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CASE NO.: Arbitration Petition  18 of 2005

PETITIONER: India Household and Healthcare Ltd

RESPONDENT: LG Household and Healthcare Ltd

DATE OF JUDGMENT: 08/03/2007

BENCH: S.B. SINHA

JUDGMENT: J U D G M E N T  

S.B. SINHA, J :

This application under Sub-sections (5) and (6) of Section 11 of the  Arbitration and Conciliation Act, 1996 (for short "the 1996 Act") has been  filed for appointing an arbitrator on the respondent’s purported failure to do  so in spite of notice dated 15.04.2005.   

Allegedly, an agreement was entered into by and between the parties  hereto on 8.05.2004.  The said agreement contained an arbitration clause  being Clause 12 thereof, the relevant portion whereof reads as follows:

"12.2   In the event of any dispute or difference  arising between the parties hereto or as to the  rights and obligations under this agreement or as to  any claim monetary or otherwise of one party to  another, such dispute or difference shall be  referred to arbitration of a common arbitrator, if  agreed upon, otherwise to two or more arbitrators,  one to be appointed by each of the parties to this  agreement and such arbitration shall be governed  by the Arbitration and Conciliation Act, 1996, for  the time being in force.  The venue for such  arbitration shall be in India or as is mutually  decided otherwise.  Until a finality is achieved in  the arbitration or litigation, the Licensor shall have  no right to cancel the agreement and appoint any  third party or enter into agreement with any party  for the sale/ importation or manufacture of the  products/ provision of services in the territory."

Respondent, however, contends that the said agreement was preceded  by a Memorandum of Understanding dated 1.11.2003.  Respondent further  contends that the said purported Memorandum of Understanding and licence  agreement dated 8.05.2004 are vitiated by a fraud of a very large magnitude  fructified by a criminal conspiracy hatched between M/s. K.P. Jayram Pillai  and Vijay R. Singh representing the petitioner and M/s. C.H. Kim and B.K.  Jung representing the respondent.  The petitioner - company bribed the said  C.H. Kim and B.K. Jung for the purpose of creation of the aforesaid  documents.  They had already been convicted and sentenced to undergo  imprisonment by the Korean Criminal Court.  It was contended that they  misused their official position to advance private benefit.  There seems to be  a substantial and reasonable nexus to promote personal advantage.  There  was furthermore no ostensible authority on their part to represent the  company.  The said Memorandum of Understanding also contravenes the

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Korean laws in terms whereof the execution thereof required the prior  approval of and a duly executed power of attorney from the Representative  Director and the Chief Executive Officer of the respondent which did not  exist in the present case.

Respondent has also filed a suit in the Madras High Court wherein by  an order dated 6.10.2005, a learned Single Judge of the said High Court  directed: "1. That 1. India Household and Health Care  Limited, through Mr. Vijay R. Singh its Managing  Director 2. Mr. K.P. Jayaram C/o India Household  and Health Care Ltd. and 3. Mr. Vijay R. Singh,  the respondents 1 to 3 herein, their agents, men,  assigns, representatives, employees or any one  claiming through or under them be and are hereby  restrained by an order of interim injunction until  further orders of this Court directly or indirectly  acting on the so called MOU dated November 1,  2003, the License Agreement and the minutes  dated May 8, 2004 respectively, or deriving any  other benefit based upon the so called MOU, the  License Agreement and Minutes, in any manner  whatsoever."

The said interim order has been confirmed by an order dated  21.01.2006 stating:

"That the order of interim injunction granted  in pursuance of the order dated 06/10/2005  restraining the First, Second and Third  Respondents, therein their agents, men, assigns,  representatives, employees or any one claiming  through or under them from directly or indirectly  acting on the so called MOU dated November 1,  2003, the License Agreement and the minutes  dated May 8, 2004, respectively, or deriving any  other benefit based upon the so called MOU, the  License Agreement and Minutes, in any manner  whatsoever together be and is hereby made  absolute."

This Court’s attention was further drawn to the fact that in the plaint  of the said suit it had categorically been stated that the private respondents  therein hatched their conspiracy to defraud the respondent and for the  purpose of obtaining bribes, commissions and kickbacks and in that view of  the matter the entire agreement is vitiated in law.

Mr. Dushyant Dave, learned senior counsel appearing on behalf of the  petitioner, in support of this application, would submit:

(i)     the execution of the agreement dated 8.05.2004 has not been denied or  disputed. (ii)    The correspondences have been passed between the parties between  the period 8.05.2004 and 5.02.2005 and dispute arose in regard to the  use of the logo ’L.G.’ (iii)   The arbitration agreement being a part of the contract, the validity or  otherwise thereof can be gone into by the arbitrator in terms of  Section 16 of the 1996 Act.   (iv)    Once an arbitration agreement is found to exist; having regard to  Section 5 thereof, no judicial authority can exercise any jurisdiction in  the matter.   (v)     This Court, having regard to the philosophy underlying the 1996 Act  should uphold the arbitration agreement between the parties.

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       Mr. R.F. Nariman, learned senior counsel appearing on behalf of the  respondent, on the other hand, would submit:

(i)     in view of the Constitution Bench decision of this Court in SBP &  Co. v. Patel Engineering Ltd. and Another [(2005) 8 SCC 618],  this Court is obligated to go into the question as to whether the  entire agreement is vitiated by fraud as a result whereof no valid  arbitration agreement came into being.   (ii)    a fraud of grave magnitude having been committed insofar as the  officers representing the company had used different signatures,  the entire agreement is vitiated. (iii)   The original agreement has not been produced before any court so  as to compare the signatures of the persons with their original. (iv)    An order of injunction having been passed by a learned Judge of  the Madras High Court on 6.10.2005, this Court should not  exercise its discretionary jurisdiction.   (v)     The arbitration agreement is vague as it contemplates both  litigation as also an arbitration.   (vi)    In any event, the applicant having not appointed its arbitrator in  terms of the purported arbitration agreement, the application is  premature.   (vii)   As some of the disputes fall outside the scope of the arbitration  agreement, this application is not maintainable.

       There cannot be any doubt whatsoever that there exists a sharp  distinction between the provisions of the Arbitration Act, 1940 and the 1996  Act.  The philosophy of the 1996 Act is different.  The 1996 Act is required  to be read keeping in view the UNCITRAL Model Rules. [Pandey and Co.  Builders Pvt. Ltd. v. State of Bihar and Anr. 2006 (11) SCALE 665 and  Rashtriya Ispat Nigam Limited and Anr. v. Verma Transport Company  (2006) 7 SCC 275]

       It is also no doubt true that where existence of an arbitration  agreement can be found, apart from the existence of the original agreement,  the Courts would construe the agreement in such a manner so as to uphold  the arbitration agreement.  However, when a question of fraud is raised, the  same has to be considered differently.  Fraud, as is well known, vitiates all  solemn acts.  A contract would mean a valid contract; an arbitration  agreement would mean an agreement which is enforceable in law.   

       Before embarking upon the rival contentions noticed hereinbefore, we  may notice that a 7-Judge Bench of this Court in SBP & Co. (supra) opined  that an order passed by the Chief Justice or his designate under Sub-sections  (5) or (6) of Section 11 of the 1996 Act is judicial in nature.  It was stated:

"39. It is necessary to define what exactly the  Chief Justice, approached with an application  under Section 11 of the Act, is to decide at that  stage. Obviously, he has to decide his own  jurisdiction in the sense, whether the party making  the motion has approached the right High Court.  He has to decide whether there is an arbitration  agreement, as defined in the Act and whether the  person who has made the request before him, is a  party to such an agreement. It is necessary to  indicate that he can also decide the question  whether the claim was a dead one; or a long barred  claim that was sought to be resurrected and  whether the parties have concluded the transaction  by recording satisfaction of their mutual rights and  obligations or by receiving the final payment  without objection. It may not be possible at that  stage, to decide whether a live claim made, is one  which comes within the purview of the arbitration

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clause. It will be appropriate to leave that question  to be decided by the arbitral tribunal on taking  evidence, along with the merits of the claims  involved in the arbitration. The Chief Justice has to  decide whether the applicant has satisfied the  conditions for appointing an arbitrator under  Section 11(6) of the Act. For the purpose of taking  a decision on these aspects, the Chief Justice can  either proceed on the basis of affidavits and the  documents produced or take such evidence or get  such evidence recorded, as may be necessary. We  think that adoption of this procedure in the context  of the Act would best serve the purpose sought to  be achieved by the Act of expediting the process of  arbitration, without too many approaches to the  court at various stages of the proceedings before  the Arbitral tribunal."

       The power of this Court, therefore, no longer is an administrative  power.  The purported arbitration agreement is an international commercial  arbitration agreement.  Section 16 of the 1996 Act which is in Chapter 4 of  Part I thereof may not, thus, be applicable in this case.  Even if it applies, the  jurisdiction of the arbitrator to determine his own jurisdiction is on the basis  of that arbitration clause which may be treated as an agreement independent  of the other terms of the contract and his decision that the contract is null  and void shall not entail ipso jure the validity of the arbitration clause.  But,  the question would be different where the entire contract containing the  arbitration agreement stands vitiated by reason of fraud of this magnitude.  It  may be noticed that Part II of the 1996 Act contains a provision for  approaching the court.  Section 45 of the 1996 Act contains a non-obstante  clause.  A judicial authority, therefore, may entertain an application at the  instance of a party which alleges that there exists an arbitration agreement  whereupon judicial authority may refer the parties to arbitration, save and  except in a case where it finds that the said agreement is null and void,  inoperative and incapable of being performed.  Section 8 of the 1996 Act,  however, is differently worded.

       Thus, as and when a question in regard to the validity or otherwise of  the arbitration agreement arises, a judicial authority would have the  jurisdiction under certain circumstances to go into the said question.

       Fraud, as is well known, vitiates all solemn acts. [See Hamza Haji v.  State of Kerala and Another, (2006) 7 SCC 416, Prem Singh and Others v.  Birbal and Others, (2006) 5 SCC 353 and Jai Narain Parasrampuria (Dead)  and Others v. Pushpa Devi Saraf and Others, (2006) 7 SCC 756]

       The said issue is pending consideration before the Madras High Court.   Not only the parties to the agreement but also those officers who have  negotiated on behalf of the respective companies are also parties therein.   LG Corporation which is the owner of the LG logo is also a party therein.   Therein, an order of injunction had been passed.  In terms of the said order  of injunction, the applicant herein was prohibited from taking any action in  terms of the said agreement which would include the arbitration clause also.   The order dated 21.01.2006  has become final.  No appeal has been preferred  thereagainst.  The applicant could have filed an appropriate application for  modification of the order of injunction which it did not choose to do.  The  doctrine of comity or amity required a court not to pass and order which  would be in conflict with another order passed by a competent court of law.   The courts have jurisdiction to pass an order of injunction not only under  Order XXXIX, Rule 2 of the Code of Civil Procedure but also under Section  151 thereof.

       This aspect of the matter has been considered in ’A Treatise on The  Law Governing Injunctions’ by  Spelling and Lewis’ wherein it is stated :                 

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"Sec. 8. Conflict and Loss of Jurisdiction. Where a court having general jurisdiction and  having acquired jurisdiction of the subject-matter  has issued an injunction, a court of concurrent  jurisdiction will usually refuse to interfere by  issuance of a second injunction.  There is no  established rule of exclusion which would deprive  a court of jurisdiction to issue an injunction  because of the issuance of an injunction between  the same parties appertaining to the same subject- matter, but there is what may properly be termed a  judicial comity on the subject.  And even where it  is a case of one court having refused to grant an  injunction, while such refusal does not exclude  another coordinate court or judge from  jurisdiction, yet the granting of the injunction by a  second judge may lead to complications and  retaliatory action\005"    

       [See also M/s Transmission Corporation of A.P. Ltd.  & Ors.  v.  M/s  Lanco Kondapalli Power Pvt. Ltd. (2006) 1 SCC 540 and Morgan Securities  and Credit Pvt. Ltd. v. Modi Rubber Ltd. 2006 (14) SCALE 267]

       In Manohar Lal Chopra v. Rai Bahadur Rao Raja Seth Hiralal [AIR  1962 SC 527], this Court injuncted a party from prosecuting a suit wherein  power under Section 10 of the Code of Civil Procedure could not have been  exercised.

       A court while exercising its judicial function would ordinarily not  pass an order which would make one of the parties to the lis violate a lawful  order passed by another court.   

       Furthermore, the applicant herein has also prayed for inter alia the  following reliefs:

"c. Whether the issue of use of LG logo is a valid  and tenable ground for the termination of  agreements between the parties? d. Whether the Petitioner is entitled under the  agreements to continue with the production of the  "Products" with LG logo as agreed between the  parties?"

       The said prayers fall outside the arbitration agreement since LG Logo  belongs to LG Corporation which is the owner of the trade mark.  It is not a  party to the arbitration agreement.  It is allegedly has filed a separate suit.  In  a case of this nature, a Division Bench of this Court in Sukanya Holdings (P)  Ltd. v. Jayesh H. Pandya and Another (2003) 5 SCC 531] held:

"Secondly, there is no provision in the Act that  when the subject-matter of the suit includes  subject-matter of the arbitration agreement as well  as other disputes, the matter is required to be  referred to arbitration. There is also no provision  for splitting the cause or parties and referring the  subject-matter of the suit to the arbitrators.

It was further stated :

"The next question which requires  consideration is \027 even if there is no provision for  partly referring the dispute to arbitration, whether

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such a course is possible under Section 8 of the  Act. In our view, it would be difficult to give an  interpretation to Section 8 under which bifurcation  of the cause of action, that is to say, the subject- matter of the suit or in some cases bifurcation of  the suit between parties who are parties to the  arbitration agreement and others is possible. This  would be laying down a totally new procedure not  contemplated under the Act. If bifurcation of the  subject-matter of a suit was contemplated, the  legislature would have used appropriate language  to permit such a course. Since there is no such  indication in the language, it follows that  bifurcation of the subject-matter of an action  brought before a judicial authority is not allowed.

Secondly, such bifurcation of suit in two parts,  one to be decided by the Arbitral Tribunal and the  other to be decided by the civil court would  inevitably delay the proceedings. The whole  purpose of speedy disposal of dispute and  decreasing the cost of litigation would be  frustrated by such procedure. It would also  increase the cost of litigation and harassment to the  parties and on occasions there is possibility of  conflicting judgments and orders by two different  forums."

       We are, however, not oblivious of the fact that Sukanya Holdings  (supra) has been distinguished in Rashtriya Ispat Nigam Limited and Anr. v.  Verma Transport Company [(2006) 7 SCC 275].  The present case, however,  is covered by Sukanya Holdings (supra).

       By reason of a notice dated 15.04.2005, only a request had been made  to nominate a person in Chennai with whom the respondent could "interact  to agree on the arbitrator to whom the claims can be made to decide the  disputes between the parties".

       Applicant has not appointed its arbitrator.  Respondent has also not  been called upon to appoint its arbitrator by the said notice or otherwise.  An  application for appointment of an arbitrator, therefore, is not maintainable  unless the procedure and mechanism agreed to by and between the parties is  complied with.   

In National Highways Authority of India & Anr. v. Bumihiway  DDB  Ltd. (JV) & Ors.  [(2006) 9 SCALE 564], it was opined:-

"44\005The parties have entered into a contract after  fully understanding the import of the terms so  agreed to from which there cannot be any  deviation.  The Courts have held that the parties  are required to comply with the procedure of  appointment as agreed to and the defaulting party  cannot be allowed to take advantage of its own  wrong."  

       For the views, I have taken, it is not necessary to consider the other  submissions made at the bar.

       For the reasons aforementioned, this application is dismissed being  not maintainable at this stage.  No costs.