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CASE NO.: Arbitration Petition  8 of 2006

PETITIONER: SVG Molasses Co. B.V.

RESPONDENT: Mysore Mercantile Co. Ltd. & Ors.

DATE OF JUDGMENT: 16/11/2006

BENCH: S.B. SINHA

JUDGMENT: Judgment

O R D E R  

       Petitioner and First Respondent entered into a contract of supply of  16,000 metric tonnes of Blackstrap Cane Molasses of Iranian origin.  

Petitioner contends that it performed its obligations under the contract  and delivered molasses in terms thereof.  However, Respondent No.1 had  arranged for its financiers M/s Hazoor Sahib Chemicals Private Limited to  open an irrevocable letter of credit.  Respondent No.1  and the said financier  failed to perform its obligations to pay in terms of the letter of credit.   

It is alleged that the Respondent Nos.1 and 2 in collusion with said  Hazoor Sahib Chemicals caused Petitioner to part with possession of  molasses by deceit and sold the same to Respondent No.3.  Respondent No.  3 caused the molasses to be stored in custom bonded tanks belonging to  Konkan Storage Systems Private Limited, who fraudulently represented  itself to be  the importer of the molasses.  

       An application under Section 9 of the Arbitration and Conciliation  Act, 1996 (for short, ’the 1996 Act’)  was filed before the District Court at  Ernakulam in January 2005, which was marked as Arbitration OP No. 9 of  2005.  An order of status quo was passed.  The parties thereafter sought to  settle their dispute, wherefor an agreement was entered into on or about  15.02.2005.   

Clause 6 of the said agreement reads as under :

"The parties hereby agree to have the Arbitration  O.P. No.9 of 2005 before the District Court at Ernakulam  disposed in terms of this agreement and seek directions to  Konkan Storage Systems (P) Ltd., to hold the Cargo at  the instance of the First Party and to deliver the same  only on the instructions of the First Party, also requiring  Konkan Storage Systems Pvt. Ltd., to disregard any  instructions from Hazoor Sahib Chemicals Pvt. Ltd."

       Clause 9 of the said contract provides that the agreement shall be  governed by and construed in accordance with Indian law.

Allegedly, in terms of the said agreement, Respondents herein  conceded that none of them had acquired any right, title or interest in   molasses and recognized the title of Petitioner therein.  Respondent No. 3  also allegedly undertook to pay for the entire molasses at the rates stipulated  in the agreement within a period within a period of 75 days from the date of   the agreement, in regard whereto Respondent Nos. 1 and 2 agreed to

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underwrite the performance of the said obligation.   

       In terms of  the said agreement, the District Court, Ernakulam,  passed  a consent order.  Petitioner, however, alleges that Respondent No.3 only  paid for 5500 metric tonnes of molasses and failed to fulfill the other terms  of the said consent order.   

       On expiry of the period fixed for compliance of the terms thereof,  Petitioner  approached the District Court seeking permission to act in terms  of the agreement.  However,  Respondent No.3  filed  an Interlocutory  Application seeking for modification thereof as also for restraining it from  invoking its contractual rights.  The application filed by Respondent No.3   was dismissed.  The Interlocutory Application filed by  Petitioner was  allowed by an order dated 02.06.2005.  The legality and/or validity of the  said order was questioned by Respondent No.3 by preferring appeal  thereagainst before the High Court of Kerala in terms of Section 37 of the  1996 Act.

       The Division Bench of the Kerala High Court  by its order dated  01.12.2005 opined that the learned District Court exceeded its jurisdiction in  permitting Petitioner to sell the goods itself, opining :

"\005By judgment dated 29.06.05 all these appeals were  dismissed.  The Court also held "in this case, whether  time is essence of contract, whether the appellant or other  parties to the settlement violated the terms of the  settlement, if so there is any justification etc. are all  matters to be decided by the arbitrator if such issues are  raised before the arbitrator".  So the contention as to who  has committed the breach, who all had violated the terms  of the agreement are all subject matter of arbitration.   When it is so, the court cannot enforce the agreement in  terms of clause 4 in favour of any party and grant  permission to the 1st respondent to sell the Molasses.  In  other words, when it is asserted by one party and denied  by other regarding the right under clause 4, and thus there  arises a dispute pending resolution by arbitration, it will  be in excess of jurisdiction under section 9 of the Act to  permit the party to sell the goods and thus  enforce the  contract.  It has to be borne in mind that clause 7 gives  the power to arbitrate and it is by virtue of an arbitration  clause that Arbitration OP itself is filed.  So the court  below erred in enforcing clause 4 in permitting the  petitioner himself to sell the goods.  The court in  exercising the jurisdiction under section 9 only by way of  an interim measure, till the disputes are finally resolved  by the Arbitrator.  Hence the order passed by the court  below to the extent it permitted a party to the agreement  to sell the goods is concerned, is liable to be set aside."

       An interim order passed by the District Court was set aside and it was  directed to appoint a commissioner to sell the cargo in public auction after  due notification.       

Disputes and differences, thus, having arisen between the parties, the  arbitration agreement contained in  Clause 7 of  the agreement dated  15.02.2005 was invoked, which was  in the following terms :

       "Any dispute, difference of opinion or question as  to the meaning, interpretation or execution of this  agreement that the parties hereto may be unable to settle  by mutual agreement shall be submitted to arbitration in  the City and  country of the choice of the First Party, by   a Committee of three Arbitrators, one to be appointed by

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the First Party and one to be appointed jointly by the  Second, Third and Fourth Parties and the third Arbitrator  to be appointed by the first two Arbitrators or, failing  agreement between them, by the President of the  Chamber of Commerce of the City, which is to be the  venue of Arbitration.  Any majority decision reached by  the Committee of Arbitrators so set up, shall be final and  binding on all Parties hereto."

In terms of the said arbitration agreement, by a letter dated  04.11.2005, Petitioner herein appointed an arbitrator.  It  also  specified the  venue of the arbitration, stating :

       "Please note that the venue of arbitration shall be  Amsterdam in the Netherlands.  Please further note that  SvG in exercise of their right under the arbitration clause  contained in the Agreement have nominated Mr. S.J.  Hoekstra residing at klipper 79, 2991 KL, Barendrecht,  The Netherlands as one of the  arbitrators."      

       By reason of the said notice, Respondents herein jointly were asked to  nominate their arbitrator and communicate the nomination to Petitioner as  also to the arbitrator nominated by it, so that the third arbitrator could in turn  be appointed and the process of adjudication of the dispute  commences.

       However, notices were not served upon all the respondents.   Respondent No.3 responded to the said notice. However, notice could not be  served upon the Second Respondent.  In the aforementioned situation, an  application under sub-section (6) of Section 11 has been filed, praying :

"a.     Appoint an arbitrator on behalf of the respondents. b.      Direct the appointment of the third arbitrator in  terms of clause 7 of the Agreement and the Act.          c.      Pass any other or further orders and directions that  this Hon’ble Court may deem just fit and proper in  the interests of justice and equity."

        Before us no counter affidavit has been filed  by  Respondents despite  opportunities having been granted in that behalf.  Respondent No.3 was not  a party to the original agreement.  However, the parties hereto entered into  an arbitration agreement when the matter was pending in the Court of the  District Judge.   Clause 7 of the agreement contained the arbitration clause,   as referred to hereinbefore.  It is this clause which is sought to be enforced.  

       Section 11 of the 1996 Act provides for appointment of arbitrators.   Sub-section (2) of Section 11 postulates that the parties are free to agree on a  procedure for appointing the arbitrator or arbitrators, subject, of course, to  the provisions of sub-section (6) thereof.   Sub-sections (5) and (6), which  are relevant for the purpose of this case, read as under :

"(5)    Failing any agreement referred  to in sub-section  (2), in an arbitration with a sole arbitrator, if the parties  fail to agree on the arbitrator within thirty days from  receipt of a request by one party from the other party to  so agree the appointment shall be made, upon request of  a party, by the Chief Justice or any person or institution  designated by him."

(6)     Where, under an appointment procedure  agreed upon by the parties, -

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(a)     a party fails to act as required under  that  procedure; or          (b)     the parties, or the two appointed arbitrators,  fail to reach an agreement expected of them under that  procedure; or

(c)     a person, including an institution, fails to  perform any function entrusted to him or it under that  procedure,  a party may request the Chief Justice or any person or  institution designated by him to take the necessary  measure, unless the agreement on the appointment  procedure provides other means for securing the  appointment."

The 1996 Act envisages party autonomy. The constitution of the  arbitral tribunal in the manner in which it is to be appointed concededly  depends upon the type of substantive agreement.  When the parties to the  agreement are to nominate one arbitrator each on their behalf, the third  arbitrator is appointed by the nominated arbitrators.   

It is not in dispute that Respondents herein have failed and/or  neglected to appoint an arbitrator in terms of the arbitration agreement.

A submission was made by the learned counsel appearing on behalf of  Respondents that they would face immense difficulties in proceeding before  an arbitral tribunal at Amsterdam in Netherlands; but this Court in exercise  of its jurisdiction under Section 11(6) of the 1996 Act cannot supplant the  agreement of the parties.

The parties entered into the Arbitration Agreement with their eyes  wide open.  They knew the terms thereof.  This Court in exercise of its  jurisdiction under Section 11(6) of the 1996 Act cannot alter the terms of the  contract.           It is idle to contend that there is no arbitration clause.  It is  furthermore not in dispute that the applicant is a company carrying on  business from Netherlands.  The goods are also said to be of Iranian origin.   It would, therefore, not be correct to say that the agreement does not fall  within the scope of International Commercial Arbitration as defined in  Section 2(1)(f) of the 1996 Act.  The identity and location of the Petitioner  being a foreign country would bring the case within the purview of  International Commercial Arbitration.

In this case, we are not concerned as to whether any of the  respondents has complied with his obligations under the contract or not, the  same would fall for determination by the Arbitral Tribunal, nor are we  concerned with under what circumstances the said agreement was entered  into.  The plea raised on behalf of the respondents that by shifting the scene  of activity to the Netherlands would be getting undue advantage of situation  to the Petitioner is again a matter wherewith we are not concerned at this  stage.  The law applicable to the agreement may be the Indian law but the  same would not mean that the arbitration agreement is invalid.   

This Court cannot also direct appointment of a single Arbitrator in  place of three Arbitrators or change the place of Arbitration as provided for  in the agreement.  The same would amount to alteration of terms of the  agreement entered into by and between the parties.  In terms of Section  11(6) of the 1996 Act, the Court would derive jurisdiction only when a  person being a party to the Arbitration agreement fails to perform a function  entrusted to it thereunder.  It is, therefore, not possible to accede to the  request of the learned counsel for the Arbitrator.

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In Punj Lloyd Ltd. v. Petronet MHB Ltd. [(2006) (2) SCC 638], this  Court cited with approval the ratio laid down in Datar Switchgears Ltd. v.  Tata Finance Ltd.  [(2000) 8 SCC 151] which was in the following terms : "\005So far as Section 11(6) is concerned, if one party  demands the opposite party to appoint an arbitrator and the  opposite party does not make an appointment within 30  days of the demand, the right to appointment does not get  automatically forfeited after expiry of 30 days. If the  opposite party makes an appointment even after 30 days of  the demand, but before the first party has moved the court  under Section 11, that would be sufficient. In other words,  in cases arising under Section 11(6), if the opposite party  has not made an appointment within 30 days of demand,  the right to make appointment is not forfeited but  continues, but an appointment has to be made before the  former files application under Section 11 seeking  appointment of an arbitrator. Only then the right of the  opposite party ceases."    Yet again in You One Engineering & Construction Co. Ltd. & Anr. v.  National Highways Authority of India (NHAI) [(2006) 4 SCC 372], a  learned Judge opined:-

"10\005The Arbitration agreement clearly envisages the  appointment of the presiding arbitrator by IRC.  There is  no qualification that the arbitrator has to be a different  person depending on the nature of the dispute.  If the  parties have entered into such an agreement with open  eyes, it is not open to ignore it and invoke exercise of  powers in Section 11(6)."   

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."  

It is also not a case where Petitioner has waived its right under the  arbitration agreement, as was the case of  B.S.N.L. & Ors. v. M/s Subhash  Chandra Kanchan & Anr. [2006 (9) SCALE 217].

        This Court appoints Justice R.C. Chopra, a former Judge of the High  Court of Delhi as an Arbitrator on behalf of Respondents herein.  The  learned Arbitrator shall fix the quantum of his fees and other expenses.  The  learned Arbitrators indisputably would appoint a third Arbitrator in terms of  clause (vii) of the agreement dated 15.2.1995.  However, keeping in view  the peculiar facts and circumstances of this case to which, I had adverted to,  the Arbitral Tribunal may consider the desirability of making an award as  expeditiously as possible.  The Respondents shall bear the cost of the  applicant which is quantified at Rs.10,000/-.

The learned Arbitrators shall, however, be at liberty to determine their  venue in regard to sub-Section (1) of Section 20 of the 1996 Act as and  when necessary.