THE HON’BLE SRI JUSTICE B.SESHASAYANA REDDY Arbitration Application No.87 of 2009 (Dated : 30-03-2010) Between: M/s.Sentini Bio-products P. Ltd. Rep. by its Managing Director Sri T.Seshagiri Rao …Applicant A n d M/s.KBK Chem-Engineering Pvt. Ltd. Rep. by its CEO & Managing Director Mr.Abhay P. Deshpande …Respondent THE HON’BLE SRI JUSTICE B.SESHASAYANA REDDY Arbitration Application No.87 of 2009 ORDER: This is an application under Section 11 of the Arbitration and Conciliation Act (“Arbitration Act”, for brevity) filed by M/s.Sentini Bio Products Private Limited, a company registered under the Companies Act seeking appointment of a Presiding Arbitrator to resolve the disputes between the parties arising out of contract agreement dated 16.01.2006. 2. T.Seshagiri Rao, Managing Director of the applicant Company has sworn to the affidavit filed in support of the application. The case of the applicant company, as set out in the affidavit, in brief, is:- The applicant Company is incorporated under the Companies Act. It has obtained a valid licence from the Government of Andhra Pradesh to manufacture Rectified Spirit/ENA/Enthol with a daily production of 1,20,000 litres and 30,000 litres of Anhydrous Alcohol. M/s.KBK Chem Engg. P. Ltd., a company registered under the Companies Act-respondent agreed to supply Plant and Machinery to the applicant Company. The value of the project was Rs.1,789 lakhs. The terms and conditions for supply of Plant and Machinery were reduced in writing and both parties entered into an agreement, dated 15.5.2007. It was mutually agreed that the completion of the project would be 15.5.2007. The respondent has offered performance bank guarantee. According to the applicant Company, the respondent has failed to commission the project within the stipulated time or even in the extended period of contract. Therefore, the applicant Company invoked performance bank guarantee furnished by the respondent. Correspondence went on between the parties, wherein they made allegations and counter allegations against each other for the delay in commissioning the project. The applicant Company invoked arbitration clause under Article 14 of the Contract and appointed Sri Justice I.Venkata Narayana, a retired Judge, High Court of A.P as one of the arbitrators to the 3 Member Arbitral Tribunal to resolve the disputes and intimated the same to the respondent under letter dated 23.4.2009. The respondent, under reply letter dated 7.5.2009 appointed Mr.Sanjay Jagtap as its arbitrator to the Three Member Team of Arbitrators. Thereupon, the applicant Company addressed letter dated 6.6.2009 to Sri Justice I.Venkata Narayana to initiate further steps with regard to appointment of a Presiding Arbitrator. The respondent Company, under its letter dated 10.7.2009 forwarded minutes of the meeting held on 30.6.2009 for signatures of the applicant company. Since the minutes of the meeting held on 30.6.2009 were not replica of the discussions held in the meeting, the applicant Company refused to sign on the said minutes and communicated the same to the respondent under letter dated 17.7.2009. Thereupon, the respondent issued a legal notice dated 31.8.2009 raising several disputes and calling upon the applicant to nominate their C.E.O or President or Director or Executive Director and to fix a date and time to meet their nominated Director within a period of two weeks on receipt of the notice for an amicable resolution of the issues. The applicant Company issued a reply notice dated 29.9.2009 contending that various allegations made in the notice dated 31.8.2009 are false. Since discussions between the parties for amicable settlement had failed because of stipulation of certain conditions by the respondent company in its communication dated 30.1.2009, it has become imminent for the applicant Company to invoke arbitration clause of the contract and appointed Sri Justice I.Venkata Narayana, a retired Judge of the High Court of Andhra Pradesh as its arbitrator. There being no response from the Arbitrator appointed by the respondent with regard to appointment of the Presiding Arbitrator of the Three Member Arbitral Tribunal, the applicant Company has filed this application with a prayer stated supra. 3. For better appreciation of the case of the applicant Company, I deem it appropriate to refer paragraph 7 of the affidavit filed in support of the application, which reads as hereunder:- “7. It is submitted that pending the appointment of Presiding Arbitrator by the 2 respective Arbitrators appointed by the parties, the Applicant received a legal notice dated 31-8-2009 from the Respondent raising several disputes and going back on the reference made by appointing the respective Arbitrators by calling upon the Applicant to nominate their C.E.O or President or Directors or Executive Directors and to fix a date and time to meet their nominated Director within a period of 2 weeks on receipt of the notice for an amicable resolution of the issues. The said demand is made by the Respondent vide their legal notice allegedly under the procedure contemplated under Art.14 of the Contract. As stated hereinabove the said procedure having been followed and only when it became impossible for settlement of dispute between the parties, which could be read from the correspondence inter se, it was decided to invoke the arbitration clause for appointment of a team of 3 persons as Arbitrators for resolution of the dispute. The Respondent’s letter dated 7.5.2009 goes to show that they have agreed to the fact that the procedure contemplated under Art.14 was followed and thereby responded by appointing Sri Sanjay Jagtap as Arbitrator on their behalf unequivocally. The allegations made by the Respondent in their legal notice dated 31.8.2009 that only by way of reflex action, they proceeded to appoint Mr.Sanjay Jagtap as their Arbitrator and that the nomination of Arbitrator by either parties is ipso facto void and unenforceable, are incorrect and false. Hence in view of the appointment of respective Arbitrators by both the parties, the Respondent cannot now go back on the procedure contemplated under Art.14 of the Contract. The applicant’s counsel received a communication dated 5.9.2009 from Honourable Mr.Justice I.Venkatanarayana stating that appointment of a Presiding Arbitrator is yet awaited from Sri Sanjay Jagtap. Subsequently, Sri Sanjay Jagtap the Arbitrator appointed by the Respondent, addressed a letter to the counsel for the Applicant dated 22.9.2009 stating that the Respondent had merely obtained his consent to nominate him as their Arbitrator without actually appointing him by stipulating the terms of reference and further stated that till such time, he is not in a position to proceed further or comply with the notice under reference. In fact, if the letter dated 7.5.2009 addressed by the Respondent to the Applicant, is carefully perused, the Respondent has in unequivocal terms appointed Sri Sanjay Jagtap as one of the persons of the Team of Arbitrators to resolve the dispute and there is no ambiguity in the said appointment as stated by the said Arbitrator vide his letter dated 22.9.2009. The applicant has issued a reply notice dated 29.9.2009 to the Counsel for the Respondent by making it clear that the various allegations made in the notice under reply are false and as such denied. It is mentioned in the said reply notice that in their communications since January 2009, the Respondent was vociferous that they never had any intention to discuss any of the issues and in fact, they behaved as if there is nothing further to discuss. The said fact was clear since there was no response from the Respondents to the repeated requests by the Applicant in writing vide communications dated 17.1.2009 and 19.2.2009 calling upon them to discuss the matter as contemplated under Art.14 of the contract. In fact, there was no situation for further discussions as the Respondent had unilaterally stipulated certain course to be followed by stipulating 7 pre-conditions in their communication dated 30-1-2009, thus apparently closing all the doors for further discussion in the matter and as such the Applicant was left with no other alternative but to invoke the Arbitration Clause and nominated Mr. Justice I.Venkata Narayana as Arbitrator on their part to which the respondent responded vide their communication dated 7.5.2009 nominating Sri Sanjay Jagtap as Arbitrator on their part. The Respondents were never ready to discuss any issues in spite of repeated reminders and requests prior to and after the appointment of the Arbitrators. Even the meeting of Directors held on 30-6-2009 was minuted by the Respondents by twisting and misrepresenting the facts, which was not accepted by the Applicant. The resultant atmosphere of mistrust and suspicion between the Applicant and the Respondent prevailing as on date was also not at all conducive for any further discussions between the parties.” 4. Notice before admission came to be ordered on 17.11.2009. The respondent entered appearance through a counsel and filed counter. One Mr. Amit Kulkarni, Company Secretary working in the respondent company, has sworn to the counter affidavit. It is stated in the counter affidavit that the applicant Company has not followed the procedure contemplated under Article 14 of the Contract with regard to settlement of disputes arose between the parties. The respondent company only nominated Mr. Sanjay Jagtap as its arbitrator without actually appointing him. It is further stated in the counter that time is not the essence of the contract and the applicant Company shifted the place of installation of plant and machinery, and therefore, the applicant Company is responsible for the delay in completing the process of installation of plant and machinery and commissioning the same. It is also stated in the counter that the applicant company commissioned the Project without proper completion of the installation of Plant and Machinery by the respondent. According to the respondent, the application filed by the applicant seeking appointment of Presiding Arbitrator is premature, since the procedure contemplated under Article 14 of the Contract has not been followed. 5. Heard Ms. Manjari S.Ganu, learned counsel appearing for the applicant and Mr. Y.N.Lohita, learned counsel appearing for the respondent. 6. Ms.Manjari S.Ganu, learned counsel appearing for the applicant Company submits that the correspondence went on between the parties clearly establish that there was no scope for settlement of disputes by way of negotiation, and therefore, it has become imminent for the applicant Company to invoke Article 14 of the Contract seeking appointment of Presiding Arbitrator for the Three Member Team of Arbitrators to resolve the disputes between the parties. Learned counsel took me to the correspondence that went on between the parties right from 13.1.2009 to 29.01.2009 to substantiate her contention that settlement of dispute between the parties by way of negotiations proved futile. Particular emphasis has been made by the learned counsel on the letter dated 30.01.2009 addressed by the respondent company to the Managing Director of the applicant Company and reply thereto given by the applicant company on 19.02.2009. It is evident from the letter dated 30.01.2009 that the respondent company stipulated seven conditions to be fulfilled by the applicant Company. I deem it appropriate to refer the relevant portion in the letter dated 30.01.2009, which reads as hereunder:- “This interim reply is sent in view of the fact that KBK is also interested in completing the process of handing over the successfully commissioned plant to Sentini. Therefore and without prejudice to any other legal or other remedies available to KBK, KBK hereby calls upon Sentini and its management: 1. To withdraw the letters dated 13th January and 17th January 2009 unconditionally; 2. To refund/restitute the amount of Performance Bank Guarantee prematurely encashed from the banks of KBK to KBK; 3. To withdraw the domestic/international experts from the site; 4. To permit the officials of KBK at site and from HO to enter upon the site premises to undertake inspection of the remaining works; 5. To make available all the utilities, equipments and other support that would be needed by KBK site officials on priority basis to enable them to complete the work in all respects; 6. To undertake Joint Inspection of the plant functioning within the terms of the contract dated 16th January 2006; 7. To, after successful commissioning trials, issue the Certificate of Acceptance from Sentini to KBK Please note that failng the response from Sentini, KBK shall not be responsible for either part or specific performance of the plant and shall always not be liable to make good any alleged losses by Sentini and shall also not be liable for any claims, damages, liquidated damages, penalties, consequential losses by whatever name called and Sentini shall alone be responsible for the costs and consequences due to its failure to adhere to the terms of the contract and illegal invocation of the performance bank guarantee and subsequent actions leading to the tampering with the plant and machinery supplied by KBK. This is without prejudice to the other rights and privileges available to KBK arising out of the contract and as per the prevalent laws of land.” 7. The applicant Company replied under letter dated 19.02.2009 justifying their action for invoking bank guarantee to a tune of Rs.1,46,00,00,000/- (One Crore forty six lakhs) and also stated that the conditions put by the respondent are not justified. In support of her submissions, reliance has been placed on the judgment of the Supreme Court in VISA INTERNATIONAL LIMITED v. CONTINENTAL RESOURCES (USA) LIMITED[1], wherein it has been held that total absence of any scope for amicable settlement can be inferred from the correspondence exchanged between the parties. It is useful to refer paragraph 38 of the cited judgment, which reads as hereunder:- “(38) IT was contended that the pre-condition for amicable settlement of the dispute between the parties has not been exhausted and therefore the application seeking appointment of arbitrator is premature. From the correspondence exchanged between the parties at pages 54-77 of the Paper-book, it is clear that there was no scope for amicable settlement, for both the parties have taken rigid stand making allegations against each other. In this regard a reference may be made to the letter dated 15th September, 2006 from the respondent herein in which it is inter-alia stated ". . . . . . since February, 2005 after the execution of the agreements, various meetings/discussions have taken place between both the parties for furtherance of the objective and purpose with which the agreement and MOU was signed between parties. Several correspondences have been made by CRL to VISA to help and support its endeavour for achieving the goal for which the above mentioned agreements were executed. " In the same letter it is alleged that in spite of repeated requests the petitioner has not provided any Funding Schedules for their portion of equity along with supporting documents to help in convincing OMC of financial capabilities of the parties and ultimately to obtain financial closure of the project. The exchange of letters between the parties undoubtedly discloses that attempts were made for an amicable settlement but without any result leaving no option but to invoke arbitration clause.” 8. Sri Y.N.Lohita, learned counsel appearing for the respondent submit that the application filed by the applicant Company seeking appointment of Presiding Arbitrator to preside over the Three Member Team of Arbitrators is premature, since the procedure contemplated under Article 14 of the Contract has not been followed. According to him, CEOs or President or Directors or Executive Directors of the two parties shall agree on a final settlement of the controversy within 3(three) weeks after the issues are submitted to them, and since there being no such effort made by the applicant Company, the instant application filed by the applicant is premature. Learned counsel refers Article 14 of the Contract exclusively. A further submission has been made that the respondent has only nominated Sri Sanjay Jagtap and not yet appointed him as an arbitrator and in which case, it cannot be construed that the respondent appointed Sri Sanjay Jagtap as arbitrator on its behalf. He would also contend that even if it is construed that the respondent has appointed Sri Sanjay Jagtap as arbitrator on its behalf, there being no discussion between the two arbitrators with regard to appointment of Presiding Arbitrator, it cannot be said cause of action has arisen for the applicant company to approach this Court invoking Section 11(6)(b) of the Act. 9. The respondent at one breath contends that it has not appointed the arbitrator on its behalf and on the other breath, it contends that the arbitrators appointed by each of the parties had not yet discussed with regard to the appointment of Presiding Arbitrator. The respondent cannot be permitted to blow hot and cold at the same breath. 10. Article 14 of the Contract reads as hereunder: “ARTICLE-14 : ARBITRATION Any technical controversy, claim or dispute, termination or indefinite hold in respect to or arising out of this agreement and its annexures or the breach thereof shall be settled by amicable consultation among the Parties. In case such settlement shall prove impossible the CEOs or President or Directors or Executive Directors of the two parties shall agree on a final settlement of the controversy within 3(three) weeks after the issues are submitted to them. If the CEOs or President or Directors or Executive Directors of the two parties are unable to find a mutually agreeable resolution to such matter, then such technical controversy, claim or dispute shall be referred to Arbitrator consisting of one or three persons mutually acceptable by BUYER and SELLER and their award shall be binding on both the parties. Should there be any dispute not settled by Arbitrator, the same could be finally taken up in the Courts of Laws at Kaikalur/ Hyderabad in AP”. 11. The correspondence between the parties commencing from 13.01.2009 to 29.9.2009 establishes that there is no scope for amicable settlement through meeting of executives of the respective parties. Indeed to the letter addressed by the applicant Company appointing Sri Justice I.Venkata Narayana, a retired Judge of this Court as arbitrator on its behalf, the respondent replied appointing Mr.Sanjay Jagtap as arbitrator on its behalf. Of course, the contention of the respondent is that it has only proposed the name of Mr.Sanjay Jagtap to be appointed as arbitrator and there is no actual appointment. I do not see any substance in the contention of the respondent since the lawyer’s notice dated 31.8.2009 is very clear that the respondent appointed Mr.Sanjay Jagtap as its arbitrator. For better appreciation, I may refer paragraph (9) of the notice dated 31.8.2009 issued by the respondent to the applicant company which reads as hereunder:- “9. Notwithstanding the aforesaid, the company had chosen to appoint Justice I.Venkatanarayana, retired Judge of High Court of Andhra Pradesh/Justice Vaman Rao retired Judge of High Court of Andhra Pradesh as its sole Arbitrator by letter dated 28th March, 2009. The same was followed up by another letter dated 23rd April, 2009 seeking to nominate Justice I.Venkatanarayana retired Judge of High Court of Andhra Pradesh as one of the persons to the three member team of arbitrators to resolve the disputes. The company had pre-supposed the reference of the dispute which is to be specified and referred to the arbitrator or arbitrators. The company further presumed that our clients would also agree for the reference being made to two arbitrators on either side and third arbitrator to be appointed. Our clients by a way of reflex action had proceeded to appoint Mr.Sanjay Jagtap as its arbitrator. The nomination of the arbitrators by either of the parties is ipso facto void and unenforceable, in so far as no attention whatsoever was bestowed by either party for making a reference to a number of arbitrators. Further both the parties have not agreed for any final settlement and have further failed to submit the issues requiring to be considered by the CEOs or President or Directors or Executive Directors of both the parties, and their further failure to find a mutually agreeable resolution, entitling the parties to invoke the arbitration clause. The same is fortified by the fact that the company by its letters dated 30th May, 2009, 6th June, 2009, 17th July, 2009 (2 letters), 17th August, 2009 had called upon our clients to refer the matter to the respective CEOs or President or Directors or Executive Directors of either party for an amicably agreeable resolution of the differences. The said letters were remitted by the company specifically in view of the arbitration clause contained in Article 14 of the agreement.” 12. It is the contention of the respondent that in view of the meeting of the executives of both the companies held on 30.6.2009, the application filed by the applicant seeking appointment of arbitrator is premature. It is a matter of record that the respondent communicated the alleged minutes of the meeting to the applicant company. Thereupon, the applicant Company refused to sign thereon on the ground that the resolutions passed in the meeting held on 30.6.2009 have been twisted. By a reading of the correspondence exchanged between the parties, I am in no doubt to conclude that the attempts for amicable settlement through procedure contemplated under Article 14 of the contract proved futile. The only way of settlement of disputes, therefore, is by way of arbitral tribunal. The applicant Company has already appointed its arbitrator and so also the respondent company. Such is the situation, the application filed by the applicant Company seeking appointment of a Presiding Arbitrator cannot be said to be premature. Therefore, I find that the applicant Company made out a valid ground for appointment of a Presiding Arbitrator to preside over the Three Member Arbitral Tribunal. 13. Accordingly, the application is allowed appointing Sri Justice D.Reddeppa Reddi, a retired Judge of this Court as Presiding Arbitrator. The Presiding Arbitrator is at liberty to fix his own fee. No order as to costs. _____________________ B.SESHASAYANA REDDY, J Dt.30-03-2010 RAR THE HON’BLE SRI JUSTICE B.SESHASAYANA REDDY Arbitration Application No.87 of 2009 (Dated : 30-03-2010) [1] (2009)2 Supreme Court Cases 55