TMI Blog2003 (11) TMI 638X X X X Extracts X X X X X X X X Extracts X X X X ..... er held 3,33,75,280 equity shares of defendant no. 3 which is 97.8% of the total equity paid up share capital. The defendants and other share holders mentioned in Annexure-A in February, 2001 desired to sell their share holding and the negotiations were held with the plaintiff. Accordingly, an agreement (share purchase agreement) was executed on 29.3.2001 between the parties for the purchase of entire 97.8% share held by the defendants no. 1 2 and other share holders as mentioned in annexure A, in the defendant no. 3. The total consideration payable for this transfer was ₹ 209.996 crores. This transaction was subject to fulfillment of certain conditions precedent. One of the condition was that the plaintiff would pay a sum of ₹ 10 crores to the defendant upon execution of Escrow agreement which would have authorised Escrow agents to hold the equity shares which were to be sold to the plaintiff. Escrow agreement was executed on 12.4.2001 between the plaintiff, the defendants and AIA Capital India Pvt. Ltd (Escrow agent). On payment of ₹ 10 crores the defendant and other share holders were to deposit 26% shares totalling ₹ 88,62,200 with the Escrow Agent. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Escrow agent got in touch with the plaintiff by letter dated 12.6.2001 in view of the conflicting instructions to him. The plaintiff again demanded refund of ₹ 5 crores from the defendant by letter dated 18.6.2001 raising objection against the alleged forfeiture of the said sum. The agreement had become void because of non fulfillment of the conditions precedent i.e non approval of the shareholders of the plaintiff which resulted in the termination of the share purchase agreement and Escrow agreement and release of Escrow agent. Consequently, the parties were restored back to their original position that obtained before the agreement was entered into by entering into an agreement dated 12.7.2001. It was an implied term of the said agreement that the defendant would refund ₹ 5 crores when the shares will be returned to the defendant. On 12.7.2001 the Escrow agent returned the share to the defendant and the defendants became liable to refund the amount immediately after receiving the original share certificate and share transfer deeds. The defendants were under obligation to repay the advance of ₹ 5 crores to the plaintiff. On 19.9.2001 BPL Broadband Networks lt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he application after referring to the relief claimed in the suit it was contended that the issues which arise in the suit are whether clause 27.2.1 of the share purchase agreement was null and void; whether the alleged forfeiture of ₹ 5 crores by the defendant no. 1 and 2 and other sellers was illegal and void and; whether the defendant and or the other shareholders were liable to pay ₹ 5 crores Along with interest to the plaintiff. It was submitted that all these issues arose in connection with the share purchase agreement dated 29.3.2001 executed between the plaintiff and the defendants and other shareholders and the defendant no. 3 company which stipulated that all disputes arising out of and in relation to the said agreement would be referred to an arbitrator. Clause 23 of the share purchase agreement which provided for arbitration was reproduced and it was submitted that in view of the arbitration clause the suit was not maintainable and the claim of the plaintiff was liable to be referred to the arbitrator under Section 8 of the Act. Copy of the share purchase agreement dated 29.3.2001 was annexed to the application. 4. The plaintiff contested this application ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ered into an agreement dated 29.3.2001 for purchase of shares of defendant no. 3 for consideration and in accordance with the terms of agreement it had advanced a sum of ₹ 5 crores to the defendant. On 12.4.2001, a memorandum was executed between the parties to the suit and Escrow Agent which acknowledged the payment of ₹ 5 crores and as per plaintiff partially modified the terms of earlier agreement. But later on it failed to obtain the consent and approval of its shareholders to this deal, Therefore, was unable to buy the shares and pay the balance amount due. The plaintiff then demanded the refund of the balance amount of ₹ 5 crores from the defendant which refused to oblige. On 12.7.2001 the parties entered into another agreement whereby they allegedly terminated and cancelled the share purchase agreement dated 29.3.2001. According to the plaintiff the implied term of the new agreement was that the shares, which were in the custody of Escrow Agent pending completion were to be returned to the defendants and the amount of ₹ 5 crores paid by the plaintiff to the defendants no. 1 2 shall be refunded back to the plaintiff. Escrow agent on 12.7.2001 returne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n is brought in a matter which is the subject of an arbitration agreement shall, if a party so applies not later than when submitting his first statement on the substance of the dispute, refer the parties to arbitration. (2)The application referred to in sub-section (1) shall not be entertained unless it is accompanied by the original arbitration agreement or a duly certified copy thereof. (3) Notwithstanding that an application has been made under sub-section(1) and that the issue is pending before the judicial authority, an arbitration may be commenced or continued and an arbitral award made. 10. The Supreme Court in P.Anand Gajapathi Raju Others Vs . P.V.G.Raju (dead) Others, [2000]2SCR684 has held that language of Section 8 is pre-emptive in nature. Therefore, in cases where there is an arbitration clause in the agreement, it is obligatory for the Court to refer the party to arbitration in terms of their arbitration agreement and nothing remains to be decided after such an application is made except to refer the disputes to an Arbitrator. In Hindustan Petroleum Corporation Limited Vs . M/s. Pink city Midway Petroleums, AIR2003SC2881 , it was held that it is clea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ys had not expired and that, Therefore, it had no jurisdiction. 21. The schemes made by the Chief Justices under Section 11 cannot govern the interpretation of Section 11. If the schemes, as drawn go beyond the terms of Section 11, they are bad and have to be amended. To the extent that the appointment of arbitrators by the Chief Justice of India scheme, 1996, goes beyond Section 11 by requiring, in clause 7, the service of a notice upon the other party to the arbitration agreement to show cause why the nomination of an arbitrator, as requested, should not be made, it is bad and must be amended. The other party needs to be given notice of the request only so that it may know of it and it may, if it so chooses, assist the Chief Justice or his designate in the nomination of an arbitrator. 12. In Smt.Kalpana Kothari Vs . Smt. Sudha Yadav Others, AIR2002SC404 , Supreme Court elucidated the scope of Section 8 of the Act vis-a-vis Section 34 of repealed Arbitration Act of 1940 as follows:- Section 34 of the 1940 Act provided for filing an application to stay legal proceedings instituted by any party to an arbitration agreement against any other party to such agreement, in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pending suit, such application is not filed before submitting first statement on the substance of the dispute; or (3) such application is not accompanied by the original arbitration agreement or duly certified copy thereof. This would, therefore, mean that the Arbitration Act does not oust the jurisdiction of the civil court to decide the dispute in a case where parties to the arbitration agreement do not take appropriate steps as contemplated under sub-sections (1) and (2) of Section 8 of the Act. 13. Secondly there is no provision in the Act that when the subject matter of the suit includes subject-matter of the arbitration agreement as well as other disputes, the matter is required to be referred to arbitration. There is also no provision for splitting the cause or parties and referring the subject-matter of the suit to the arbitrators. 14.Thirdly there is no provision as to what is required to be done in a case where some parties to the suit are not parties to the arbitration agreement. As against this, under Section 24 of the Arbitration Act, 1940, some of the parties to a suit could apply that the matters in difference between them be referred to arbitration and the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as held that before reverting the disputes between the parties under Section 8 of the Act for arbitration, the Court must adjudicate whether the disputes raised fall within the ambit of arbitration clause or not, without any substance. 15. The principles of law laid down in the aforesaid judgments may be summed up as given below:- 1. The provision of Section 8 is pre-emptory in nature and is mandatory. 2. The mandate of Section 8 can be invoked by a party to an action before a judicial authority by filing an application. 3. The application invoking Section 8 may be filed in any action, not necessarily the civil suits, which is brought before a judicial authority , which does not necessarily imply a Civil Court established under Civil Procedure Code and a Court as defined by clause (e) of Section 2 of the Act 4. The application for referring the disputes to an Arbitrator may be made by a party not later than when submitting his first statement on the substance of the dispute . Before invoking the powers of the judicial authority under Section 8, the party applying, must not have submitted the statement on the substance of the dispute, in the proceeding in which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... endant in a civil suit. Both the plaintiff and the defendant are parties to an arbitration agreement (share purchase agreement dated 29.3.2001). They are also parties to that subsequent agreement dated 12.4.2001 by which the earlier agreement dated 29.3.2001 was allegedly abrogated. The application has been filed by the defendant before filing their written statement. The share purchase agreement between the parties stipulated purchase of 97.8% of share holding of defendants Nos.1 and 2 and other share holders whose names are mentioned in Annexure-A to the plaint, in defendant No. 3 Company. Pursuant to clause 27.2.24 of the agreement dated 29.3.2001, the plaintiff out of ₹ 10 crores advance paid a sum of ₹ 5 crores to the defendant and the defendants placed 26% of the shares in the custody of Escrow Agent in accordance with Escrow agreement. The plaintiff, before making the payment of balance of advance of ₹ 5 crores, failed to obtain the consent and approval of its shareholders to go through the share purchase deal with the defendants and consequently, it is alleged to have cancelled the deal. The defendant declined to refund the amount of ₹ 5 crores recei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ief is also claimed on the basis of the breach of the terms and conditions of the agreement dated 27.2.2001 read with memorandum dated 12.4.2001. This issue also requires examination of the rights and obligations of the parties in the share purchase agreement dated 29.3.2001 and the memorandum dated 12.4.2001. 17. Argument of learned counsel for the defendants/applicants is short and simple. It is argued that the entire claim of recovery of ₹ 5 crores or damages of ₹ 6,60,00,000/- made by the plaintiff in the case is on the premises that the terms and conditions of the share purchase agreement read with memorandum has been breached by the defendant and the defendants had no right to forfeit the amount of ₹ 5 crores. It is argued that the claim made in the suit is based on share purchase agreement dated 29.3.2001. The share purchase agreement provided for arbitration of the disputes between the parties arising out of and in relation to the execution of this agreement. According to him, the subject of the suit is thus fully covered by the subject matter, which is arbitrable under the arbitration agreement dated 29.3.2001. It is also argued that the question wheth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urt in Century Spinning and Manufacturing Company Vs . Motilal Dhariwal, AIR1966MP313 in support of his arguments. 19. To controvert, the counsel for the defendants has argued that a caveat was filed in the case and counsel appeared on behalf of the defendants on the first date of hearing on the application. It is argued that an objection to the grant of ad-interim injunction to the plaintiff was raised in view of the arbitration agreement and that the defendant has filed an appeal against the order in which also, it had raised objection to the maintainability of the suit and the competence of the jurisdiction of the Court in view of the arbitration agreement. It was specifically pleaded that the subject matter of the suit is liable to be referred to the Arbitrator under Section 8 of the Act. It was submitted that as an abundant caution, the grounds for challenging the order of this Bench were also mentioned. Therefore, the argument that the defendants have submitted the statement on the substance of the dispute before the instant application was filed, is devoid of any merit and should be rejected. 20. In the foregoing paragraphs, it has already been observed that the claim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t dated 12.4.2001 indeed does not have an arbitral clause. But whether the arbitration clause, as contained in the agreement dated 29.3.2001, exists or is valid or whether the Arbitrator has jurisdiction to arbitrate the reference, will be decided only on the examination of that agreements. 22. In Union of India Vs . Kishori Lal Gupta Bros.(supra), [1960]1SCR493 , a subsequent agreement came up for consideration to decide whether it had abrogated the earlier agreement which contained an arbitration agreement and it was observed that it represented the common intention of the parties to substitute it for an earlier contract between them and it had given rise to new cause of action by obliterating the earlier contracts and the parties could look to it alone for enforcement of their claim. Therefore, there could be no question that the arbitration clause, which, whether a substantive or collateral term, was nevertheless an integral part of the said contract, must be deemed to exist along with them as a result of the said settlement. The question was considered in a proceeding, which arose out of the challenge to an arbitration Award. The objection as to the existence and validity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the learned Single Judge) could not file reply to the applications under Order 1 Rule 8 CPC under Section 8 of the Arbitration Act, under Order 39 Rules 1 and 2 CPC and under Order 38 Rule 5 CPC, Therefore, their grievance is that they were not properly heard. In order to do justice, we order that let the appellant file reply to these applications by 16th December, 2002 with an advance copy to the counsel for the respondent (plaintiff before the learned Single Judge) who may file rejoinder/reply within two days thereafter. The matter is already fixed before the learned Single Judge for 20th December, 2002 and we hope that the matter will be heard on that date and till then the impugned order be kept in abeyance but the parties shall maintain status quo in respect of the shares. With these observations, the appeal stands disposed of. 24. From the order, it appears that the defendants had submitted to the Court that they were not properly heard. So the defendants were allowed to file reply to the applications. It was thereafter that the present application under Section 8 of the Act was filed. Therefore, there is no substance in the argument that the defendants had disclosed thei ..... X X X X Extracts X X X X X X X X Extracts X X X X
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