Wellington Associates Ltd. vs Mr. Kirit Mehta

L.....I.........T.......T.......T.......T.......T.......T..J

This is an application filed under sub-clauses

(2), (6), (10) and (12) of Section 11 of the Arbitration

and Conciliation Act, 1996 ( hereinafter called the

Act). The application is made to the Chief Justice of

India and after due nomination, has been placed before

me.

The brief facts as set out in the petition, to the

extent necessary for the purpose of this application,

are as follows. The petitioner is a company with its

registered office at Les Cascades, Port Luis Republic of

Mauritius. The respondent is the promoter and Managing

Director of M/s C.M.M. Ltd., Mumbai. The petitioner

entered into two agreements both dated 15.8.1995 with

the respondent under which it was stated that the

petitioner had agreed to subscribe to a private

placement of two lots of 85,000 equity shares ( each

agreement comprising one lot of 85,000 equity shares,

thereby aggregating to 1,70,000 shares) of C.M.M. Ltd.

The shares were having face value of Rs.10/- per share.

They were agreed to be acquired by the petitioners at a

premium of Rs.20/- per share. The cumulative value

amounted to Rs.51 lakhs ( 1.70 lakhs x Rs.30 per share).

The shares were to be held by the petitioners for a

period of one year from the date of subscription. It was

stated that the respondent agreed and undertook to

compulsorily purchase back from the petitioners the said

shares after the expiry of the said period in the

following manner.(i) under the Ist agreement, 85,000

with an assured return at the rate of 35% p.a. and

(ii)

under the 2nd agreement, 85,000 with an assured return

at the rate of 29% p.a. It was stated that the

respondent agreed that upon default by the respondent,

the respondent would be liable to pay penal interest at

3% p.a. from the date of subscription till actual date

of payment. Pursuant to the above agreements, a

"subscription agreement" was later entered into on

25.9.95 between the petitioner (the subscriber), the

respondent-promoter and the C.M.M. company.

On 26.9.95, Sigma Credit and Capital Services Pvt.

Ltd., wrote to the petitioner stating that it had taken

up the deal of C.M.M. Ltd. and that it would ensure the

petitioner that the terms of the agreement between the

prospective investor ( petitioner) and C.M.M.Ltd.

-for

the subscription and assured buy back, especially

regarding the assured return and the confirmed buy-back

- would be complied with by both the parties. The said

company further undertook to buy-back the 85,000 NRI

shares of CMM Ltd., at the end of 12 months from the

date of investment, at the rate of 25% p.a. in case the

respondent failed to meet the commitment of buy-back.

The petitioner paid Rs.51 lakhs to the respondent on

9.10.95 pursuant to the above agreements and 1,70,000

shares were allotted to the petitioner. By 8.10.96, the

respondent did not buy back the shares. Nor did Sigma

buy back the shares.

On 11.7.1997, the petitioner's lawyer issued a

registered notice to the respondent complaining that

after the lapse of one year from the date of

subscription, neither the respondent nor Sigma Credit

and Capital Services (P)Ltd. had honoured their

commitments as per agreements dated 15.8.95 and letter

dated 26.9.95. There was no response to this notice by

the respondent or by Sigma. A further notice was issued

by the petitioner on 19.4.99 stating that there was no

response to the earlier notice, that the two agreements

dated 15.8.95 contained an "arbitration clause" and that

the petitioner desired that the disputes and

differences be referred to arbitration. It was also

intimated that the petitioners had appointed Justice

M.L. Pendse, Retired Chief Justice, Karnataka High Court

as their Arbitrator and that the respondent was being

called upon to appoint his Arbitrator within 30 days

from the date of receipt of the letter or else the

respondent should confirm the appointment of Sri Justice

M.L. Pendse. In default, the petitioners would proceed

under the Arbitration and Conciliation Act, 1996. The

respondent sent a reply on 28.5.1999 raising various

contentions. One of the contentions was that the

arbitration clause, namely, clause 5 in the agreements

dated 15.8.95 used the words "may" and that the said

clause was not mandatory but was an enabling provision

and, therefore, fresh consent of parties for arbitration

was necessary. On 16.6.99, the petitioner's lawyers

wrote back to the respondent stating that the

interpretation put by the respondent on the arbitration

clause was not correct. The respondent sent a further

reply on 21.6.99. Petitioner's lawyers sent a rejoinder

on 2.7.99. Thereafter, the present petition was filed

under section 11 of the Act seeking the appointment of

arbitrator/arbitrators.

In this petition before me, the respondent filed a

reply and the petitioner thereafter filed a rejoinder.

Learned counsel for the petitioner Sri U.A. Rana

submitted that the word 'may' used in clause 5 of the

agreement was to be read, in the context , as 'shall'

and that, in any event, in view of section 16 of the

Act, the question of the "existence" of the arbitration

agreement was a matter to be decided by the arbitral

tribunal and not by me. A point was raised by the

petitioner in the rejoinder based on Ador Samia Ltd. Vs.

Peekay Holdings Ltd. ( 19998(8) SCC 572) that the action

of the Chief Justice of India or his designate under

Section 11(6) was an administrative act and did not

amount to the exercise of any judicial function. Nor

would the Chief Justice of India or his designate have

any trappings of a judicial authority, while acting

under section 11. Counsel also submitted that in Bombay,

a civil suit would take more than 20 years for

adjudication, and therefore such a situation should be

avoided and the matter should be referred to

arbitration.

On the other hand, learned counsel for the

respondent Sri P.H. Parekh submitted that the relevant

clause, viz., clause 5 was not mandatory in its

language and that in a similar case in P. Gopal Das Vs.

Kota Styraw Board ( AIR 1971 Raj. 258), it was held by

the Rajasthan High Court that the use of the word 'may'

indicated that a fresh consent of both parties for

arbitration was necessary. Counsel submitted that

section 16 of the Act would not apply to the situation

on hand and that it was permissible for me to decide

whether clause 5 was an arbitration clause or not.

On the above submissions, the following points

arise for consideration:

(1) Whether clause 5 amounted to an arbitration clause

at all and whether such a question amounted to a dispute

relating to the 'existence' of the arbitration clause?

Whether such a question should be decided only by the

arbitral tribunal under section 16 and could not be

decided by the Chief Justice of India or his designate

while dealing with an application under section 11?

(2) If the Chief Justice or his designate could decide

the said question, then whether clause 5 of the

agreements dated 15.8.95 which used the words "may be

referred" required fresh 'consent' of the parties before

a reference was made for arbitration?

(3) To what relief.

Point 1:

This point raises a question as to the scope of

section 16 on the one hand and section 11 on the other.

Before referring the said section, I shall refer

to the relevant clauses 4 and 5 in the two agreements

dated 15.8.95. They read as follows:

"Clause 4: It is hereby agreed that, if any dispute arises in connection with these presents, only courts in Bombay would have jurisdiction to try and determine the suit and the parties hereto submit themselves to the exclusive jurisdiction of the courts in Bombay."

Clause 5: It is also agreed by and between the parties that any dispute or differences arising in connection with these presents may be referred to arbitration in pursuance of the Arbitration Act, 1947, by each party appointing one arbitrator and the arbitrators so appointed selecting an umpire. The venue of arbitration shall be at Bombay."

The petitioner's counsel submits that the question

whether clause 5 extracted above tantamounts to a

dispute as to 'existence" of the arbitration agreement

-

is a question which can be decided only by the arbitral

tribunal in view of section 16 of the Act and that it

cannot be decided by me. That section reads as follows:

"Section 16: Competence of arbitral tribunal to rule on its jurisdiction.-

(1) The arbitral tribunal may rule on its own jurisdiction, including ruling on any objections with respect to the existence or validity of the arbitration agreement, and for that purpose, -

(a) an arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract; and

(b) a decision by the arbitral tribunal that the contract is null and void shall not entail ipso jure the invalidity of the arbitration clause.

(2) A plea that the tribunal does not have jurisdiction shall be raised not later than the submission of the statement of defence; however, a party shall not be precluded from raising such a plea merely because that he has appointed, or participated in the appointment of, an arbitrator.

(3) A plea that the arbitral tribunal is exceeding the scope of its authority shall be raised as soon as the matter alleged to be beyond the scope of its authority is raised during the arbitral proceedings.

(4) The arbitral tribunal may, in either of the cases referred to in sub- section (2) or sub-section (3), admit a later plea if its considers the delay justified.

(5) The arbitral tribunal shall decide on a plea referred to in sub-section (2) or sub-section (3) and, where the arbitral tribunal takes a decision rejecting the plea, continue with the arbitral proceedings and make an arbitral award.

(6) A party aggrieved by such an arbitral award may make an application for setting aside such an arbitral award in accordance with section 34.

For appreciating the scope of section 16 of the

new Act, it is necessary to go back to section 33 of the

Indian Arbitration Act, 1940. That section vested

jurisdiction in the court to decide whether there was in

'existence' an arbitration clause or not, whenever the

'existence' of the arbitration clause was challenged by

any of the parties. That section read as follows:

"Section 33: Arbitration agreement or award to be contested by application -

Any party to an arbitration agreement or any person claiming under him desiring to challenge the existence or validity of an arbitration agreement or an award or to have the effect of either determined, shall apply to the Court and the Court shall decide the question on affidavits, ........"

In M/s. D. Gobindram Vs. M/s Shamji Kalidas Co.

[AIR 1961 SC 1285 (at 1293)(para 25)] it was held that

the question as to the existence of arbitration clause

was for the Court to decide under section 33 and not

for the arbitrators. In Khardah Co.Ltd. Vs. Raymon &

Co.(India) Pvt.Ltd. (AIR 1962 SC 1810) and In Waverly

Jute Mills Co.Ltd. Vs. Raymon & Co. (India) Pvt. Ltd.

(AIR 1963 SC 90, at 96 para 17), it was held that the

question as to the validity of the contract was also for

the Court to decide under section 33 and not for the

arbitrator. If there was no arbitration clause at the

time of entry of the arbitrators on their duties, the

whole proceedings would be without jurisdiction. In

Renusagar Power Co. Ltd. Vs. General Electric Co. (AIR

1985 SC 1156 = 1985(1) SCR 432) (at p.1170) it was

stated that ordinarily,. as a rule, an arbitrator had no

authority to clothe himself with power to decide the

question of his own jurisdiction unless parties

expressly conferred such a power on him.

Thus, it is clear from section 33 of the old

Act of 1940 that any question as to the "existence" of

the arbitration agreement was to be decided only by

application to the Court and not by the arbitrator. This

disability on the part of the arbitrator has now been

removed by section 16 of the new Act. Now section 16 has

conferred power on the arbitral tribunal to decide

whether there is in 'existence' an arbitration clause.

But, it must be noted that the language employed

by section 16 of the new Act shows that the said

provision is only an enabling one which,- unlike section

33 in the old Act of 1940,- now permits the arbitral

tribunal to decide a question relating to the

'existence', of the arbitration clause. This section

corresponds to Article 16 of the UNCITRAL Model Law and

Article 21 of the UNCITRAL Arbitration Rules. While

Article 16 of the Model Law says that the arbitral

tribunal may rule on its own jurisdiction, Article 21 of

the Rules states that the 'arbitral tribunal shall have

power to rule' on these questions. Such power given to

the arbitral tribunal is also referred to as 'Kompetenz

- kompetenz".

The more important question however is whether

section 16 excludes the jurisdiction of the Chief

Justice of India or his designate in this behalf if a

question as to the existence of the arbitration clause

is raised by the respondent in his reply to the petition

filed under section 11. (I am not concerned with the

question of the validity or effect of the arbitration

clause, in the present case). In my view, section 16

does not take away the jurisdiction of the Chief Justice

of India or his designate, if need be, to decide the

question of the 'existence' of the arbitration

agreement. Section 16 does not declare that except the

arbitral tribunal, none else can determine such a

question. Merely because the new Act permits the

Arbitrator to decide this question, it does not

necessarily follow that at the stage of section 11 the

Chief Justice of India or his designate cannot decide a

question as to the existence of the arbitration clause.

The interpretation put on section 16 by the

petitioner's counsel that only the arbitral tribunal can

decide about the "existence" of the arbitration clause

is not acceptable for other reasons also apart from the

result flowing from the use of the word 'may' in section

16. The acceptance of the said contention will, as I

shall presently show, create serious problems in

practice. As Saville L.J. stated in a speech at Middle

Temple Hall on July 8, 1996: "Question of the

jurisdiction of the tribunal cannot be left (unless the

parties agreed) to the tribunal itself, for that would

be a classic case of pulling oneself up by one's own

bootstraps". ( A practical approach to Arbitration Law,

Keren Tweeddale & Andrew Tweeddale, (1999) Blackstone

Press Ltd.)(P.75). Let us take this very case. If

indeed clause 5 does not amount to an 'arbitration

agreement', it will, in my view, be anomalous to ask the

arbitrator to decide the question whether clause 5 is

at all an arbitration clause. It is well settled and has

been repeatedly held that the source of the

jurisdiction of the arbitrator is the arbitration

clause. [see Waverly Jute Mills case (AIR 1963 SC 90)

above referred to ) When that is the position, the

arbitrator cannot, in all situations, be the sole

authority to decide upon the "existence" of the

arbitration clause. Supposing again, the contract

between the parties which contained the arbitration

clause remained at the stage of negotiation and there

was no concluded contract at all. Then in such a case

also, there is no point in appointing an arbitrator and

asking him to decide the question as to the existence of

the arbitration clause. But, I may point out that there

can be some other situations where the question as to

the "existence" of an arbitration clause can be decided

by the arbitrator. Take a case where the matter has gone

to the arbitrator without the intervention of an

application under section 11. Obviously, if the question

as to the existence of the arbitration clause is raised

before the arbitral tribunal, it has power to decide the

question. Again in a case where the initial existence of

the arbitration clause is not in issue at the time of

section 11 application but a point is raised before the

arbitral tribunal that the said clause or the contract

in which it is contained has ceased to be in force, then

in such a case, the arbitrator can decide whether the

arbitration clause has ceased to be in force. A question

may be raised before the arbitrator that the whole

contract including the arbitration clause is void. Now

Section 16 of the new Act permits the arbitral tribunal

to treat the arbitration clause as an independent clause

and section 16 says that the arbitration clause does not

perish even if the main contract is declared to be null

and void. Keeping these latter and other similar

situations apart, I am of the view that in cases where

-

to start with - there is a dispute raised at the stage

of the application under section 11 that there is no

arbitration clause at all, then it will be absurd to

refer the very issue to an arbitrator without deciding

whether there is an arbitration clause at all between

the parties to start with. In my view, in the present

situation, the jurisdiction of the Chief Justice of

India or his designate to decide the question as to the

'existence' of the arbitration clause cannot be doubted

and cannot be said to be excluded by section 16.

Further, a reading of sub-clauses (4),(5) and (6)

of section 11 shows that they enable the Chief Justice

or his designate to appoint arbitrator or arbitrators,

and likewise section 11(12) enables the Chief Justice

of India or his designate to appoint arbitrator or

arbitrators; under Rule 2 of the scheme framed by the

Chief Justice of India, a request is to be made to the

Chief Justice of India alongwith with a duly certified

copy of the 'original arbitration agreement'. Section

2(b) of the Act defines `arbitration agreement' as an

agreement referred to in section 7. section 7 defines

'arbitration agreement' as follows:

"S.7. Arbitration agreement (1) In this Part, "arbitration agreement" means an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not.

(2) An arbitration agreement may be in the form of an arbitration clause in a contract or in the form of a separate agreement.

(3) An arbitration agreement shall be in writing.

(4) An arbitration agreement is in writing if it is contained in --

(a) a document signed by the parties;

(b) an exchange of letters, telex, telegrams or other means of telecommunication which provide a record of the agreement; or

(c) an exchange of statements of claim and defence in which the existence of the agreement is alleged by one party and not denied by the other.

(5) The reference in a contract to a document containing an arbitration clause constitutes an arbitration agreement if the contract is in writing and the reference is such as to make that arbitration clause part of the contract.

The words in sub-clause (1) of section 7, "means an

agreement by the parties to submit to arbitration", in

my opinion, postulate an agreement which necessarily or

rather mandatorily requires the appointment of an

arbitrator/arbitrators. Section 7 does not cover a case

where the parties agree that they "may" go to a suit or

that they 'may' also go to arbitration.

Thus, unless the document filed by the party

before the Chief Justice of India or his designate is an

`arbitration agreement' as defined in section 7 as

explained above, requiring a reference in a mandatory

sense, no reference, in my view, can be made to the

arbitral tribunal. It is, as already stated, indeed

implicit - if an objection is raised by the respondent

before the Chief Justice of India or his designate that

the so called arbitration clause is not an arbitration

clause at all falling within section 7 - that such a

question will have to be decided in the proceedings

under section 11 of the Act. Therefore the contention

raised by the learned counsel for the petitioner that

the question - whether clause 5 of the agreement amounts

to an arbitration clause - is to be decided only by the

arbitral tribunal is liable to be rejected.

It is true that in Ador Samia Pvt. Ltd. vs. Peekay

Holdings Ltd. & Others [1999 (8) SCC 572], it has been

held that the Chief Justice or his designate under

section 11(6) acts in an administrative capacity and he

does not exercise any judicial function and that he has

no trappings of a judicial authority. But this decision,

in my view, cannot support the plea raised by the

petitioner in his rejoinder. Even if the Chief Justice

of India or his designate under section 11(12) is to be

treated as an administrative authority, the position is

that when the said authority is approached seeking

appointment of an arbitrator/arbitrator tribunal under

section 11 and a question is raised that there is, to

start with, no arbitration clause at all between the

parties, the Chief Justice of India or his designate

has to decide the said question.

For the aforesaid reasons, this objection raised

by the learned counsel for the petitioner is rejected.

Point 1 is decided accordingly.

Point 2:

Does clause 5 amount to an arbitration clause as

defined in section 2(b) read with section 7? I may here

state that in most arbitration clauses, the words

normally used are that "disputes shall be referred to

arbitration". But in the case before me, the words used

are `may be referred'.

It is contended for the petitioner that the word

'may' in clause 5 has to be construed as `shall'.

According to the petitioner's counsel, that is the true

intention of the parties. The question then is as to

what is the intention of the parties? The parties, in

my view, used the words `may' not without reason. If

one looks at the fact that clause 4 precedes clause 5,

one can see that under clause 4 parties desired that in

case of disputes, the Civil Courts at Bombay are to be

approached by way of a suit. Then follows clause 5 with

the words `it is also agreed' that the dispute 'may' be

referred to arbitration implying that parties need not

necessarily go to the Civil Court by way of suit but can

also go before an arbitrator. Thus, clause 5 is merely

an enabling provision as contended by the respondents. I

may also state that in cases where there is a sole

arbitration clause couched in mandatory language, it is

not preceded by a clause like clause 4 which discloses

a general intention of the parties to go before a Civil

Court by way of suit. Thus, reading clause 4 and clause

5 together, I am of the view that it is not the

intention of the parties that arbitration is to be the

sole remedy. It appears that the parties agreed that

they can "also" go to arbitration also in case the

aggrieved party does not wish to go to a Civil Court by

way of a suit. But in that event, obviously, fresh

consent to go to arbitration is necessary. Further, in

the present case, the same clause 5, so far as the Venue

of arbitration is concerned, uses word 'shall'. The

parties, in my view, must be deemed to have used the

words `may' and `shall' at different places, after due

deliberation.

A somewhat similar situation arose in B.Gopal Das

vs. Kota Straw Board [AIR 1971 Raj. 258]. In that case

the clause read as follows:

"That in case of any dispute arising between us, the matter may be referred to arbitrator mutually agreed upon and acceptable to you and us."

It was held that fresh consent for arbitration was

necessary. No doubt, the above clause was a little

clearer there than in the case before me. In the above

case too, the clause used the word `may' as in the

present case. The above decision is therefore directly

in point.

Before leaving the above case decided by the from

Rajasthan High Court, one other aspect has to be

referred to. In the above case, the decision of the

Calcutta High Court in Jyoti Brothers vs. Shree Durga

Mining Co. [AIR 1956 Cal. 280] has also been referred

to. In the Calcutta case, the clause used the words

"can" be settled by arbitration and it was held that

fresh consent of parties was necessary. Here one other

class of cases was differentiated by the Calcutta High

Court. It was pointed out that in some cases, the word

`may' was used in the context of giving choice to one of

the parties to go to arbitration. But, at the same time,

the clause would require that once the option was so

exercised by the specific party, the matter was to be

mandatorily referred to arbitration. Those cases were

distinguished in the Calcutta case on the ground that

such cases where option was given to one particular

party, the mandatory part of the clause stated as to

what should be done after one party exercised the

option. Reference to arbitration was mandatory, once

option was exercised. In England too such a view was

expressed in Pittalis and Sheriffenttin [1986 (1) QB

868]. In the present case, we are not concerned with a

clause which used the word `may' while giving option to

one party to go to arbitration. Therefore, I am not

concerned with a situation where option is given to one

party to seek arbitration. I am, therefore, not to be

understood as deciding any principle in regard to such

cases.

Suffice it to say, that the words 'may be

referred' used in clause 5, read with clause 4, lead me

to the conclusion that clause 5 is not a firm or

mandatory arbitration clause and in my view, it

postulates a fresh agreement between the parties that

they will to go to arbitration. Point 2 is decided

accordingly against the petitioner.

Point 3:

In the light of the finding on Point 2, it is

obvious that I have to dismiss this petition. It may be

that if the petitioner files a suit in Bombay, there can

be considerable delay. But that is no ground to construe

the clause differently. I may state however, that in

case a Civil suit is filed, it will be for the

petitioner to seek an early disposal of the case and I

have no reason to doubt that the civil court will treat

the request of the petitioner for early disposal with

due consideration.

With the above observations, this petition is

dismissed but in the circumstances without costs.