Swiss Timing Ltd V. Organizing Committee Commonwealth Games (2)

 

22. As noticed above, the attention of this Court was not drawn to the provision contained in Section 16 of the Arbitration Act, 1996 in the case of N. Radhakrishnan (supra). Section 16 provides that the Arbitral Tribunal would be competent to rule on its own jurisdiction including ruling on any objection with regard to existence or validity of the arbitration agreement. The Arbitration Act emphasises that an arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract. It further provides that a decision by the Arbitral Tribunal that the contract is null and void shall not entail ipso jure the invalidity of the arbitration clause. The aforesaid provision came up for consideration by Ludhiana Improvement Trust & Anr.[6] 23. In the aforesaid case, the designated Judge of the Punjab &

Haryana High Court had refused to refer the disputes to arbitration. The High Court had accepted the plea that since the underlying contract was void, the arbitration clause perished with it. The judgment of the High Court was challenged in this Court, by filing a Special Leave Petition.

Before this Court it was submitted by the appellant that the High Court treated the application under Section 11(6) of the Arbitration Act as if it was deciding a suit but without Ltd., it was submitted that the High Court was only required to conduct a preliminary enquiry as to whether there was a valid arbitration agreement; or whether it was a stale claim.

On the other hand, it was submitted by the respondents that once the High Court had found the main agreement to be void, the contents thereof including the arbitration clause are also rendered void.

24. This Court rejected the aforesaid submission of the respondents with the following observations :

“13. We have carefully considered the submissions made on behalf of the respective parties and we are of the view that the learned designated Judge exceeded the bounds of his jurisdiction, as envisaged in SBP & Co. (supra). In our view, the learned designated Judge was not required to undertake a detailed scrutiny of the merits and de- merits of the case, almost as if he was deciding a suit. The learned Judge was only required to decide such preliminary issues such as jurisdiction to entertain the application, the existence of a valid arbitration agreement, whether a live claim existed or not, for the purpose of appointment of an arbitrator. By the impugned order, much more than what is contemplated under Section 11(6) of the 1996 Act was sought to be decided, without any evidence being adduced by the parties. The issue regarding the continued existence of the arbitration agreement, notwithstanding the main agreement itself being declared void, was considered by the 7-Judge Bench in SBP & Co. (supra) and it was held that an arbitration agreement could stand independent of the main agreement and did not necessarily become otiose, even if the main agreement, of which it is a part, is declared void.

14. The same reasoning was adopted by a member of this Bench (S.S. Nijjar, J.), while deciding the case of Reva Electric Car wherein the provisions of Section 16(1) in the backdrop of the doctrine of kompetenz kompetenz were considered and it was inter alia held that under Section 16(1), the legislature makes it clear that while considering any objection with regard to the existence or validity of the arbitration agreement, the arbitration clause, which formed part of the contract, had to be treated as an agreement independent of the other terms of the contract. Reference was made in the said judgment to the provisions of Section 16(1)(b) of the 1996 Act, which provides that even if the arbitral tribunal concludes that the contract is null and void, it should not result, as a matter of law, in an automatic invalidation of the arbitration clause. It was also held that Section 16(1)(a) of the 1996 Act presumes the existence of a valid arbitration clause and mandates the same to be treated as an agreement independent of the other terms of the contract. By virtue of Section 16(1)(b) of the 1996 Act, the arbitration clause continues to be enforceable, notwithstanding a declaration that the contract was null and void.

25. Keeping in view the aforesaid observations made by this Court, I see no reason to accept the submission made by the learned counsel for the respondents that since a criminal case has been registered against the Chairman of the Organising Committee and some other officials of the petitioner, this Court would have no jurisdiction to make a reference to arbitration.

26. As noticed above, the concept of separability of the arbitration clause/agreement from the underlying contract has been statutorily recognised by this country under Section 16 of the Arbitration Act, 1996. Having provided for resolution of disputes through arbitration, parties can not be permitted to avoid arbitration, without satisfying the Court that it will be just and in the interest of all the parties not to proceed with the arbitration. Section 5 of the Arbitration Act provides that the Court shall not intervene in the arbitration process except in accordance with the provisions contained in Part I of the Arbitration Act. This policy of least interference in arbitration proceedings recognises the general principle that the function of Courts in matters relating to arbitration is to support arbitration process. A conjoint reading of Section 5 and Section 16 would make it clear that all matters including the issue as to whether the main contract was void/voidable can be referred to arbitration. Otherwise, it would be a handy tool available to the unscrupulous parties to avoid arbitration, by raising the bogey of the underlying contract being void.

27. I am of the opinion that whenever a plea is taken to avoid arbitration on the ground that the underlying contract is void, the Court is required to ascertain the true nature of the defence. Often, the terms “void” and “voidable” are confused and used loosely and interchangeably with each other. Therefore, the Court ought to examine the plea by keeping in mind the relevant statutory provisions in the Indian Contract Act, 1872, defining the terms “void” and “voidable”. Section 2, the interpretation clause defines some of the relevant terms as follows: “2(g) An agreement not enforceable by law is said to be void;

2(h) An agreement enforceable by law is a contract;

2(i) An agreement which is enforceable by law at the option of one or more of the parties thereto, but not at the option of the other or others, is a voidable contract;

2(j) A contract which ceases to be enforceable by law becomes void when it ceases to be enforceable.” The aforesaid clauses clearly delineate and differentiate between term “void” and “voidable”. Section 2(j) clearly provides as to when a voidable contract would reach the stage of being void. Undoubtedly, in cases, where the Court can come to a conclusion that the contract is void without receiving any evidence, it would be justified in declining reference to arbitration but such cases would be few and isolated. These would be cases where the Court can readily conclude that the contract is void upon a meaningful reading of the contract document itself. Some examples of where a contract may fall in this category would be : (a) Where a contract is entered into by a person, who has not attained the age of majority (Section 11);

(b) Where both the parties are under a mistake as to a matter of fact essential to the agreement (Section 19);

(c) Where the consideration or object of the contract is forbidden by law or is of such a nature that, if permitted, it would defeat the provisions of any law or where the object of the contract is to indulge in any immoral activity or would be opposed to public policy. Glaring examples of this would be where a contract is entered into between the parties for running a prostitution racket, smuggling drugs, human trafficking and any other activities falling in that category.

(d) Similarly, Section 30 renders wagering contracts as void. The only exception to this is betting on horse racing. In the circumstances noted above, it may not be necessary for the Court to take any further evidence apart from reading the contract document itself. Therefore, whilst exercising jurisdiction under Section 11(6) of the Arbitration Act, the Court could decline to make a reference to arbitration as the contract would be patently void.

28. However, it would not be possible to shut out arbitration even in cases where the defence taken is that the contract is voidable. These would be cases which are covered under the circumstances narrated in Section 12 – unsoundness of mind;

Section 14 – absence of free consent, i.e. where the consent is said to be vitiated as it was obtained by Coercion (Section 15), Undue Influence (Section 16), Fraud (Section 17) or Misrepresentation (Section 18). Such a contract will only become void when the party claiming lack of free consent is able to prove the same and thus rendering contract void.

This indeed is the provision contained in Section 2(j) of the Indian Contract Act. In exercising powers under Section 11(6) of the Arbitration Act, the Court has to keep in view the provisions contained in Section 8 of the Arbitration Act, which provides that a reference to arbitration shall be made if a party applies not later than when submitting his first statement on the substance of the dispute. In contrast, Section 45 of the aforesaid Act permits the Court to decline reference to arbitration in case the Court finds that the agreement is null and void, inoperative or incapable of being performed.

29. To shut out arbitration at the initial stage would destroy the very purpose for which the parties had entered into arbitration. Furthermore, there is no inherent risk of prejudice to any of the parties in permitting arbitration to proceed simultaneously to the criminal proceedings. In an eventuality where ultimately an award is rendered by arbitral tribunal, and the criminal proceedings result in conviction rendering the underlying contract void, necessary plea can be taken on the basis of the conviction to resist the execution/enforcement of the award. Conversely, if the matter is not referred to arbitration and the criminal proceedings result in an acquittal and thus leaving little or no ground for claiming that the underlying contract is void or voidable, it would have the wholly undesirable result of delaying the arbitration. Therefore, I am of the opinion that the Court ought to act with caution and circumspection whilst examining the plea that the main contract is void or voidable. The Court ought to decline reference to arbitration only where the Court can reach the conclusion that the contract is void on a meaningful reading of the contract document itself without the requirement of any further proof.

30. In the present case, it is pleaded that the manner in which the contract was made between the petitioner and the respondent was investigated by the CBI. As a part of the investigation, the CBI had seized all the original documents and the record from the office of the respondent. After investigation, the criminal case CC No.22 of 2011 has been registered, as noticed earlier. It is claimed that in the event the Chairman of the Organising Committee and the other officials who manipulated the grant of contract in favour of the respondent are found guilty in the criminal trial, no amount would be payable to the petitioner. Therefore, it would be appropriate to await the decision of the criminal proceedings before the arbitral tribunal is constituted to go into the alleged disputes between the parties. I am unable to accept the aforesaid submission made by the learned counsel for the respondents, for the reasons stated in the previous paragraphs. The balance of convenience is tilted more in favour of permitting the arbitration proceedings to continue rather than to bring the same to a grinding halt.

31. I must also notice here that the defence of the contract being void is now-a-days taken routinely along with the other usual grounds, to avoid/delay reference to arbitration. In my opinion, such ground needs to be summarily rejected unless there is clear indication that the defence has a reasonable chance of success. In the present case, the plea was never taken till the present petition was filed in this Court.

Earlier, the respondents were only impressing upon the petitioners to supply certain information. Therefore, it would be appropriate, let the Arbitral Tribunal examine whether there is any substance in the plea of fraud now sought to be raised by the respondents.

32. The Respondent also relied on the judgment of this Court in India Household and Healthcare Ltd. (supra), wherein the application under section 11 (6) of the Arbitration Act was dismissed. This case, however, will not come in the way of referring the matter to arbitration since it is clearly distinguishable from the present case. In India Household and Healthcare Ltd. (supra), the substantive/underlying contract containing the arbitration clause was entered into by the parties on 08.05.2004. This agreement, however, was preceded by a Memorandum of Understanding (“MoU”) dated 1.11.2003. It was contended by the Respondent that both the Agreement and the MoU are vitiated by fraud which was fructified by a criminal conspiracy hatched between officials representing the Petitioner and Respondent therein. This Court also noticed that the concerned officials of the Respondent had been convicted and sentenced to undergo imprisonment by the Korean Criminal Court. The said MoU was also contended by the Respondent to be in contravention of the laws of Korea. It was further noticed that the Respondent filed a suit in the Madras High Court against the Petitioner, whereby the High Court vide interim order dated 06.10.2005 issued an injunction and thereby restrained the Petitioner therein to act directly or indirectly on the basis of MoU and the Agreement dated 08.05.2004, and to derive any other benefit based upon the said MoU and the license agreement in any manner whatsoever. This interim order, the court noticed, was confirmed by an order dated 21.01.2006; against which no appeal was filed by the Petitioner. The Court, relying upon A Treatise on Law Governing Injunctions by Spelling and Lewis, concluded that this injunction order having not been challenged by the Petitioner has become final and also that this order restrains the invocation of the arbitration agreement contained in Agreement dated 08.05.2004. Therefore, the Court declined to refer the matter to arbitration.

Another factor that weighed with Court in dismissing the Petition, it appears, is that the Petitioner did not conform to the procedure concerning appointment of the Arbitrator before filing the Petition under Section 11 (6).

33. This case is clearly distinguishable and hence is not applicable into the facts and circumstances of the present case because of the following reasons: Firstly, there has been no conviction in the present case, though the trial has been going on against the officials of both the parties.

Secondly, there is no injunction or any other order restraining the Petitioner from invoking the Arbitration Clause. Lastly, all the conditions precedent for invoking the arbitration clause have been satisfied by the Petitioner, as observed earlier.

34. The respondent had relied on the judgment of this Court in Ors.[7] This judgment reiterates the normal rule which was stated by the Constitution Bench of this Court in M.S.Sheriff prosecution of the criminal proceeding with the civil suit.

In the aforesaid case, the Constitution Bench had observed as follows: “14. . It was said that the simultaneous prosecution of these matters will embarrass the accused. . but we can see that the simultaneous prosecution of the present criminal proceedings out of which this appeal arises and the civil suits will embarrass the accused. We have therefore to determine which should be stayed.

15. As between the civil and the criminal proceedings we are of the opinion that the criminal matters should be given precedence. There is some difference of opinion in the High Courts of India on this point. No hard-and-fast rule can be laid down but we do not consider that the possibility of conflicting decisions in the civil and criminal courts is a relevant consideration. The law envisages such an eventuality when it expressly refrains from making the decision of one court binding on the other, or even relevant, except for certain limited purposes, such as sentence or damages. The only relevant consideration here is the likelihood of embarrassment.

16. Another factor which weighs with us is that a civil suit often drags on for years and it is undesirable that a criminal prosecution should wait till everybody concerned has forgotten all about the crime. The public interests demand that criminal justice should be swift and sure; that the guilty should be punished while the events are still fresh in the public mind and that the innocent should be absolved as early as is consistent with a fair and impartial trial. Another reason is that it is undesirable to let things slide till memories have grown too dim to trust.

This, however, is not a hard-and-fast rule. Special considerations obtaining in any particular case might make some other course more expedient and just. For example, the civil case or the other criminal proceeding may be so near its end as to make it inexpedient to stay it in order to give precedence to a prosecution ordered under Section 476. But in this case we are of the view that the civil suits should be stayed till the criminal proceedings have finished.”

35. The purpose of the aforesaid solitary rule is to avoid embarrassment to the accused. In contrast, the findings recorded by the arbitral tribunal in its award would not be binding in criminal proceedings. Even otherwise, the Constitution Bench in the aforesaid case has clearly held that no hard and fast rule can be laid down that civil proceedings in all matters ought to be stayed when criminal proceedings are also pending. As I have indicated earlier in case the award is made in favour of the petitioner herein, the respondents will be at liberty to resist the enforcement of the same on the ground of subsequent conviction of either the Chairman or the officials of the contracting parties.

36. It must also notice here that the Petitioners relied upon an earlier order of this court in the case of M/s Nussli (Switzerland) Ltd. (supra). The aforesaid order, however, seems to have been passed on a consensus between the learned counsel for the parties. This is evident from the following observations in the aforesaid order:

“In view of the aforesaid order, learned senior counsel for both the parties have agreed that the parties have agreed that the matter ought to be referred to Arbitration. However, Mr. Gopal Subramaniam, learned senior counsel appearing for the Respondent, submits that serious issued would arise which are currently under investigation of the CBI, which may ultimately culminate into certain conclusions which could result in the invalidation of the contract from inception.

He has, however, very fairly stated that there would be no impediment for the arbitral Tribunal to look into all the issues including the allegations which are pending with the CBI in investigation.

I am of the opinion that the submission made by the learned senior counsel is in accordance with the law settled, not only by this Court, but in other jurisdictions also concerning the international commercial arbitrations.” The aforesaid excerpt clearly shows that Mr. Gopal Subramaniam, had very fairly agreed to proceed with arbitration.

The decision of this Court in M/s Nussli (Switzerland) Ltd.

(supra) has not laid down any law.

37. As noticed earlier, the petitioners have already nominated Hon’ble Mr. Justice S.N. Variava, Former Judge of this Court, having his office at Readymoney Mansion, 2nd floor, Next to Akbarallys, Veer Nariman Road, Fort, Mumbai – 400 001, as their arbitrator. I hereby nominate.

Hon’ble Mr. Justice B.P. Singh, Former Judge of this Court, R/o A-7, Neeti Bagh, 3rd Floor, New Delhi – 110 049, as the second Arbitrator and Hon’be Mr. Justice Kuldip Singh, Former Judge of this Court, R/o H.No. 88, Sector 10A, Chandigarh – 160 010, as the Chairman of the Arbitral Tribunal, to adjudicate the disputes that have arisen between the parties, on such terms and conditions as they deem fit and proper.

38. The Registry is directed to communicate this order to the Chairman of the Arbitral Tribunal, as well as, to the Second Arbitrator to enable them to enter upon the reference and decide the matter as expeditiously as possible.

39. The Arbitration Petition is accordingly allowed with no order as to costs.

.J.

[Surinder Singh Nijjar] New Delhi;

May 28, 2014 [pic] —- [1] (2010) 1 SCC 72 [2] (2013) 7 SCC 622 [3] 2007 (5) SCC 510 [4] (2003) 6 SCC 503 [5] (2000) 4 SCC 539 [6] 2013 (7) SCALE 327: 2013 (2) Arb. LR 241 (SC) [7] (2013) 7 SCC 622

Analysis

Labels

Ambassadors, Injunctions, Misrepresentation, Warranty

Subjects

• Constitutional Law

See Also

• Supreme Court of India
• Constitutional Law of India

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