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CASE NO.: Arbitration Petition  15 of 2006

PETITIONER: National Agricultural Co-op. Marketing Federation India Ltd

RESPONDENT: Gains Trading Ltd

DATE OF JUDGMENT: 22/05/2007

BENCH: R. V. Raveendran

JUDGMENT: J U D G M E N T

R.V. RAVEENDRAN, J.

       This petition under section 11(5) of the Arbitration and Conciliation  Act, 1996 (’Act’ for short) is filed for appointing a sole arbitrator to  adjudicate upon the disputes between the petitioner and respondent.

2.      The petitioner alleges that the respondent entered into an agreement  dated 28.2.2005, agreeing to purchase from the petitioner 40,000 MT (plus  or minus 10%) of iron-ore fines at FOB price of US$ 50 per dry MT, subject  to the terms and conditions of the said agreement. Clause 17 of the said  agreement providing for settlement of disputes by arbitration is extracted  below :

"17. Arbitration: Any dispute arising out of or in this connection  with this contract or the execution thereof shall, to the extent  possible, be settled amicably by negotiation and mutual agreement  between the Seller and the Buyer. If no settlement can be reached in  this way, the matter in dispute shall then be referred to and finally  resolved by arbitration in Hong Kong in accordance with the  provisions of the Arbitration and Conciliation Act, 1996 or any other  statutory modification, enactment or amendment thereof for the time  being in force."

3.      The petitioner alleges that respondent failed to nominate the vessel in  terms of the contract in spite of several reminders and ultimately refused to  take delivery of the cargo; that in view of breach by the respondent, the  petitioner had to sell the cargo at Rs.1010/- per MT (as against the contract  price of Rs.2190/-) incurring a loss of Rs.1180/- per MT; that it had to incur  storage charges for storing the cargo for more than five months; that it had to  incur freight charges for moving a part of the cargo from Karwar Port to  Mangalore Port; that the amount invested in the cargo was locked up for  considerable period involving loss of interest on the value; and that as a  consequence, respondent is liable to pay a sum of Rs.11,50,57,488/-            (= US $26,27,568). The alleged refusal/repudiation by the respondent gave  rise to a dispute and the petitioner by a notice dated 21.9.2005 through  counsel, invoked the arbitration agreement and furnished a panel of three  names to enable the respondent to give concurrence for appointment of any  one of them as the sole arbitrator. The respondent sent a reply refusing to  comply. This led to the filing of the present application under section 11(5)  of the Act, seeking appointment of the sole arbitrator.  

4.      The respondent has resisted the petition. The contentions of  respondent in brief are :

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(a)     It had complied with its contractual obligation by nominating a vessel  to collect the cargo, but the petitioner failed to accept in time; that the  port was subsequently closed due to monsoon and therefore it was no  longer feasible to continue the contract on FOB terms; and that at a  meeting held at Shanghai on 25.4.2005, the representatives of parties  had agreed to cancel the contract dated 28.2.2005 which was on FOB  terms and decided to enter into new negotiations for a fresh contract  on CFR terms. As a result, the agreement dated 28.2.2005 including  the arbitration agreement which is apart of it, is no longer in force and  therefore, the petition for appointment of an Arbitrator in terms of the  clause 17 of the agreement was not maintainable.  

(b)     Part I of the Act applies only where the place of arbitration is in India.  As place of arbitration is Hong Kong, outside India, the provisions in  Part I including section 11 of the Act are inapplicable and this Court  has no jurisdiction to appoint an arbitration. The arbitration agreement  requires that the disputes to be referred and resolved at Hong Kong.  Therefore, the law of arbitration, as in force in Hong Kong, will  govern the arbitration. Consequently, the reference to "Arbitration and  Conciliation Act, 1996" in clause 17, is meaningless and redundant.  As per the Hong Kong law, the Arbitrator can be appointed only by  the Hong Kong International Arbitration Centre.  

5.      On the aforesaid contentions, the following questions arise for  consideration:

(i)     Whether an arbitration clause comes to an end, if the contract  containing such arbitration agreement, was abrogated?  

(ii)    Whether section 11 of the Act is inapplicable in regard to the  arbitrations which are to take place outside India?  (iii)   Whether the appointment of the Arbitrator, and the reference  arbitration are governed by the laws in force in Hong Kong and not by  the Arbitration and Conciliation Act, 1996?

Re : Point (i)

6.      Respondent contends that the contract was abrogated by mutual  agreement; and when the contract came to an end, the arbitration agreement  which forms part of the contract, also came to an end. Such a contention has  never been accepted in law. An arbitration clause is a collateral term in the  contract, which relates to resolution disputes, and not performance. Even if  the performance of the contract comes to an end on account of repudiation,  frustration or breach of contract, the arbitration agreement would survive for  the purpose of resolution of disputes arising under or in connection with the  contract. [Vide :  Heymen vs. Darwins Ltd - 1942 (1) All ER 337, Union of  India vs. Kishori Lal Gupta & Bros. - AIR 1959 SC 1362 and The Naihati  Jute Mills Ltd. vs. Khyaliram Jagannath - AIR 1968 SC 522]. This position  is now statutorily recognized. Sub-section (1) of section 16 of the Act makes  it clear that while considering any objection with respect to the existence or  validity of the arbitration agreement, an arbitration clause which forms part  of the contract, has to be treated as an agreement independent of the other  terms of the contract; and a decision that the contract is null and void shall  not entail ipso jure the invalidity of the arbitration clause. The first  contention is, therefore, liable to be rejected.   

Re : Points (ii) and (iii)  

7.      Part I of the Act deals with Arbitration.  Part-II deals with  enforcement of certain foreign awards. Sub-section (2) of section 2 provides  that Part I of the Act dealing with Arbitration shall apply where the place of  arbitration is in India. Section 11 dealing with appointment of arbitrators is

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contained in Part I. As the venue of arbitration is outside India, it is  contended by respondent that entire Part I including section 11 will not  apply and therefore neither the Chief Justice of India nor his designate will  have the jurisdiction to appoint the arbitrator.  

Such a contention is already considered and negatived by this Court in  Bhatia International v. Bulk Trading S.A. [2002 (4) SCC 105]. This Court  has held:  

"Sub-section (2) of section 2 provides that Part I would apply where  the place of arbitration is in India. To be immediately noted, that it is  not providing that Part I shall not apply where the place of  arbitration is not in India. It is also not providing that Part I will  "only" apply where the place of arbitration is in India (emphasis  supplied). Thus the legislature has not provided that Part I is not to  apply to arbitrations which take place outside India. The use of the  language is significant and important. The legislature is emphasizing  that the provisions of Part I would apply to arbitrations which take  place in India, but not providing that the provisions of Part I will not  apply to arbitrations which take place out of India. The wording of  sub-section (2) of Section 2 suggests that the intention of the  legislature was to make provisions of Part I compulsorily applicable  to an arbitration, including an international commercial arbitration,  which takes place in India. Parties cannot, by agreement, override or  exclude the non-derogable provisions of Part I in such arbitrations.  By omitting to provide that Part I will not apply to international  commercial arbitrations which take place outside India the effect  would be that Part I would also apply to international commercial  arbitrations held out of India. But by not specifically providing that  the provisions of Part I apply to international commercial  arbitrations held out of India, the intention of the legislature appears  to be to allow parties to provide by agreement that Part I or any  provision therein will not apply\005\005.. Where such arbitration is held  in India the provisions of Part I would compulsorily apply and  parties are free to deviate only to the extent permitted by the  derogable provisions of Part I. In cases of international commercial  arbitrations held out of India provisions of Part I would apply unless  the parties by agreement, express or implied, exclude all or any of its  provisions. In that case the laws or rules chosen by the parties would  prevail. Any provision, in Part I, which is contrary to or excluded by  that law or rules will not apply."

8.      Let me now examine whether the arbitration procedure and  appointment of arbitrator is governed by the Act, or by the laws in Hong  Kong. This depends on the interpretation of the arbitration clause in  particular the following words : "the matter in dispute shall then be referred  to and finally resolved by arbitration in Hong Kong in accordance with the  provisions of the Arbitration and Conciliation Act, 1996."  The respondent  wants to read this provision thus :  

(i)     the matter in dispute shall be referred to arbitration at Hong Kong;  

(ii)    the matter in dispute shall be finally resolved by arbitration at Hong  Kong; and  0 The respondent wants to ignore the words "in accordance with the  provisions of Arbitration and Conciliation Act, 1976 or any other statutory  modification, enactment or amendment thereof for the time being in force"  in clause 17 as a meaningless addition. The use of the words ’referred to and  finally resolved by arbitration in Hong Kong’, according to respondent,  shows an intention that the arbitration has to take place in Hong Kong in  accordance with Hong Kong Laws.  

9.      The rules of interpretation require the clause to be read in the ordinary

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and natural sense, except where that would lead to an absurdity. No part of a  term or clause should be considered as a meaningless surplusage, when it is  in consonance with the other parts of the clause and expresses the specific  intention of parties. When read normally, the arbitration clause makes it  clear that the matter in dispute shall be referred to and finally resolved by  arbitration in accordance with the provisions of the Arbitration and  Conciliation Act, 1996 (or any statutory modification, enactment or  amendment thereof) and the venue of arbitration shall be Hong Kong. This  interpretation does not render any part of the arbitration clause, meaningless  or redundant. Merely because the parties have agreed that the venue of  arbitration shall be Hong Kong, it does not follow that Laws in force in  Hong Kong will apply. The arbitration clause states that the Arbitration and  Conciliation Act, 1996 (an Indian Statute) will apply. Therefore, the said Act  will govern the appointment of arbitrator, the reference of disputes and the  entire process and procedure of arbitration from the stage of appointment of  arbitrator till the award is made and executed/given effect to.  

Conclusion  

10.     As none of the objections of the respondent has any merit, this  petition deserves to be allowed.  

11.     The petitioner has suggested three names in its letter dated  21.12.2005. Learned counsel for the respondent submitted that in view of the  bona fide objections raised by the respondent, it had not suggested any one  for being appointed as Arbitrator. He also submitted that the respondent was  not willing for any of the persons suggested by the petitioner being  appointed as Arbitrator. He stated that an independent arbitrator may be  appointed as the sole Arbitrator, keeping in view sub-section (9) of section  11 which provides that in the case of appointment of a sole arbitrator in an  international commercial arbitration, the Chief Justice of India or his  designate may appoint an arbitrator of a nationality other than the nationality  of the parties if the parties belong to different nationalities.  

12.     For the reasons stated above, this petition is allowed. Let this matter  be listed on 24.5.2007 for appointment of the Arbitrator. The parties may  also, if possible, suggest the name of a person finding mutual acceptance, by  that date for appointment as arbitrator.