IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED : 27.8.2009 CORAM THE HONOURABLE MR.JUSTICE M.CHOCKALINGAM AND THE HONOURABLE MR.JUSTICE R.SUBBIAH O.S.A.No.256 of 2009 and M.P.No.1 of 2009 1. R.Sakthikumar @ Ram S.Kumar S/o Late S.Ramasamy, 45281, Lynx Drive, Fremont, California, USA-94539 Represented by duly constituted Power of attorney mr.S.Arulkumar 2. Tamilarasi, W/o R.Sakthikumar Both are residing at B-3, Royal veilla, Parsn's Sesh Nestle, Nanjundapuram Road, Coimbatore – 641 036. ... Appellants/Petitioners Vs. 1. U.Damodharan @ Arun Ulag, S/o T.Ulagaratchagan 14515 NE 42nd P1#506 Bellevue, Washington USA – 98007 2. Rajasekaran Damodharan, S/o V.Damodharan, 596, Shoal Circle, Redwood City, California, USA-94065 .. Respondents/Respondents 1 & 2 The appeal has been preferred under Order XXXVI Rule 1 of O.S. Rules read with Section 37(1)(a) of the Arbitration and Conciliation Act 1996 against the order dated 8.6.2009 passed by the learned single Judge in O.P.No.355 of 2006 on the file of this Court. For Appellant : Mr.M.S.Krishnan, Senior Counsel for M/s. Sarvabhauman Associates For Respondent : Mr.R.Murari for R1. https://hcservices.ecourts.gov.in/hcservices/ J U D G M E N T (The judgement of the Court was delivered by M.CHOCKALINGAM,J.) Challenge is made to an order of the learned single Judge of this Court made in O.P.No.355 of 2006 whereby the award of the Arbitrator was confirmed by dismissing the O.P. 2. The Court heard the learned counsel for the appellant and also for the respondent and made a scrutiny of all the materials available. 3. The appellants filed the said O.P. challenging the award dated 17.7.2004 made by the sole arbitrator for the following facts and circumstances. (a) The appellants are the husband and wife, while the first respondent is the sister's son of the first appellant. The second respondent is the close associate of the parties. The appellants and the respondents commenced two companies, one by name Think Business Network, TBN(US) based in United States and the other TBN(IN) based in India. The appellants are having 51% of shares and the respondents 49% in the company based in United States and had equal shares in TBN(IN) in the company based in India. The companies were commenced in October 1996 and carried on the business activities till 2000 – 2001. The object of the software service of TBN (US) was to locate the customers who were in requirements of software service and after doing so, it should place orders before TBN(IN). It is also agreed that the TBN(IN) should perform the service and provide to TBN(US). The US based company should pay for the service rendered by the other and in turn, the TBN(US) should provide to its customers and recover the money from them. A customer called 'Kinzan' was located by TBN(US). They wanted service from TBN(IN). For the service rendered by Indian based Company for the customer 'Kinzan', payment was not made by TBN(US) though 'Kinzan' has paid the amount to TBN (US). The TBN(IN) took a stand that till TBN(US) pays TBN(IN) for the software service performed in favour of 'kinzan'. TBN(IN) should continue to retain the ownership of the copyright in respect of the software. Therefore, TBN(US) should not permit 'Kinzan' to use the copyright. In view of the same, there was a rift between the parties. The appellant filed a suit against TBN(US). (b) The petitioners/appellants floated a Company called 'Dhyan Infotech Pvt.Ltd. and diverted its business in favour of the newly created company. The first respondent was the Director of the U.S. based Company and he was excluded from the entire process. The appellants made allegations against the first respondent and refused to provide accounts and removed him from the Directorship. Under such circumstances, the first respondent filed a comprehensive suit in the Superior Court in California in which proceedings, they agreed for arbitration. Both the appellants and the respondents are U.S. citizens. Admittedly, the parties agreed for two arbitrations, one in respect of the company in U.S. and the other in respect of the https://hcservices.ecourts.gov.in/hcservices/ company in India. Insofar as US Company is concerned, it was agreed that the arbitral proceedings should be placed before the Superior Court at California and it should be proceeded with. In respect of both arbitral proceedings, Mr.Rao, a Chartered accountant at Chennai was appointed as a sole Arbitrator. Insofar as the arbitral award in respect of the Indian based Company is concerned, it was agreed by all the parties and it was also placed before the Superior Court at California and it was not challenged, but the arbitral award made by the said sole Arbitrator in respect of the U.S. based Company was challenged before the learned single Judge of this court in O.P.No.355 of 2006. 4. The appellants challenged the award in the said O.P. mainly on the following grounds : i) The award was opposed to the principles of natural justice. ii) The Arbitrator has misconducted himself and has acted in a biased manner. iii) The Arbitrator has travelled beyond the scope of reference and decided the matters and rights of Companies who were not parties to the Arbitration Agreement. 5. The learned single Judge after looking into the materials available and hearing the submissions made, rejected all the contentions putforth by the petitioner side and confirmed the award. Hence, this appeal at the instance of the petitioners. 6. Advancing the arguments on behalf of the appellants, the learned senior counsel would submit that the agreement specifies that the difference and disputes relating to the Company where to be referred to arbitration as detailed in paragraph 2. Para 4 of the Agreement provides that Arbitration and Conciliation Act, 1996, shall apply. Para 6 of the Agreement provides that the Arbitrator was at liberty to convey, discuss, reply, receive or accept the order to the related parties by e-mail, fax, and other accepted modes of transmission. Placing reliance on Sections 18 and 24(3) of the Arbitration Act, the learned counsel would submit that under Section 18, both the parties to the arbitration proceedings should be treated equally and to be given full opportunity to present their case. Section 24(2) of the Act provides that all statements, documents and information submitted to the Arbitration Tribunal by one party shall be communicated to the other party. The above principles constitute the principles of natural justice. 7. Learned counsel further submits that in the instant case, it would be seen that the hearing that had taken place is one sided. The Arbitrator has heard and received information from each parties in the form of e-mails and in the form of questionnaire and has not furnished the same to the other parties. It would be quite evident https://hcservices.ecourts.gov.in/hcservices/ from page 2 of the Award under the head "hearing and proceedings", the Arbitrator has had information from individuals parties found in Exhibit B, C, C and E and considered only the information furnished by the respondents without furnishing the same to the other parties and without the other parties knowing its contents. Much reliance was placed by the respondents on Clause 6 of the Arbitration Agreement before the learned Single Judge. The said clause only enables the Arbitrator to convey or receive communications by email, fax etc. but did not permit the Arbitrator to decide the issue of one party communicating the same to the other party. In fact, it may not be permissible for the parties to even agree upon such procedure in view of Section 24(3) of the Act, which mandates information to be given to the other parties. Section 24(3) is not in controversy between the parties. Section 24(1), 25, 26 of the Act would clearly indicate "unless and otherwise agreed upon by the parties" but the same was absent in Section 24(3). In fact, appellant No.2, has not even answered the questionnaire which was sent to her on 4.1.2004 which would be evident in page Nos.100 and 101 of the paper book. It would be seen from Exhibits B,C and D that the Arbitrator has sent the questionnaire to the parties only in July 2004 and got the answers from three of the parties. From the available materials, it would be quite clear that the Arbitrator has sent e-mails to the respective parties. None of the said information had been communicated to the other. Therefore, there was violation of mandatory provisions contained in Section 24(3) of the Act. Hence, the Award has to be set aside for violation of mandatory provisions. 8. Added further learned counsel, the Award was opposed to various provisions of the Arbitration and Conciliation Act. Section 23(1) of the Act provides that the parties should state the facts supporting their claim, the points to the issue and the relief or remedies sought for, while the other party should state the defence, unless the other party agrees to certain statements. 9. In the instant case, there was no claim statement made by the parties containing any claim or relief. Apart from that, Section 19 (2) of the Act provides for the parties to agree on the procedure which however is subject to Part I which contains Sections 2 to 43. Hence, it would be quite clear that Section 23(1) of the Act was mandatory and was not subject to any contract to the contrary. The procedure to be followed could be agreed but the requirement to file a claim statement containing the claims and relief/s was mandatory. In the instant case, Section 23 of the Act has not been complied with. 10. It is pertinent to point out that number of reliefs granted by the Arbitrator was not even found in the answer to the questionnaire submitted by the parties. In the course of the award, the Arbitrator has held that the amount of US$2,90,000 is payable to TBN-IN by TBN-US. The claim is not even found in the answer to the questionnaire submitted by the first respondent. Equally, in page No.14 of the Award, the Arbitrator has held that TBN-US shall get https://hcservices.ecourts.gov.in/hcservices/ compensated from Dhyan Infotech and the said Indian Company shall pay 25% to gross receipts in the EMS and other Software to TBN-US which again is not found in any claim by the first respondent, even in the answer to the questionnaire submitted by him. Thus, it would be quite clear that the award has proceed to decide upon the matters which were not found in any claim putforth. Apart from the above, the Award was opposed to Section 28 of the Arbitration and Conciliation Act. The said provision provides that Arbitral Tribunal should decide in accordance with the terms of the contract and shall take into account the usage of the trade applicable to the transaction. 11. The Arbitration Agreement was entered into between the parties who were Directors/shareholders of TBN-US. Dhyan Infotech was not a party to the Arbitration Agreement. The award directs the Indian Company to pay TBN-US for the use of its alleged intellectual property rights in EMS and also software to an extent of 25% of gross receipts. Since Dhyan Infotech was not a party to the Arbitration Agreement, the rights of the said Company cannot be adjudicated, the direction was opposed to the Indian law, since intellectual property rights cannot be assigned for non-payment of monies. The Award was also opposed to Section 81 of the Act also. The parties have not been treated equally and given equal opportunity. The Arbitrator had hurriedly conducted the proceedings and passed the award without providing opportunity. The questionnaire were sent in piece meal by the Arbitrator only in July 2004. There was hardly time for the parties to know about the answers given by the other parties or even to require the Arbitrator to furnish information. On 8.7.2004, the Arbitrator has addressed the first respondent to the effect that the first respondent wants the accounts of TBN-US to be audited and has suggested that he would make a trip to the U.S. and audit the accounts. The Arbitrator had offered his services and requested information for visa and had asked for expenses. The first petitioner had replied to the effect that there are not enough funds for TBN-US to pay for the audit. Thereafter, there was exchange of e- mails between the first and the third respondent/Arbitrator. As could be seen from the exchange of e-mails on 15.7.2004, the first respondent has addressed the Arbitrator regarding the alleged misappropriation of TBN EMS software by Dhyan Infotech and also made certain suggestions and two days thereafter, the Award has been passed. Apart from that, it is also seen from the award that the Arbitrator reckoned the figures which are not borne out by any of the exhibits on record. The calculation made by the Arbitrator appears to have been made on the basis of the personal information received from the first respondent behind the back of the appellants. This would also vitiate the Award. All would indicate that the third respondent/Arbitrator acted in bias. 12. The learned counsel took the Court to the letter addressed by the first respondent to the third respondent/Arbitrator on 15.7.2004 which according to him would indicate bias and misconduct on the part of the third respondent/Arbitrator. The Arbitration Award has been made beyond the terms of the reference. The Award would clearly go to show that it dealt with the Companies who are not https://hcservices.ecourts.gov.in/hcservices/ parties to the Arbitration Agreement. Dhyan Infotech is not a party to the Arbitration Agreement at all. The mail at pages 163 and 165 of the paper book addressed by the first respondent to the third respondent would make out a case of bias of the third respondent against the appellants and in favour of the first respondent. The document would indicate a private conversation which clearly reveals the private interaction between the first respondent and the third respondent which would vitiate the Award. All the above would clearly indicate that the award suffered by all the above reasons mentioned, since it is violative of all mandatory provisions of law and it has got to be set aside, but the learned single Judge has not paid its attention on any one of these aspects, but has affirmed the award accepting the contentions putforth by the respondent side. Hence, the judgement of the learned single Judge has got to be set aside. 13. In support of the contention, the learned counsel for the appellants relied on the following judgments: i) 2005(2) ALR 342 (Rudramuni Devaru vs. Shrimad Maharaj Niranjan Jagadguru Dr.Gangadhar rajayogendra Mahaswamigalu, Moorusaavira Math, Hubli & ors.) ii) 2006(7) SCC 800 (Suresh Chandra Nanhorya vs. Rajendra Rajak) iii) 2008(4) R.A.J. 168 (Ker) (Impex corporation v. Elenjikal Aquamarine Exports Ltd.) iv) 2003(2) Arb.LR 5(SC) (Oil & Natural Gas Corporation Ltd. vs. SAW Pipes Ltd.) v) 2008(1) Arb. I.R 484 (Delhi) (Oceanic dehydrates Pvt.Ltd. vs. Union of India) vi) 2005(1) R.A.J. 121 (Ker) (Sulaikha Clay Mines v. Alpha Clays) vii) AIR 1970 SC 82 (H.E.M. Union v. State of Bihar) viii) AIR 1987 SC 1242 (Ram Sarup Gupta v. BishunNarain Inter College) ix) 2002 Sup. ALR 375 (Gowri Spinning Mills Ltd vs. Adimoolam) x) AIR 1970 SC 967 (Dewan Singh v. Champat Singh) 14. Contrary to the above contentions learned counsel for the respondents putforth his submissions in his sincere attempt to sustain the order of the learned single Judge. The learned counsel for the respondents also relied on the following decisions. (i) (2009) 5 MLJ 1055 (Vijayakumar Raju v. Indus Ind Bank Ltd. ). https://hcservices.ecourts.gov.in/hcservices/ (ii) 2007 (4) Arb.LR 18 (Bombay)(DB) ( Vimal G.Jain v. Vertex financial services Pvt. Ltd) (iii) (2002)3 Supreme Court cases 572 (Narayan Prasad Lohia v. Nikunj Kumar Lohia) (iv) AIR 1987 Supreme Court 2316 (Delhi Municipal Corpn.v. M/s. Jagan Nath Ashok Kumar) 15. The Court paid its anxious consideration on the submissions made and scrutinised all the materials available. 16. Admittedly, an agreement for reference to the sole Arbitrator was entered into between the parties on 2.2.2004 which reads as follows: "WHEREAS differences and disputes have arisen between the parties in connection with the administration, management and other affairs of the 'company'; WHEREAS the parties aforesaid have agreed to settle the difference and disputes more specifically detailed hereunder and refer the matters to sole arbitrator for arbitration; ... ... 2. The matters of differences/disputes relating to the company specifically referred to arbitration as per para 1, are detailed hereunder but not limited to: a) Business relationship and commercial transactions with Think Business Networks Private Limited, India and other related parties; b) Cases filed by the company against individuals/companies in its capacity as plaintiff/respondent; c) Cases filed against the company by the individuals/companies and in which the company is a defendant; d) Remuneration/compensation to the directors of the company for the period after April 1st, 2002; e) Legal expenses & claim of reimbursement to the parties involved, administration, capital structure & shareholding pattern and conduct of affairs of the company; f) Valuation of assets and liabilities of the company including contingent assets and contingent liabilities to arrive at network of the company; https://hcservices.ecourts.gov.in/hcservices/ g) Withdrawal of the cases filed by the company or in which the company is involved; h) All matters connected by procedure, legal obligations for the above matters; i) To arrive at compensation amount, stated as value per share as per accepted accounting standards, for transfer of shares in respect of willing parties; ... ... 4. The parties herein agree to co-operate, furnish relevant date and handover possession during the period of arbitration for early award of arbitration and further agree that the provisions of the Arbitration and Conciliation Act, 1996 shall apply, provided they are not inconsistent or repugnant to this agreement; 5. The arbitrator will decide the matter within 4 months. But in case the matter could not be decided within 4 months, the time to make the award shall be extended by one more month. The cost of arbitration and the expenses shall be met out of the company's funds. 6. The arbitrator may ask for auditing of books of account of the company to a period relevant to the arbitration, for finalisation of the accounts of the company, may appoint consultants or advisors to value the assets of the company, may take administrative assistance for other related matters of arbitration. The arbitrator is at liberty to convey, discuss, reply, receive- accept and order to the related parties herein communication by email, fax and other accepted modes of transmission during the arbitration process." Under the said agreement, the sole Arbitrator Mr.Rajeshwara Rao, Chartered Accountant, Mylapore, Madras was appointed in respect of two companies, TBN-US based in United States and TBN-IN, based in India. Two arbitral proceedings were initiated, pending the suit in the Superior Court of California. The said Arbitration Agreement was entered in India. It is also an admitted position that two arbitral awards came to be made by the same Arbitrator, following the same procedure. The arbitral award in respect of the disputes between the parties insofar as India was concerned, it was not adjudicated by either of the parties but insofar as the award made by the Arbitrator in respect of the disputes arose in TBN-US based in United States, the arbitral award is challenged before the Court. It is also borne by documentary evidence that before the Superior Court in California, the parties would submit the arbitral awards for confirmation but the appellants filed O.P. before this Court. Preliminary objections were raised as to the jurisdiction of this Court by the respondents but the same was rejected by the Court. The https://hcservices.ecourts.gov.in/hcservices/ said order has become final, since it was not appealed against. Apart from that, in Clause 4 of the Agreement, it was agreed that the provisions of the Arbitration and Conciliation Act, 1996, provides that they were not inconsistent or repugnant to the Agreement. 17. The Award was challenged by the appellants on the grounds that it was in violation of mandatory provisions under Sections 23 and 34 of the Arbitration and Conciliation Act. Apart from that, it dealt with the third parties and thus exceeded the terms of the Agreement and it is also hit by bias. Sections 23 and 24 of the Arbitration and Conciliation Act, 1996 reads as follows: " 23. Statement of claim and defence. (1) Within the period of time agreed upon by the parties or determined by the arbitral tribunal, the claimant shall state the fact supporting his claim, the points at issue and the relief or remedy sough, and the respondent shall state his defence in respect of these particulars, unless the parties have otherwise agreed as to the required elements of those statements. (2) The parties may submit with their staements all documents they consider to be relevant or may add a reference to the documents or other evidence they will submit. (3) Unless otherwise agreed by the parties, either party may amend or supplement his claim or defence during the course of the arbitral proceedings, unless the arbitral tribunal considers it inappropriate to allow the amendment or supplement having regard to the delay in making it. 24. Hearings and written proceedings. - (1) Unless otherwise agreed by the parties, the arbitral tribunal shall decide whether to hold oral hearings for the presentation of evidence or for oral argument, or whether the proceedings shall be conducted on the basis of documents and other materials: Provided that the arbitral tribunal shall hold oral hearings, at an appropriate stage of the proceedings, on a request by a party, unless the parties have agreed that no oral hearing shall be held. (2) The parties shall be given sufficient advance notice of any hearing and of any meeting of the arbitral tribunal for the purposes of inspection of documents, goods or other property. (3) All statements, documents or other information supplied to, or applications made to the arbitral tribunal by one party shall be communicated to the https://hcservices.ecourts.gov.in/hcservices/ other party, ad any expert report or evidentiary document on which the arbitral tribunal may rely in making its decision shall be communicated to the parties." 18. Admittedly, both the parties did not putforth their claim statements and also did not claim in respect of their respective claims and objections to their claims. On appointment, the sole Arbitrator has issued questionnaire in piece meal and the same were also answered. In clause 6 of the agreement, it is found that the Arbitrator could convey or receive the communication by e-mail, fax etc. 19. The first contention putforth by the appellants side that the parties were not allowed to place their claim statement and the defence statement from the opposite part cannot be countenanced for two reasons. The disputed parties are all based in United states and the Chartered Accountant appointed as sole Arbitrator was based at Madras, India. Taking into consideration, the said fact, clause 6 should have been incorporated to the effect enabling the Arbitrator to convey or receive communications through e-mail, fax etc. Apart from that, insofar as arbitral award in respect of Indian based company TBN-IN is concerned, the same procedure was adopted to which the appellants have not raised even the little finger but have followed the same procedure and the said Award is also was not challenged. Under such circumstances, now the appellants cannot be permitted to state that proper procedure was not adopted. 20. Section 24(3) of the Act mandates that all statements, documents or other information supplied to, or applications made to the arbitral tribunal by one party shall be communicated to the other party. In the instant case, admittedly, after the questionnaire were served upon the appellants on the one side and the respondents on the other and the answers were also obtained therefor, neither the questionnaire served upon one party and the answer received therefrom was communicated to the other party enabling to understand what was actually claimed by the other party and how the claims of the first party was defended by the other party. Thus, both the parties were kept in darkness. It is