TMI Blog1998 (6) TMI 575X X X X Extracts X X X X X X X X Extracts X X X X ..... raised in the petition are private disputes between two shareholders' groups and not in any way related to the affairs of the company to invoke the provisions of Section 397/398 of the Companies Act, According to him, the disputes between the parties have arisen out of and in connection with an agreement dated October 14, 1996 (principal agreement), as modified by a supplemental agreement dated July 7, 1997. The principal agreement very specifically provides in Clause 26 that any dispute arising out of or in connection with the agreement shall be finally resolved by arbitration under the rules of the London Court of International Arbitration. Since the main allegation relates to alleged breach of contractual terms, recourse to arbitration alone is permissible and cannot be enforced through a petition under Section 397/398. He pointed out to Section 45 of the Arbitration and Conciliation Act of 1996, according to which a judicial authority shall have to, at the request of one of the parties, refer the parties to arbitration when such a judicial authority is seized of an action in a matter in respect of which the parties have made an agreement for an arbitration. According to hi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n has been made relates to a matter covered under the arbitration agreement, it is immaterial as to the nature of the reliefs sought and the stand taken by the respondents to the application that the reliefs sought in the petition cannot be granted by the arbitrator is of no relevance. Referring to the decision of the Calcutta High Court in S. I. Engineering Private Limited v. Port Shipping Company Limited [1994] 1 Cal LJ, in which the court held that it is not merely a suit that can be stayed under Section 34 of the Arbitration Act of 1940, but also any legal proceedings of whatever nature, he argued to state that even the present proceedings should be referred to arbitration since the question of staying the proceedings under the 1996 Act does not arise. In this connection, he also relied on a similar decision of the Calcutta High Court in Swaika Vanaspati Products Ltd. v. Vivek Kumar Daga (unreported decision dated April 29, 1994). He also referred to Japan Kumar Paul v. Krishna Kanta Paul, AIR 1980 Cal 28, to state that even in a proceeding under Section 397/398, the matter could be referred to arbitration as was done in that case. On referring to the reply of the petitioners t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itude, conferred on the CLB to bring to an end the matters complained of and that these powers are in the domain of public policy. Dealing with his arguments that the CLB has exclusive jurisdiction in the matter of oppression and mismanagement as enjoined under Section 397/398 of the Companies Act, he submitted that on the vesting of jurisdiction on the CLB, the jurisdiction of the civil court should be inferred to have been ousted. For this proposition, he relied on Union of India v. Tara Chand Gupta, AIR 1971 SC 1558, in which the Supreme Court, after considering various judgments in paragraph 22, laid down that ousting of jurisdiction of the civil courts in favour of the special tribunal is inferred where the statute gives finality to the order of the tribunal on which it confers jurisdiction and provides for adequate remedy to do what the court would normally do in such a proceeding before it According to Shri Singh, under Section 397/398, the statute has provided for finality to the orders of the Company Law Board by vesting vast powers. This being the position, he submitted that, when the parties cannot approach even a civil court in respect of matters under Section 397/398, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other words, there has been novation of the principal agreement. The supplemental agreement does not contain any arbitration clause and it stands on its own. He relied on the case of Damodar Valley Corporation v. K. K. Kar, AIR 1974 SC 158, 161, in which the Supreme Court held Section 62 of the Contract Act, incorporates this principle when it provides that if the parties to a contract agree to substitute a new contract or to rescind or alter it, the original contract need not be performed. Where, therefore, the dispute between the parties is that the contract itself does not subsist either as a result of its being substituted by a new contract or by rescission or alteration, that dispute cannot be referred to the arbitration as the arbitration clause itself would perish if the averment is found to be valid. As the very jurisdiction of the arbitrator is dependent upon the existence of the arbitration clause under which he is appointed, the parties have no right to invoke a clause which perishes with the contract. Citing this judgment and drawing our attention to clause (F) of the supplemental agreement dated July 7, 1997, which reads as The parties are now desirous of altering ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o be decided by the arbitrators in terms of Article 26.1 of the principal agreement. Since the prayer of the petitioner for referring the matter to arbitration cannot be considered unless and otherwise we give a finding on the effect of the supplementary agreement on the principal agreement, we have to perforce consider these issues in these proceedings. However, we make it abundantly clear that our finding on these issues are not intended to either influence or act as res judicata in any other proceedings in which these matters may have to be examined. 10. To decide whether the parties should be referred to arbitration, it is necessary to examine whether the arbitration clause contained in the principal agreement still exists and if so, then, whether the matters arising out of and in connection with the supplemental agreement will also become the subject-matter of arbitration. Shri Singh argued to state that there has been novation of the principal agreement, According to him, fundamental and essential features contained in the principal agreement have been changed by the supplemental agreement relating to shareholding, management and financial arrangement and these changes hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xamine whether the supplemental agreement is an amendment to the principal agreement or is in substitution of the principal agreement. According to Shri Sarkar, it is an amendment while according to Shri Singh it is a substitution. 12. The supplemental agreement was entered into on July 7, 1997, in which clause (A) to the preamble reads as follows : Pursuant to the shareholders' agreement dated October 9, 1996 (14-10-1996) executed by and between KCDIL, GMH and the company (the principal agreement), it was agreed inter alia, that, KCDIL and GMH would participate as shareholders in the company to jointly promote and develop the project (defined in the principal agreement) on the terms and conditions thereunder appearing, Clause (F) to the preamble reads : The parties are now desirous of now altering the principal agreement to reflect this understanding arrived at between them to wit . As per the preamble there are certain clauses relating to shareholding, composition of the board of directors, etc. Clause (4) of this agreement explicitly provides to state : The parties record and confirm that the principal agreement shall be deemed to be amended from the effective date ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions to the principal agreement, and, therefore, we are not in a position to agree with Shri Singh that the supplemental agreement has novated the principal agreement. In other words, both the agreements are subsisting and have to be read together. 13. Having held that there is no novation of the principal agreement which contains an arbitration clause and also holding that both the agreements subsist, the issue for our consideration is whether the allegations in the petition are matters arising in and out of the terms of agreement. As per Section 45 of the Arbitration and Conciliation Act, 1996, a judicial authority, when seized of an action of the matter in respect of which 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, unless it finds that the said agreement is null and void, inoperative or incapable of being performed . Therefore, we have to necessarily see whether the matter in respect of which the parties have made an agreement is the subject-matter in the petition. Instead of going through the entire petition to examine this issue, we feel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... supplemental agreement has only modified certain clauses in the principal agreement relating to shareholding and management. No new rights or obligation ab initio have been created in the supplemental agreement. The case cited by Shri Sarkar viz., Jamini Kanta Das v. Union of India, AIR 1955 Cal 45, seems to be more applicable to the present case, as in that case, the court held that an arbitration clause in the original contract was not inconsistent with the subsequent modification and continued to subsist in view of the fact that the modification of the contract in question did not go to the very root of the first contract and did not change its character and that the facts of the case did not warrant the inference that the parties intended to rescind the original contract. In the present case also, neither we could infer that the parties intended to rescind the principal agreement nor the circumstances show that the principal agreement had been rescinded impliedly. Therefore, we are of the view that the arbitration clause contained in the principal agreement will have to cover disputes arising out of and in connection with the supplemental agreement also. In page 8 of the reply ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on Act, when a plea of arbitration is taken, was solely within the discretion of the court before which such a plea was taken. While in the cases cited by Shri Singh, the courts had refused to exercise their discretion to stay the proceedings, in the cases cited by Shri Sarkar, the courts exercised the discretion to stay the proceedings. However, after the coming into force of Arbitration and Conciliation Act, 1996, the legal position has changed, more particularly with reference to foreign arbitration. Now it is mandatory, by virtue of Section 45 of this Act, that a judicial body will have to refer the parties to arbitration once it is seized of an action in respect of which the parties have made an agreement for arbitration to which the convention in the First Schedule to the Act applies. (Foreign Arbitration.) The ingredients of this section are : a judicial authority should be seized of an action in the matter of which the parties have made an agreement for arbitration ; one of the parties should make a request for referring the parties to arbitration and that the judicial body does not find that the said agreement is null and void, inoperative or incapable of being performed. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 96, has appeared on the scene effective from January 25, 1996, which Ordinance before its lapse has been re-promulgated. Section 45 thereof enjoins a judicial authority (the Company Law Board being one such judicial authority) when requested by any one of the parties or any person claiming through or under him, where the parties have made an agreement referred to in Section 44, to refer the parties to arbitration, unless it finds that the said agreement is null and void, inoperative or incapable of being performed. Undisputedly, there exists an arbitration agreement between the parties whereby their disputes arising out of the contract would be referable to an arbitrator having his legal seat at Zurich, Switzerland, and to which disputes the substantive law of contract as prevalent in India would apply. The Company Law Board would thus be obliged to proceed in accordance with Section 45 and refer the parties to arbitration, because the agreement is neither null and void, nor inoperative or incapable of being performed. Incapability, of course, has not to be understood as being inconvenienced. When the parties enter into such agreement with open eyes they are presumed to have incurr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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