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CASE NO.: Appeal (civil)  5156 of 2003

PETITIONER: Hindustan Petroleum Corpn. Ltd.                          

RESPONDENT: Vs. M/s. Pinkcity Midway Petroleums                  

DATE OF JUDGMENT: 23/07/2003

BENCH: N Santosh Hegde & B P Singh.

JUDGMENT:

J U D G M E N T  

(Arising out of SLP © No.21154 of 2002)

SANTOSH HEGDE, J.

       Heard learned counsel for the parties.

       Leave granted.

       This appeal is filed against the judgment of the High  Court of Punjab & Haryana at Chandigarh delivered in Civil  Revision No.1688 of 2002 on 1.7.2002 whereby the High Court  dismissed the revision petition filed by the appellant herein  against an order made by the Civil Judge, (Senior Division),  Rewari, Haryana, dated 19.2.2002 dismissing the application  filed by the appellant herein under Section 8 read with Section  5 of the Arbitration and Conciliation Act, 1996 (for short ’the  Act’) in a suit pending before it seeking reference of the suit  pending before it to an arbitrator as contemplated under Clause  40 of the Dealership Agreement between the parties.

       The facts necessary for disposal of this appeal, briefly  stated, are as follows :

       The appellant herein is a company carrying on the  business of manufacture, sale and distribution of petroleum  products which it does through dealers and distributors  appointed by it. The respondent herein is one of such dealers  appointed by the appellant to sell its petroleum products  through a retail outlet at Jaisingpur Khera, National Highway  No.8, District Rewari, Haryana. The said appointment as a  dealer of the respondent is governed by a Dealership  Agreement dated 26.3.1997 executed by the parties. According  to the appellant, Clause 30 of the said agreement empowers it to  stop the supply of its products to a dealer for a period as the  appellant thinks fit, for breach of any of the conditions  contained in the agreement. The appellant also states that this  stoppage of supply of its product is in addition to and without  prejudice to any other right or remedy available to it or others  under the said agreement. The appellant also contends that  under Clause 40 of the said agreement, any dispute of  whatsoever nature between the parties, arising out of or in  relation to the said agreement, will have to be referred to the  sole arbitration of the Chairman and the Managing Director of

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the Corporation who may, as per the said clause, either himself  act as an arbitrator or nominate some other officer of the  appellant to act as an arbitrator. It is also the case of the  appellant that under Clause 20 of the said agreement, the  respondent is not only obligated to comply with the terms and  conditions of the said agreement but is also responsible to  comply with all directions, orders, guidelines etc. issued by the  appellant-Corporation on safe practices and marketing  discipline. The appellant further contends that in this regard as  per the marketing discipline, guidelines issued for the purpose  of prevention of mal-practices, irregularities at retail outlets, the  officers of the appellant are entitled to conduct inspections,  make necessary report and take action thereon. This right of the  Corporation, according to the appellant, is in addition to the  powers of the Government of India and other statutory  authorities as notified in the Notification dated 28.12.1998  issued in exercise of powers conferred under Section 3 of the  Essential Commodities Act, 1955 and Order of 1998 issued  thereon for purposes of checking mal-practices.

       The appellant contends that while in exercise of such  power of inspection on 18.11.2001 by the officers of the  Corporation, it was found that there was short delivery of Motor  Spirit (MS) and High Speed Diesel (HSD) in the dispensing  units of the respondent. The said officers also found weights  and measurement seals in the HSD dispensing units tampered  with. Based on the said inspection reports, the appellant states  that on 29.11.2001 a show-cause notice was issued by the  appellant to the respondent in regard to short-delivery and  tampering, as stated above.

       In response to the above show-cause notice of the  appellant, it is stated that the respondent submitted its reply and  on consideration of the same, the appellant not being satisfied,  suspended the sales and supply of petroleum products to the  respondent’s retail outlet for a period of 30 days and also levied  a penalty of Rs.15,000/- for the said irregularities committed by  the respondent as per the appellant’s letter dated 16.1.2002.

       Being aggrieved by the said stoppage of supply of  appellant’s product, the respondent filed Civil Suit No.18 of  2000 in the Court of the Civil Judge, (Senior Division), Rewari,  praying, inter alia, for a declaration that the order dated  16.1.2002 is illegal and arbitrary. The respondent along with  the plaint in the said suit also filed an application under Order  39 Rules (1) and (2) of the CPC. Learned Civil Judge was  pleased to stay the suspension of supplies by the appellant to  the respondent while in regard to the penalty, no stay was  granted.

       In reply to the plaint filed in the Civil Judge’s Court, the  appellant filed an application under section 8 read with Section  5 of the Act in the said suit praying for referring the dispute  pending before the Civil Court to the arbitrator as per Clause 40  of the Dealership Agreement dated 26.3.1997. Along with that  application, as required under Section 8 of the Act, the  appellant also enclosed a copy of the agreement. In the said  application, the appellant had stated that the action taken by it  was in consonance with the terms and conditions of the  Dealership Agreement, hence, any dispute arising out of the  said action of the appellant could only be referred to the  arbitrator as per Clause 40 of the said agreement.

       The learned Civil Judge by his order dated 19.2.2002  dismissed the said application holding that the dispute between

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the parties was not covered by the arbitration agreement. A  revision filed by the appellant in the High Court, as stated  above, against the order of the learned Civil Judge came to be  dismissed by the High Court. It is in the above backdrop that  the appellant is before us in this appeal.

       Mr. Mukul Rohtagi, learned A.S.G. appearing for the  appellant-Corporation, contended that the courts below have  seriously erred in coming to the conclusion that the arbitration  clause found in the Dealership Agreement does not apply to a  dispute of the nature which was pending in the suit before the  learned Civil Judge. Learned counsel contended that the courts  below having come to the conclusion that there was an  arbitration clause which is widely worded in the Dealership  Agreement which would ordinarily cover all differences,  disputes, claims etc., could not have further proceeded to  examine whether such a clause would cover the dispute raised  in the suit because such an exercise could only be undertaken  by the arbitrator in view of Section 16 of the Act. In support of  this contention of his, learned counsel placed strong reliance on  a Constitution Bench judgment of this Court in Konkan  Railway Corporation Ltd. & Anr. v. Rani Construction Pvt. Ltd.  [2002 (2) SCC 388]. He further contended that even the finding  rendered by the two courts below that there can be no  arbitration clause in regard to a dispute concerning short- delivery of Motor Spirit and HSD or the tampering with the  weights and measurement seals because such a dispute can only  be adjudicated in a manner provided for under the Standards of  Weights and Measures (Enforcement) Act, 1985 (the 1985 Act),  and such dispute cannot be gone into in arbitration proceedings,  is wholly erroneous and cannot be sustained. With reference to  the judgment of the High Court, the learned counsel also  contended that the High Court has erred in coming to the  conclusion that a revision petition under Section 115 of the  CPC will not be available to the appellant on the facts and  circumstances of this case.

       Mr. Chetan Sharma, learned senior counsel appearing for  the respondent, in reply, contended that the courts below have  justly come to the conclusion that the arbitration clause found  in the Dealership Agreement could not have contemplated an  adjudication by an arbitrator in regard to a dispute arising  between the parties pertaining to short-delivery of the Motor  Spirit and HSD or tampering with the seal because these are the  disputes which have penal consequences, hence, could only be  tried by a competent criminal court on being investigated by an  authorised agency as provided in the 1985 Act. He also  submitted that since the dispute ex facie showed that the same  cannot be adjudicated by an arbitrator, the courts below were  justified in coming to the conclusion that the application filed  under Sections 5 and 8 of the 1996 Act was not maintainable.  Learned counsel also supported the finding of the High Court in  regard to non-maintainability of the revision petition before it.

       For deciding the question whether the courts below were  justified in coming to the conclusion that they could go into the  question of the existence or validity of the arbitration  agreement, we will have to first consider the relevant clauses  found in the Dealership Agreement. Clause 40 of the said  agreement reads thus :

"40.  Arbitration

(a)     Any dispute or difference of any nature

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whatsoever any claim, cross-claim, counter-claim  or set off or regarding any right, liability, act,  omission or account of any of the parties hereto  arising out of or in relation to this agreement shall  be referred to the Sole Arbitration of the Chairman  & Managing Director of the Corporation who may  either himself act as the Arbitrator or nominate  some other Officer of the Corporation to act as the  Arbitrator. The dealer will not be entitled to raise  any objection to any such arbitrator on the ground  that the Arbitrator is an officer of the Corporation. (b)     In the event of the Arbitrator to whom the  matter is originally referred being transferred, he  shall be entitled to continue the arbitration  proceedings notwithstanding his transfer unless the  Chairman & Managing Director at the time of such  transfer or at any time thereafter, designates  another Officer to act as Arbitrator in his place in  accordance with the terms of this agreement. (c)     In the event of the  arbitrator, to whom the  matter is originally referred vacating his office or  being unable or refusing to act for any reason, the  Chairman & Managing Director at the time of  vacation of office or inability or refusal to act,  shall designate another Officer to act as Arbitrator  in accordance with the terms of this agreement. (d)     The Arbitrator newly nominated by the  Chairman & Managing Director under Clauses (b)  or (c) above shall be entitled to proceed with the  reference from the point at which it was left by his  predecessor. (e)     It is an express term of this contract that no  person other than the Chairman & Managing  Director or a Director nominated as aforesaid shall  act as Arbitrator. If for any reason, Chairman &  Managing Director is unable or unwilling or  refuses or fails to act as an Arbitrator or nominate  an Arbitrator then the matter shall be referred to  the Director (Marketing) who shall appoint a  Officer of the Corporation to act as an Arbitrator.  It being fully understood and agreed by and  between the parties hereto that the vacancy should  not be supplied within the meaning of sub-section  1(b) of section 8 of the Arbitration Act, 1940 (Act  No.10 of 1940). (f)     The award of the Arbitrator so appointed  shall be final conclusive and binding on all parties  to the agreement subject to the provisions of the  Arbitration Act, 1940. (g)     The award shall be made in writing and  published by the Arbitrator within 12 months after  entering upon the reference or within such  extended time not exceeding one further year as  the parties shall agree in writing. The parties  hereto shall be deemed to have irrevocably given  their consent to the Arbitrator to make and publish  the award within the period referred to  hereinabove and shall not be entitled to raise any  objection or protest thereto under any  circumstances whatsoever. (h)     It is hereby expressly agreed that the powers  of the Arbitrator appointed in the matter  hereinabove mentioned shall include the power to  make interim award/awards as the circumstances  of the case may justify to appoint a receiver,

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commissioner or custodian by whatever name  called to take possession of the property in dispute  during the pendency of the proceedings and  subject to such final order as may be passed by the  Arbitrator and shall also have the power to issue  such further orders from time to time as he may  deem fit, on an application being made to him by  any of the parties to the dispute where it is  apprehended that the property to which it relates is  in danger of being wasted, damaged, deteriorated  or parted with or rights of other parties are likely to  be created thereon. (i)     The Arbitrator shall be at liberty to appoint,  if necessary, any accountant or engineer or other  technical person to assist him and to act on the  opinion taken from such person. (j)     The Arbitrator shall be entitled to direct  anyone of the parties to pay the costs of the other  party in such manner and to such extent as the  Arbitrator may in his discretion determine and  shall also be entitled to require on or both the  parties to deposit funds in such proportion to meet  the Arbitrator’s fees and expenses as and when  called upon to do so. (k)     The venue of the Arbitration shall be as  decided by the Arbitrator."

       A perusal of this clause clearly shows that the parties to  the Dealership Agreement had agreed to refer their dispute  arising out of the agreement, of whatever nature it may be, to an  arbitrator as contemplated in that agreement. Section 8 of the  Act in clear terms mandates that a judicial authority before  which an action is brought in a matter which is the subject of an  arbitration agreement to refer such parties to arbitration, the  language of this Section is unambiguous.  

       This Court in the case of P. Anand Gajapathi Raju & Ors.  v. P. V. G. Raju (Dead) & Ors. [2000 (4) SCC 539] has held  that the language of Section 8 is peremptory in nature.  Therefore, in cases where there is an arbitration clause in the  agreement, it is obligatory for the Court to refer the parties to  arbitration in terms of their arbitration agreement and nothing  remains to be decided in the original action after such an  application is made except to refer the dispute to an arbitrator.  Therefore, it is clear that if, as contended by a party in an  agreement between the parties before the Civil Court, there is a  clause for arbitration, it is mandatory for the Civil Court to refer  the dispute to an arbitrator. In the instant case the existence of  an arbitral clause in the agreement is accepted by both the  parties as also by the courts below but the applicability thereof  is disputed by the respondent and the said dispute is accepted  by the courts below. Be that as it may, at the cost of repetition,  we may again state that the existence of the arbitration clause is  admitted. If that be so, in view of the mandatory language of  Section 8 of the Act, the courts below ought to have referred the  dispute to arbitration.

       The question then would arise: what would be the role of  the Civil Court when an argument is raised that such an  arbitration   clause does not apply to the facts of the case in  hand ? Learned counsel for the appellant contends that it is a  matter which should be raised before the arbitrator who is  competent to adjudicate upon the same and the Civil Court  should not embark upon an inquiry in regard to the applicability

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of the arbitration clause to the facts of the case. While learned  counsel appearing for the respondent contends that since the  applicability of the arbitration clause to the facts of the case  goes to the very root of the jurisdiction of the reference to  arbitration, this question will have to be decided by the Civil  Court before referring the matter to arbitration even in cases  where there is admittedly an arbitration clause. The answer to  this argument, in our opinion, is found in Section 16 of the Act  itself. It has empowered the Arbitral Tribunal to rule on its own  jurisdiction including rule on any objection with respect to the  existence or validity of the arbitration agreement. That apart, a  Constitution Bench of this Court in Konkan Railway (supra)  with reference to the power of the arbitrator under Section 16  has laid down thus :

"It might also be that in a given case the  Chief Justice or his designate may have  nominated an arbitrator although the period  of thirty days had not expired. If so, the  Arbitral Tribunal would have been  improperly constituted and be without  jurisdiction. It would then be open to the  aggrieved party to require the Arbitral  Tribunal to rule on its jurisdiction. Section  16 provides for this. It states that the  Arbitral Tribunal may rule on its own  jurisdiction. That the Arbitral Tribunal may  rule "on any objections with respect to the  existence or validity of the arbitration  agreement" shows that the Arbitral  Tribunal’s authority under Section 16 is not  confined to the width of its jurisdiction, as  was submitted by learned counsel for the  appellants, but goes to the very root of its  jurisdiction. There would, therefore, be no  impediment in contending before the  Arbitral Tribunal that it had been wrongly  constituted by reason of the fact that the  Chief Justice or his designate had nominated  an arbitrator although the period of thirty  days had not expired and that, therefore, it  had no jurisdiction." (emphasis supplied)

       It is clear from the language of the Section, as interpreted  by the Constitution Bench judgment in Konkan Railway (supra)  that if there is any objection as to the applicability of the  arbitration clause to the facts of the case, the same will have to  be raised before the concerned Arbitral Tribunal. Therefore, in  our opinion, in this case the courts below ought not to have  proceeded to examine the applicability of the arbitration clause  to the facts of the case in hand but ought to have left that issue  to be determined by the Arbitral Tribunal as contemplated in  Clause 40 of the Dealership Agreement and as required under  Sections 8 and 16 of the Act.

       In the normal circumstances, the above finding of ours  should have sufficed to dispose of this appeal before us. But in  view of the categoric findings given by the two courts below in  regard to the non-applicability of Clause 40 of the Dealership  Agreement to the facts of the case, and also in view of the  arguments addressed before us, we are constrained to examine  the correctness of the findings of the two courts below to avoid  multiplicity of proceedings.

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       It was argued before the courts below as also before us  that the mis-conduct, if any, pertaining to short-supply of  petroleum products or tampering with the seals would be a  criminal offence under the 1985 Act. Therefore, the  investigation into such conduct of the dealer can only be  conducted by such officers and in a manner so specified in the  said Act, and it is not open to the appellant to arrogate to itself  such statutory power of search and seizure by relying on some  contractual terms in the Dealership Agreement. It is further  argued that such disputes involving penal consequences can  only be tried by a court of competent jurisdiction and cannot be  decided by an arbitrator.            Having considered the above arguments addressed on  behalf of the respondent as also the findings of the courts  below, we are of the opinion that the same cannot be accepted  because the appellant is neither exercising the power of search  and seizure conferred on a competent authority under the 1985  Act nor does the Dealership Agreement contemplate the  arbitrator to exercise the power of a criminal court while  arbitrating on a dispute which has arisen between the  contracting parties. This is clear from the terms of the  Dealership Agreement. In our opinion, the findings of the  courts below in this regard run counter to the clauses of the said  Agreement, as could be seen from the following clauses of the  Dealership Agreement which read thus :

       "20.  Dealer to comply with provisions of  Acts, Rules & Regulations  

(a)     The Dealer shall at all times faithfully, promptly  and diligently observe and perform and carry out at  all times, all directions, orders, rules, terms and  conditions as may be issued by the Corporation or  its representatives from time to time on safe  practices and marketing discipline and for the  proper carrying on of the Dealership of the  Corporation. (b)     The Dealer shall observe and comply with the  provisions of Petroleum Act, 1934, Explosives  Act, 1884, Weights & Measures Act, 1976, etc.,  and all rules and regulations made thereunder. (c)     The Dealer shall faithfully observe and perform all  the obligations, duties and requirements under the  licences required or obtained for running the  dealership and shall promptly renew all licences  from time to time. (d)     The Dealer shall be solely responsible for any  breach or contravention by them, their employees,  of any Acts, rules, regulations or bye-laws of the  Central and/or State Governments and/or  Municipal, Local and/or other authorities as may  be applicable to the Retail Outlet business and the  Corporation shall not be responsible in any manner  for any of the liabilities arising out of non- compliance by the Dealer, their employees, their  agents and sub-agents. (e)     The Corporation will obtain in its name a storage  licence from the Controller of Explosives for the  storage of petroleum products at the said premises  and the dealer shall faithfully observe and perform  all the terms and conditions of such licence(s). (f)     The dealer shall obtain any or every licence(s)  necessary for the storage/sale of petroleum  and  other products at the said premises required under

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any Central/State Government or local enactment  for the time being in force and shall faithfully  observe and perform all the terms and conditions  for such licence(s) and shall promptly renew the  same from time to time. (g)     The dealer shall be solely responsible for any  breach or contravention by them, their servants or  agents of any laws, rules, regulations or bye-laws  passed or made by the Central and/or State  Government and/or Municipal local and/or other  Authorities as may be applicable from time to time  to the business including without prejudice to the  generality of the foregoing. The concerned  Authorities respectively appointed under the  Petroleum Act, Payment of Wages Act, Shops &  Establishment Act, Factories Act and the  Workmen’s Compensation Act or any statutory  modifications or re-enactments of the said statutes  or rules and the Corporation shall not be  responsible in any manner for any liability out of  non-compliance by the dealer with the same. The  dealer shall at all times indemnify and keep  indemnified the Corporation against all actions,  proceedings, claims and demands made against it  by the Central and/or State Government and/or  Municipal Local and/or other Authorities and/or by  any customer of the product and/or any other third  party as a result of or in consequence of any act or  omission of whatsoever nature of the dealer, his  servants or agents, including, without prejudice to  the generality of the foregoing, any accident or  loss or damage arising out of the storage, handling  and/or sale of the products or attributable to the  use of the said premises for the aforesaid purposes  whether or not such act or omission or accident or  loss or damage was due to any negligence, want of  care or skill or any misconduct of the dealers, their  servants or agents. (h)     The dealer shall indemnify and save harmless the  Corporation from all losses, damages, claims, suits  or actions which may arise out of or result from  any injury to any person or property or from  violation of any statutory enactments, rules or  regulations or other written orders or other laws or  caused by or resulting from non-observance by the  dealer of the provisions of this Agreement."     

       A perusal of  various sub-clauses of this Clause of the  Dealership Agreement shows that the dealer is under an  obligation to faithfully, promptly and diligently observe and  perform and carry out at all times all directions, orders, rules,  terms and conditions of safe practices and marketing discipline  while carrying on the dealership of the appellant. Clause 20 of  the said Agreement also requires the dealer to observe and  comply with the provisions of the Petroleum Act, Explosives  Act, the Weights and Measures Act, 1976 and the rules and  regulations made thereunder.

       Clause 30 of the Agreement reads thus :  

"30.  Corporation’s right to stop/suspend  Petrol/Diesel/Lubricants supply.

       Notwithstanding anything to the

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contrary herein contained the Corporation  shall be at liberty upon a breach by the  dealer of any covenant in this Agreement to  stop and/or suspend forthwith supply of  Petrol/Diesel/Lubricants and other products  to the dealer and/or sales for such period or  periods as the Corporation may think fit, and  such right of stoppage and/or suspension  shall be in addition to and/or without  prejudice to any other right or remedy  available to the Corporation under this  Agreement. The dealer shall not be entitled  to claim any compensation or damage from  the Corporation on account of any such  stoppage and/or suspension of supply."  

       A perusal of this Clause shows that if the dealer commits   a default in complying with the obligations enumerated in  Clause 20 of the Agreement, the appellant is entitled to stop or  suspend supply of its petroleum products to such a dealer  without prejudice to other remedies available under the  Agreement. This right of the appellant to take action against an  erring dealer under the terms of the Agreement is de hors the  proceedings that may be available to be initiated against an  erring dealer under the provisions of various other enactments  referred to in Clause 20 of the said Agreement including under  the provisions of the 1985 Act. This right of the Corporation to  suspend the supply of petroleum products to an erring dealer is  a right exercised under the terms of the contract and is  independent of the statutory provisions of the various Acts  enumerated in Clause 20 of the Agreement. The courts below,  in our opinion, have committed an error by misreading the  terms of the contract when they came to the conclusion that the  only remedy available as against a misconduct committed by an  erring dealer in regard to short-supply and tampering with the  seals lies under the provisions of the 1985 Act. The courts  below have failed to notice that when a dealer short-supplies or  tampers with the seal, apart from the statutory violation, he also  commits a misconduct under Clause 20 of the Agreement in  regard to which the appellant is entitled to invoke Clause 30 of  the Agreement to stop supply of petroleum products to such  dealer. The power conferred under the Agreement does not in  any manner conflict with the statutory power under the 1985  Act nor does the prescribed procedure under the 1985 Act in  regard to search and seizure and prosecution apply to the power  of the appellant to suspend the supply of its petroleum products  to an erring dealer. The power exercised by the appellant in  such a situation is a contractual power under the agreement and  not a statutory one under the 1985 Act. The existence of dual  procedure; one under the criminal law and the other under the  contractual law is a well-accepted legal phenomenon in the  Indian jurisprudence.  

       Therefore, in our opinion, the courts below have erred in  coming to the conclusion that the appellant did not have the  legal authority to investigate and proceed against the respondent  for its alleged misconduct under the terms of the Dealership  Agreement. We are also of the opinion that if the appellant is  satisfied that the respondent is indulging in short-supply or  tampering with the seals, it will be entitled to initiate such  action as is contemplated under the agreement like suspending  or stopping the supply of petroleum products to such erring  dealer. If in that process any dispute arises between the  appellant and such dealer, the same will have to be referred to

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arbitration as contemplated under Clause 40 of the Dealership  Agreement.

       This brings us to consider the last question involved in  this appeal, namely, the maintainability of the revision petition  before the High Court under Section 115 of the CPC. The High  Court by the impugned order has come to the conclusion that its  jurisdiction to entertain a revision petition would only be  available if the order impugned is such that if it is allowed to  stand, it would occasion failure of justice or cause an  irreparable injury to a party against whom the said order is  made. In support of this finding, the High Court has relied upon  certain judgments of this Court. Having perused the said  judgments, we are of the opinion that the findings given in  those judgments do not apply to the facts of this case at all. We  have come to the conclusion that the Civil Court had no  jurisdiction to entertain a suit after an application under Section  8 of the Act is made for arbitration.  Therefore, we are of the  opinion that the trial court failed to exercise its jurisdiction  vested in it under Section 115 of the C.P.C. when it rejected the  application of the appellant filed under Sections 8 and 5 of the  Act. In such a situation, refusal to refer the dispute to arbitration  would amount to failure of justice as also causing irreparable  injury to the appellant. For the said reason, we are of the  opinion that the High Court has erred in coming to the  conclusion that the appellant was not entitled to the relief under  Section 115 CPC.  

For the reasons stated above, this appeal succeeds and the  impugned orders of the courts below are set aside. The  application filed by the appellant under Sections 8 and 5 of the  Act is allowed. Consequently, the trial court is directed to refer  the dispute pending in Civil Suit No.18 of 2002 before it to  arbitration, as prayed for by the appellant in the said  application. The interim order passed by the High Court shall  stand vacated.  

The appeal is allowed with costs