Ludhiana Improvement Trust & Anr vs M/S Today Homes & Infrastructure P.Ld

Improvement Trust, through its

Administrator, and the State of Punjab,

against the order passed by the Chief

Justice of Punjab and Haryana High Court in

a petition filed by the respondent herein

under Section 11 of the Arbitration and 2 Conciliation Act, 1996 (hereinafter referred

to as `the 1996 Act') for the appointment of

an Arbitrator. In the said application,

which was numbered as Arbitration Case No.76

of 2007, the appellants herein were made

respondents.

3. The Ludhiana Improvement Trust (hereinafter

referred to as "the Trust") was constituted

under the Punjab Town Improvement Act, 1922

(hereinafter referred to as "the 1922 Act")

for the planned development of the city of

Ludhiana. For the purpose of construction of

the City Centre in Ludhiana, the Trust, with

the intention of entering into a joint-

venture with developers in the private

sector, invited bids by a Request of

Proposal document dated 15.3.2005. Bids

were filed by interested parties by

10.5.2005 and evaluation of the Technical

bids was completed by 16.5.2005. In the

final evaluation the respondent was found to 3

be the highest bidder and a Letter of Intent

was thereupon issued to him on 18.5.2005 for

development of the City Centre, Ludhiana.

The said Letter of Intent was alleged to

have been approved by the Trust in its

meeting held on 18.5.2005, which was

attended by 7 out of its 10 members.

4. The records indicate that on being issued

the Letter of Intent the respondent

deposited an amount of Rs.3.72 crores with

the Trust towards security for the purposes

of the contract. According to the Agreement,

the respondent would ultimately be required

to pay to the Trust an amount of (Rs.371.12

crores). The records also reveal that

possession of an area measuring 25.59 acres

was handed over to the said respondent by

the Trust on 24.5.2005. The Trust also

appears to have entered into a part-time

agreement with the respondent and the HDFC

Bank limited whereby it was agreed that the 4

entire proceeds received from bookings of

the area to be sold would be deposited in an

Escrow Account with the HDFC Bank, out of

which 30% of the amount so deposited would

be credited automatically to the account of

the Trust and the balance 70% would be

available to the respondent No.1 for the

purpose of development of the City Centre. A

Power of Attorney was also executed by the

Trust in favour of the respondent No.1

empowering the said respondent to act as its

lawful attorney for the development work and

marketing of the City Centre.

5. During the continuance of the agreement

certain disputes arose and certain

allegations surfaced that under-hand

dealings were being resorted to and up to

70% of the total amounts payable, by those

who had booked space in the City Centre,

were being received in cash and only 30%

being received by means of cheques was being 5

deposited in the Escrow account, resulting

in huge losses to the Government of Punjab

towards its share of revenue.

6. Accordingly, the Trust issued a letter to

the respondent No.1 on 12.9.2006 seeking an

explanation regarding the allegations to

which a reply was sent by the respondent

No.1 on the very next day denying the

allegations and indicating that its accounts

could be scrutinized, and, if the

explanation was not found to be

satisfactory, the dispute could be referred

to arbitration.

7. The suggestion made by the respondent No.1

was rejected by the Trust by its letter

dated 14th September, 2006, and in the said

letter it was mentioned that an Arbitrator

for auditing the accounts, would be

appointed within the next two days.

According to the respondent No.1, the said

action of the petitioner was not in keeping 6

with the terms and conditions of the

Agreement and clause 17 of the Concession

Agreement dated 24th May, 2005, and the

petitioner ought to have invoked clause 17.1

(a) and (b) of the said Agreement which

provides for conciliation and settlement of

disputes in an amicable manner. The

respondent No.1 accordingly filed

Arbitration Petition No. 263 of 2006 under

Section 11(6) of the 1996 Act for

appointment of an Arbitrator in accordance

with clause 17 of the Concession Agreement.

The said petition was contested by the

petitioner on the ground that no cause of

action had accrued to the respondent No.1

for making such application.

8. Subsequently, however, an application was

moved on behalf of the respondent No.1 on 9th

August, 2007, for withdrawal of the

arbitration case. The same was allowed and

the said case was dismissed as withdrawn on 7

22nd August, 2007, with liberty as was prayed

for. Thereafter, various circumstances

intervened. The Trust was dissolved by the

Government on 14th September, 2006 and one of

the major decisions taken was to revoke the

Power of the Attorney granted in favour of

the respondent No.1 from 5th October, 2006,

upon the agreement that the sales and/or

leases of the Ludhiana City Centre property,

which had been effected till then, which was

approximately 22% of the total saleable

area, would go to the share of the

petitioner herein which would have the

effect of validating the sales and leases

which had already taken place.

9. It also appears that since the terms of the

Memorandum of Settlement dated 6th October,

2006, provided for the execution of a

supplementary agreement, and nothing further

was done in that regard, the respondent No.1

wrote a letter to the Trust on 29th December, 8

2006, requesting such supplementary

agreement to be executed. When nothing

more was heard from the petitioners, the

respondent No.1 again addressed a letter to

the Trust on 8th June, 2007, that in the

absence of the procedure under clause 17.1

(a) and (b) the dispute should be settled by

way of an amicable settlement. Again on 30th

June, 2007, another letter was written by

the respondent No. 1 indicating the name of

the Arbitrator from its side. The proposal

was, however, rejected on the ground that in

the absence of any dispute, merely on vague,

false or motivated averments, arbitration

could not be resorted to. It was in such

circumstances, that the application under

Section 11(6) of the Arbitration Act for

appointment of an Arbitrator by the Court

came to be filed.

10. In the proceedings under Section 11(6) of

the 1996 Act, it was contended that the 9

Trust had awarded the contract to the

respondent No.1 herein in keeping with all

the norms and procedures and after bids had

been invited by way of public advertisement.

It was submitted that after the Technical

and Financial bids submitted by the bidders

were opened, the contract was awarded to the

respondent No.1 herein, as the highest

bidder. Subsequently, disputes arose

between the parties with regard to the

working of the Agreement, which prompted

the respondent No.1 to invoke the

arbitration clause in the Agreement and on

the failure of the appellant herein to

appoint an Arbitrator, the respondent No.1

had applied to the Chief Justice of Punjab

and Haryana under Section 11(6) of the

Arbitration and Conciliation Act, 1996, for

the appointment of an Arbitrator.

11. On behalf of the appellant herein, it has

been contended that the said Agreement 10

itself was void having been entered into in

suspicious circumstances and by perpetrating

fraud by altering the terms of the

advertisement inviting bids thereby

enlarging the eligibility criteria for

participation in the bid, so that persons,

who were otherwise ineligible, were given an

entry into the bidding process and

ultimately the contract was awarded to one

of such persons. Various irregularities

were also pointed out by which it was

claimed that the main Agreement which

contained the Arbitration Agreement was

itself void and hence the Arbitration

Agreement could not also survive.

12. After considering the submissions made on

behalf of the respective parties, by placing

reliance upon the decision of this Court in

the Case of Konkan Railway Corporation

Limited and Anr. Vs. Rani Construction

Private Limited, [2002 (2) SCC 388], which 11

was followed in Hindustan Petroleum

Corporation Ltd. vs. Pinkcity Midway

Petroleum [2003 (6) SCC 503], the Hon'ble

the Chief Justice took the view that having

regard to Section 16 of the Arbitration and

Conciliation Act, 1996, it was for the

Arbitrator and not the Chief Justice to

decide the question of jurisdiction.

13. Incidentally, no reference has been made in

the order of the Hon'ble Chief Justice to

the later decision of the Bench of Seven

Judges in S.B.P. and Company vs. Patel

Engineering Ltd. and Anr. [2005 (8) SCC

618], wherein the views expressed by the

Constitution Bench in the Konkan Railway

case (supra) were overruled and it was

asserted that an order passed by the Chief

Justice or his delegatee Judge, on an

application under Section 11(6) of the

aforesaid Act, would be a judicial order and 12

not an administrative order as had been held

in the Konkan Railway case(supra).

14. On the basis of his aforesaid finding, the

Chief Justice appointed a former Chief

Justice of India as Sole Arbitrator to

adjudicate upon all the disputes between the

parties, including the disputes which had

been indicated in the order which has now

been made before us in the instant appeal.

15. On behalf of the appellant various

submissions were made regarding the manner

in which the contract had been awarded to

the respondent company in violation of the

provisions of Rule 94 of the Punjab Town

Improvement Trust Rules, 1939. It was

contended that since the main Agreement had

been fraudulently obtained, even the

Arbitration Agreement contained therein was

void and unenforceable. The said contention

was opposed by Mr. Shanti Bhushan, learned

Senior Counsel appearing for the respondent- 13

company, and it was urged that the High

Court had quite correctly allowed the

application filed by the Company under

Section 11(6) of the Arbitration and

Conciliation Act, 1996. Mr. Shanti Bhushan

contended that the main Agreement and the

Arbitration Agreement contained therein

could not be equated as they were for

different purposes. According to Mr. Shanti

Bhushan, even if the main Agreement was held

to be void, it did not affect the

Arbitration Agreement which had been

included in the main Agreement for the

purpose of deciding such issue.

16. Mr. Shanti Bhushan, submitted that even if

it is accepted that the High Court ought to

have taken into consideration the later

decision of the seven-Judge Bench in the

Patel Engineering case (supra), such an

omission could be rectified by this Court

itself in these proceedings on the basis of 14

the detailed submissions advanced on behalf

of the parties.

17. We have considered the submissions of both

the parties and have also considered Mr.

Shanti Bhushan's submissions that the issues

which had been left undecided by the High

Court could be decided in these proceedings

itself. However, in our view, such a course

of action would have been justified if after

considering the submissions of the

respective parties the High Court had

arrived at a finding regarding the dispute

between the parties. Unfortunately, relying

on the earlier Constitution Bench decision

of this Court in the Konkan Railway case

(supra), the High Court left it to the

learned Arbitrator appointed by it to decide

the said issues under Section 16 of the 1996

Act, which was contrary to the directions

given by the seven-Judge Bench of this Court

in the Patel Engineering case (supra), which 15

categorically overruled the decision of the

Constitution Bench in the Konkan Railway

case. In fact, in sub-paragraphs (10) and

(12) of Paragraph 47 of the said judgment,

the seven-Judge Bench specifically indicated

that the orders which had already been

passed in applications under Section 11(6)

of the 1996 Act, prior to the decision in

the Patel Engineering case (supra), would be

treated as valid, leaving all objections to

be decided under Section 16 of the Act. It

was also indicated that from the date of the

judgment, however, the decision rendered in

the Patel Engineering case (supra), would

govern all applications and even pending

applications under Section 11(6) of the 1996

Act.

18. We have, therefore, no option but to set

aside the order of the Chief Justice and

remit the matter for a fresh decision in

keeping with the decision of the seven-Judge 16

Bench in S.B.P. & Company vs. Patel

Engineering Limited and Another [2005 (8)

SCC 618].

19. The appeal is disposed of accordingly.

20. There will be no order as to costs.

_________________J.

(ALTAMAS KABIR)

_________________J.

(MARKANDEY KATJU)

New Delhi

Dated:October 14, 2008