TMI Blog2008 (10) TMI 697X X X X Extracts X X X X X X X X Extracts X X X X ..... 10, Mr. J. Sivanandaraj, Learned Counsel for the plaintiffs, Mr. Satish Parasaran, Learned Counsel for defendants 3 to 5 and P.H. Arvind Pandian, Learned Counsel for 2nd defendant. 2. In brief, the history of this litigation is as follows:- (a) On 30.01.2004, the Plaintiffs, the 2nd defendant and defendants 6 to 10 entered into a Joint Venture Agreement at New Delhi, by which the 9th defendant was floated as a Joint Venture Company with the object of purchasing, constructing and developing a hotel property, a shopping complex and an information technology park and to develop and sell the properties owned by defendants 7 and 8. For achieving these objects, the Joint Venture Company was to obtain a Syndicated Credit Facility and the facility was to be secured by a Corporate Guarantee issued by the 4th defendant. (b) In September 2005, disputes arose between the Joint Venture partners and the 10th defendant was removed from the post of Managing Director of the Joint Venture Company (D-9). (c) In November 2005, the defendants 6 and 10 filed a petition in C.P.65 of 2005 under sections 397, 398, 402and 403of the Companies Act, on the file of the Company Law Board. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecision. Therefore, by a communication dated 25.08.2006, the defendants 6 and 10 informed the plaintiffs that if they did not hear from the plaintiffs, their response within 7 days, they would place a request with the Secretariat of the International Court of Arbitration. (i) On 02.09.2006, the plaintiffs sent a reply through counsel contending that the defendants 6 and 10 had waived their right to seek arbitration and that they were attempting to agitate disputes before multiple fora. (j) On 23.01.2007, defendants 7, 8 and 10 joined together and filed a suit in O.S. No. 90 of 2007 on the file of the District Munsif Court, Kangeyam against the plaintiffs, the 9th defendant and 2 others, seeking a declaration that the allotment of shares in favour of the 2nd plaintiff herein, at the instance of the first plaintiff herein, in the Joint Venture company (9th defendant herein), is tainted by fraud and misrepresentation and also null and void and for consequential reliefs. Along with the suit, the defendants 7, 8 and 10 herein (Plaintiffs in O.S. No. 90 of 2007) also sought an interim order of injunction in I.A. No. 411 of 2007 restraining the first plaintiff herein from acting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Article 22 of the Joint Venture Agreement is null and void and for a consequential injunction restraining defendants from the proceeding with the Arbitration. On 7.3.2008, this Court granted an ad interim ex parte injunction, in O.A. No. 277 of 2008, restraining the defendants in the suit from proceeding with the Arbitration. (q) On 28.03.2008, the International Court of Arbitration, by itself, appointed Prof. James Crawford on behalf of 6th defendant and the 2nd plaintiff, pursuant to the Arbitration Clause. On 07.05.2008, the ICC also appointed Sir Ian Barker QC as the Chairman of the Arbitral Tribunal. (r) But the Arbitrators did not proceed further in view of the interim order of injunction granted in O.A. No. 277 of 2008. Therefore, on 13.06.2008, defendants 6 and 10 filed applications A. Nos. 2670 and 2671 of 2008, seeking respectively (i) to refer the parties to Arbitration under section 45of the Arbitration and Conciliation Act, 1996 and (ii) to vacate the interim order of injunction granted in O.A. No. 277 of 2008. Hence all the applications were taken up together. 3. Before proceeding further, an interesting fact situation is to be taken note of and it is th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat while selecting the third arbitrator, ICC shall not select a person of Indian or American or nationality. The Arbitration shall be conducted in the English language. The seat of arbitration tribunal shall be London, England. Any arbitration award by the Arbitration Tribunal shall be final and binding upon the parties, shall not be subject to appeal and shall be enforced by judgment of a Court of competent jurisdiction. 22.4. The losing party, as determined by the Arbitral Tribunal, shall pay all reasonable out-of-pocket expenses (including, without limitation, reasonable attorney's fees) incurred by the prevailing Party, as determined by the arbitral tribunal, in connection with any such dispute. Notwithstanding any other provision of this Agreement, any Party shall be entitled to seek injunctive or other provisional relief against immediate, irreparable loss or damage from any Court of competent jurisdiction pending the final decision or award of the arbitrator. When any Dispute occurs and is referred to Arbitration, expect for the matters under dispute, the Parties shall continue to exercise their remaining respective rights and fulfill their remaining respective obl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry large magnitude and that some of the parties to the fraud were even convicted by a criminal court in Korea for various offences including bribery. Therefore a civil suit was filed for restraining the Defendants from acting on the Memorandum of Understanding and License Agreement and an interim order of injunction came to be issued. In such circumstances, the Supreme Court refused even to appoint an Arbitrator under Section 11. 7. The plaintiffs and some of the defendants resist the application under Section 45on the ground inter alia ? (a) that the Arbitration Agreement is null and void, inoperative and incapable of being performed; (b) that the issues raised before the Arbitrators are already in issue before various Courts and Special Forums in India and hence the defendants 6 and 10 who have themselves initiated such proceedings in India cannot seek to agitate the very same issues for the very same prayers before the Arbitrators; (c) that the defendants 6 and 10 are not only challenging the Joint Venture Agreement as vitiated by fraud, but have also initiated criminal proceedings in India and hence they have made the Arbitration Agreement a dead letter and ino ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich the Convention set forth in the Schedule applies, or any person claiming through or under him commences any legal proceedings in any Court against any other party to the submission or any person claiming through or under him in respect of any matter agreed to be referred, any party to such legal proceedings may, at any time after appearance and before filing a written statement or taking any other step in the proceedings apply to the Court to stay the proceedings and the Court, unless satisfied that the agreement is null and void, inoperative or incapable of being performed or that there is not in fact any dispute between the parties with regard to the matter agreed to be referred, shall make an order staying the proceedings. 10. The Schedule to Foreign Awards (Recognition and Enforcement) Act, 1961 contained the Convention on the Recognition and Enforcement of Foreign Arbitral Awards. Article II.3 of the Schedule to the 1961 Act reads as follows:- The Court of a contracting State, when seized of an action on a matter in respect of which the parties have made an agreement within the meaning of this Article, shall at the request of one of the parties, refer the parties ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ealt with under Sections 20, 23 to 30and 36of the Contract Act. In brief: (i) Section 20declares an agreement to be void, if both parties to the agreement, are under a mistake as to a matter of fact; (ii) Section 23lists out the circumstances under which the consideration or object of an agreement would be illegal; (iii) Section 24declares agreements whose considerations and objects are unlawful in part, to be void; (iv) Section 25declares an agreement without consideration to be void except under certain contingencies; (v) Sections 26and 27declare agreements in restraint of marriage and trade to be void; (vi) Section 28declares agreements in restraint of legal proceedings to be void (with a few exceptions); (vii) Section 29declares agreements to be void for uncertainty; (viii) Section 30declares agreements by way of wager to be void (with the exception of horse racing), and (ix) Section 36declares all agreements contingent upon the happening of impossible events, to be void. 15. While the provisions of Sections 20, 23 to 30and 36of the Contract Act, deal with agreements which are void from their very inception, Section 35deals with a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Relief Act. (iv) Some of the defendants are not parties to the Arbitration Agreement. (v) The very claim of the defendants 6 and 10 before the Arbitrators is that the Joint Venture Agreement is null and void. Therefore the Arbitration Agreement which forms part of it, is also null and void. (vi) Complicated issues, which cannot be decided by arbitration, are involved. (vii) The conduct of the defendants 6 and 10 disentitles them from seeking Arbitration. 18. The challenge to the Arbitration Agreement on the ground that it is null and void is found only in sub paragraph V of paragraph-16 of the plaint. But there, the plaintiffs have not specifically pleaded any question of fact that rendered the Arbitration Agreement null and void. None of the parameters prescribed in sections 20, 23 to 30, 35or 36of the Contract Act, is pleaded with any kind of precision by the plaintiffs, to enable this Court to come to the conclusion that the Arbitration Agreement is null and void. The plaintiffs seek a declaration that the Arbitration Agreement is null and void only on the basis that the defendants 6 and 10 themselves have sought a declaration in their Arbitration Claim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r, in reason No. V in paragraph-16 of the plaint, the plaintiffs have not laid a foundation, strong enough for their claim, that the Arbitration Agreement is null and void, for some acceptable reasons of their own. The plaintiffs have just pleaded that even according to the defendants 6 and 10, the Joint Venture Agreement has become null and void. This is not, in my considered opinion, a pleading, sufficient to hold that the Arbitration Agreement is null and void, for the purpose of rejecting an application under Section 45of the Act. 21. INCAPABLE OF BEING PERFORMED: The next limb of the rider contained in section 45is the word inoperative. But before examining the question as to whether the arbitration agreement in this case has become inoperative, let me, for the purpose of convenience, examine whether the agreement has become incapable of being performed. The phrase incapable of being performed signifies, in effect, frustration and the consequent discharge. If, after the making of the contract, the promise becomes incapable of being fulfilled or performed, due to unforeseen contingencies, the contract is frustrated. 22. When the rule of frustration was at its infancy, in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 25. Thus section 56of the Contract Act, contemplates 3 situations, namely (i) agreement to do an act which is impossible in itself (ii) agreement to do an act which becomes impossible after the making of the contract and (iii) agreement to do an act, which becomes unlawful later, on account of some event which the promisor could not prevent. 26. But the case on hand will not fall either under the category of an agreement to do an act impossible in itself or under the category of an agreement to do an act, which became unlawful by reason of some event which the promisor could not prevent. It will also not fall under the category of a contract to do an act which became impossible after the contract was made. We must remember that we are here concerned with the arbitration agreement and not the main joint venture agreement. The arbitration by itself is not incapable of being performed, even if the joint venture agreement between the parties is presumed to be incapable of being performed. Therefore, I do not accept the contention that the arbitration agreement became incapable of being performed. 27. The reliance placed by the plaintiffs on section 16of the Specific Relief Act, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8) 1 Lloyd's Rep. 163}, where an agreement contained a clause, the first part of which mandated the reference of any dispute to Arbitration in England and the latter part of it mandated the reference of any other dispute to Arbitration in Russia. Therefore the Court held that the Arbitration Agreement was void for ambiguity and was neither effective nor enforceable. But the case on hand poses no such conundrum. 31. One of the circumstances when an arbitration agreement may become inoperative is, when the dispute arising out of the underlying contract is resolved. The Supreme Court of New South Wales, Commercial Division, Australia, took such a view in Shanghai Foreign Trade Corporation (PR China) vs. Sigma Metallurgical Co. Pty. Ltd., (Yearbook Commercial Arbitration, Vol. XXII-1997 page 609). An agreement may be rendered inoperative even by acts of omission or commission, on the part of the parties. Waiver, abandonment, renunciation, election, acquiescence etc., are some of the acts of commission or omission, by which an agreement may be made inoperative by a party. In his The Law and Practice of Arbitration and Conciliation (2nd Edition) Mr. O.P. Malhotra, the learned Aut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o seek resolution of dispute as provided in the arbitration agreement must be clearly manifested by the step taken by such party. Once such unequivocal intention is declared or abandonment of the right to claim the benefit of the agreement becomes manifest from the conduct, such party would then not be entitled to enforce the arbitration agreement because there is thus a breach of the agreement by both the parties disentitling both to claim any benefit of the arbitration agreement. Section 34provides that a party dragged to the Court as defendant by another party who is a party to the arbitration agreement must ask for stay of the proceedings before filing the written statement or before taking any other step in the proceedings. That party must simultaneously show its readiness and willingness to do all things necessary to the proper conduct of the arbitration. The legislature by making it mandatory on the party seeking benefit of the arbitration agreement to apply for stay of the proceedings before filing the written statement or before taking any other steps in the proceedings unmistakably pointed out that filing of the written statement discloses such conduct on the part of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ical grounds. 35. The above cases arose out of section 34of the Arbitration Act, 1940, relating to stay of legal proceedings. Section 34of the old Act entitled a party against whom legal proceedings were initiated, to seek a stay of the proceedings, on the basis of the arbitration agreement. But the right so conferred was restricted by the prescription that it should be exercised before the filing of a written statement or taking any other steps in the proceedings. Therefore, the Supreme Court held that the action of the defendant in filing a written statement or taking other steps in the legal proceedings would tantamount to abandonment of the right to seek arbitration. 36. Interestingly, the Supreme Court did not merely look at the filing of the written statement as an act simplicitor, disentitling the defendant to seek arbitration in terms of section 34, without anything more. In other words, the Supreme Court did not just think that the filing of the written statement by the defendant resulted in the forfeiture of a right to seek arbitration. The filing of the written statement was considered by the Apex court, as an abandonment of the right itself. 37. A similar ride ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the contract between them, it may riot be open to him thereafter to turn around and make a disclaimer of the action initiated by him, if the other party has submitted himself to the jurisdiction and obtained a relief or finding in his favour. 41. Abandonment may also arise when the contract is followed by a long period of delay or inactivity. But the party seeking to establish abandonment must show that the other party so conducted himself as to entitle him to assume and that he did assume, that the contract was agreed to be abandoned sub silentio. The abandonment of a right may arise by virtue of a party making an election. Some times this is also called waiver by election. It would arise when a person is entitled to alternative rights inconsistent with one another and that person acts in a manner which is consistent only with his having chosen to rely on one of them. Such cases do not require detriment to the other party as foundation for their application { R. Samudra Vijayam Chettiar Vs. Srinivasa Alwar and Others AIR 1956 Madras 301 = (1956) 69 L.W. 62. A second type of waiver is waiver by estoppel. It arises when the innocent party so conducts himself as to lead the part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Complainant D-10 Accused Plaintiffs, Defts. 2, 4, and 5 Offences alleged 120-B, r/w 409, 420, 405, 471, 389 Status Not investigated; petition for direction filed in high court Crl.M.P. No. 6096/2006, J.M. Perundurai D-10 Plaintiffs, Defts.4 and 5 and others 109, 406, 420, 467 Dismissed Cr. No. 7/07 District Crime Branch, Erode D-10 Plaintiffs, D-2,4 5 120-B, 109, 420, 408, 409 Stayed by High Court in Crl. O.P. 12695/07 Crime No. 238/07, Chennimalai Police Chenniappan Director of D-6 Plaintiffs, D-2, 4 5 120-B, 406, 409, 420 IPC Stayed by High Court in Crl. O.P. 19448/07 Crime No. 466 of 2007, Kangeyam Police Chenniappan Director of D-6 Plaintiffs, D-2 4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the defendants 6 and 10 have made the arbitration agreement (or clause) inoperative by resorting to a series of litigation before various fora. 48. An argument was raised by the learned Senior counsel for defendants 6 and 10 that the company petitions filed by his clients are only statutory remedies availed by them and that it would not amount to abandonment. As a matter a fact, there were 2 company petitions, one filed by defendants 6 and 10 and another filed by defendant-2, under sections 397and 398, Companies Act, 1956. These company petitions have now been disposed of by the Company Law Board, by a common order dated 13-8-2008. Both company petitions related to the alleged oppression and mismanagement of the affairs of the Joint Venture company. 49. The order passed by the Company Law Board dated 13-8-2008 discloses that the entire dispute before the Board revolved only around the Joint Venture Agreement. It is stated in paragraph-3 of the order of the CLB that all the contentious issues primarily arising on account of the alleged breach of the terms of the JVA dated 30-1-2004 are common to C.P. No. 65 of 2005 as well as C.P. No. 76 of 2005. In paragraph- 16 of its orde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an (plaintiffs), without suffering any prejudices by them. 52. In the light of such findings and opinion, the CLB issued certain directions to the parties in paragraph-17 of its order, which are as follows:- 17. In view of the foregoing conclusions and in exercise of the powers under Sections 397and 398read with Section 402and with a view to bringing to an end the grievances of CG Holdings, KCP, ORE and Athappan, the following order is passed:- CEPL shall return a sum of ₹ 75 crores and ₹ 4 crores invested by ORE and Athappan respectively, together with simple interest at the rate of 8% per annum from the date of investment till the date of repayment within a period of 12 months in one or more instalments, commencing from 01.11.2008. While making the payment CEPL, CG Holdings and KCP shall ensure that at least 25% of the amount due is paid in every quarter. CEPL. C.G. Holdings and KCP are at liberty to make use of the fixed deposit held by CEPL with SBI, Erode Main Branch, free of any liens or encumbrances towards refund of the investments of ORE and Athappan. VML shall not alienate or sell any of its immovable properties till full payment is made to ORE, in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s for a direction to the JV company (D-9) to transfer the title of the real estate to the claimant or to its order. This prayer actually merges with the prayer now granted by CLB. In such circumstances, it is clear that the defendants 6 and 10 have, by their own conduct, made the arbitration clause/agreement inoperative. 55. The purpose of arbitration is to minimize the role of courts and other fora and to ensure speedy resolution of disputes. In cases covered by Part II of the Act, the role of the court at the pre reference stage, is confined only to the grant of interim measures under section 9and the examination of the validity and enforceability of the arbitration agreement (whether null and void, inoperative or incapable of being performed). The defendants approached the District Court at Coimbatore, seeking a relief under section 9and it is understandable. But they also filed Company Petitions, a suit and several criminal complaints and also obtained a relief from the Company Law Board, which would restore the parties to the joint venture agreement, to their original position. The claim for damages alone is now available for the arbitral tribunal to adjudicate, since the q ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... International Court of Arbitration merely conveyed, by their letter dated 1.2.2008, their decision to proceed further with the Arbitration. This letter is filed as plaint document No. 39. No reasons are found in the said letter. Therefore, the contention that the plaintiffs have submitted to the jurisdiction of the Arbitral Tribunal, cannot be accepted. 58. As stated in the earlier portion of this order, one view expressed by the Supreme Court in Shin-etsu Chemical Co. Ltd Vs. Aksh Optifibre Ltd and another (2005) 7 SCC 234 = 2005-4-L.W.683} is that if the Court decides to reject an application under Section 45, an elaborate enquiry is to be held, giving opportunities to the parties to lead evidence. Such a view was expressed on the basis that the order rejecting an application under Section 45is appealable. 59. But in the present case, there is neither any scope nor any need for an elaborate enquiry, as I am rejecting the application on the basis of the admitted facts and evidence that the Arbitration Agreement has become inoperative by virtue of the conduct of the defendants 6 and 10. A question of fraud or misrepresentation, required to be established before holding an a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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