1
Reportable
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 4150 OF 2009
(Arising out of SLP [C] No.11117 of 2006)
M.R. Engineers & Contractors Pvt. Ltd. … Appellant
Vs.
Som Datt Builders Ltd. ... Respondent
J U D G M E N T
R.V. RAVEENDRAN, J.
Leave granted. Heard learned counsel for both parties. The matter
relates to interpretation of sub-section (5) of section 7 of Arbitration and
Conciliation Act, 1996 ('Act' for short) and the issue involved is whether an
arbitration clause contained in a main contract, would stand incorporated by
reference, in a sub-contract, where the sub-contract provided that it “shall be
carried out on the terms and conditions as applicable to the main contract.”
2. The Public Works Department, Government of Kerala, (in short ‘PW
Department’) entrusted the work of “Four Laning and Strengthening of
Alwaye – Vyttila and Aroor – Cherthala and Strengthening of Vyttila to
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Aroor Section of NH 47 – N2 & N3 packages” which included the work of
“Construction of Project Directorate Building for National Highway Four
Laning Project at Edapally, Cochin” to the respondent. The said contract
between PW Department and the respondent contained a provision for
arbitration, as per clause 67.3 of the General Conditions of Contract. The
relevant portion of the said clause is extracted below:
“Arbitration 67.3.
Any dispute in respect of which :
(a) the decision, if any, of the Engineer has not become final and
binding pursuant to Sub-Clause 67.1, and
(b) amicable settlement has not been reached within the period
stated in Sub-Clause 67.2.
shall be referred to the adjudication of a Committee of three
arbitrators. The Committee shall be composed of one arbitrator to
be nominated by the Employer, one to be nominated by the
Contractor and the third who will act as the Chairman of the
Committee, but not as umpire, to be nominated by the Director –
General (Road Development), Ministry of Surface Transport
(Roads Wing); Government of India. If either of the parties abstain
or fail to appoint his arbitrator, within sixty days after receipt of
notice for the appointment of such arbitrator, then the Director-
General (Road Development), Ministry of Surface Transport,
Government of India, himself shall appoint such arbitrator(s). A
certified copy of the appointment made by the Director-General
(Road Development), Ministry of Surface Transport, Govt. of
India, shall be furnished to both parties.”
x x x x x x x x x x
3. The appellant is a sub-contractor of the respondent. Respondent
entrusted a part of the work entrusted to it by the PW Department namely
“construction of Project Directorate building” to the appellant under its
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work order dated 4.5.1994. The relevant portions of the work order are
extracted below:
“With reference to your offer and subsequent discussions, we are
pleased to accept your offer for the construction of the office
building at the unit, firm and fixed price of Rs.3150/- (Rupees
Three Thousand One Hundred Fifty Only) per square metre. The
construction shall be carried out as per the tender specifications
and drawings issued for construction by the client.
The square metre rate includes cost of all materials, labour,
equivalent etc., required for the completion of building work but
excludes the furniture required for the same. No escalation shall be
payable on the above contracted price. The work shall be carried
out as per the drawings furnished by the Department. This subcontract
shall be carried out on the terms and conditions as
applicable to main contract unless otherwise mentioned in this
order letter.
In case there are any change in the foundation design from the
tender drawing, suitable variation claim shall be submitted to the
client by us and the amount approved and paid shall be payable to
you after deducting twenty percent amount.”
x x x x x x x x x x
The approximate cost of this order comes to Rs.33,07,500/-
(emphasis supplied).
4. The appellant alleges that it informed the respondent that it executed
certain extra items and excess quantities of agreed items on the instructions
of the PW Department and requested the respondent to make a claim on the
PW Department in that behalf; that the respondent accordingly made
necessary claims in that behalf on the PW Department; that the said claims,
as also several other claims of the respondent against the PW Department
were referred to arbitration and the arbitrator made an award dated
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18.8.1999. According to appellant, the Arbitrator awarded certain amounts
in regard to its claims put through the respondent and in terms of the
arrangement between the respondent and the appellant, the respondent is
liable to pay to the appellant, eighty percent of the amounts awarded for
such claims, that is Rs.37,55,893/-, along with Rs.1,55,807/- towards prereference
interest upto 4.12.1996 and compensation at 18% per annum for
non-payment of Rs.37,55,893/- from 5.12.1996. The appellant alleged that a
sum of Rs.1,76,936/- was also due by the respondents towards unlawful
deductions. The appellant therefore lodged a claim on the respondent by
letter dated 5.7.2000, for payment of Rs.65,11,341/-. As the claim was not
settled, the appellant sent a letter dated 6.12.2000 seeking reference of the
disputes by arbitration.
5. As the respondent failed to comply, the appellant filed an application
under section 11 of the Act. According to the appellant clause 67.3 of the
General Conditions of Contract forming part of the contract between the PW
Department and the respondent, providing for arbitration, was imported into
the sub-contract between respondent and appellants. The appellant relies
upon the term in the work order dated 4.5.1994 that the “sub-contract shall
be carried out on the terms and conditions as applicable to main contract” to
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contend that the entire contract between the department and the respondent,
including clause 67.3 relating to arbitration, became a part and parcel of the
contract between the parties. The appellant also contended that having
regard to section 7(5) of the Arbitration & Conciliation Act, 1996, the
arbitration clause contained in the main contract between the PW
Department and the respondent, constituted an arbitration agreement
between the respondent and appellant on account of the incorporation
thereof by reference in the contract between the appellant and respondent.
The respondent denied the said claim and contention.
6. The designate of the Learned Chief Justice by order dated 31.1.2003
rejected the said application on the ground that the arbitration clause (in
the contract between PW Department and the respondent) was not
incorporated by reference in the contract between the respondent and
appellant. The said order is challenged in this appeal by special leave.
The question that arises for consideration is whether the provision for
arbitration contained in the contract between principal employer and the
contractor, was incorporated by reference in the sub-contract between the
contractor and sub-contractor.
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7. Section 7 of the Act defines ‘arbitration agreement’. Sub-sections (1)
and (5) of section 7, relevant for our purpose, are extracted below:
“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.
x x x x x
(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. ”
[emphasis supplied]
Having regard to section 7(5) of the Act, even though the contract between
the parties does not contain a provision for arbitration, an arbitration clause
contained in an independent document will be imported and engrafted in the
contract between the parties, by reference to such independent document in
the contract, if the reference is such as to make the arbitration clause in
such document, a part of the contract. The wording of Sec. 7(5) of the Act
makes it clear that a mere reference to a document would not have the effect
of making an arbitration clause from that document, a part of the contract.
The reference to the document in the contract should be such that shows the
intention to incorporate the arbitration clause contained in the document,
into the contract. If the legislative intent was to import an arbitration clause
from another document, merely on reference to such document in the
7
contract, sub-section (5) would not contain the significant later part which
reads : “and the reference is such as to make that arbitration clause part of
the contract”, but would have stopped with the first part which reads : “The
reference in a contract to a document containing an arbitration clause
constitutes an arbitration agreement if the contract is in writing.” Section
7(5) therefore requires a conscious acceptance of the arbitration clause from
another document, by the parties, as a part of their contract, before such
arbitration clause could be read as a part of the contract between the parties.
But the Act does not contain any indication or guidelines as to the conditions
to be fulfilled before a reference to a document in a contract, can be
construed as a reference incorporating an arbitration clause contained in such
document, into the contract. In the absence of such statutory guidelines, the
normal rules of construction of contracts will have to be followed.
8. There is a difference between reference to another document in a
contract and incorporation of another document in a contract, by reference.
In the first case, the parties intend to adopt only specific portions or part of
the referred document for the purposes of the contract. In the second case,
the parties intend to incorporate the referred document in entirety, into the
contract. Therefore when there is a reference to a document in a contract, the
8
court has to consider whether the reference to the document is with the
intention of incorporating the contents of that document in entirety into the
contract, or with the intention of adopting or borrowing specific portions of
the said document for application to the contract. We will give a few
instances of incorporation and mere reference to explain the position
(illustrative and not exhaustive).
9. If a contract refers to a document and provides that the said document
shall form part and parcel of the contract, or that all terms and conditions of
the said document shall be read or treated as a part of the contract, or that the
contract will be governed by the provisions of the said document, or that the
terms and conditions of the said document shall be incorporated into the
contract, the terms and conditions of the document in entirety will get bodily
lifted and incorporated into the contract. When there is such incorporation of
the terms and conditions of a document, every term of such document,
(except to the extent it is inconsistent with any specific provision in the
contract) will apply to the contract. If the document so incorporated contains
a provision for settlement of disputes by arbitration, the said arbitration
clause also will apply to the contract.
9
10. On the other hand, where there is only a reference to a document in a
contract in a particular context, the document will not get incorporated in
entirety into the contract. For example if a contract provides that the
specifications of the supplies will be as provided in an earlier contract or
another purchase order, then it will be necessary to look to that document
only for the limited purpose of ascertainment of specifications of the goods
to be supplied. The referred document cannot be looked into for any other
purpose, say price or payment of price. Similarly if a contract between X and
Y provides that the terms of payment to Y will be as in the contract between
X and Z, then only the terms of payment from the contract between X and Z,
will be read as part of the contract between X and Y. The other terms, say
relating to quantity or delivery cannot be looked into.
11. Sub-section (5) of Section 7 merely reiterates these well settled
principles of construction of contracts. It makes it clear that where there is a
reference to a document in a contract, and the reference shows that the
document was not intended to be incorporated in entirety, then the reference
will not make the arbitration clause in the document, a part of the contract,
unless there is a special reference to the arbitration clause so as to make it
applicable.
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12. The following passages from Russell on Arbitration throws
considerable light on the position while dealing with Section 6(2) of
(English) Arbitration Act, 1996 corresponding to Sec.7(5) of the Indian Act.
(23rd Edition, see pages 52-55):
“Reference to another document. The terms of a contract may
have to be ascertained by reference to more than one document.
Ascertaining which documents constitute the contractual
documents and in what, if any, order of priority they should be
read is a problem encountered in many commercial transactions,
particularly those involving shipping and construction. This issue
has to be determined by applying the usual principles of
construction and attempting to infer the parties’ intentions by
means of an objective assessment of the evidence. This may make
questions of incorporation irrelevant, if for example it is clear that
the contractual documents in question are entirely separate and no
intention to incorporate the terms of one in the other can be
established. However, the contractual document defining and
imposing the performance obligations may be found to incorporate
another document which contains an arbitration agreement. If there
is a dispute about the performance obligations, that dispute may
need to be decided according to the arbitration provisions of that
other document. This very commonly occurs when the principal
contractual document refers to standard form terms containing an
arbitration agreement. However the standard form wording may
not be apt for the contract in which the parties seek to incorporate
it, or the reference may be to another contract between parties at
least one of whom is different. In these circumstances it may be
possible to argue that the purported incorporation of the arbitration
agreement is ineffective. The draftsmen of the Arbitration Act
1996 were asked to provide specific guidance on the issue, but they
preferred to leave it to the court to decide whether there had been a
valid incorporation by reference. “
[Para : 2.044]
“Subject to drawing a distinction between incorporation of an
arbitration agreement contained in a document setting out
standard form terms and one contained in some other contract
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between different parties, judicial thinking seems to have
favoured the approach of Sir John Megaw in Aughton, namely
that general words of incorporation are not sufficient. Rather,
particular reference to the arbitration clause needs to be made
to comply with s. 6 of the Arbitration Act 1996, unless special
circumstances exit.”
[Para : 2.047]
“Reference to standard form terms. If the document sought to
be incorporated is a standard form set of terms and conditions the
courts are more likely to accept that general words of incorporation
will suffice. This is because the parties can be expected to be more
familiar with those standard terms including the arbitration
clause.”
[Para : 2.048]
After referring to the view of Sir John Megaw, in Aughton Ltd. v. M.F. Kent
Services Ltd. [1991 (57) BLR 1] that specific words were necessary to
incorporate an arbitration clause and that the reference in a sub-contract to
another contract’s terms and conditions would not suffice to incorporate the
arbitration clause into the sub-contract, followed in Barrett & Son
(Brickwork) Ltd. v. Henry Boot Nanagement Ltd. [1995 CILL 1026, Trygg
Hansa Insurance Co. Ltd. v Equitas Ltd. [1998 (2) Lloyds’ Rep.439) and
Anonymous Greek Co of General Insurances (The “Ethniki”) v. AIG Europe
(UK) [2002 (2) All ER 566] and Sea Trade Maritime Corp. v. Hellenic
Mutual War Risks Association (Bermuda) Ltd. (The “Athena”) No.2 –
[2006] EWHC 2530, Russell concludes:
“The current position therefore seems to be that if the arbitration
agreement is incorporated from a standard form a general
reference to those terms is sufficient, but at least in the case of
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reference to a non-standard form contract in the context of
construction and reinsurance contracts and bills of lading a
specific reference to the arbitration agreement is necessary.”
A general reference to another contract will not be sufficient to incorporate
the arbitration clause from the referred contract into the contract under
consideration. There should be a special reference indicating a mutual
intention to incorporate the arbitration clause from another document into
the contract.
The exception to the requirement of special reference is where the referred
document is not another contract, but a Standard form of terms and
conditions of a Trade Associations or Regulatory institutions which publish
or circulate such standard terms & conditions for the benefit of the members
or others who want to adopt the same. The standard forms of terms and
conditions of Trade Associations and Regulatory Institutions are crafted and
chiselled by experience gained from trade practices and conventions,
frequent areas of conflicts and differences, and dispute resolutions in the
particular trade. They are also well known in trade circles and parties using
such formats are usually well versed with the contents thereof including the
arbitration clause therein. Therefore, even a general reference to such
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standard terms, without special reference to the arbitration clause therein, is
sufficient to incorporate the arbitration clause into the contract.
13. The scope and intent of section 7(5) of the Act may therefore be
summarized thus:
(i) An arbitration clause in another document, would get incorporated
into a contract by reference, if the following conditions are fulfilled : (i) The
contract should contain a clear reference to the documents containing
arbitration clause, (ii) the reference to the other document should clearly
indicate an intention to incorporate the arbitration clause into the contract,
(iii) The arbitration clause should be appropriate, that is capable of
application in respect of disputes under the contract and should not be
repugnant to any term of the contract.
(ii) When the parties enter into a contract, making a general reference to
another contract, such general reference would not have the effect of
incorporating the arbitration clause from the referred document into the
contract between the parties. The arbitration clause from another contract
can be incorporated into the contract (where such reference is made), only
by a specific reference to arbitration clause.
(iii) Where a contract between the parties provides that the execution or
performance of that contract shall be in terms of another contract (which
contains the terms and conditions relating to performance and a provision for
settlement of disputes by arbitration), then, the terms of the referred contract
in regard to execution/performance alone will apply, and not the arbitration
agreement in the referred contract, unless there is special reference to the
arbitration clause also.
(iv) Where the contract provides that the standard form of terms and
conditions of an independent Trade or Professional Institution (as for
example the Standard Terms & Conditions of a Trade Association or
Architects Association) will bind them or apply to the contract, such
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standard form of terms and conditions including any provision for arbitration
in such standard terms and conditions, shall be deemed to be incorporated
by reference. Sometimes the contract may also say that the parties are
familiar with those terms and conditions or that the parties have read and
understood the said terms and conditions.
(v) Where the contract between the parties stipulates that the Conditions of
Contract of one of the parties to the contract shall form a part of their
contract (as for example the General Conditions of Contract of the
Government where Government is a party), the arbitration clause forming
part of such General Conditions of contract will apply to the contract
between the parties.
14. The Learned counsel for appellant relied on two decisions to contend
that even a general reference to the main contract (between PW Department
and the respondent) in the sub-contract was sufficient to incorporate the
arbitration clause in the main contract, into the sub-contract, even if there
was no special reference to the arbitration clause. We will refer to them
briefly.
14.1 The first case referred is Atlas Export Industries v. Kotak & Co. [1999
(7) SCC 61]. In that case, the appellant had contracted to supply goods to a
foreign buyer through the respondent. The contract entered among them
provided that the terms and conditions of standard contract No.15 of the
Grain & Food Trade Association Ltd., London (for short GAFTA Contract
15) would apply. The contract also confirmed that both buyers and sellers
15
were familiar with the text of GAFTA contract and agreed to be bound by its
terms and conditions. Clause 27 of GAFTA contract 15 provided for
settlement of disputes by Arbitration in London in accordance with the
Arbitration Rules of GAFTA. This Court upheld the decision of the High
Court rejecting the appellant’s objection that there was no agreement in
writing between parties requiring the disputes being referred to arbitration in
accordance with the arbitration rules of GAFTA, holding that the arbitration
clause from GAFTA Contract 15, was incorporated by reference, into the
contract.
14.2 The second case relied upon by the appellant is a decision rendered by
a designate of the Learned Chief Justice of India in Groupe Chimique
Tunisien SA v. Southern Petrochemicals Industries Corpn. Ltd. - 2006 (5)
SCC 275. In that case a purchase order placed by the respondent on the
petitioner stated that “all other terms and conditions are as per FAI terms.
(“FAI Terms” referred to the terms and conditions for sale and purchase of
phosphoric acid of Fertilizer Association of India). Clause 15 of FAI terms
provided for settlement of disputes by arbitration. Certain disputes having
arisen, the petitioner appointed its arbitrator and called upon the respondent
to appoint its arbitrator. When respondent failed to comply, the petitioner
16
filed a petition under Section 11 of the Act for appointment of the second
Arbitrator. In the counter to the petition under Sec. 11 of the Act, the
respondent did not deny the fact that the purchase orders were placed with
the petitioner nor denied the fact that the purchase orders were all placed
subject to FAI terms and conditions, including clause 15 of FAI terms which
provided for arbitration. This court held that the purchase orders placed by
the respondents with the petitioner having been made subject to FAI terms
which contained the arbitration clause, the arbitration clause contained in the
FAI terms would constitute the arbitration agreement between the parties.
14.3 Both the decisions are not of any assistance to the appellant. Both
relate to reference to standard terms & conditions of Trade Associations. In
both cases the parties had agreed to be bound by the standard terms and
conditions of the Trade Association thereby clearly showing an intention to
subject themselves to the provision for arbitration contained in the standard
terms of the Trade Association. The said two decisions therefore relate to
cases referred to Para 13(iii) above, whereas the case on hand falls under
para 13(ii) above.
17
15. The work order (sub-contract), relevant portions of which have been
extracted in para 3 above, shows that the intention of the parties was not to
incorporate the main contract (between the PW Department and respondent)
in entirety into the sub contract. The use of the words “This sub-contract
shall be carried out on the terms and conditions as applicable to main
contract” in the work order would indicate an intention that only the terms
and conditions in the main contract relating to execution of the work, were
adopted as a part of the sub-contract between respondent and appellant, and
not the parts of the main contract which did not relate to execution of the
work, as for example the terms relating to payment of security deposit,
mobilization advance, the itemised rates for work done, payment, penalties
for breach etc., or the provision for dispute resolution by arbitration. An
arbitration clause though an integral part of the contract, is an agreement
within an agreement. It is a collateral term of a contract, independent of and
distinct from its substantive terms. It is not a term relating to ‘carrying out’
of the contract. In the absence of a clear or specific indication that the main
contract in entirety including the arbitration agreement was intended to be
made applicable to the sub-contract between the parties, and as the wording
of the sub-contract discloses only an intention to incorporate by reference
the terms of the main contract relating to execution of the work as contrasted
18
from dispute resolution, we are of the view that the arbitration clause in the
main contract did not form part of the sub-contract between the parties. We
are fortified in this view, by the decision in Alimenta SA. v. National
Agricultural Co-op. Marketing Federation of India Ltd. [1987 (1) SCC 615].
The NAFED – the respondent therein entered into two contracts with
Alimenta S.A. for the supply of certain goods referred to HPS. Clause 11 of
the first contract stipulated that “other terms and conditions as per FOSFA-
20 contract terms”. (FOSFA-20 being a standard form of contract of the
Federation of Oils, Seeds and Fats Association Ltd. containing an
Arbitration clause). Clause 9 of the second contract provided that “all other
terms and conditions for supply not specifically shown and covered
hereinabove shall be as per previous contract signed between us for earlier
supplies of HPS”. The question before this court was whether the arbitration
clause in FOSFA -20 was incorporated in the first contract by way of Clause
11 and in the second contract by virtue of Clause 9. The Court held that
while the Arbitration clause was incorporated in the first contract, the same
was not incorporated in the second contract. The following reasoning of the
Court while dealing with the second contract is relevant for our purpose:
“There is a good deal of difference between Clause 9 of this
contract and Clause 11 of the first contract. Clause 11 has been
couched in general words, but Clause 9 refers to all other terms
19
and conditions for supply. The High Court has taken the view that
by Clause 9 the terms and conditions of the first contract which
had bearing on the supply of HPS were incorporated into the
second contract, and the term about arbitration not being
incidental to supply of goods, could not be held to have been lifted
as well from the first contract into the second one.”
“It is, however, contended on behalf of the appellant that the High
Court was wrong in its view that a term about arbitration is not a
term of supply of goods. We do not think that the contention is
sound. It has been rightly pointed out by the High Court that the
normal incidents of terms and conditions of supply are those which
are connected with supply, such as, its mode and process, time
factor, inspection and approval, if any, reliability for transit,
incidental expenses etc. We are unable to accept the contention of
the appellant that an arbitration clause is a term of supply. There is
no proposition of law that when a contract is entered into for
supply of goods, the arbitration clause must form part of such a
contract. The parties may choose some other method for the
purpose of resolving any dispute that may arise between them. But
in such a contract the incidents of supply generally form part of the
terms and conditions of the contract. The first contract includes the
terms and conditions of supply and as Clause 9 reference to these
terms and conditions of supply, it is difficult to hold that the
arbitration clause is also referred to and, as such, incorporated into
the second contract. When the incorporation clause refers to
certain particular terms and conditions, only those terms and
conditions are incorporated and not the arbitration clause. In the
present case, Clause 9 specifically refers to the terms and
conditions of supply of the first contract and the second contract
and accordingly, only those terms and conditions are incorporated
into the second contract and not the arbitration clause. The High
Court has taken the correct view in respect of the second contract
also”.
(emphasis supplied)
16. Even assuming that the arbitration clause from the main contract had
been incorporated into the sub-contract by reference, we are of the view that
the appellant could not have claimed the benefit of the arbitration clause.
This is in view of the principle that the document to which a general
20
reference is made, contains an arbitration clause whose provisions are
clearly inapt or inapplicable with reference to the contract between the
parties, it would be assumed or inferred that there was no intention to
incorporate the arbitration clause from the referred document. In this case
the wording of the arbitration clause in the main contract between the PW
Department and contractor makes it clear that it cannot be applied to the
sub-contract between the contractor and the sub-contractor. The arbitration
clause in the main contract states that the disputes which are to be referred
to the committee of three arbitrators under clause 67(3) are disputes in
regard to which the decision of the Engineer (‘Engineer’ refers to person
appointed by State of Kerala to act as Engineer for the purpose of the
contract between PW Department and the respondent) has not become final
and binding pursuant to sub-clause 67.1 or disputes in regard to which
amicable settlement has not been reached between the State of Kerala and
the respondent within the period stated in sub-clause 67.2. Obviously neither
67.1 nor 67.2 will apply as the question of ‘Engineer’ issuing any decision
in a dispute between the contractor and sub-contractor, or any negotiations
being held with the Engineer in regard to the disputes between the contract
and sub-contractor does not arise. The position would have been quite
different if the arbitration clause had used the words “all disputes arising
21
between the parties” or “all disputes arising under this contract”. Secondly
the arbitration clause contemplates a committee of three arbitrators, one
each to be appointed by the State of Kerala and the respondent and the third
(Chairman) to be nominated by the Director General, Road Development
Ministry of Surface, Transport, Roads Wing, Govt. of India. There is no
question of such nomination in the case of a dispute between the contractor
and sub-contractor. It is thus seen that the entire arbitration agreement
contained in the main contract between the employer and the contractor was
tailor-made to meet the requirements of the contract between the employer
and the contractor and is wholly inapt and inapplicable in the context of a
dispute between the contractor and the sub-contractor. This makes it clear
that the arbitration clause contained in the main contract would not apply to
the disputes arising with reference to the sub-contract.
17. In view of our finding that there is no arbitration agreement between
the parties, it is unnecessary to examine the contention of the respondent
that no dispute existed between the parties in view of the full and final
settlement receipt executed by the appellant.
22
18. We are therefore of the view that there is no error in the order of the
High Court rejecting the application of the appellant on the ground that there
is no arbitration agreement.
…………………………J.
(R V Raveendran)
New Delhi; ………………………..J.
July 7, 2009. (J M Panchal)
23
If a problem can be solved, no need of worry about it.... If a problem can not be solved, what is the use of worrying?
Pages
▼
Thursday, July 16, 2009
Proceeding u/s 9 of A & C Act 1996
OMP No. 65/2008 Page 1 of 19
*IN THE HIGH COURT OF DELHI AT NEW DELHI
+ OMP No. 65/2008
Reserved on : 8th July, 2009
% Date of decision: 15th July, 2009
M/S VALUE ADVISORY SERVICES ….… Petitioner
Through: Mr. P.V. Kapur, Sr. Advocate with Ms. Chetna Gulati, Advocate.
Versus
M/S ZTE CORPORATION & ORS ....... Respondents
Through: Mr. Dayan Krishnan & Mr. Gautam Narayan, Advocates for Respondent No.3.
CORAM :-
HON’BLE MR. JUSTICE RAJIV SAHAI ENDLAW
1. Whether reporters of Local papers may
be allowed to see the judgment? Yes
2. To be referred to the reporter or not? Yes
3. Whether the judgment should be reported Yes
in the Digest?
RAJIV SAHAI ENDLAW, J.
1. Petition has been preferred under Section 9 of the Arbitration Act, 1996 for interim measures. The petitioner is stated to be involved in an International Commercial Arbitration of the International Chamber of Commerce with the respondents No. 1 and 2. The senior counsel for the petitioner informs that the said arbitration is at a final stage and the award has been reserved. It is informed that the petitioner has monetary claims against the
OMP No. 65/2008 Page 2 of 19
respondents No. 1 and 2. The respondent No.1 is a corporation incorporated in China and respondent No.2, an Indian Company, is stated to be a subsidiary of the respondent No.1. M/s ITI Limited has been impleaded as the respondent No.3. It is stated that monies are due from the respondent No.3 to the respondents No. 1 and 2.
2. The petitioner had earlier filed another petition under Section 9 of the Act against the same respondents and which was registered as OMP.No.359/2006. Vide ex parte order dated 4th August, 2006 in OMP 359/2006, on the petitioner expressing apprehension that if the respondent No.3 releases all monies due to the respondents No.1 and 2, the petitioner will be left with no means to recover the monies ultimately awarded to it, the respondent No.3 was restrained from releasing to the respondents No. 1 and 2 the amount then stated to be due to the petitioner from the respondents No. 1 and 2. The respondents No. 1 and 2 failed to appear in OMP.No. 359/2006 in spite of entering appearance and were ordered to be proceeded against ex parte. The said OMP was disposed of vide order dated 27th August, 2007. Though the said order notices that the respondent No.3 is a third party to the contract, however, on the statement at bar of the counsel for the respondent No.3 that the respondent No.3 shall not release the payment to the respondents No.1 and 2 in terms of prayer (e) of OMP 359/2006 without prior permission of the court or till the disposal of the arbitration proceedings pending in Singapore, the ex parte order was made absolute and the OMP was disposed of. The said order remains in force.
3. The petitioner has now moved this OMP for the relief of restraining the respondent No.3 from releasing the payments in the
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sum of USD 3476258 to the respondent No.1 and for directing the respondent No.3 to deposit the said sum and/or its Indian equivalent in this court. The first of the aforesaid reliefs is squarely covered by the relief granted in the earlier OMP. The petition has been urged only on the ground of direction to the respondent No.3 to deposit the amounts in this court.
4. The respondent No.3 has filed reply in opposition to the petition and the grant of the relief aforesaid and has pleaded –
i) that it is not a party to the agreement containing the arbitration clause and not concerned with the dispute between the petitioner on the one hand and the respondents No.1&2 on the other hand and no petition under Section 9 of the Act lies against it, especially when the main/principle relief claimed in the petition is against a non-party to the arbitration agreement;
ii) that till the award for any amount in favour of the petitioner, the petitioner cannot be said to be entitled to any amount from the respondent No.2 and hence not entitled to deposit in this court of any amount;
iii) that even in the earlier OMP No.359/2006 the petitioner had sought the relief of deposit of the monies due from the respondents No.3 to the respondents No.1&2 in this court and the respondent No.3 had contested the said relief inter-alia on the ground that it was a sick company within the meaning of Sick Industrial Companies Act, 1985 (SICA) and was before the BIFR and petitioner in the garb of the relief under Section 9 of
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the Act could not circumvent the provisions of SICA and further that any order of deposit of the monies in this court would jeopardize the scheme of rehabilitation formulated by the operating agency appointed by the BIFR for rehabilitation of the respondent No.3;
iv) the court while passing orders in OMP No.359/2006 had not returned any finding of the petition under Section 9 being maintainable against the respondent No.3, a non-party to the arbitration agreement and had merely acted on the consent given by the respondent No.3; that the order therein was in the nature of the consent order and if the petitioner desires to challenge the same, the respondent No.3 is entitled to withdraw the consent given in OMP No.359/2006.
5. Though notice of the petition was issued to all the respondents but the record reveals that the respondents No.1&2 remained unserved. However, considering that the respondents No.1&2 had failed to appear in OMP No.359/2006 also in spite of service and further considering the nature of the controversy in the present case, need was not felt to postpone the matter further for service of the respondents No.1&2 and the senior counsel for the petitioner and the counsel for the respondent No.3 have been heard.
6. The senior counsel for the petitioner has contended:
a) That the contention of the respondent of being sick is misconceived in as much as the courts have held that the bar under Section 22 of SICA, 1985 applies only when the amounts claimed are shown to be admitted and are part of the scheme of rehabilitation of
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the sick company; the respondent No.3 has in its reply nowhere stated that the liability for the amounts to the petitioner or to the respondents No.1&2 is admitted or is shown in the scheme of rehabilitation. Reliance in this regard is placed on Mafatlal Industries Ltd Vs MTNL 99(2002) DLT 204;
b) that there is no bar in Section 22 or any other provision of SICA, 1985 to the court directing a sick company to deposit the monies in the court;
c) that the provisions of SICA, 1985 do not apply to arbitration. Reliance in this regard is placed on Lloyd Insulations (India) Ltd. Vs. Cement Corporation of India Ltd. 2001 II AD (Delhi) 567 (DB);
d) that if the sick company desires to avoid an order of deposit it was for the sick company to approach the BIFR under Section 22A of SICA, 1985 and seek orders in this respect.
e) the senior counsel fairly conceded that there was a divergence of opinion in various judgments of single judges of this court on the aspect of maintainability of a petition under Section 9 of the Act against a third party;
f) Reference was made to:
i) Arun Kapur Vs. Vikram Kapur 95 (2002) DLT 42 where it was held in para 44 thereof that while a petition under Section 17 of the Act is moved before the Arbitral Tribunal for an order against a party to the proceedings, Section 9 vests remedy in a party to arbitration proceedings to seek interim measures of protection
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against the person who need not be either party to the arbitration agreement or to arbitration proceedings.
ii) CREF Finance Limited vs. Puri Construction Ltd. 2000 (3) Arb. LR 331 (Delhi) where in exercise of powers under Section 9 of the Act orders were made against a third party, of course holding the said third party to be not a stranger to the covenants between the parties to the agreement containing an arbitration clause; in that case the third party against whom orders were made was an agent of the party to the agreement.
iii) Mikuni Corporation Vs UCAL Fuel Systems Ltd 2008 (1) Arb. LR 503 (Delhi) where it was held that since no arbitration proceedings could take place vis-à-vis the party against whom orders were sought, application under Section 9 did not lie against such party. The judgment in CREF Finance Limited was distinguished since in that case the third party was an agent of a party to the arbitration agreement and reliance was placed on National Highways Authority of India Vs. China Coal Construction Group Corporation AIR 2006 Delhi 134 holding that an interim order could be passed in respect of parties to arbitration and in connection with subject matter thereof and no interim order could be passed in respect of a party who had no privity of contract with the petitioner. Thus the petition seeking interim measures against a non party to the arbitration was held to be not maintainable.
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iv) Smt. Kanta Vashist Vs. Shri Ashwani Khurana MANU/DE/0380/2008 also holding that no injunction could be issued even against companies which though of the family, members whereof were parties to the arbitration, were independent legal entities and not parties to the arbitration agreement.
g) The senior counsel for the petitioner contended that in the present case also the respondent No.3 cannot be called a total stranger to the transaction between the petitioner and the respondents No.1&2 in as much as the claims of the petitioner against the respondents No.1&2 were for agreed commission for facilitating the contract of the respondents No.1&2 with the respondent No.3. It was contended that in fact it was the petitioner who had been negotiating and dealing with the respondent No.3 on behalf of the respondents No.1&2 and the petitioner was fully in the picture of the transaction between the respondents No.1&2 on the one hand and the respondent No.3 on the other hand and the respondent No.3 was also in the know of the same.
h) It was further contended that it was not the case of the respondent No.3 that the amounts were not payable by it to the respondents No.1&2 and there was no bar in SICA to the respondents No.1&2 paying the said amounts to the respondent No.3 and thus no impediment to the deposit of the same in this court.
i) It also was contended that the order sought by the petitioner was in the nature of a garnishee order and fell
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within the ambit of Section 9 (ii) (b) of the Arbitration Act.
j) That the respondent No.3 was merely a trustee of the money and cannot take the protection of BIFR and the plea of the respondent No.3 of the order if made of deposit, interfering with the working capital of the respondent No.3 indicated that the respondent No.3 was violating the said trust and using the monies lying with it in trust, for its own purposes.
k) That the suit by the petitioner for the same reliefs as claimed in the present petition may be barred by Section 5 r/w Section 8 of the Act and if it was to be held that the petitioner was not entitled to the relief under Section 9 also, for the reason of Respondent No.3 being a third party, the petitioner would be left remediless.
l) That the Arbitration Act was not a complete or a self-contained code and thus the provisions of CPC as available to a court, of attachment of monies belonging to a judgment debtor in the hands of the others, were available. Reliance was placed on Ludwig Wunsche & Co. Vs. Raunaq International Ltd. AIR 1983 Delhi 247 and Orient Middle East Lines Ltd. Vs. M/s Brace Transport Corporation of Monrovia AIR 1986 Gujarat 62.
7. The counsel for the respondent No.3 besides relying on the same judgments as aforesaid holding petition under Section 9 to be not maintainable against a non-party to an arbitration agreement,
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contended that in the present case the respondent No.3 had nothing whatsoever to do with the transaction, if any, between the petitioner and the respondents No.1&2; he also relied on 21st Edition of Russell on Arbitration, at paragraphs 6-131 & 6-132 prescribing that a Tribunal does not have jurisdiction over a third party even though that third party may hold the monies, goods or property in dispute and the Tribunal thus is less able to secure compliance by a third party with an injunction then it is to secure compliance by the parties to the arbitration. He further contended that the order under Section 9 was in the nature of an interim order and it was a settled principle of law that interim order could only be in aid of the final order and when there was no possibility of any final order against the respondent No.3 in an arbitration between the petitioner on the one hand and the respondents No.1&2 on the other hand, the question of granting any interim order in favour of the petitioner against the respondent No.3 did not arise. He further contended that an order in the nature of a garnishee order also could be made only where the amount was admitted or agreed and no adjudication at that stage could be undertaken. It was further contended that the Division Bench of this court in Lloyd Insulations (India) Ltd. (supra) had merely held Section 22 of SICA was not a bar to the continuance of the arbitration proceedings had not dealt with the execution of arbitral award as a decree and which would definitely be within the purview of the said Section 22. He vehemently contended that no reliance could be placed by the petitioner of the earlier order which was a concession given in all fairness and in retrospect erroneously.
8. The senior counsel for the petitioner after the conclusion of hearing on 6th July, 2009 had mentioned the matter to draw attention
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to certain other documents which remained to be placed on record. On the next day, permission was granted to the petitioner to file an additional affidavit in the court. In the said additional affidavit it has been stated that a query under the Right to Information Act was made from the respondent No.3 and to which a reply dated 15th February, 2007 had been given by the respondent No.3 in which it is inter-alia stated that respondent No.3 has kept reserved a sum of USD 34,76,258/- out of the total payment due to the respondent No.1; that as on 4th August, 2006 a sum of USD 141,74,748/- and as on 30th December, 2006 a sum of USD 182,72,191/- were due to the respondent No.1 from the respondent No.3; that even after 1st March, 2006 till 23nd December, 2006 orders of the value of USD 244,493,283.62 had been placed by the respondent No.3 on the respondent No.1; that after the order dated 4th August, 2006 (Supra) in OMP No.359/2006 and till that date payment of USD 2,50,000/- had been made directly by respondentNo.3 to the respondents No. 1 and 2 and not including payments under LC by various banks; that after 4th August, 2006 LCs for the sum USD 83,84,624.18 had been opened by respondent No.3 in favour of the respondent No.1.
9. It was the contention of the senior counsel for the petitioner on the basis of the aforesaid document that since the respondent No.3 had admitted to making payments from time to time to the respondent No.1, they could have no objection, if out of the said payments, the amount claimed by the petitioner is deposited in this court instead of being paid to the respondent No.3. Reliance was also placed on K. Chandrasekharam Vs. M/s Vijay Bhargavi Chit Fund Pvt. Ltd. 2000(1)ALD761 laying down that attachment before judgment can be ordered even against a third party and on Goel Associates Vs. Jivan Bima Rashtriya Avas Samati Ltd. 114(2004)
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Delhi Law Times 478 (DB) laying down that the principle of Order 38 Rule 5 though not contained in the 1996 Act, the principles thereof are applicable.
10. The counsel for the respondent No.3 on the next day responded that in the short time available he could not take instructions but however contended that even if payments had been made after 4th August, 2006 by the respondent No.3 to the respondent No.1, the same were not to the detriment of the petitioner in as much as the amount which it had agreed to retain stood retained by the respondent No.3. Else, it was stated that the said documents did not change the pleas taken in the reply and during the oral submissions.
11. The points of controversy which arise for determination in this petition can be framed as:-
A. Whether in exercise of powers under Section 9 of the Act, the court can make an order against or with respect to any party other than a party to the arbitration.
B. If it is found that such orders can be made, whether the order as sought in the present case is in the teeth of Section 22 of SICA, 1985.
Re: Point A
12. Besides the judgments noted above, I find that recently in NAFED Vs. Earthtech Enterprises Ltd. MANU/DE/0534/09 also it has been held that an application under Section 9 can be made only
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against the parties to the arbitration agreement and cannot be entertained against third party.
13. A conspectus of the judgments aforesaid on Section 9 would show that the court in each case has made the observation with regard to maintainability/applicability of Section 9 qua third parties depending upon facts of each case and depending upon feasibility of the order sought/required therein. In my view, no general principle of maintainability/applicability or non-maintainability/non-applicability can be laid down. It will have to be determined by the court in the facts of each case whether for the purpose of interim measure of protection, preservation, sale of any goods, securing the amount in dispute, an order affecting a third party can be made or not.
14. In my view, if as a general rule it is laid down that in exercise of power under Section 9, no direction can be issued to parties not parties to agreement containing an arbitration clause or not parties to arbitration proceedings, the same will hamper the efficacy of the said provision. Under clause (i) thereof, the guardian to be appointed may not be such a party; similarly the goods under clause (ii) (a) may be or may be required to be in custody of or delivered to or sold to such third parties – further orders against such third parties may also be required in connection with such sale; under clause (ii)(b) the amount to be secured may be in the form of money payable or property in hands of such third party – the scope cannot / ought not to be restricted to securing possible with orders against parties to arbitration only. Similar examples can be given with respect to other clauses also.
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15. The proceedings in a court, as distinct from those before an arbitrator, are also between parties to an agreement/transaction only. Still, the practice of issuing interim orders/directions qua third parties exists; not only in execution proceeding, provisions wherefor exists in Sections 47, 60 and Order 21 Rules 46 and 46A to F but also in pre-decretal stage, as provided for in Order 38 Rules 6 to 11A of CPC. It is difficult to fathom and there is no indication whatsoever of it in the Act, that the legislature while empowering the court under Section 9 to grant interim measures has restricted the power aforesaid of the court in any manner. On the contrary, Section 9 provides that the court for the purposes of Section 9 “shall have the same power for making orders as it has for the purpose of, and in relation to, any proceedings before it”. The conclusion is thus inescapable that if the court, in relation to proceedings before it could have made an order against/qua third parties, similar order can be made under Section 9 as well, subject to the discussion below.
16. The CPC, at pre decretal stage, permits attachment of property to satisfy any decree which may be passed in the suit (Order 38 Rule 6). Such attachment can also be of property of defendant, not in possession of defendant but belonging to the defendant and over which defendant has disposing power or which is in possession of another person in trust for or on behalf of judgment debtor. The rules for such attachment are the same as of attachment in execution of decree (Order 38 Rule 7). Such attachment of property of judgment debtor in hands of others is permissible under Section 60 CPC. There is no reason for holding that if the claimant in an arbitration had been a plaintiff in a suit and could have obtained attachment before judgment of property of defendant in hands of
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third parties, merely because he is before an arbitrator, he is not entitled to such order. Such orders can be crucial. Normally proceedings before court or before arbitrator take time. The defendant cannot during the said time be permitted to arrange his affairs in a manner to leave the plaintiff/claimant with merely a paper decree/award. An attachment before judgment under Order 38 Rule 11 CPC continues post judgment also. If it is to be held that in arbitration proceedings such interim relief of attachment of properties of respondent/defendant is not possible, it will discourage rather than encourage arbitration, which is the need of the hour.
17. However whenever attachment qua properties/monies in hands of third parties is made, the possibility of such third party contesting the same cannot be ruled out; while the party seeking attachment may aver the property to be of person against whom he is seeking a decree, the third party may set up title in such property in himself or in yet another party or resist attachment on other grounds. Order 38 Rule 8 CPC provides for adjudication of such claims by the court. The question which arises is, whether and how such disputes to attachment, if raised pursuant to attachment under Section 9 are also to be adjudicated. The necessary corollary to what I have held above is that the court, even in a proceeding under Section 9 will have to adjudicate such disputes. Order 38 Rules 7,8 and 11A apply the provisions of attachment in relation to execution in Order 21 Rules 46, 46A to F, to attachment before judgment also. Rule 46C of Order 21 provides for trial of disputed questions where such third party disputes liability, as a suit.
18. However, considering the nature of proceeding under Section 9, I find that the court is not bound to, where the third party, with
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respect to property/money in whose hands attachment is issued, denies liability and such denial raises disputed questions of fact which cannot be adjudicated without trial, to conduct trial. The court, in such cases in its discretion can on a prima facie view of the matter, either refuse to exercise powers under Section 9 or pass other appropriate order to protect the interest of all parties concerned.
19. Thus the first point of controversy framed above is answered accordingly. Axiomatically, interim measure in the nature of attachment before judgment can be sought by petitioner against respondent No.3 and the plea of respondent No.3 to such an order is to be decided in these proceedings only. That will answer the second point of controversy as well. The plea of respondent No.3 does not entail any disputed questions of facts requiring trial.
20. Under Order 21 Rule 46 attachment is prescribed to effect by prohibiting payment/delivery until further orders, to the defendant/judgment debtor. To that extent, the respondent No.3 has in the earlier OMP already consented. The question is whether an order of deposit in court of the monies due from respondent No.3 to Respondents No. 1 and 2 can be made. Prior to 1976 amendment of CPC, such order of deposit was not contemplated under Rule 46 of Order 21. Under sub-rule 3 an option was given to the third party with respect to monies/goods in whose hands attachment was issued to deposit the same in court, in discharge of his liability. However, the court could not compel such third party to deposit in court. It was so held in Maharajadhiraj Sir Kameshwar Singh Bahadur Vs. Kuleshwar Singh and Ors. AIR 1942 Patna 508. By the 1976 amendment of CPC, Rule 46A was introduced, whereunder the order
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against third party of deposit in court also became possible. However, that provision is in Order 21 relating to execution of decree. Though by virtue of Order 38 Rules 7, 8 and 11A attachment before judgment has to be in the same manner as in Order 21, but the court is not bound to direct deposit in court. Rule 46A itself uses the word “may” and the power thereunder is discretionary.
21. Thus in the present case, where as yet there is no decree or award in favour of petitioner and when the claims of the petitioner are being disputed by respondents No. 1 and 2, and when the interest of the petitioner is sufficiently protected by order in the earlier petition, it is not deemed appropriate to direct the respondent No.3 to deposit the monies owed by it to respondents No. 1 and 2, in this court. The reason of respondent No.3 using the said monies for its own purpose also does not sway me to direct so, for the reasons of Section 22 of SICA, 1985, though ordinarily the possibility of such third party/garnishee dissipating the monies may be a reason for directing deposit in court. I do not find the respondent No.3 to be in the position of a trustee. Also, there is considerable force in the contention of counsel for respondent No.3 that the petitioner had sought the said relief in the earlier petition also and it was not so granted. There is no change in position since then. The principles of res judicata apply to interim orders also and the petitioner cannot relitigate.
Re: Point B
22. The attachment of monies in hands of a third party/garnishee cannot be in supersession of/ detriment to rights of such third party/garnishee. Thus if respondents No. 1 and 2 as creditors of
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respondent No.3 could not compel the respondent No.3 to deposit the monies in court in a proceeding initiated by them or could not recover monies from respondent No.3 owing to the bar of Section 22 SICA, 1985, the petitioner, as creditor of respondents No. 1 and 2 will have no superior rights against respondent No.3.
23. In Syndicate Bank Vs Vijay Kumar (1992) 2 SCC 331, attachment was effected with respect to the two FDRs of the judgment debtor with the bank. The bank claimed its general lien over the amounts of the FDRs. The Supreme Court held that in the circumstances the said FDRs could not be attached and the bank could not be directed to deposit the amount thereof in the court.
24. Mulla on CPC 16th Edition Volume 3, pages 2694-2695 with reference to Anglo-Baltic and Mediterranean Bank Vs Barber & Co. (1924) 2 KB 410 comments that where a judgment is recovered against a company which is in voluntary liquidation, the invariable practice of the courts is to stay execution of the judgment unless there are very exceptional reasons for exercising its discretion otherwise; it further comments that even in execution of a decree against a judgment debtor company in liquidation, a debt due by a third party to the company cannot be attached and paid to the decree holder for the reason that the said debt being general assets of the company is divisible amongst the creditors pari passu. Reference therein is also made to Gauhati Bank Vs Ganpatlal Thakur (1956) Assam 301 in which case a claim under Section 153 (2) of the Companies Act had been sanctioned with respect to the garnishee bank and whereunder the amount owed by the bank to the judgment debtor was payable in installments; the decree holder was
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held to be bound by the said scheme and not held entitled to the amount in lumpsum or immediately.
25. From the aforesaid also, it follows that the objection of the respondent No.3 is to be prima facie adjudicated. It also follows that if the respondent No.3 as per the law governing it is not liable to make payment, it cannot be directed to deposit the amount in the court.
26. I have no doubt in my mind that in the circumstances aforesaid an order of deposit by the respondent no.3 of the monies, and which order is opposed by the respondent No.3, would be coercive and would be in the nature of execution, distress or the like against respondent No.3 which is a sick company. Such an order is prohibited by Section 22 (supra). The Supreme Court recently in M.D. Bhoruka Textiles Ltd Vs Kashmiri Rice Industries 2009 92 SCL 335 (SC) has also held that SICA is a special statute and overrides other acts. The words “or the like” in Section 22 are to be construed on the basis of ejusdem generis principle. Accordingly, those words may be taken to be referring to any proceeding for attachment or even for injunction or restraint against a sick company. An order directing respondent no.3 to deposit the monies in the court will be in the nature of order of recovery of money from respondent no.3 and which is not permissible.
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27. In the circumstances, the relief claimed of directing respondent No.3 to deposit money in this court is also found to be barred by Section 22, SICA, 1985.
28. The petition is dismissed, however, with no orders as to costs.
RAJIV SAHAI ENDLAW
JUDGE
JULY 15, 2009
M/PP
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*IN THE HIGH COURT OF DELHI AT NEW DELHI
+ OMP No. 65/2008
Reserved on : 8th July, 2009
% Date of decision: 15th July, 2009
M/S VALUE ADVISORY SERVICES ….… Petitioner
Through: Mr. P.V. Kapur, Sr. Advocate with Ms. Chetna Gulati, Advocate.
Versus
M/S ZTE CORPORATION & ORS ....... Respondents
Through: Mr. Dayan Krishnan & Mr. Gautam Narayan, Advocates for Respondent No.3.
CORAM :-
HON’BLE MR. JUSTICE RAJIV SAHAI ENDLAW
1. Whether reporters of Local papers may
be allowed to see the judgment? Yes
2. To be referred to the reporter or not? Yes
3. Whether the judgment should be reported Yes
in the Digest?
RAJIV SAHAI ENDLAW, J.
1. Petition has been preferred under Section 9 of the Arbitration Act, 1996 for interim measures. The petitioner is stated to be involved in an International Commercial Arbitration of the International Chamber of Commerce with the respondents No. 1 and 2. The senior counsel for the petitioner informs that the said arbitration is at a final stage and the award has been reserved. It is informed that the petitioner has monetary claims against the
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respondents No. 1 and 2. The respondent No.1 is a corporation incorporated in China and respondent No.2, an Indian Company, is stated to be a subsidiary of the respondent No.1. M/s ITI Limited has been impleaded as the respondent No.3. It is stated that monies are due from the respondent No.3 to the respondents No. 1 and 2.
2. The petitioner had earlier filed another petition under Section 9 of the Act against the same respondents and which was registered as OMP.No.359/2006. Vide ex parte order dated 4th August, 2006 in OMP 359/2006, on the petitioner expressing apprehension that if the respondent No.3 releases all monies due to the respondents No.1 and 2, the petitioner will be left with no means to recover the monies ultimately awarded to it, the respondent No.3 was restrained from releasing to the respondents No. 1 and 2 the amount then stated to be due to the petitioner from the respondents No. 1 and 2. The respondents No. 1 and 2 failed to appear in OMP.No. 359/2006 in spite of entering appearance and were ordered to be proceeded against ex parte. The said OMP was disposed of vide order dated 27th August, 2007. Though the said order notices that the respondent No.3 is a third party to the contract, however, on the statement at bar of the counsel for the respondent No.3 that the respondent No.3 shall not release the payment to the respondents No.1 and 2 in terms of prayer (e) of OMP 359/2006 without prior permission of the court or till the disposal of the arbitration proceedings pending in Singapore, the ex parte order was made absolute and the OMP was disposed of. The said order remains in force.
3. The petitioner has now moved this OMP for the relief of restraining the respondent No.3 from releasing the payments in the
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sum of USD 3476258 to the respondent No.1 and for directing the respondent No.3 to deposit the said sum and/or its Indian equivalent in this court. The first of the aforesaid reliefs is squarely covered by the relief granted in the earlier OMP. The petition has been urged only on the ground of direction to the respondent No.3 to deposit the amounts in this court.
4. The respondent No.3 has filed reply in opposition to the petition and the grant of the relief aforesaid and has pleaded –
i) that it is not a party to the agreement containing the arbitration clause and not concerned with the dispute between the petitioner on the one hand and the respondents No.1&2 on the other hand and no petition under Section 9 of the Act lies against it, especially when the main/principle relief claimed in the petition is against a non-party to the arbitration agreement;
ii) that till the award for any amount in favour of the petitioner, the petitioner cannot be said to be entitled to any amount from the respondent No.2 and hence not entitled to deposit in this court of any amount;
iii) that even in the earlier OMP No.359/2006 the petitioner had sought the relief of deposit of the monies due from the respondents No.3 to the respondents No.1&2 in this court and the respondent No.3 had contested the said relief inter-alia on the ground that it was a sick company within the meaning of Sick Industrial Companies Act, 1985 (SICA) and was before the BIFR and petitioner in the garb of the relief under Section 9 of
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the Act could not circumvent the provisions of SICA and further that any order of deposit of the monies in this court would jeopardize the scheme of rehabilitation formulated by the operating agency appointed by the BIFR for rehabilitation of the respondent No.3;
iv) the court while passing orders in OMP No.359/2006 had not returned any finding of the petition under Section 9 being maintainable against the respondent No.3, a non-party to the arbitration agreement and had merely acted on the consent given by the respondent No.3; that the order therein was in the nature of the consent order and if the petitioner desires to challenge the same, the respondent No.3 is entitled to withdraw the consent given in OMP No.359/2006.
5. Though notice of the petition was issued to all the respondents but the record reveals that the respondents No.1&2 remained unserved. However, considering that the respondents No.1&2 had failed to appear in OMP No.359/2006 also in spite of service and further considering the nature of the controversy in the present case, need was not felt to postpone the matter further for service of the respondents No.1&2 and the senior counsel for the petitioner and the counsel for the respondent No.3 have been heard.
6. The senior counsel for the petitioner has contended:
a) That the contention of the respondent of being sick is misconceived in as much as the courts have held that the bar under Section 22 of SICA, 1985 applies only when the amounts claimed are shown to be admitted and are part of the scheme of rehabilitation of
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the sick company; the respondent No.3 has in its reply nowhere stated that the liability for the amounts to the petitioner or to the respondents No.1&2 is admitted or is shown in the scheme of rehabilitation. Reliance in this regard is placed on Mafatlal Industries Ltd Vs MTNL 99(2002) DLT 204;
b) that there is no bar in Section 22 or any other provision of SICA, 1985 to the court directing a sick company to deposit the monies in the court;
c) that the provisions of SICA, 1985 do not apply to arbitration. Reliance in this regard is placed on Lloyd Insulations (India) Ltd. Vs. Cement Corporation of India Ltd. 2001 II AD (Delhi) 567 (DB);
d) that if the sick company desires to avoid an order of deposit it was for the sick company to approach the BIFR under Section 22A of SICA, 1985 and seek orders in this respect.
e) the senior counsel fairly conceded that there was a divergence of opinion in various judgments of single judges of this court on the aspect of maintainability of a petition under Section 9 of the Act against a third party;
f) Reference was made to:
i) Arun Kapur Vs. Vikram Kapur 95 (2002) DLT 42 where it was held in para 44 thereof that while a petition under Section 17 of the Act is moved before the Arbitral Tribunal for an order against a party to the proceedings, Section 9 vests remedy in a party to arbitration proceedings to seek interim measures of protection
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against the person who need not be either party to the arbitration agreement or to arbitration proceedings.
ii) CREF Finance Limited vs. Puri Construction Ltd. 2000 (3) Arb. LR 331 (Delhi) where in exercise of powers under Section 9 of the Act orders were made against a third party, of course holding the said third party to be not a stranger to the covenants between the parties to the agreement containing an arbitration clause; in that case the third party against whom orders were made was an agent of the party to the agreement.
iii) Mikuni Corporation Vs UCAL Fuel Systems Ltd 2008 (1) Arb. LR 503 (Delhi) where it was held that since no arbitration proceedings could take place vis-à-vis the party against whom orders were sought, application under Section 9 did not lie against such party. The judgment in CREF Finance Limited was distinguished since in that case the third party was an agent of a party to the arbitration agreement and reliance was placed on National Highways Authority of India Vs. China Coal Construction Group Corporation AIR 2006 Delhi 134 holding that an interim order could be passed in respect of parties to arbitration and in connection with subject matter thereof and no interim order could be passed in respect of a party who had no privity of contract with the petitioner. Thus the petition seeking interim measures against a non party to the arbitration was held to be not maintainable.
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iv) Smt. Kanta Vashist Vs. Shri Ashwani Khurana MANU/DE/0380/2008 also holding that no injunction could be issued even against companies which though of the family, members whereof were parties to the arbitration, were independent legal entities and not parties to the arbitration agreement.
g) The senior counsel for the petitioner contended that in the present case also the respondent No.3 cannot be called a total stranger to the transaction between the petitioner and the respondents No.1&2 in as much as the claims of the petitioner against the respondents No.1&2 were for agreed commission for facilitating the contract of the respondents No.1&2 with the respondent No.3. It was contended that in fact it was the petitioner who had been negotiating and dealing with the respondent No.3 on behalf of the respondents No.1&2 and the petitioner was fully in the picture of the transaction between the respondents No.1&2 on the one hand and the respondent No.3 on the other hand and the respondent No.3 was also in the know of the same.
h) It was further contended that it was not the case of the respondent No.3 that the amounts were not payable by it to the respondents No.1&2 and there was no bar in SICA to the respondents No.1&2 paying the said amounts to the respondent No.3 and thus no impediment to the deposit of the same in this court.
i) It also was contended that the order sought by the petitioner was in the nature of a garnishee order and fell
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within the ambit of Section 9 (ii) (b) of the Arbitration Act.
j) That the respondent No.3 was merely a trustee of the money and cannot take the protection of BIFR and the plea of the respondent No.3 of the order if made of deposit, interfering with the working capital of the respondent No.3 indicated that the respondent No.3 was violating the said trust and using the monies lying with it in trust, for its own purposes.
k) That the suit by the petitioner for the same reliefs as claimed in the present petition may be barred by Section 5 r/w Section 8 of the Act and if it was to be held that the petitioner was not entitled to the relief under Section 9 also, for the reason of Respondent No.3 being a third party, the petitioner would be left remediless.
l) That the Arbitration Act was not a complete or a self-contained code and thus the provisions of CPC as available to a court, of attachment of monies belonging to a judgment debtor in the hands of the others, were available. Reliance was placed on Ludwig Wunsche & Co. Vs. Raunaq International Ltd. AIR 1983 Delhi 247 and Orient Middle East Lines Ltd. Vs. M/s Brace Transport Corporation of Monrovia AIR 1986 Gujarat 62.
7. The counsel for the respondent No.3 besides relying on the same judgments as aforesaid holding petition under Section 9 to be not maintainable against a non-party to an arbitration agreement,
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contended that in the present case the respondent No.3 had nothing whatsoever to do with the transaction, if any, between the petitioner and the respondents No.1&2; he also relied on 21st Edition of Russell on Arbitration, at paragraphs 6-131 & 6-132 prescribing that a Tribunal does not have jurisdiction over a third party even though that third party may hold the monies, goods or property in dispute and the Tribunal thus is less able to secure compliance by a third party with an injunction then it is to secure compliance by the parties to the arbitration. He further contended that the order under Section 9 was in the nature of an interim order and it was a settled principle of law that interim order could only be in aid of the final order and when there was no possibility of any final order against the respondent No.3 in an arbitration between the petitioner on the one hand and the respondents No.1&2 on the other hand, the question of granting any interim order in favour of the petitioner against the respondent No.3 did not arise. He further contended that an order in the nature of a garnishee order also could be made only where the amount was admitted or agreed and no adjudication at that stage could be undertaken. It was further contended that the Division Bench of this court in Lloyd Insulations (India) Ltd. (supra) had merely held Section 22 of SICA was not a bar to the continuance of the arbitration proceedings had not dealt with the execution of arbitral award as a decree and which would definitely be within the purview of the said Section 22. He vehemently contended that no reliance could be placed by the petitioner of the earlier order which was a concession given in all fairness and in retrospect erroneously.
8. The senior counsel for the petitioner after the conclusion of hearing on 6th July, 2009 had mentioned the matter to draw attention
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to certain other documents which remained to be placed on record. On the next day, permission was granted to the petitioner to file an additional affidavit in the court. In the said additional affidavit it has been stated that a query under the Right to Information Act was made from the respondent No.3 and to which a reply dated 15th February, 2007 had been given by the respondent No.3 in which it is inter-alia stated that respondent No.3 has kept reserved a sum of USD 34,76,258/- out of the total payment due to the respondent No.1; that as on 4th August, 2006 a sum of USD 141,74,748/- and as on 30th December, 2006 a sum of USD 182,72,191/- were due to the respondent No.1 from the respondent No.3; that even after 1st March, 2006 till 23nd December, 2006 orders of the value of USD 244,493,283.62 had been placed by the respondent No.3 on the respondent No.1; that after the order dated 4th August, 2006 (Supra) in OMP No.359/2006 and till that date payment of USD 2,50,000/- had been made directly by respondentNo.3 to the respondents No. 1 and 2 and not including payments under LC by various banks; that after 4th August, 2006 LCs for the sum USD 83,84,624.18 had been opened by respondent No.3 in favour of the respondent No.1.
9. It was the contention of the senior counsel for the petitioner on the basis of the aforesaid document that since the respondent No.3 had admitted to making payments from time to time to the respondent No.1, they could have no objection, if out of the said payments, the amount claimed by the petitioner is deposited in this court instead of being paid to the respondent No.3. Reliance was also placed on K. Chandrasekharam Vs. M/s Vijay Bhargavi Chit Fund Pvt. Ltd. 2000(1)ALD761 laying down that attachment before judgment can be ordered even against a third party and on Goel Associates Vs. Jivan Bima Rashtriya Avas Samati Ltd. 114(2004)
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Delhi Law Times 478 (DB) laying down that the principle of Order 38 Rule 5 though not contained in the 1996 Act, the principles thereof are applicable.
10. The counsel for the respondent No.3 on the next day responded that in the short time available he could not take instructions but however contended that even if payments had been made after 4th August, 2006 by the respondent No.3 to the respondent No.1, the same were not to the detriment of the petitioner in as much as the amount which it had agreed to retain stood retained by the respondent No.3. Else, it was stated that the said documents did not change the pleas taken in the reply and during the oral submissions.
11. The points of controversy which arise for determination in this petition can be framed as:-
A. Whether in exercise of powers under Section 9 of the Act, the court can make an order against or with respect to any party other than a party to the arbitration.
B. If it is found that such orders can be made, whether the order as sought in the present case is in the teeth of Section 22 of SICA, 1985.
Re: Point A
12. Besides the judgments noted above, I find that recently in NAFED Vs. Earthtech Enterprises Ltd. MANU/DE/0534/09 also it has been held that an application under Section 9 can be made only
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against the parties to the arbitration agreement and cannot be entertained against third party.
13. A conspectus of the judgments aforesaid on Section 9 would show that the court in each case has made the observation with regard to maintainability/applicability of Section 9 qua third parties depending upon facts of each case and depending upon feasibility of the order sought/required therein. In my view, no general principle of maintainability/applicability or non-maintainability/non-applicability can be laid down. It will have to be determined by the court in the facts of each case whether for the purpose of interim measure of protection, preservation, sale of any goods, securing the amount in dispute, an order affecting a third party can be made or not.
14. In my view, if as a general rule it is laid down that in exercise of power under Section 9, no direction can be issued to parties not parties to agreement containing an arbitration clause or not parties to arbitration proceedings, the same will hamper the efficacy of the said provision. Under clause (i) thereof, the guardian to be appointed may not be such a party; similarly the goods under clause (ii) (a) may be or may be required to be in custody of or delivered to or sold to such third parties – further orders against such third parties may also be required in connection with such sale; under clause (ii)(b) the amount to be secured may be in the form of money payable or property in hands of such third party – the scope cannot / ought not to be restricted to securing possible with orders against parties to arbitration only. Similar examples can be given with respect to other clauses also.
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15. The proceedings in a court, as distinct from those before an arbitrator, are also between parties to an agreement/transaction only. Still, the practice of issuing interim orders/directions qua third parties exists; not only in execution proceeding, provisions wherefor exists in Sections 47, 60 and Order 21 Rules 46 and 46A to F but also in pre-decretal stage, as provided for in Order 38 Rules 6 to 11A of CPC. It is difficult to fathom and there is no indication whatsoever of it in the Act, that the legislature while empowering the court under Section 9 to grant interim measures has restricted the power aforesaid of the court in any manner. On the contrary, Section 9 provides that the court for the purposes of Section 9 “shall have the same power for making orders as it has for the purpose of, and in relation to, any proceedings before it”. The conclusion is thus inescapable that if the court, in relation to proceedings before it could have made an order against/qua third parties, similar order can be made under Section 9 as well, subject to the discussion below.
16. The CPC, at pre decretal stage, permits attachment of property to satisfy any decree which may be passed in the suit (Order 38 Rule 6). Such attachment can also be of property of defendant, not in possession of defendant but belonging to the defendant and over which defendant has disposing power or which is in possession of another person in trust for or on behalf of judgment debtor. The rules for such attachment are the same as of attachment in execution of decree (Order 38 Rule 7). Such attachment of property of judgment debtor in hands of others is permissible under Section 60 CPC. There is no reason for holding that if the claimant in an arbitration had been a plaintiff in a suit and could have obtained attachment before judgment of property of defendant in hands of
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third parties, merely because he is before an arbitrator, he is not entitled to such order. Such orders can be crucial. Normally proceedings before court or before arbitrator take time. The defendant cannot during the said time be permitted to arrange his affairs in a manner to leave the plaintiff/claimant with merely a paper decree/award. An attachment before judgment under Order 38 Rule 11 CPC continues post judgment also. If it is to be held that in arbitration proceedings such interim relief of attachment of properties of respondent/defendant is not possible, it will discourage rather than encourage arbitration, which is the need of the hour.
17. However whenever attachment qua properties/monies in hands of third parties is made, the possibility of such third party contesting the same cannot be ruled out; while the party seeking attachment may aver the property to be of person against whom he is seeking a decree, the third party may set up title in such property in himself or in yet another party or resist attachment on other grounds. Order 38 Rule 8 CPC provides for adjudication of such claims by the court. The question which arises is, whether and how such disputes to attachment, if raised pursuant to attachment under Section 9 are also to be adjudicated. The necessary corollary to what I have held above is that the court, even in a proceeding under Section 9 will have to adjudicate such disputes. Order 38 Rules 7,8 and 11A apply the provisions of attachment in relation to execution in Order 21 Rules 46, 46A to F, to attachment before judgment also. Rule 46C of Order 21 provides for trial of disputed questions where such third party disputes liability, as a suit.
18. However, considering the nature of proceeding under Section 9, I find that the court is not bound to, where the third party, with
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respect to property/money in whose hands attachment is issued, denies liability and such denial raises disputed questions of fact which cannot be adjudicated without trial, to conduct trial. The court, in such cases in its discretion can on a prima facie view of the matter, either refuse to exercise powers under Section 9 or pass other appropriate order to protect the interest of all parties concerned.
19. Thus the first point of controversy framed above is answered accordingly. Axiomatically, interim measure in the nature of attachment before judgment can be sought by petitioner against respondent No.3 and the plea of respondent No.3 to such an order is to be decided in these proceedings only. That will answer the second point of controversy as well. The plea of respondent No.3 does not entail any disputed questions of facts requiring trial.
20. Under Order 21 Rule 46 attachment is prescribed to effect by prohibiting payment/delivery until further orders, to the defendant/judgment debtor. To that extent, the respondent No.3 has in the earlier OMP already consented. The question is whether an order of deposit in court of the monies due from respondent No.3 to Respondents No. 1 and 2 can be made. Prior to 1976 amendment of CPC, such order of deposit was not contemplated under Rule 46 of Order 21. Under sub-rule 3 an option was given to the third party with respect to monies/goods in whose hands attachment was issued to deposit the same in court, in discharge of his liability. However, the court could not compel such third party to deposit in court. It was so held in Maharajadhiraj Sir Kameshwar Singh Bahadur Vs. Kuleshwar Singh and Ors. AIR 1942 Patna 508. By the 1976 amendment of CPC, Rule 46A was introduced, whereunder the order
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against third party of deposit in court also became possible. However, that provision is in Order 21 relating to execution of decree. Though by virtue of Order 38 Rules 7, 8 and 11A attachment before judgment has to be in the same manner as in Order 21, but the court is not bound to direct deposit in court. Rule 46A itself uses the word “may” and the power thereunder is discretionary.
21. Thus in the present case, where as yet there is no decree or award in favour of petitioner and when the claims of the petitioner are being disputed by respondents No. 1 and 2, and when the interest of the petitioner is sufficiently protected by order in the earlier petition, it is not deemed appropriate to direct the respondent No.3 to deposit the monies owed by it to respondents No. 1 and 2, in this court. The reason of respondent No.3 using the said monies for its own purpose also does not sway me to direct so, for the reasons of Section 22 of SICA, 1985, though ordinarily the possibility of such third party/garnishee dissipating the monies may be a reason for directing deposit in court. I do not find the respondent No.3 to be in the position of a trustee. Also, there is considerable force in the contention of counsel for respondent No.3 that the petitioner had sought the said relief in the earlier petition also and it was not so granted. There is no change in position since then. The principles of res judicata apply to interim orders also and the petitioner cannot relitigate.
Re: Point B
22. The attachment of monies in hands of a third party/garnishee cannot be in supersession of/ detriment to rights of such third party/garnishee. Thus if respondents No. 1 and 2 as creditors of
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respondent No.3 could not compel the respondent No.3 to deposit the monies in court in a proceeding initiated by them or could not recover monies from respondent No.3 owing to the bar of Section 22 SICA, 1985, the petitioner, as creditor of respondents No. 1 and 2 will have no superior rights against respondent No.3.
23. In Syndicate Bank Vs Vijay Kumar (1992) 2 SCC 331, attachment was effected with respect to the two FDRs of the judgment debtor with the bank. The bank claimed its general lien over the amounts of the FDRs. The Supreme Court held that in the circumstances the said FDRs could not be attached and the bank could not be directed to deposit the amount thereof in the court.
24. Mulla on CPC 16th Edition Volume 3, pages 2694-2695 with reference to Anglo-Baltic and Mediterranean Bank Vs Barber & Co. (1924) 2 KB 410 comments that where a judgment is recovered against a company which is in voluntary liquidation, the invariable practice of the courts is to stay execution of the judgment unless there are very exceptional reasons for exercising its discretion otherwise; it further comments that even in execution of a decree against a judgment debtor company in liquidation, a debt due by a third party to the company cannot be attached and paid to the decree holder for the reason that the said debt being general assets of the company is divisible amongst the creditors pari passu. Reference therein is also made to Gauhati Bank Vs Ganpatlal Thakur (1956) Assam 301 in which case a claim under Section 153 (2) of the Companies Act had been sanctioned with respect to the garnishee bank and whereunder the amount owed by the bank to the judgment debtor was payable in installments; the decree holder was
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held to be bound by the said scheme and not held entitled to the amount in lumpsum or immediately.
25. From the aforesaid also, it follows that the objection of the respondent No.3 is to be prima facie adjudicated. It also follows that if the respondent No.3 as per the law governing it is not liable to make payment, it cannot be directed to deposit the amount in the court.
26. I have no doubt in my mind that in the circumstances aforesaid an order of deposit by the respondent no.3 of the monies, and which order is opposed by the respondent No.3, would be coercive and would be in the nature of execution, distress or the like against respondent No.3 which is a sick company. Such an order is prohibited by Section 22 (supra). The Supreme Court recently in M.D. Bhoruka Textiles Ltd Vs Kashmiri Rice Industries 2009 92 SCL 335 (SC) has also held that SICA is a special statute and overrides other acts. The words “or the like” in Section 22 are to be construed on the basis of ejusdem generis principle. Accordingly, those words may be taken to be referring to any proceeding for attachment or even for injunction or restraint against a sick company. An order directing respondent no.3 to deposit the monies in the court will be in the nature of order of recovery of money from respondent no.3 and which is not permissible.
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27. In the circumstances, the relief claimed of directing respondent No.3 to deposit money in this court is also found to be barred by Section 22, SICA, 1985.
28. The petition is dismissed, however, with no orders as to costs.
RAJIV SAHAI ENDLAW
JUDGE
JULY 15, 2009
M/PP
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Friday, July 10, 2009
whether the proceedings before the Consumer Forum should remain stayed involving similar issues pending before High Court
Issue: whether the proceedings before the Consumer Forum should remain stayed and await the decision of the outcome of the proceedings involving similar issues pending before this High Court
Title:
M/S HINDUSTAN MOTORS LTD. versus AMARDEEP SINGH WIRK & ORS.
L.P.A. No. 204 of 2009 & CM No. 6638/2009 Date of Decision: 14th May, 2009
existence of parallel or other adjudicatory Forums cannot take away or exclude jurisdiction created under the Consumer Protection Act.
The Supreme Court in the case of Secretary, Thirumurugan Co-operative Agricultural Credit Society vs. M. Lalitha & Ors. (2004) 1 SCC 305, held that having due regard to the scheme of the Consumer Protection Act and the purpose sought to be achieved to protect the interest of the consumers better, its provisions are to be interpreted broadly, positively and purposefully to give meaning to additional/extended jurisdiction, particularly when Section 3 seeks to provide remedy under the Act in addition to other remedies provided under other Acts unless there is a clear bar.
Title:
M/S HINDUSTAN MOTORS LTD. versus AMARDEEP SINGH WIRK & ORS.
L.P.A. No. 204 of 2009 & CM No. 6638/2009 Date of Decision: 14th May, 2009
existence of parallel or other adjudicatory Forums cannot take away or exclude jurisdiction created under the Consumer Protection Act.
The Supreme Court in the case of Secretary, Thirumurugan Co-operative Agricultural Credit Society vs. M. Lalitha & Ors. (2004) 1 SCC 305, held that having due regard to the scheme of the Consumer Protection Act and the purpose sought to be achieved to protect the interest of the consumers better, its provisions are to be interpreted broadly, positively and purposefully to give meaning to additional/extended jurisdiction, particularly when Section 3 seeks to provide remedy under the Act in addition to other remedies provided under other Acts unless there is a clear bar.
Thursday, July 9, 2009
who can be said to be persons “in-charge of, and was responsible to the company for the business of the company”
CRIMINAL APPEAL NOS.1130-31 OF 2003 K.K. Ahuja Vs. V.K. Vora & Anr.
Issue: who can be said to be persons “in-charge of, and was responsible to the company for the business of the company” referredto in section 141of the Negotiable Instruments Act, 1881
Having regard to section 141, when a cheque issued by a company (incorporated under the Companies Act, 1956) is dishonoured, in addition to the company, the following persons are deemed to be guilty of the offence and shall be liable to be proceeded against and punished :
(i) every person who at the time the offence was committed, was in charge of and was responsible to the company for the conduct of the business of the company;
(ii) any Director, Manager, Secretary or other officer of the company with whose consent and connivance, the offence under section 138 has been committed; and
(iii) any Director, Manager, Secretary or other officer of the company whose negligence resulted in the offence under section 138 of the Act, being committed by the company.
While liability of persons in the first category arises under sub-section (1) of Section 141, the liability of persons mentioned in categories (ii) and (iii) arises under sub-section (2). The scheme of the Act, therefore is, that a person who is responsible to the company for the conduct of the business of the company and who is in charge of business of the company is vicariously liable by reason only of his fulfilling the requirements of subsection (1).
But if the person responsible to the company for the conduct of business of the company, was not in charge of the conduct of the business of the company, then he can be made liable only if the offence was committed with his consent or connivance or as a result of his negligence.
Issue: who can be said to be persons “in-charge of, and was responsible to the company for the business of the company” referredto in section 141of the Negotiable Instruments Act, 1881
Having regard to section 141, when a cheque issued by a company (incorporated under the Companies Act, 1956) is dishonoured, in addition to the company, the following persons are deemed to be guilty of the offence and shall be liable to be proceeded against and punished :
(i) every person who at the time the offence was committed, was in charge of and was responsible to the company for the conduct of the business of the company;
(ii) any Director, Manager, Secretary or other officer of the company with whose consent and connivance, the offence under section 138 has been committed; and
(iii) any Director, Manager, Secretary or other officer of the company whose negligence resulted in the offence under section 138 of the Act, being committed by the company.
While liability of persons in the first category arises under sub-section (1) of Section 141, the liability of persons mentioned in categories (ii) and (iii) arises under sub-section (2). The scheme of the Act, therefore is, that a person who is responsible to the company for the conduct of the business of the company and who is in charge of business of the company is vicariously liable by reason only of his fulfilling the requirements of subsection (1).
But if the person responsible to the company for the conduct of business of the company, was not in charge of the conduct of the business of the company, then he can be made liable only if the offence was committed with his consent or connivance or as a result of his negligence.