Hindustan Petroleum Corpn. Ltd vs M/S. Pinkcity Midway Petroleums

Court of Punjab & Haryana at Chandigarh delivered in Civil

Revision No.1688 of 2002 on 1.7.2002 whereby the High Court

dismissed the revision petition filed by the appellant herein

against an order made by the Civil Judge, (Senior Division),

Rewari, Haryana, dated 19.2.2002 dismissing the application

filed by the appellant herein under Section 8 read with Section

5 of the Arbitration and Conciliation Act, 1996 (for short 'the

Act') in a suit pending before it seeking reference of the suit

pending before it to an arbitrator as contemplated under Clause

40 of the Dealership Agreement between the parties.

The facts necessary for disposal of this appeal, briefly

stated, are as follows :

The appellant herein is a company carrying on the

business of manufacture, sale and distribution of petroleum

products which it does through dealers and distributors

appointed by it. The respondent herein is one of such dealers

appointed by the appellant to sell its petroleum products

through a retail outlet at Jaisingpur Khera, National Highway

No.8, District Rewari, Haryana. The said appointment as a

dealer of the respondent is governed by a Dealership

Agreement dated 26.3.1997 executed by the parties. According

to the appellant, Clause 30 of the said agreement empowers it to

stop the supply of its products to a dealer for a period as the

appellant thinks fit, for breach of any of the conditions

contained in the agreement. The appellant also states that this

stoppage of supply of its product is in addition to and without

prejudice to any other right or remedy available to it or others

under the said agreement. The appellant also contends that

under Clause 40 of the said agreement, any dispute of

whatsoever nature between the parties, arising out of or in

relation to the said agreement, will have to be referred to the

sole arbitration of the Chairman and the Managing Director of

the Corporation who may, as per the said clause, either himself

act as an arbitrator or nominate some other officer of the

appellant to act as an arbitrator. It is also the case of the

appellant that under Clause 20 of the said agreement, the

respondent is not only obligated to comply with the terms and

conditions of the said agreement but is also responsible to

comply with all directions, orders, guidelines etc. issued by the

appellant-Corporation on safe practices and marketing

discipline. The appellant further contends that in this regard as

per the marketing discipline, guidelines issued for the purpose

of prevention of mal-practices, irregularities at retail outlets, the

officers of the appellant are entitled to conduct inspections,

make necessary report and take action thereon. This right of the

Corporation, according to the appellant, is in addition to the

powers of the Government of India and other statutory

authorities as notified in the Notification dated 28.12.1998

issued in exercise of powers conferred under Section 3 of the

Essential Commodities Act, 1955 and Order of 1998 issued

thereon for purposes of checking mal-practices.

The appellant contends that while in exercise of such

power of inspection on 18.11.2001 by the officers of the

Corporation, it was found that there was short delivery of Motor

Spirit (MS) and High Speed Diesel (HSD) in the dispensing

units of the respondent. The said officers also found weights

and measurement seals in the HSD dispensing units tampered

with. Based on the said inspection reports, the appellant states

that on 29.11.2001 a show-cause notice was issued by the

appellant to the respondent in regard to short-delivery and

tampering, as stated above.

In response to the above show-cause notice of the

appellant, it is stated that the respondent submitted its reply and

on consideration of the same, the appellant not being satisfied,

suspended the sales and supply of petroleum products to the

respondent's retail outlet for a period of 30 days and also levied

a penalty of Rs.15,000/- for the said irregularities committed by

the respondent as per the appellant's letter dated 16.1.2002.

Being aggrieved by the said stoppage of supply of

appellant's product, the respondent filed Civil Suit No.18 of

2000 in the Court of the Civil Judge, (Senior Division), Rewari,

praying, inter alia, for a declaration that the order dated

16.1.2002 is illegal and arbitrary. The respondent along with

the plaint in the said suit also filed an application under Order

39 Rules (1) and (2) of the CPC. Learned Civil Judge was

pleased to stay the suspension of supplies by the appellant to

the respondent while in regard to the penalty, no stay was

granted.

In reply to the plaint filed in the Civil Judge's Court, the

appellant filed an application under section 8 read with Section

5 of the Act in the said suit praying for referring the dispute

pending before the Civil Court to the arbitrator as per Clause 40

of the Dealership Agreement dated 26.3.1997. Along with that

application, as required under Section 8 of the Act, the

appellant also enclosed a copy of the agreement. In the said

application, the appellant had stated that the action taken by it

was in consonance with the terms and conditions of the

Dealership Agreement, hence, any dispute arising out of the

said action of the appellant could only be referred to the

arbitrator as per Clause 40 of the said agreement.

The learned Civil Judge by his order dated 19.2.2002

dismissed the said application holding that the dispute between

the parties was not covered by the arbitration agreement. A

revision filed by the appellant in the High Court, as stated

above, against the order of the learned Civil Judge came to be

dismissed by the High Court. It is in the above backdrop that

the appellant is before us in this appeal.

Mr. Mukul Rohtagi, learned A.S.G. appearing for the

appellant-Corporation, contended that the courts below have

seriously erred in coming to the conclusion that the arbitration

clause found in the Dealership Agreement does not apply to a

dispute of the nature which was pending in the suit before the

learned Civil Judge. Learned counsel contended that the courts

below having come to the conclusion that there was an

arbitration clause which is widely worded in the Dealership

Agreement which would ordinarily cover all differences,

disputes, claims etc., could not have further proceeded to

examine whether such a clause would cover the dispute raised

in the suit because such an exercise could only be undertaken

by the arbitrator in view of Section 16 of the Act. In support of

this contention of his, learned counsel placed strong reliance on

a Constitution Bench judgment of this Court in Konkan

Railway Corporation Ltd. & Anr. v. Rani Construction Pvt. Ltd.

[2002 (2) SCC 388]. He further contended that even the finding

rendered by the two courts below that there can be no

arbitration clause in regard to a dispute concerning short-

delivery of Motor Spirit and HSD or the tampering with the

weights and measurement seals because such a dispute can only

be adjudicated in a manner provided for under the Standards of

Weights and Measures (Enforcement) Act, 1985 (the 1985 Act),

and such dispute cannot be gone into in arbitration proceedings,

is wholly erroneous and cannot be sustained. With reference to

the judgment of the High Court, the learned counsel also

contended that the High Court has erred in coming to the

conclusion that a revision petition under Section 115 of the

CPC will not be available to the appellant on the facts and

circumstances of this case.

Mr. Chetan Sharma, learned senior counsel appearing for

the respondent, in reply, contended that the courts below have

justly come to the conclusion that the arbitration clause found

in the Dealership Agreement could not have contemplated an

adjudication by an arbitrator in regard to a dispute arising

between the parties pertaining to short-delivery of the Motor

Spirit and HSD or tampering with the seal because these are the

disputes which have penal consequences, hence, could only be

tried by a competent criminal court on being investigated by an

authorised agency as provided in the 1985 Act. He also

submitted that since the dispute ex facie showed that the same

cannot be adjudicated by an arbitrator, the courts below were

justified in coming to the conclusion that the application filed

under Sections 5 and 8 of the 1996 Act was not maintainable.

Learned counsel also supported the finding of the High Court in

regard to non-maintainability of the revision petition before it.

For deciding the question whether the courts below were

justified in coming to the conclusion that they could go into the

question of the existence or validity of the arbitration

agreement, we will have to first consider the relevant clauses

found in the Dealership Agreement. Clause 40 of the said

agreement reads thus :

"40. Arbitration

(a) Any dispute or difference of any nature

whatsoever any claim, cross-claim, counter-claim

or set off or regarding any right, liability, act,

omission or account of any of the parties hereto

arising out of or in relation to this agreement shall

be referred to the Sole Arbitration of the Chairman

& Managing Director of the Corporation who may

either himself act as the Arbitrator or nominate

some other Officer of the Corporation to act as the

Arbitrator. The dealer will not be entitled to raise

any objection to any such arbitrator on the ground

that the Arbitrator is an officer of the Corporation.

(b) In the event of the Arbitrator to whom the

matter is originally referred being transferred, he

shall be entitled to continue the arbitration

proceedings notwithstanding his transfer unless the

Chairman & Managing Director at the time of such

transfer or at any time thereafter, designates

another Officer to act as Arbitrator in his place in

accordance with the terms of this agreement.

(c) In the event of the arbitrator, to whom the

matter is originally referred vacating his office or

being unable or refusing to act for any reason, the

Chairman & Managing Director at the time of

vacation of office or inability or refusal to act,

shall designate another Officer to act as Arbitrator

in accordance with the terms of this agreement.

(d) The Arbitrator newly nominated by the

Chairman & Managing Director under Clauses (b)

or (c) above shall be entitled to proceed with the

reference from the point at which it was left by his

predecessor.

(e) It is an express term of this contract that no

person other than the Chairman & Managing

Director or a Director nominated as aforesaid shall

act as Arbitrator. If for any reason, Chairman &

Managing Director is unable or unwilling or

refuses or fails to act as an Arbitrator or nominate

an Arbitrator then the matter shall be referred to

the Director (Marketing) who shall appoint a

Officer of the Corporation to act as an Arbitrator.

It being fully understood and agreed by and

between the parties hereto that the vacancy should

not be supplied within the meaning of sub-section

1(b) of section 8 of the Arbitration Act, 1940 (Act

No.10 of 1940).

(f) The award of the Arbitrator so appointed

shall be final conclusive and binding on all parties

to the agreement subject to the provisions of the

Arbitration Act, 1940.

(g) The award shall be made in writing and

published by the Arbitrator within 12 months after

entering upon the reference or within such

extended time not exceeding one further year as

the parties shall agree in writing. The parties

hereto shall be deemed to have irrevocably given

their consent to the Arbitrator to make and publish

the award within the period referred to

hereinabove and shall not be entitled to raise any

objection or protest thereto under any

circumstances whatsoever.

(h) It is hereby expressly agreed that the powers

of the Arbitrator appointed in the matter

hereinabove mentioned shall include the power to

make interim award/awards as the circumstances

of the case may justify to appoint a receiver,

commissioner or custodian by whatever name

called to take possession of the property in dispute

during the pendency of the proceedings and

subject to such final order as may be passed by the

Arbitrator and shall also have the power to issue

such further orders from time to time as he may

deem fit, on an application being made to him by

any of the parties to the dispute where it is

apprehended that the property to which it relates is

in danger of being wasted, damaged, deteriorated

or parted with or rights of other parties are likely to

be created thereon.

(i) The Arbitrator shall be at liberty to appoint,

if necessary, any accountant or engineer or other

technical person to assist him and to act on the

opinion taken from such person.

(j) The Arbitrator shall be entitled to direct

anyone of the parties to pay the costs of the other

party in such manner and to such extent as the

Arbitrator may in his discretion determine and

shall also be entitled to require on or both the

parties to deposit funds in such proportion to meet

the Arbitrator's fees and expenses as and when

called upon to do so.

(k) The venue of the Arbitration shall be as

decided by the Arbitrator."

A perusal of this clause clearly shows that the parties to

the Dealership Agreement had agreed to refer their dispute

arising out of the agreement, of whatever nature it may be, to an

arbitrator as contemplated in that agreement. Section 8 of the

Act in clear terms mandates that a judicial authority before

which an action is brought in a matter which is the subject of an

arbitration agreement to refer such parties to arbitration, the

language of this Section is unambiguous.

This Court in the case of P. Anand Gajapathi Raju & Ors.

v. P. V. G. Raju (Dead) & Ors. [2000 (4) SCC 539] has held

that the language of Section 8 is peremptory in nature.

Therefore, in cases where there is an arbitration clause in the

agreement, it is obligatory for the Court to refer the parties to

arbitration in terms of their arbitration agreement and nothing

remains to be decided in the original action after such an

application is made except to refer the dispute to an arbitrator.

Therefore, it is clear that if, as contended by a party in an

agreement between the parties before the Civil Court, there is a

clause for arbitration, it is mandatory for the Civil Court to refer

the dispute to an arbitrator. In the instant case the existence of

an arbitral clause in the agreement is accepted by both the

parties as also by the courts below but the applicability thereof

is disputed by the respondent and the said dispute is accepted

by the courts below. Be that as it may, at the cost of repetition,

we may again state that the existence of the arbitration clause is

admitted. If that be so, in view of the mandatory language of

Section 8 of the Act, the courts below ought to have referred the

dispute to arbitration.

The question then would arise: what would be the role of

the Civil Court when an argument is raised that such an

arbitration clause does not apply to the facts of the case in

hand ? Learned counsel for the appellant contends that it is a

matter which should be raised before the arbitrator who is

competent to adjudicate upon the same and the Civil Court

should not embark upon an inquiry in regard to the applicability

of the arbitration clause to the facts of the case. While learned

counsel appearing for the respondent contends that since the

applicability of the arbitration clause to the facts of the case

goes to the very root of the jurisdiction of the reference to

arbitration, this question will have to be decided by the Civil

Court before referring the matter to arbitration even in cases

where there is admittedly an arbitration clause. The answer to

this argument, in our opinion, is found in Section 16 of the Act

itself. It has empowered the Arbitral Tribunal to rule on its own

jurisdiction including rule on any objection with respect to the

existence or validity of the arbitration agreement. That apart, a

Constitution Bench of this Court in Konkan Railway (supra)

with reference to the power of the arbitrator under Section 16

has laid down thus :

"It might also be that in a given case the

Chief Justice or his designate may have

nominated an arbitrator although the period

of thirty days had not expired. If so, the

Arbitral Tribunal would have been

improperly constituted and be without

jurisdiction. It would then be open to the

aggrieved party to require the Arbitral

Tribunal to rule on its jurisdiction. Section

16 provides for this. It states that the

Arbitral Tribunal may rule on its own

jurisdiction. That the Arbitral Tribunal may

rule "on any objections with respect to the

existence or validity of the arbitration

agreement" shows that the Arbitral

Tribunal's authority under Section 16 is not

confined to the width of its jurisdiction, as

was submitted by learned counsel for the

appellants, but goes to the very root of its

jurisdiction. There would, therefore, be no

impediment in contending before the

Arbitral Tribunal that it had been wrongly

constituted by reason of the fact that the

Chief Justice or his designate had nominated

an arbitrator although the period of thirty

days had not expired and that, therefore, it

had no jurisdiction." (emphasis supplied)

It is clear from the language of the Section, as interpreted

by the Constitution Bench judgment in Konkan Railway (supra)

that if there is any objection as to the applicability of the

arbitration clause to the facts of the case, the same will have to

be raised before the concerned Arbitral Tribunal. Therefore, in

our opinion, in this case the courts below ought not to have

proceeded to examine the applicability of the arbitration clause

to the facts of the case in hand but ought to have left that issue

to be determined by the Arbitral Tribunal as contemplated in

Clause 40 of the Dealership Agreement and as required under

Sections 8 and 16 of the Act.

In the normal circumstances, the above finding of ours

should have sufficed to dispose of this appeal before us. But in

view of the categoric findings given by the two courts below in

regard to the non-applicability of Clause 40 of the Dealership

Agreement to the facts of the case, and also in view of the

arguments addressed before us, we are constrained to examine

the correctness of the findings of the two courts below to avoid

multiplicity of proceedings.

It was argued before the courts below as also before us

that the mis-conduct, if any, pertaining to short-supply of

petroleum products or tampering with the seals would be a

criminal offence under the 1985 Act. Therefore, the

investigation into such conduct of the dealer can only be

conducted by such officers and in a manner so specified in the

said Act, and it is not open to the appellant to arrogate to itself

such statutory power of search and seizure by relying on some

contractual terms in the Dealership Agreement. It is further

argued that such disputes involving penal consequences can

only be tried by a court of competent jurisdiction and cannot be

decided by an arbitrator.

Having considered the above arguments addressed on

behalf of the respondent as also the findings of the courts

below, we are of the opinion that the same cannot be accepted

because the appellant is neither exercising the power of search

and seizure conferred on a competent authority under the 1985

Act nor does the Dealership Agreement contemplate the

arbitrator to exercise the power of a criminal court while

arbitrating on a dispute which has arisen between the

contracting parties. This is clear from the terms of the

Dealership Agreement. In our opinion, the findings of the

courts below in this regard run counter to the clauses of the said

Agreement, as could be seen from the following clauses of the

Dealership Agreement which read thus :

"20. Dealer to comply with provisions of

Acts, Rules & Regulations

(a) The Dealer shall at all times faithfully, promptly

and diligently observe and perform and carry out at

all times, all directions, orders, rules, terms and

conditions as may be issued by the Corporation or

its representatives from time to time on safe

practices and marketing discipline and for the

proper carrying on of the Dealership of the

Corporation.

(b) The Dealer shall observe and comply with the

provisions of Petroleum Act, 1934, Explosives

Act, 1884, Weights & Measures Act, 1976, etc.,

and all rules and regulations made thereunder.

(c) The Dealer shall faithfully observe and perform all

the obligations, duties and requirements under the

licences required or obtained for running the

dealership and shall promptly renew all licences

from time to time.

(d) The Dealer shall be solely responsible for any

breach or contravention by them, their employees,

of any Acts, rules, regulations or bye-laws of the

Central and/or State Governments and/or

Municipal, Local and/or other authorities as may

be applicable to the Retail Outlet business and the

Corporation shall not be responsible in any manner

for any of the liabilities arising out of non-

compliance by the Dealer, their employees, their

agents and sub-agents.

(e) The Corporation will obtain in its name a storage

licence from the Controller of Explosives for the

storage of petroleum products at the said premises

and the dealer shall faithfully observe and perform

all the terms and conditions of such licence(s).

(f) The dealer shall obtain any or every licence(s)

necessary for the storage/sale of petroleum and

other products at the said premises required under

any Central/State Government or local enactment

for the time being in force and shall faithfully

observe and perform all the terms and conditions

for such licence(s) and shall promptly renew the

same from time to time.

(g) The dealer shall be solely responsible for any

breach or contravention by them, their servants or

agents of any laws, rules, regulations or bye-laws

passed or made by the Central and/or State

Government and/or Municipal local and/or other

Authorities as may be applicable from time to time

to the business including without prejudice to the

generality of the foregoing. The concerned

Authorities respectively appointed under the

Petroleum Act, Payment of Wages Act, Shops &

Establishment Act, Factories Act and the

Workmen's Compensation Act or any statutory

modifications or re-enactments of the said statutes

or rules and the Corporation shall not be

responsible in any manner for any liability out of

non-compliance by the dealer with the same. The

dealer shall at all times indemnify and keep

indemnified the Corporation against all actions,

proceedings, claims and demands made against it

by the Central and/or State Government and/or

Municipal Local and/or other Authorities and/or by

any customer of the product and/or any other third

party as a result of or in consequence of any act or

omission of whatsoever nature of the dealer, his

servants or agents, including, without prejudice to

the generality of the foregoing, any accident or

loss or damage arising out of the storage, handling

and/or sale of the products or attributable to the

use of the said premises for the aforesaid purposes

whether or not such act or omission or accident or

loss or damage was due to any negligence, want of

care or skill or any misconduct of the dealers, their

servants or agents.

(h) The dealer shall indemnify and save harmless the

Corporation from all losses, damages, claims, suits

or actions which may arise out of or result from

any injury to any person or property or from

violation of any statutory enactments, rules or

regulations or other written orders or other laws or

caused by or resulting from non-observance by the

dealer of the provisions of this Agreement."

A perusal of various sub-clauses of this Clause of the

Dealership Agreement shows that the dealer is under an

obligation to faithfully, promptly and diligently observe and

perform and carry out at all times all directions, orders, rules,

terms and conditions of safe practices and marketing discipline

while carrying on the dealership of the appellant. Clause 20 of

the said Agreement also requires the dealer to observe and

comply with the provisions of the Petroleum Act, Explosives

Act, the Weights and Measures Act, 1976 and the rules and

regulations made thereunder.

Clause 30 of the Agreement reads thus :

"30. Corporation's right to stop/suspend

Petrol/Diesel/Lubricants supply.

Notwithstanding anything to the

contrary herein contained the Corporation

shall be at liberty upon a breach by the

dealer of any covenant in this Agreement to

stop and/or suspend forthwith supply of

Petrol/Diesel/Lubricants and other products

to the dealer and/or sales for such period or

periods as the Corporation may think fit, and

such right of stoppage and/or suspension

shall be in addition to and/or without

prejudice to any other right or remedy

available to the Corporation under this

Agreement. The dealer shall not be entitled

to claim any compensation or damage from

the Corporation on account of any such

stoppage and/or suspension of supply."

A perusal of this Clause shows that if the dealer commits

a default in complying with the obligations enumerated in

Clause 20 of the Agreement, the appellant is entitled to stop or

suspend supply of its petroleum products to such a dealer

without prejudice to other remedies available under the

Agreement. This right of the appellant to take action against an

erring dealer under the terms of the Agreement is de hors the

proceedings that may be available to be initiated against an

erring dealer under the provisions of various other enactments

referred to in Clause 20 of the said Agreement including under

the provisions of the 1985 Act. This right of the Corporation to

suspend the supply of petroleum products to an erring dealer is

a right exercised under the terms of the contract and is

independent of the statutory provisions of the various Acts

enumerated in Clause 20 of the Agreement. The courts below,

in our opinion, have committed an error by misreading the

terms of the contract when they came to the conclusion that the

only remedy available as against a misconduct committed by an

erring dealer in regard to short-supply and tampering with the

seals lies under the provisions of the 1985 Act. The courts

below have failed to notice that when a dealer short-supplies or

tampers with the seal, apart from the statutory violation, he also

commits a misconduct under Clause 20 of the Agreement in

regard to which the appellant is entitled to invoke Clause 30 of

the Agreement to stop supply of petroleum products to such

dealer. The power conferred under the Agreement does not in

any manner conflict with the statutory power under the 1985

Act nor does the prescribed procedure under the 1985 Act in

regard to search and seizure and prosecution apply to the power

of the appellant to suspend the supply of its petroleum products

to an erring dealer. The power exercised by the appellant in

such a situation is a contractual power under the agreement and

not a statutory one under the 1985 Act. The existence of dual

procedure; one under the criminal law and the other under the

contractual law is a well-accepted legal phenomenon in the

Indian jurisprudence.

Therefore, in our opinion, the courts below have erred in

coming to the conclusion that the appellant did not have the

legal authority to investigate and proceed against the respondent

for its alleged misconduct under the terms of the Dealership

Agreement. We are also of the opinion that if the appellant is

satisfied that the respondent is indulging in short-supply or

tampering with the seals, it will be entitled to initiate such

action as is contemplated under the agreement like suspending

or stopping the supply of petroleum products to such erring

dealer. If in that process any dispute arises between the

appellant and such dealer, the same will have to be referred to

arbitration as contemplated under Clause 40 of the Dealership

Agreement.

This brings us to consider the last question involved in

this appeal, namely, the maintainability of the revision petition

before the High Court under Section 115 of the CPC. The High

Court by the impugned order has come to the conclusion that its

jurisdiction to entertain a revision petition would only be

available if the order impugned is such that if it is allowed to

stand, it would occasion failure of justice or cause an

irreparable injury to a party against whom the said order is

made. In support of this finding, the High Court has relied upon

certain judgments of this Court. Having perused the said

judgments, we are of the opinion that the findings given in

those judgments do not apply to the facts of this case at all. We

have come to the conclusion that the Civil Court had no

jurisdiction to entertain a suit after an application under Section

8 of the Act is made for arbitration. Therefore, we are of the

opinion that the trial court failed to exercise its jurisdiction

vested in it under Section 115 of the C.P.C. when it rejected the

application of the appellant filed under Sections 8 and 5 of the

Act. In such a situation, refusal to refer the dispute to arbitration

would amount to failure of justice as also causing irreparable

injury to the appellant. For the said reason, we are of the

opinion that the High Court has erred in coming to the

conclusion that the appellant was not entitled to the relief under

Section 115 CPC.

For the reasons stated above, this appeal succeeds and the

impugned orders of the courts below are set aside. The

application filed by the appellant under Sections 8 and 5 of the

Act is allowed. Consequently, the trial court is directed to refer

the dispute pending in Civil Suit No.18 of 2002 before it to

arbitration, as prayed for by the appellant in the said

application. The interim order passed by the High Court shall

stand vacated.

The appeal is allowed with costs