REPORTABLE

IN THE SUPREME COURT OF INDIA CIVIL ORIGINAL JURISDICTION

ARBITRATION PETITION NO. 17 OF 2007

M/S COMED CHEMICALS LTD.      … PETITIONER

VERSUS

C.N. RAMCHAND  … RESPONDENT

J U D G M E N T

C.K. THAKKER, J.

1. The present petition is filed by the

petitioner under Section 11 of the Arbitration

and  Conciliation  Act,  1996  (hereinafter

referred to as “the Act”) praying to Hon’ble

the Chief Justice of India to appoint third

Arbitrator  as  Presiding  Arbitrator  or  to

appoint Sole Arbitrator as deemed fit in the

facts and circumstances of the case.

2. It is the case of the applicant that

it is a Company known as M/s Comed Chemicals

Ltd. registered under the Indian Companies Act,

1956.  Mr.  Ashwani  Kapil  is  the  authorized

signatory who has approached this Court.  It is

stated in the application that the Company is

doing business in chemicals in the field of

bio-technology.  To  expand  the  business,  the

Company  floated  a  subsidiary  company  in  the

name and style of Comed Biotech Ltd.  For the

said purpose, it entered into a Memorandum of

Understanding (‘MoU’ for short) and appointed

Dr.  C.N.  Ramchand  (respondent  herein)  on

September  4,  2003  for  the  development  of

products  in  the  field  of  bio-industries  and

manufacturing and marketing of such products.

After various meetings and negotiations, terms

and  conditions  were  finalized  between  the

parties  and  the  respondent  was  appointed  as

Director (Technical) by the applicant Company.

A copy of the agreement has been annexed to the

Application.  MoU  also  provided  that  the

2

respondent will work full time with the Company

at least for next eight years from the date of

signing  of  the  agreement.  According  to  the

Company, it invested large amount in the new

adventure  and  paid  substantial  sum  as

remuneration to the respondent for the work.

3.  It  is the allegation of the Company

that the respondent did not take interest in

work and failed to attend Board Meetings held

in May and June, 2004 in spite of prior notice

and information in advance about such meetings.

A  notice  was  issued  by  the  Company  to  the

respondent  on  July  14,  2004  asking  him  to

remain present at the Board Meeting scheduled

to be held on July 30, 2004.  The respondent,

however, sent a Letter of Resignation on July

17, 2004. The Company has alleged that not only

the  respondent  wanted  to  quit  the  Company

before completing the work assigned to him in

violation  of  the  agreement,  but  he  also

instigated other subordinate staff-workers to

leave  the  organization.  Resultantly,  other

3

staff members also resigned. In view of the

large investment by the Company, it refused to

accept  the  resignation  of  the  respondent.

There was correspondence and exchange of legal

notices between the parties.  It is, however,

not necessary to enter into the details thereof

in the present proceedings.  

4. By  a  communication  dated  August  12,

2005, the applicant through his advocate sent a

notice to the respondent for appointment of an

arbitrator in accordance with Clause 12 of MoU

and informed him that the applicant-Company had

decided to appoint Ramesh H. Nanavati, retired

District  Judge  as  his  arbitrator.   The

applicant called upon the respondent to state

whether he was agreeable to the said name.  It

also stated that if he was not agreeable, he

could suggest any other name and/or appoint an

arbitrator  for resolving  the dispute  failing

which  the  applicant  would  be  constrained  to

take appropriate action in accordance with law.

The  respondent through  his advocate  informed

4

the Company on September 12, 2005 that he was

not agreeable to the arbitrator suggested by

the  Company.   He,  however,  suggested  three

names. At Sl. No. 1, there was a name of Dr.

Sandeep H. Shah, President, Indian Psychiatric

Association.

5. In view of non-agreement between the

applicant  and  respondent,  the  Company  filed

Arbitration  Application  No.  9  of  2006  under

Section 11 of the Act in the High Court of

Gujarat  at  Ahmedabad  requesting  the  Hon’ble

Chief Justice of the High Court to appoint an

arbitrator. Notice was issued to the respondent

who filed his reply. In the reply, he asserted

that he is a ‘British national’ and hence any

question of arbitration between the applicant-

Company which is registered in India and the

respondent-British  national  would  fall  under

‘International  Commercial  Arbitration’  as

defined in Section 2(1)(f) of the Act and under

Section 11(9) of the Act, it would be within

the power and authority of the Chief Justice of

5

India to deal with and decide such application

and the Chief Justice of a High Court has no

jurisdiction to entertain the application.  In

support of the contention that he is a British

national,  the  respondent  submitted  requisite

material which went to show that he is British

national.  In view of the above contention, the

Company sought permission from the High Court

to withdraw the petition so as to enable the

Company to make appropriate application to the

Hon’ble Chief Justice of India. The permission

sought for was granted and the application was

disposed of as withdrawn.

6. The Company then approached this Court

by filing the present application on May 22,

2007.   Hon’ble  the  Chief  Justice  of  India

designated me as his nominee to deal with and

decide  the  application  preferred  by  the

Company.  Notice was issued to the respondent

pursuant  to  which  he  appeared  and  filed  a

counter-affidavit on February 12, 2008.  The

6

Registry was directed to place the matter for

hearing.  

7. I have heard the learned counsel for

the parties.

8. Learned  counsel  for  the  applicant-

Company submitted that the application deserves

to be allowed by appointing a third arbitrator

as  Umpire  or  sole  arbitrator  in  view  of

difference  between  the  applicant  and  the

respondent and failure to come to an agreement

to appoint an arbitrator acceptable to both the

parties.  It  was  stated  that  the  applicant

appointed Ramesh H. Nanavati, retired District

Judge as his arbitrator since the controversy

related  to  interpretation  of  agreement  and

legal issues were involved.  The respondent,

however, did not agree and suggested another

name. The applicant could not agree to that

name because of absence of legal background on

the part of the person sought to be appointed.

The Company, therefore, invoked Section 11 of

the Act by going to the High Court of Gujarat.

7

But  in  view  of  objection  raised  by  the

respondent that he is a British national, the

application  was withdrawn  and thereafter  the

applicant has approached this Court.  It was,

therefore, prayed that the petition deserves to

be  allowed  by  either  appointing  third

arbitrator  as  Umpire  or  by  appointing  sole

arbitrator  to  deal  with  dispute  between  the

parties.

9. The  learned  counsel  for  the

respondent, on the other hand, submitted that

the  present application  is not  maintainable.

According to him, there is no dispute arising

out  of  legal  relationship  considered  as

commercial covered by clause (f) of Section 2

(1) of the Act and hence the provisions of the

Act would not apply to the case on hand.  It

was  also  submitted  that  the  agreement  in

substance,  provides  for  supply  of  technical

know-how and expertise for payment of ‘fees’

and there is no element of ‘commerce’ which

could attract the provisions of the Act.  It

8

was  also  urged  that  the  respondent  was

appointed by the Company as an employee and the

relation between the Company and the respondent

was of master and servant and to such cases,

the Act has no application. Clause (12) of the

Agreement  on  which  strong  reliance  had  been

placed  by  the  Company  cannot  be  termed  as

‘arbitration  clause’.  In  absence  of  legal,

valid  and  enforceable  arbitration  clause,

applicant-Company has no right to approach this

Court.  It was, therefore, submitted that the

application deserves to be dismissed.

10. Having heard the learned counsel for

the parties, in my opinion, the petition should

be allowed.  Clause (f) of sub-Section (1) of

Section  2  of  the  Act  defines  “International

Commercial Arbitration” and reads thus;

(f)  “international  commercial arbitration”  means  an  arbitration relating  to  disputes  arising  out  of legal  relationships,  whether contractual  or  not,  considered  as commercial under the law in force in India and where at least one of the parties is—

9

(i) an individual who is a national of, or  habitually  resident  in,  any country other than India; or

(ii) a  body  corporate  which  is incorporated  in  any  country  other than India; or

(iii) a company or an association or a body of  individuals  whose  central management  and control  is exercised in any country other than India; or

(iv) the Government of a foreign country.

11. Chapter  II  of  the  Act  deals  with

“Arbitration Agreement” and declares that all

disputes arising between the parties would be

governed by the provisions of the Act.  Chapter

III  provides  for  “Composition  of  Arbitral

Tribunal”. Section 10 enacts that the parties

are free to determine number of arbitrators,

but such number shall not be an even number.

In  case  of  failure  to  determine  number  of

arbitrators,  the  Arbitral  Tribunal  shall

consist  of  a  sole  arbitrator.   Section  11

relates  to  appointment  of  arbitrators.  It

states that in case of failure on the part of

the  parties  in  arriving  at  an  agreement  to

10

appoint an arbitrator, an application may be

made to the Chief Justice of India in case of

International Commercial Arbitration so that an

appropriate order may be passed for appointment

of arbitrator.  It is on the basis of the above

provision that the applicant-Company has filed

this application.

12. I find no substance in the preliminary

objection raised by the learned counsel for the

respondent that there is no arbitration clause

in the Agreement.  Clause 12 of the agreement

which provides for arbitration reads thus;

12.  If  there  be  any  dispute pertaining to meaning of this MoU or of  any  nature,  will  be  solved  and decided by appointing an independent Arbitrator  acceptable  to  all  the parties and if not solved by him can be referred to court of law and for which  the  jurisdiction  will  be Vadodara.

13. Bare  reading  of  the  above  clause

leaves  no  room  for  doubt  that  it  is  an

‘arbitration  clause’  and  expressly  declares

11

that any dispute pertaining to MoU would be

solved and decided by an arbitrator.

14. I  am  also  unable  to  uphold  the

argument of the learned counsel that there is

no International Commercial Arbitration.   

The  learned  counsel  for  the  respondent

submitted that there is no ‘commercial’ element

in the agreement and what was agreed between

the parties was to provide ‘technical know-how’

and  ‘expertise’ to  the applicant-Company  for

which the respondent was to be paid ‘fees’.   

15. The learned counsel in this connection

referred  to  Kamani  Engineering  Corporation

Ltd.  &  Ors.  v.  Societe  De  Traction  Et

D’Electricite Societe Anonyme, & Ors., AIR 1965

Bom 114, Josef Meisaner GMBR & Co. v. Kanoria

Chemicals & Industries Ltd. & Anr.,  AIR 1986

Cal 45 and  Mukesh H.Mehta & Ors. v. Harendra

Mehta, (1998)  92  Comp  Cases  402.   It  was

submitted  by  the  counsel  that  in  the  above

cases,  it  has  been  held  that  if  the  work

undertaken by a person is of a professional

12

character  and  does  not  involve  business  or

trade, the contract cannot be said to be of

‘commercial’ nature.  Such contract does not

involve  business  or  trade  and  there  is  no

element of participation in commercial activity

or in profit.  Remuneration, if any, is in the

nature of ‘fees’. A person scrupulously keeps

himself away from any commercial relationship.

As  such,  provisions  relating  to  arbitration

agreement  in  the  field  of  commercial

arbitration are not attracted to these cases. 16. It  may,  however,  be  profitable  to

refer  to  a  decision  of  this  Court  in  R.M.

Investment & Trading Co. Pvt. Ltd. v. Boeing

Co. & Anr., (1994) 4 SCC 541.  There this Court

was called upon to consider the provisions of

Foreign  Awards  (Recognition  and  Enforcement)

Act, 1961.  The question before the Court was

whether  there  was  commercial  relationship

between the parties as defined in Section 2 of

the Act and whether the Act would apply. In

that case, an Indian Company entered into an

13

agreement with a Company registered in USA. The

Indian Company agreed to provide Boeing with

consultancy  services  for  sale  of  Boeing

Aircraft in India.  Agreement for purchase of

two Boeing Aircrafts was executed.  A dispute

arose  and the  appellant claimed  compensation

and remuneration for consultancy services.  In

view  of  arbitration  clause,  the  matter  was

referred to arbitrator.  It was contended by

the  foreign  Company  that  there  was  no

‘commercial element’ and hence the application

was liable to be dismissed.

17. This Court, however, rejected the

contention. It was held that the agreement to

render consultancy service by the appellant to

the respondent was ‘commercial’ in nature and

there was commercial relationship between the

parties.

18.Referring  to  earlier  cases,  this

Court stated;

“It is not disputed that the sale of aircraft  by  Boeing  to  customers  in

14

India  was  to  be  a  commercial transaction.  The  question  is  whether rendering  of  consultancy  services  by RMI  for  promoting  such  commercial transaction  as  consultant  under  the Agreement  is  not  a  “commercial transaction”. We are of the view that the  High Court was right in holding that  the  agreement  to  render consultancy services by RMI to Boeing is commercial in nature and that RMI and  Boeing  do  stand  in  commercial relationship  with  each  other.  While construing the expression “commercial” in Section 2 of the Act it has to be borne  in  mind  that  the  Act  is calculated  and  designed  to  subserve the  cause  of  facilitating international  trade  and  promotion thereof  by  providing  for  speedy settlement of disputes arising in such trade  through  arbitration  and  any expression or phrase occurring therein should  receive,  consistent  with  its literal  and  grammatical  sense,  a liberal construction.” [See: Renusagar Power Co. Ltd. v. General Electric Co. (SCC at p. 723-24 : SCR at p. 492) and Koch  Navigation  Inc. v.  Hindustan Petroleum  Corpn.  Ltd.6 (SCC  at  p. 262 : SCR at p. 75).]

The  expression  “commercial” should,  therefore,  be  construed broadly having regard to the manifold activities which are integral part of international trade today”.

 (emphasis supplied)

19. It was further observed;

15

“While  construing  the  expression ‘commercial relationship’ in Section 2 of the Act, aid can also be taken from the  Model  Law  prepared  by  UNCITRAL wherein relationships of a commercial nature  include  “commercial representation  or  agency”  and ‘consulting’”.

20. Now,  UNCITRAL  Model  Law  on

International Commercial Arbitration as adopted

by  the  United  National  Commission  on

International  Trade  Law  defines  the  term

‘commercial’ thus;

“The term ‘commercial’ should be given a wide interpretation so as to cover  matters  arising  from  all relationship of a commercial nature, whether  contractual  or  not. Relationship  of a  commercial nature include, but are not limited to, the following  transactions;  any  trade transaction  for  the  supply  or exchange  of  goods  or  services; distribution  agreement;  commercial representation  or  agency;  factoring leasing,  construction  of  works; consulting;  engineering,  licensing; investment,  financing;  banking; insurance; exploitation agreement or concession;  joint venture and other forms  of  industrial  or  business cooperation;  carriage  of  goods  or passengers  by  air,  sea,  rail  or road.”  [Foot-note to Article 1 (1)]

16

 (emphasis supplied)

21. Before  more  than  three  decades,  in

Union of India v. D.N. Revri & Co.,  (1976) 4

SCC 147, this Court stated;

“It must be remembered that a contract is a commercial document between the parties and it must be interpreted in such a manner as to give efficacy to the contract rather than to invalidate it.  It  would  not  be  right  while interpreting a contract, entered into between  two  lay  parties,  to  apply strict rules of construction which are ordinarily applicable to a conveyance and  other  formal  documents.  The meaning  of  such  a  contract  must  be gathered  by  adopting  a  common  sense approach and it must not be allowed to be thwarted by a narrow, pedantic and legalistic interpretation”.  

22. Very recently, in Citibank N.A. v. TLC

Marketing PLC & Anr.,  (2008) 1 SCC 481, this

Court  held  that  commercial  contract  must  be

broadly construed with a view to give efficacy

to such contract rather than to invalidate it.

Clauses  of  the  contract  must  be  liberally

interpreted.   Narrow  and  technical  approach

17

should  be  avoided.  [see  also  Russel  on

Arbitration (1997); p.60] 23. The other issue which has been raised

by the learned counsel for the respondent is

that  the  respondent  was  appointed  as  an

employee by the applicant-Company and there is

relationship of master and servant between the

parties.  A contract in question is a contract

of employment to which the Act does not apply.

The submission of the Company, on the other

hand, is that looking to the agreement as a

whole, it cannot be said that the respondent

was a mere employee.  The relevant clauses of

the agreement go to show that it was a contract

of trade and business, which is a commercial

transaction  and  Clause  12  clearly  gets

attracted.

24. It  has  not  been  disputed  by  the

applicant-Company  that  if  the  contract  is

merely of an employment and the relationship

between the parties is of master and servant,

the  matter  cannot  be  referred  to  Arbitral

18

Tribunal.  But if the respondent is engaged by

the  applicant  Company  to  perform  functions

which  are inextricably  linked with  functions

which could be undertaken by a businessman or

by  a  Company  and  such  activities  form  an

integral  part  of  his  activities,  there  is

element  of  ‘commerce’.   In  that  case,  the

provisions of the Act would clearly apply.

25. In  the  instant  case,  the  respondent

has been appointed as Director (Technical) and

has  been  allotted  40%  equity  shares  in  the

subsidiary Company (Comed Bio-Tech Ltd.). Over

and above that, he was to be paid salary and

other benefits in lieu of services rendered by

him.   Para  3  of  the  Agreement  required  the

respondent  to  undertake  certain

responsibilities.

26. They are as under;

“Responsibility of DR. C.N. RAMCHAND

1. Will be responsible for the selection of  machineries,  instruments,  staff selection including technical staff and arrange for the same.

19

2. He  will  arrange  for  successful operation of the research center.

3. To  arrange  and  coordinate  with  the group  companies  in  the  area  of  the product  planning,  product  development and arrange for the stage up the level of the launching in the market.

4. He will be chief executive officer in the  Comed  Bio  Tech  Ltd.  in  al operational matters.

5. He will be responsible to develop new bio  molelcules  as  per  the  discussion with his utmost care integrity.

27. The  applicant-Company  wanted  to

venture into the field of bio-technology which

was not previously chartered or traversed by it

(novel bio-products). The respondent possessed

special knowledge and to get the benefit of

such research and expertise, an agreement had

been entered into by the parties and respondent

had been appointed Director of the subsidiary

Company.

28. Now,  it  is  well  settled  that  a

Director is not a mere employee or servant of

the Company. In Lee v. Lee’s Air Framing Ltd.,

1961 AC 12, it was held that a Director is a

20

controller of the company’s affairs and is not

a mere servant of the Company.  Such Director

may  have  to  work  also  as  an  employee  in  a

different  capacity.  Gower  and  Davies’

Principles  of  Modern  Company  Law,  (17th Edn.

pp. 370-76) also deals with duties of Director

viz-a-viz as an employee of the Company and

makes it clear that a Director per se cannot be

said  to  be  an  employee  or  servant  of  the

Company.   29. In  Ram  Pershad  v.  Commissioner  of

Income Tax, New Delhi  (1972) 2 SCC 696, this

Court held that a Managing Director may have a

dual capacity.  He may be both, a Director as

well as an Employee.  30. The Court stated;

“7. Though an agent as such is not a servant,  a  servant  is  generally  for some  purposes  his  master’s  implied agent,  the  extent  of  the  agency depending upon the duties or position of the servant. It is again true that a  director  of  a  company  is  not  a servant but an agent inasmuch as the company cannot act in its own person but has only to act through directors who  qua  the  company  have  the

21

relationship  of  an  agent  to  its principal.  A  Managing  Director  may have a dual capacity. He may both be a Director  as well as employee. It is therefore evident that in the capacity of  a  Managing  Director  he  may  be regarded  as  having  not  only  the capacity as persona of a director but also has the persona of an employee, as an agent depending upon the nature of  his  work  and  the  terms  of  his employment. Where he is so employed, the  relationship  between  him  as  the Managing Director and the Company may be similar to a person who is employed as a servant or an agent for the term “employed” is facile enough to cover any of these relationships. The nature of his employment may be determined by the  articles  of  association  of  a company and/or the agreement if any, under which a contractual relationship between the Director and the company has been brought about, whereunder the Director is constituted an employee of the company, if such be the case, his remuneration  will  be  assessable  as salary  under  Section  7.  In  other words,  whether  or  not  a  Managing Director is a servant of the company apart  from his being a Director can only be determined by the article of association  and  the  terms  of  his employment”.

31. The Court then referred to Anderson v.

James Sutherland (Peterhead) Limited where Lord

Normand at p. 218 said:

22

“... the managing director has two functions  and  two  capacities.  Qua Managing Director he is a party to a contract with the company, and this contract  is  a  contract  of employment;  more  specifically  I  am of opinion that it is a contract of service  and  not  a  contract  for service.”

32. Thus, from settled legal position as

also from the functions to be performed by the

respondent,  I  hold  that  the  respondent  was

working in dual or double capacity, i.e. (i)

as an employee, and (ii) as a Director.  In

the later capacity, however, he was the Chief

Executive  Officer  of the subsidiary Company

and had to look after all operational matters.

The  functions  to  be  performed  by  him  were

supervisory  and  related  to  policy  making

decisions in the affairs of the Company, as

observed by this Court in  Ram Pershad.  Any

dispute between the applicant-Company and the

respondent  would,  therefore,  be  covered  by

Clause 12 of the Agreement which provides for

arbitration.   Hence,  the  contention  of  the

learned counsel for the respondent that the

23

respondent was merely an employee and there

was no element of business, trade or commerce

has no substance and must be rejected. 33. For  the  foregoing  reasons,  in  my

opinion, the application filed by the Company

must be allowed by holding that the case is

covered by clause (f) of sub-section (1) of

Section  2  of  the  Act.  It  is  a  case  of

International  Commercial  Arbitration  and  is

covered by Clause 12 of MoU.  Since there is a

dispute  between  the  parties,  it  has  to  be

decided by an arbitrator. The clause extracted

hereinabove  provides  for  an  arbitrator  i.e.

sole arbitrator and hence only one arbitrator

should be appointed. I, therefore, appoint Mr.

Madhukar  Fanse,  retired  Judge,  City  Civil

Court,  Ahmedabad  as  the  sole  arbitrator  to

decide the dispute between the parties.

……………………………………………J. (C.K. THAKKER)

NEW DELHI, November 06, 2008.

24

25