9)
No
4
16.11.1995
Financial & Technical Know-how License Agreement
1. Capital Controls Company Inc., (Colmar) now Severn Trent Water Purification Inc. (Respondent No.1) 2. Capital Controls (India) Private Ltd.(Respondent No.5)
Yes
5
16.11.1995
Export Sales Agreement
1. Capital Controls Company Inc., (Colmar) now Severn Trent Water Purification Inc. (Respondent No.1) 2. Capital Controls (India) Private Ltd. (Respondent No.5)
Yes
6
16.11.1995
Trademark Registered User License Agreement
1. Capital Controls Company Inc., (Colmar) now Severn Trent Water Purification Inc. (Respondent No.1) 2. Capital Controls (India) Private Ltd. (Respondent No.5)
No
7
Aug-97
Suppleme-ntary Collaboration Agreement
1. Capital Controls Company Inc., (Colmar) now Severn Trent Water Purification Inc. (Respondent No.1) 2. Capital Controls (India) Private Ltd.(Respondent No.5)
Yes
Facts
12. Prior to the formation of the joint venture company, the Chloro Controls Group carried on the business of manufacture and sale of gas chlorination equipments and from 1980 onwards, it developed and commenced the manufacturing of electro-chlorination equipment also. The business was done in the name of "Chloro Controls Equipments Company", a sole proprietary concern of Respondent No.9, Mr. M.B. Kocha and it was the distributor in India for the products of the Capital Controls group for more than a decade prior to the formation of the joint venture. On 1st December, 1988, a letter of intent and a letter of understanding were executed between Capital Controls Company Inc., Colmar, Pennsylvania, U.S.A (which name was subsequently changed in the year 2002 to 'Severn Trent Water Purification Inc., respondent No.1) and respondent no.9 to form a new, jointly-owned company in India, to be called "Capital Controls (India) Pvt. Ltd.", the respondent No.5 in the present appeals, for the purposes of manufacture, sale and export of chlorination equipments on the terms and conditions as agreed between the parties.
The formation of the joint venture company got delayed for some time, because Respondent No.1 informed the appellant that Severn Trent, U.K. and the officers of the Capital Controls Company Inc., Colmar, Pennsylvania, U.S.A. had acquired all the shares of the Capital Controls Company Inc. and this share acquisition permitted them to support their representatives and distributers with continuity. On 14th November, 1995, the joint venture company, Capital Controls (India) Private Ltd., Respondent No. 5, was incorporated and registered under the Companies Act, 1956 (for short, the 'Companies Act').
13. To examine the factual matrix of the case in its correct perspective, reference to pleadings of the parties would be appropriate.
14. The petitioner is a Private Limited Company and its shares are entirely held by Respondent/Defendant Nos.9 to 11 (Kocha/Chloro Control Group). Respondent No.1-Company was earlier known as "Capital Control Company Inc." and in or about the year 1990 the Capital Controls Group came to be acquired by Severn Trent Services PLC (UK), originally a State owned water authority and following privatization from the UK Government in 1989, it proceeded to build a product and services business from the US beginning with the acquisition of the Capital Controls Group. The name of the first respondent was changed to Severn Trent Water Purification Inc. with effect from 1st April, 2002. Thus, Respondent Nos.1 and 2 became the group companies and were earlier part of "the Capital Controls Group" (hereinafter referred to as the Capital Controls/Severn Trent Group). Till January 1999, the respondent Nos.1 and 2 developed and sold electro- chlorination equipment under the brand name "Hypogen" and from January 1999 onwards, the said brand was replaced by the brands "Sanilec" and "Omnipure". Respondent Nos.1 and 2 carried on the business of manufacture, supply, sale and distribution of chlorination equipments, including gas and electro-chlorination equipments. Respondent No.3 is a company incorporated under the Companies Act and engaged in the business of manufacture and marketing of electro-chlorination equipment. In or about the year 1989-90, the said Respondent no.3 was floated as a joint venture in technical and financial collaboration with the De Nora group of Italy which held 51% of the equity share capital of the said respondent. Respondent No.4 is a Private Limited Company incorporated under the Companies Act and carried on business in electro-chlorination equipments. It had a tie-up with an American Company called "Excel Technologies International Inc." which was engaged in the business of electrolytic disinfection equipment.
15. Respondent No.5, i.e., Capital Controls (India) Private Ltd. is a Company incorporated under the Companies Act pursuant to the joint venture agreements dated 16th November, 1995 executed between the appellant and respondent no.9 on the one hand and the respondent nos.1 and 2 on the other. 50 per cent of the share capital of Respondent No.5 is held by the appellant and balance of 50 per cent is held by Respondent No.2. Thus, the appellant and Respondent No.2 are the joint venture partners who have together incorporated the Respondent No.5 - company.
16. Respondent Nos.6 and 8 are the Directors of the Respondent No.5 Company, appointed as such by the Capital Controls Group. Respondent No.7 is the Chairman also appointed by the Capital Controls Group, but has no casting vote. Respondent Nos.9 to 11 are the Directors of the Respondent no.5 company, nominated by the Kocha Group/Chloro Controls Group and Respondent No.9 is the Managing Director of the said joint venture.
17. It appears that the joint venture company, Respondent no.5, was incorporated on 14th November, 1995. As discussed above, the joint venture agreements were primarily a project between Respondent Nos. 1 and 2 on the one hand and the appellant company along with its proprietor, Respondent No. 9, on the other. The purpose of these joint venture agreements as indicated in the Memorandum of Association of this joint venture company was to design, manufacture, import, export, act as agent, marketing etc. of gas and electro-chlorination equipments. In order to achieve this object, the parties had decided to execute various agreements. It needs to be emphasized at this stage itself that, as is clear from the above narrated chart, the agreements had been signed between different parties, each agreement containing somewhat different clauses. Therefore, there is a need to examine the content and effect of each of the seven agreements that are stated to have been signed between different parties. Content, scope and purpose of the agreements subject matter of the present appeals
18. The parties to the proceedings, except respondent Nos. 3 and 4, were parties to one or more of the seven agreements entered into between the parties. This includes the Principal Agreement, i.e., the Shareholders Agreement, the Financial and Technical Know-how License Agreement, the International Distributor Agreement, Exports Sales Agreement, Trademark Registered User License Agreement and Managing Director's Agreement, all dated 16th November, 1995. Lastly, the parties also entered into and executed a Supplementary Collaboration Agreement in August, 1997. We have already noticed that except respondent Nos.3 and 4 who were not signatory to any agreement, all other parties were not parties to all the agreements but had signed one or more agreement(s) keeping in mind the content and purpose of that agreement.
19. Now we shall proceed to discuss each of these agreements. Share Holders Agreement
20. The Shareholders Agreement dated 16th November, 1995 was entered into and executed between the Capital Control (Delaware) Co. Inc., respondent No. 2, on the one hand and Chloro Controls (India) Private Ltd., the appellant company run by the Kocha/ Capital Controls group and Mr. M.B. Kocha, respondent No. 9, on the other. As is apparent from the pleadings on record, these two groups had negotiated for starting a joint venture company in India and for this purpose they had entered into the Shareholders Agreement. The main object of this agreement was to float a joint venture company which would be responsible for manufacture, sale and services of the products as defined in the Financial & Technical Know-How License Agreement, in terms of clause 1 of the Agreement.
The Agreement was subject to obtaining all necessary approvals, licenses and authorization from the Government of India, as the joint venture company under the name and style of Capital Control India Pvt. Ltd. was to be registered as a company with its office located in India at Bombay and to carry on its business in India. The plant was to be taken on lease. As already noticed, the authorized capital of the company was Rs.5 million, consisting of equity shares of Rs.10 each. In terms of clause 7, Capital Controls, which was the short form for Capital Control (Delaware) Co. Inc., appointed the joint venture company as a distributor in India of the products manufactured by it, subject to the terms and conditions of the International Distributor Agreement attached to that Agreement as Appendix II. Directors to the joint venture company were to be nominated for a period of three years in accordance with clause 8 of the Agreement.
Clause 14 made it obligatory for the parties to ensure that the joint venture company entered into the Financial and Technical Know-How License Agreement with Capital Controls, subject to which, as mentioned above, the joint venture company was to have the right and license to manufacture the specified products in India. The Financial and Technical Know-How License Agreement, which was annexed to the Principal Agreement as Appendix IV, was to be executed relating to sale and purchase of chlorination equipment assets. This Agreement had to be construed and interpreted in accordance with the laws of the Union of India in terms of clause 29. Further clause 21 related to termination of this Principal Agreement.
In terms of this clause, it was agreed that the Agreement was to continue in force and effect for so long as each party held not less than twenty-six per cent (26%) of the total paid- up equity shares of the company or in the event that the company failed to achieve a cumulative sales volume of Rs.120 million over three years and cumulative profit of fifteen per cent (15%) over three years from signing of the Agreement. Either party had the option to terminate the agreement and dispose of the shares as provided in the terms thereof. Material breach of the Agreement or a deadlock regarding the management of the Company were, inter alia, the contemplated grounds for termination of the Agreement, whereby the party not in default could terminate the Agreement by giving notice in writing to the other party.
The period of notice in the event of a material breach was 90 days from the date of such notice. Clause 21.3 provided that in the event of the termination of the Agreement, the joint venture company would be wound up and all obligations undertaken by Chloro Controls under different agreements would cease with immediate effect. In such an eventuality, even the name of the joint venture company was required to be changed and the word 'Capital', either individually or in combination with other words, was to be removed.
21. Two other very material clauses of this Agreement, which require the attention of this Court, are clauses 4 and 30. In terms of clause 4.5, the Kocha Group and their company Chloro Controls were bound not to engage themselves, directly or indirectly, or even have financial interest in the manufacture, sale or distribution of chlorination equipment which were similar to those manufactured by the joint venture company during the term of the Agreement. In terms of clause 30, all or any disputes or differences arising under or in connection with the Agreement between the parties were liable to be settled by arbitration, in accordance with the Rules of Conciliation and Arbitration of the International Chamber of Commerce (for short, the 'ICC'), by three arbitrators designated in conformity with those Rules. The arbitration proceedings were to be held in London, England and were to be governed by and subject to English laws.
22. As is clear from the above terms and conditions of this Agreement, it was treated as a principal agreement executed between the parties and other agreements, like the Financial & Technical Know- How License Agreement, Trademark Registered User License Agreement, International Distributor Agreement, Managing Directors' Agreement and Export Sales Agreements were not the only anticipated agreements to be executed between the parties, but their drafts and necessary details had been annexed as Appendix I to VII of the shareholder agreement. The other Agreements were only required to be signed by the parties who, as per the Shareholders Agreement, were required to sign such agreement. The Arbitration Clause of the Shareholders Agreement reads as under: "Any dispute or difference arising under or in connection with this Agreement, or any breach thereof, which cannot be settled by friendly negotiation and agreement between the parties, shall be finally settled by arbitration conducted in accordance with the Rules of Conciliation and Arbitration of the International Chamber of Commerce by three arbitrators designated in conformity with those Rules. The arbitration proceedings shall be held in London, England and shall be governed by and subject to English law. Judgment upon the award rendered may be entered in any court of competent jurisdiction." International Distributor Agreement
23. The International Distributor Agreement has been mentioned as Appendix II to the Shareholders Agreement. The International Distributor Agreement was executed on the same day and entered into between Capital Controls Company Inc., respondent No.1 and the joint venture company Capital Controls India Pvt. Ltd., respondent no.5. Under this Agreement, the joint venture company was appointed as the exclusive distributor of products in the "territory" and for the term provided under clause 10 of that Agreement. The specified territory was India, Afghanistan, Nepal and Bhutan but the agreement also stated that exports to other countries were not permissible except with the specific authorization by respondent No.1. Besides providing the rights and duties of the Distributors, this Agreement also stated the schedule for delivery of products/orders, the prices payable, commissions and inspection. It also provided for the terms of payment. Distributor's orders of products were subject to acceptance by the seller at its offices and the seller reserved his right, at any time, to cease manufacture as well as offering for sale any product and to change the design of product.
24. This distributorship right was non-assignable and was exclusively between the distributor and the seller. The relationship between the parties was agreed to be that of a seller and purchaser. Clause 11 of the Agreement then clearly postulated that the distributor was an independent contractor and not joint venture or partner with an agent or employee of the seller. Clause 13 provided that the Agreement contained the entire understanding between the parties with respect to that subject matter and superseded all negotiations, discussions, promises or agreements, prior to or contemporaneous with this Agreement.
25. Further, this Agreement contained the confidentiality clause as well as the non-competition clause being clauses 16 and 18, respectively. The latter specified that the distributor shall not, directly or indirectly, sell, manufacture or supply products similar to any of the products or engage, directly or indirectly, in any business the same as or similar to that of seller, except subject to the conditions of the Agreement.
26. In terms of clause 20, the agreement between the parties was to remain confidential and not to be discussed, shown to or filed with any Government agencies without the prior consent of the seller in writing. This Agreement did not contain any arbitration clause, but it did provide a jurisdiction clause i.e. clause 21, which read as under: "The construction, interpretation and performance of this Agreement and all transactions under it shall be governed by and interpreted under the laws of the State of Pennsylvania, U.S.A., and the parties hereto agree that each shall be subject to the jurisdiction of, and any litigation hereunder shall be brought in, any federal or state court located in the Eastern District of the Commonwealth of Pennsylvania, and that the resolution of such litigation by such court shall be binding upon the parties."
27. We may notice here that the International Distributor Agreement was not only executed in furtherance to Clause 7 of the Shareholders Agreement but in that clause itself it was also stated to be annexed thereto as Appendix II. The Distributor Agreement was liable to be renewed as long as the Distributor i.e. Capital Controls, held at least twenty-six per cent (26%) of the shares in the joint venture company. Managing Directors Agreement
28. Clause 8.6 of the Shareholders Agreement had provided for appointment or reappointment of the Managing Director or whole time Director by mutual consent. Subject to the provisions of the Companies Act, it was agreed that Mr. Kocha would be appointed as the first Managing Director of the Company for an initial period of 3 years and on such terms and conditions as were specified in Appendix III, i.e., the Managing Directors Agreement of the same date. In other words, the Managing Directors Agreement had been executed between joint venture company, Capital Control India Pvt. Ltd. and Mr. M.B. Kocha, on terms already agreed to between the parties to the Shareholders' Agreement.
29. The joint venture company, which is stated to have been incorporated on 14th November, 1995, held Board Meeting on 16th November, 1995 and as contemplated under Clause 8.6 of the Shareholders Agreement, appointed Mr. Kocha as the Managing Director of the Company for three years commencing from 1st April, 1996. This Managing Directors Agreement spelt out the powers which the Managing Director could exercise and more specifically, under Clause 3, the powers which the Managing Director could exercise only with the prior approval of the Board of Directors of the Joint Venture Company. For instance, under Clause 3 (k), the Managing Director was not entitled to undertake any new business or substantially expand the business contemplated thereunder except with the approval of the Board of Directors. Further, clause 6 contained a non-compete clause requiring Mr. Kocha not to run any similar business for two years after the date of termination of the Agreement.
30. This Agreement also did not contain any arbitration agreement and provided no terms which were not within the contemplation of clause 8.7 of the Shareholders Agreement. Export Sales Agreement
31. Export Sales Agreement was again singed between the Chloro Control India Pvt. Ltd. and Capital Control Co. Inc., the foreign partner to the joint venture. This Agreement, on its bare reading, presupposes the existence and working of the joint venture company. The products required to be manufactured by the joint venture company under the Shareholders Agreement as well as those stated in Exhibit 1 of this Agreement were to be exported to different countries by Capital Control Company Inc. which was required to export those goods and execute such orders as per the terms and conditions of this Agreement, except in countries specified in Exhibit 2 to the Agreement.
It is noteworthy that the export could be effected to all countries covered under the 'Territory' excluding the countries specified in Ext. 2 of the agreement which was completely in consonance with the execution and performance of Shareholder Agreement and the International Distributor Agreement executed between the parties. This Agreement stipulated distinct terms and conditions which had to be adhered to by the parties while the Capital Control Company Inc. was to act as sole and exclusive agent for sale of the products. The products under the Agreement meant design, supply, installation commissioning and after-sale services of chlorination systems and equipment related products manufactured by the Joint Venture Company.
The services under the Agreement could be performed by Capital control Co. Inc. itself or through its affiliated corporation or duly appointed sales agents and distributors. In terms of Clause 17 of the Agreement, it was to be construed and interpreted in accordance with the laws in the State of Pennsylvania, U.S.A. It specifically contained an arbitration clause (clause 18) that read as under: "Any dispute of difference arising under or in connection with this Agreement, or any breach thereof, which cannot be settled by friendly negotiation and agreement between the parties shall be finally settled by arbitration conducted in accordance with the Rules of American Arbitration Association. The arbitration proceedings shall be held in Pennsylvania, U.S.A. Judgment upon the award rendered may be rendered may be entered in any court of competent jurisdiction." Financial and Technical Know-how License Agreement and Trademark Registered User Agreement
32. Now, we shall deal with both these agreements together as both these agreements are inter-dependent and one finds elaborate reference to one in the other. Furthermore, both these agreements have been entered into and executed between Capital Control Co. Inc. on the one hand and the joint venture company on the other.
33. Under clause 14 of the Shareholders Agreement, it was required of the parties to cause the joint venture company to enter into the Financial and Technical Know-How License Agreement with the Capital Controls under which the latter was to grant the joint venture company the right and license to manufacture the products in India in accordance with the Technical Know-How and other technical information possessed by Capital Controls. Clause 18 of the Principal Agreement also referred to this agreement and postulated that if the Government of India did not grant permission for the terms of foreign collaboration contained in this agreement, even the Principal Agreement, i.e. the Shareholder's Agreement would be liable to be terminated without giving rise to any claim for damages. Both these clauses provided that this Agreement was attached to the Principal Agreement itself and had been referred to as the 'License Agreement', for short.
34. We may refer to certain terms of this agreement which would indicate that the terms and conditions of the Principal Agreement were to be implemented through this Agreement. Besides providing the obligations of the Capital Controls (respondent no.5), it also stipulated that the licensee, i.e. the joint venture company would be free to manufacture the products under the said patent even after the expiry of the Agreement. Under clauses 9 and 10 of the Agreement, obligations of the licensee were stated and it required the licensee to maintain quality comparable to corresponding products made by Capital Controls in USA and to allow free access and information to Capital Controls. The products manufactured by the licensee whose quality was approved by Capital Controls could be marked with the legend, 'Manufactured in India under license from Capitals Control Company Inc. Colmar, Pennsylvania, USA". However, if the agreement was terminated, the licensee was not to use the trademark and legend.
35. As stated, the purpose of this Agreement was that the licensee desired to obtain the right and license to manufacture the products in accordance with the Technical Know-How owned or acquired by Capital Controls and for which that company was willing to grant license on the terms and conditions stated in that Agreement. The first and foremost restriction was that the rights under the agreement were non- transferable and the right was restricted to sell the products exclusively in India and the countries listed in the Appendix to the Agreement. The Agreement also contained a non-competing clause providing that the licensee must not manufacture or have manufactured for it, sell or offer for sale or be financially interested in similar products without prior written permission of Capital Controls. Respondent no.1 had also agreed that its affiliated companies would sell the product in India only through the licensee. The Agreement provided for payment of royalties under clause 11.
36. Another very significant clause of this Agreement was the Term and Termination clause. The agreement was to continue in force for ten years from the date it was filed with the Reserve Bank of India, subject to earlier termination in terms of clause 15.2. Clause 14.2 provided practically for the conditions of termination of this Agreement similar to those contemplated for the Share Holders Agreement. Neither any modification/amendment of this Agreement nor any waiver of its terms and conditions was to be binding upon the parties unless made in writing and duly executed by both the parties. Appendix I to this agreement recorded the products which the joint venture company was to manufacture. In the event of dispute, the parties were expected to settle it by friendly negotiations, failing which it was to be referred to the ICC, by three Arbitrators designated in conformity with the relevant Rules. Clause 26, the Arbitration clause, read as under:- "Any dispute or difference arising under or in connection with this Agreement, or any breach thereof, which cannot be settled by friendly negotiation and agreement between the parties shall be finally settled by arbitration conducted in accordance with the Rules of Conciliation and Arbitration of the International Chamber of Commerce by three arbitrators designated in conformity with those Rules. The Arbitration proceedings shall be held in London, England and shall be governed by and subject to English Law. Judgment upon the award rendered may be entered in any court of competent jurisdiction."
37. Clauses 15.1 and 15.2 of the Principal Agreement referred to the Trademark Registered User License Agreement. Firstly, it is provided that respondent no.9, Mr. Kocha and Chloro Controls acknowledged that Capital Controls was the sole owner of certain trademarks and trade- names used by Capital Controls in connection with the sale of the products. Besides agreeing that they would not adopt, use or register as a trademark or tradename any word or symbol, which in the opinion of Capital Controls is confusingly similar to their trademarks, there the joint venture company was required to enter into a Trademark Registered User License Agreement for obtaining the right to use certain trademarks and tradenames and it was further specifically provided that the said agreement formed part of the Financial and Technical Know-How License Agreement.
38. The Trademark Registered User Agreement, as already noticed, was executed between the respondent no.1 and respondent no.5, the joint venture company. The relationship between the parties under this agreement was contractual and respondent no.1 had agreed to grant user permission to use the trademarks, subject to the terms and conditions specified in the agreement. The agreement was executed with the clear intention that the license owner (respondent No. 1) would provide its secret drawings, plans, specifications, test data, formulae and other manufacturing procedures and as well as technical know-how for assembly, manufacture, quality control and testing of goods to the licensee, the joint venture company. The agreement dealt with various aspects including grant of non-exclusive right to use the trademarks in relation to the goods in the territory as the registered user of the trademarks. In terms of clause 10 of the agreement, the joint venture company was not to acquire any ownership interest in the trademarks or registrations thereof by virtue of use of trademark and it was specifically agreed that every permitted use of trademarks by the user would enure to the benefit of the licensor company. This Agreement was to terminate automatically in the event the License Agreement i.e. the Financial and Technical Know-How License Agreement, was terminated for any reason. Clause 13 also provided that the permitted use of the trademarks did not involve the payment of any royalty or other consideration, other than the royalties payable under the Financial and Technical Know-How License Agreement by joint venture company to the licensor company. This agreement was terminable on the conditions stipulated in clause 16, which again were similar to the termination clause provided in other agreements. This Agreement did not contain an arbitration clause. Supplementary Collaboration Agreement
39. The last of the documents in this series which requires to be mentioned by the Court is the Supplementary Collaboration Agreement. Any joint venture agreement in India which is in collaboration with a foreign partner can be commenced only after obtaining the permission of the Government of India. The parties herein had already executed a joint venture agreement dated 16th November, 1995. The company obtained the permission of the Government of India vide its letter No. FC-II 830(96)245(96) dated 11th October, 1996 amended on 21st April, 1997. The company then commenced the operation and business of the joint venture company with effect from 1st April, 1997.
40. In the letter by the Government of India dated 11th October, 1996, besides noticing the items of manufacture activity covered by the foreign collaboration agreement, foreign equity participation being 50% and other conditions which had been specifically postulated, under clause 7 of the letter it was specified that the approval letter was made a part of the foreign collaboration agreement executed between the parties and only those provisions of the agreement which were covered by the said letter or which were not at variance with the said letter would be binding on the Government of India or the Reserve Bank of India. Thus, the parties were directed to proceed to finalize the agreement.
41. Vide its letter dated 21st December, 1996, the joint venture company had written to the Ministry of Industry, Department of Industrial Policy and Promotion, Government of India, requesting to amend point No. 2 of the above-mentioned approval letter. The request was to widen the scope of the manufacture activities covered by the foreign collaboration agreement. The company wished to add the manufacture of gas and electro-chlorination equipments, amongst other stated items. The other amendment that was sought for was increase in the authorized share capital from Rs.25 lakhs to paid-up capital of 50 lakhs in the joint venture company. Both these requests of the joint venture company were accepted by the Government of India vide their letter dated 21st April, 1997 and clauses (2), (3) and (4) of the earlier approval letter dated 11th October, 1996 were modified. All other terms and conditions of the approval letter remained the same. The Government of India had asked for acknowledgement of the said letter.
42. In furtherance to this letter of the Government of India, the joint venture company and the respondent no.2 executed this Supplementary Collaboration Agreement. The important part of this one- page agreement is 'we hereby conform that we shall adhere to the terms and conditions as stipulated by the Government of India. Letter No. FC.II: 830(96) 295(96) dated 11.10.1996, amended 21.04.1997.' It also stated that the companies had entered into the joint venture agreement dated 16th November, 1995 and had commenced their operation with effect from 1st April, 1997. In other words, the Supplementary Collaboration Agreement was a mere confirmation of the previous joint venture agreement. By this time i.e., somewhere in August 1997, all other agreements had been executed, the joint venture company had come into existence and, in furtherance to those agreements, it had commenced its business.
43. As we have already noticed under the head 'Corporate Structure', the name of Respondent No. 1, Capital Control Co. Inc. was changed to Severn Trent Water Purification Inc. with effect from 1st April, 2002. Later on, respondent no.2, Capital Control (Delaware) Co. Inc. was merged with the respondent no.1 on 31st March, 2003. Thus, for all purposes and intents, in fact and in law, interest of respondent no.1 and 2 was controlled and given effect to by Severn Trent.
44. On this issue, version of the respondents had been disputed in the earlier round of litigation between the parties where respondent No. 1, Severn Trent Water Purification Co. Inc., USA, had filed a petition for winding up respondent No. 5-Chloro Controls India Pvt. Ltd., the joint venture company, on just and equitable ground under Section 433(j) of the Companies Act. In this petition, specific issue was raised that merger of Capital Controls (Delaware) Co. with Severn Trent was not intimated to the respondent No. 5 company prior to the filing of the arbitration petition by Severn Trent under Section 9 of the 1996 Act as well as that Severn Trent was not a share holder of the joint venture company and thus had no locus standi to file the petition. This Court vide its judgment dated 18th February, 2008 in Civil Appeal No. 1351 of 2008 titled Severn Trent Water Purification Inc. v. Chloro Control (India) Pvt. Ltd. and Anr. held that the winding up petition by Severn Trent Water Purification Inc. was not maintainable as it was not a contributory. But the question whether that company was a creditor of the joint venture company was left open.
45. At this very stage, we may make it clear that we do not propose to deal with any of the contentions raised in that petition whether decided or left open, as the judgment has already attained finality. In terms of the settled position of law, the said judgment cannot be brought in challenge in the present proceedings, collaterally or otherwise.
46. Certain disputes had already arisen between the parties that resulted in termination of the joint venture agreements. Vide letter dated 21st July, 2004, Severn Trent Services informed respondent no.9, respondent no.5 and Chloro Controls India Pvt. Ltd., the present appellant, that they had failed to remedy the issues and grievances communicated to them in their previous correspondences and meetings and also failed to engage in any productive negotiation in this connection and therefore, they were terminating from that very day, the joint venture agreements executed between them and the appellant company, which included agreements stated in that letter i.e. the Shareholders Agreement, the International Distributor Agreement, the Financial and Technical Know-How License Agreement, the Export Sales Agreement and the Trademark Registered User Agreement, all dated 16th November, 1995 and requested them to commence the winding up proceedings of the joint venture company, respondent No. 5. They were also called upon to act in accordance with the terms of the agreement in the event of such termination. It may be noticed here itself that prior to the serving of the notice of termination, a suit had been instituted by the appellant in which application under Section 8/45 of the 1996 Act was filed. Contentions of the learned Counsel appearing for the parties in the backdrop of above detailed facts
47. The appellant had filed a derivative suit being Suit No. 233 of 2004 praying, inter alia, for a decree of declaration that the joint venture agreements and the supplementary collaboration agreement are valid, subsisting and binding and that the scope of business of the joint venture company included the manufacture, sale, distribution and service of entire range of chlorination equipments including electro- chlorination equipment. An order of injunction was also obtained restraining respondent Nos. 1 and 2 from interfering in any way and/or preventing respondent No.5 from conducting its business of sale of chlorination equipments including electro-chlorination equipment and that they be not permitted to sell their products in India save and except through the joint venture company, in compliance of clause 2.5 of the Financial and Technical Know-How License Agreement read with the Supplementary Collaboration Agreement. Besides this, certain other reliefs have also been prayed for.
48. After the institution of the suit, as already noticed, the respondent Nos.1 and 2 had terminated the joint-venture agreements vide notices dated 23rd January, 2004 and 21st July, 2004. Resultantly, in the amended plaint, specific prayer was made that both these notices were wrong, illegal and invalid; in breach of the joint venture agreements and of no effect; and the joint venture agreements were binding and subsisting. To be precise, the appellant had claimed damages, declaration and injunction in the suit primarily relying upon the agreements entered into between the parties. In this suit, earlier interim injunction had been granted in favour of the appellant, which was subsequently vacated at the appellate stage. The respondent Nos.1 and 2 filed an application under Section 8 of the Act, praying for reference of the suit to the arbitral tribunal in accordance with the agreement between the parties. This application was contested and finally decided by the High Court in favour of respondent Nos.1 and 2, vide order dated 4th March, 2010 making a reference of the suit to arbitration.
49. It is this Order of the Division Bench of the High Court of Bombay that has given rise to the present appeals before this Court. While raising a challenge, both on facts and in law, to the judgment of the Division Bench of the Bombay High Court making a reference of the entire suit to arbitration, Mr. Fali S. Nariman, learned senior counsel appearing for the appellant, has raised the following contentions :
a. There is inherent right conferred on every person by Section 9 of the Code of Civil Procedure , 1908, (for short 'CPC') to bring a suit of a civil nature unless it is barred by a statute or there was no agreement restricting the exercise of such right. Even if such clause was there (is invoked), the same would be hit by Section 27 of the Indian Contract Act, 1872 and under Indian law, arbitration is only an exception to a suit and not an alternative to it. The appellant, in exercise of such right, had instituted a suit before the Court of competent jurisdiction, at Bombay and there being no bar under any statute to such suit. The Court could not have sent the suit for arbitration under the provisions of the 1996 Act.
b. The appellant, being dominus litus to the suit, had included respondent Nos.3 and 4, who were necessary parties. The appellant had claimed different and distinct reliefs. These respondents had not been added as parties to the suit merely to avoid the arbitration clause but there were substantive reliefs prayed for against these respondents. Unless the Court, in exercise of its power under Order I, Rule 10(2) of the CPC, struck out the name of these parties as being improperly joined, the decision of the High Court would be vitiated in law as these parties admittedly were not parties to the arbitration agreement.
c. On its plain terms, Section 45 of the 1996 Act provides that 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. The expression 'party' refers to parties to the action or suit. The request for arbitration, thus, has to come from one of the parties to the suit or action or any person claiming through or under him. The Court then can refer those parties to arbitration. The expression 'parties' used under Section 45 would necessarily mean all the parties and not some or any one of them. If the expression 'parties' is not construed to mean all parties to the action and the agreement, it will result in multiplicity of proceedings, frustration of the intended one-stop remedy and may cause further mischief. Judgment of the High Court in referring the entire suit, including the parties who were not parties to the arbitration agreement as well as against whom the cause of action did not arise from arbitration agreement, suffers from error of law.
d. The 1996 Act is an amending and consolidating Act being an enactment setting out in one statute the law relating to arbitration, international commercial arbitration and enforcement of foreign arbitral awards. Further, the 1996 Act has no provision like Section 34 of the Arbitration Act, 1940 (for short "1940 Act"). In Section 3 of the Foreign Awards (Recognition and Enforcement) Act, 1961 (for short '1961 Act'), there existed a mandate only to stay the proceedings and not to actually refer the parties to arbitration. Thus, the position before 1996 in India, as in England, permitted a partial stay of the suit, both as regards matters and parties. But after coming into force of the 1996 Act, it is no longer possible to contend that some parties and/or some matters in a suit can be referred to arbitration leaving the rest to be decided by another forum.
e. Bifurcation of matters/cause of action and parties is not permissible under the provisions of the 1996 Act. Such procedure is unknown to the law of arbitration in India. The judgment of this Court in the case of Sukanya Holdings Pvt. Ltd. (supra) is a judgment in support of this contention. This judgment of the Court is holding the field even now. In the alternative, it is submitted that bifurcation, if permitted, would lead to conflicting decisions by two different forums and under two different systems of law. In such situations, reference would not be permissible.
f. In the alternative, reference to arbitral tribunal is not possible in the facts and circumstances of the present case. Where three major agreements, i.e., Managing Director Agreement, Trademark Registered User Agreement and Supplementary Collaboration Agreement do not have any arbitration clause, there the International Distributor Agreement exclusively provides the jurisdiction for resolution of dispute to the federal or state courts in the Eastern District of the Commonwealth of Pennsylvania, USA. This latter agreement, thus, provided for resolution of disputes under a specific law and by a specific forum. Thus, for uncertainty and indefiniteness, the alleged arbitration clause is unenforceable.
Thus, in the present case, out of all the agreements signed between different parties, four agreements, i.e., Managing Director Agreement, International Distributor Agreement, Trademark Registered User Agreement and the Supplementary Collaboration Agreement, have no arbitration clause. Furthermore, different agreements have been signed by different parties and respondent No.9 is not a party to some of the agreements containing/not containing an arbitration clause. In any case, respondent Nos.3 and 4 are not party to any of the Agreements and the cause of action of the appellant against them is limited to the scope of International Distributor Agreement vis-Ã -vis the products covered under the joint-venture agreement. On these contentions, it is submitted that the judgment of the High Court is liable to be set aside and no reference to arbitral tribunal is possible. Also, the submission is that, within the ambit and scope of Section 45 of the 1996 Act, multiple agreements, where some contain an arbitration clause and others don't, a composite reference to arbitration is not permissible. There has to be clear intention of the parties to refer the dispute to arbitration.
50. Mr. Harish Salve, learned senior counsel, while supporting the judgment of the High Court for the reasons stated therein, argued in addition that the submissions made by Mr. F.S. Nariman, learned senior counsel, cannot be accepted in law and on the facts of the case. He contended that :
i. Under the provisions of the 1996 Act, particularly in Part II, the Right of Reference to Arbitration is indefeasible and therefore, an interpretation in favour of such reference should be given primacy over any other interpretation.
ii. In substance, the suit and the reliefs claimed therein relate to the dispute with regard to the agreed scope of business of the joint venture company as regards gas based chlorination or electro based chlorination. This major dispute in the present suit being relatable to joint venture agreement therefore, execution of multiple agreements would not make any difference. The reference of the suit to arbitral Tribunal by the High Court is correct on facts and in law.
iii. The filing of the suit as a derivative action and even the joinder of respondent Nos.3 and 4 to the suit were primarily attempts to escape the impact of the arbitration clause in the joint venture agreements. Respondent Nos. 3 and 4 were neither necessary nor appropriate parties to the suit. In the facts of the case the party should be held to the bargain of arbitration and even the plaint should yield in favour of the arbitration clause.
iv. All agreements executed between the parties are in furtherance to the Shareholders Agreement and were intended to achieve only one object, i.e., constitution and carrying on of business of chlorination products by the joint venture company in India and the specified countries. The parties having signed the various agreements, some containing an arbitration clause and others not, performance of the latter being dependent upon the Principal Agreement and in face of clause 21.3 of the Principal Agreement, no relief could be granted on the bare reading of the plaint and reference to arbitration of the complete stated cause of action was inevitable.
v. The judgment of this Court in the case of Sukanya (supra) does not enunciate the correct law. Severability of cause of action and parties is permissible in law, particularly, when the legislative intent is that arbitration has to receive primacy over the other remedies. Sukanya being a judgment relatable to Part 1 (Section 8) of the 1996 Act, would not be applicable to the facts of the present case which exclusively is covered under Part II of the 1996 Act.
vi. The 1996 Act does not contain any restriction or limitation on reference to arbitration as contained under Section 34 of the 1940 Act and therefore, the Court would be competent to pass any orders as it may deem fit and proper, in the circumstances of a given case particularly with the aid of Section 151 of the CPC.
vii. A bare reading of the provisions of Section 3 of the 1961 Act on the one hand and Section 45 of the 1996 Act on the other clearly suggests that change has been brought in the structure and not in the substance of the provisions. Section 3 of the 1961 Act, of course, primarily relates to stay of proceedings but demonstrates that the plaintiff claiming through or under any other person who is a party to the arbitration agreement would be subject to the applications under the arbitration agreement. Thus, the absence of equivalent words in Section 45 of 1996 Act would not make much difference. Under Section 45, the applicant seeking reference can either be a party to the arbitration agreement or a person claiming through or under such party. It is also the contention that a defendant who is neither of these, if cannot be referred to arbitration, then such person equally cannot seek reference of others to arbitration. Such an approach would be consistent with the development of arbitration law.
51. The contention raised before us is that Part I and Part II of the 1996 Act operate in different fields and no interchange or interplay is permissible. To the contra, the submission is that provisions of Part I have to be construed with Part II. On behalf of the appellant, reliance has been placed upon the judgment of this Court in the case Bhatia International v. Bulk Trading S.A. and Anr. [(2002) 4 SCC 105]. The propositions stated in the case of Bhatia International (supra) do not directly arise for consideration of this Court in the facts of the present case. Thus, we are not dealing with the dictum of the Court in Bhatia International's case and application of its principles in this judgment. It is appropriate for us to deal with the interpretation, scope and ambit of Section 45 of the 1996 Act particularly relating to an international arbitration covered under the Convention on Recognition and Enforcement of Foreign Arbitral Awards (for short, 'the New York Convention').
52. Now, we shall proceed to discuss the width of Section 45 of the 1996 Act. Interpretation of Section 45 of the 1996 Act
53. In order to invoke juris
