THE HON’BLE SRI JUSTICE B.SESHASAYANA REDDY Arbitration Application No.73 of 2011 (Dated : 20-08-2011) Between: M/s. Rank Silicon Pvt. Ltd. …Petitioner A n d M/s. Maytas Hill County Residences Pvt. Limited And another …Respondents THE HON’BLE SRI JUSTICE B.SESHASAYANA REDDY Arbitration Application No.73 of 2011 ORDER: This arbitration application has been taken under sub-sections (5) and (6) of Section 11 of the Arbitration and Conciliation Act, 1996 read with para (3)(i)(c) of the Scheme for Appointment of Arbitrators, 1996, for resolution of the disputes that have arisen between the parties relating to agreement dated 21.02.2008. 2. The case of M/s. Rank Silicon Pvt. Ltd (in short, `the applicant’), precisely, is:- M/s.Maytas Hill County Residences Private Limited and M/s.Maytas Properties Pvt. Ltd. (in short, `the respondents’) issued Letter of Intent dated 08.01.2008 for setting up of Crusher Plant at Hill County site. An agreement came to be entered between the applicant and the respondents on 21.2.2008 for setting up a crusher plant at the designated area in the Hill County site. The respondents allotted three acres of land situated in Survey Nos.206/P and 207/P within the Hill County site on lease to enable the applicant to install the crushing plant on a monthly lease of Rs.1,000/-. The term of lease is 60 months extendable on the terms mutually agreed upon. The estimated cost of the total investment for completion of the project is Rs.6 crores. The applicant made a request to the respondents to give an advance of Rs.2 crores towards cost of the Project. As per the terms of the agreement, the respondents agreed to pay at Rs.370/- per metric ton to the applicant exclusive of Value Added Tax. The agreed rate is subject to enhancement at the rate of 5% for every completed year from the date of start of supply of aggregate on the amount paid previous year. The applicant made arrangements to procure a 750 KVA DG set by investing about Rs.60,00,000/-. However, the request made by the applicant to the respondents for providing advance of Rs.2 Crores came to be not acceded to. The applicant approached the Andhra Pradesh State Financial Corporation for loan. The applicant made necessary arrangements to install the crushing unit. While so, the respondents terminated the agreement under letter-dated 14.5.2008. On receipt of termination letter, the applicant got issued a legal notice dated 22.5.2008 requesting the respondents to re-examine the legal intricacies and implications and allow to complete the terms and conditions of the contract. The respondents did not respond to the request of the applicant. However, the respondents sent E-mail to the applicant on 7.6.2008 cancelling the lease deed dated 21.2.2008. The applicant filed A.O.P.615 of 2008 on the file of III Additional District Judge, Ranga Reddy District at L.B.Nagar and obtained an order of status quo in I.A.No.1226 of 2008. As per the agreement dated 21.2.2008, the disputes between the parties are required to be settled by one or more arbitrators appointed by mutual consent in terms of Arbitration & Conciliation Act, 1996. The applicant issued notice dated 22.9.2009 invoking the arbitration clause and proposing Prof. R.Venkata Rao, Vice Chancellor, The National Law School of India University, Bangalore as arbitrator. The claims that are required to be referred to arbitrator have been set out in the notice. Paragraph (10) of the notice reads as hereunder:- “10. That, as already pointed out in the preceding para 7, by the unilateral act of termination of the mutually agreed contract by you, which is arbitrary, illegal and without any justified reasons, my client had incurred huge business loss of Rs.6,96,84,892/- (Rupees six crore ninety six lakhs eighty four thousand eight hundred ninety two only) as per the details furnished below, for which you are solely responsible: S.No. Item Party Expenditure 1 Steel Platforms Rank Cranes Pvt. Ltd. 15,00,815.00 2 Ready Mix Concrete Rank Ready Mix Concrete Pvt. Ltd. 2,57,250.00 3 Procurement of Steel Sujana Metal Products Ltd. 2,84,764.00 4 Plant & Machinery Puzzolana Machinery Fabricators, Hyd. 25,50,000.00 5 Procurement of Tippers (4 Nos.) Automotive Manufactures 85,45,392.00 6 Containers Ravi Cranes 3,28,900.00 7 Processing Fee APSFC 2,24,720.00 8 Land Survey Expenditure 1,95,000.00 9 Proclain usage at site Normal rental for 72 days from 21.3.08 to 31.5.08 10,80,000.00 10 Tipper usage at site Normal rent for 52 days from 10.04.08 to 31.5.08 1,73,333.00 11 Drilling and breaking of Rock M/s. Kavya Mining Works 2,50,000.00 12 Drilling and chiselling of Boulders M/s. ESSNN Constructions 3,30,630.00 13 Invoice 46,80,000.00 14 Salaries and wages 11,51,320.00 15 Civil work expenses As per Vouchers 1,32,768.00 Total 2,16,84,892.00 16 Loss of Profit 4,80,00,000.00 Grand Total 6,96,84,892.00 The respondents issued reply dated 19.12.2009 disputing the claim of the applicant and attributing laches on the part of the applicant that led to termination of the agreement. Hence, this application by the applicant-M/s.Rank Silicon Pvt. Limited seeking the prayer stated supra. 3. Notice to the respondents came to be ordered on 30.04.2010. The respondents entered appearance through a counsel and filed counter. It is stated in the counter that the agreement came to be terminated, as the applicant was not capable of setting up the crushing plant within the stipulated period. Since the agreement has been cancelled, the arbitration clause does not survive. For better appreciation, I may refer paras 25 and 26 of the counter affidavit, which read as hereunder:- “ In reply to the averments of para 7, it is incorrect to state that the answering respondent arbitrarily and abruptly terminated the said agreement vide letter dated 14.5.2008. As stated earlier, the Applicant was under a specific obligation to set up the unit in a specific time period as agreed upon by both the parties and non-fulfilment of the said obligations resulted in termination of the agreement by the answering respondent. It is also incorrect to state that the letter of termination did not contain a valid reason for the purpose of the agreement. As stated earlier, as the Applicant was incapable of setting up the crushing plant within the stipulated period, the answering respondent exercised the powers conferred to the answering respondent under the agreement dated 21.2.208 and terminated the agreement. It is also incorrect to state that the answering respondent did not have any integrity in abiding to the terms and conditions of the said agreement. 26. The allegations of the Applicant that despite issuance of the notice dated 22.9.2009, through their counsel with a request to re-examine the legal intricacies and implications and to permit the Applicant to comply with the terms and conditions of the contract, the answering respondent did not send any reply are incorrect and denied. As admitted by the Applicant, the answering respondent sent an email on 7.6.2008 cancelling the lease deed dated 21.8.2008, requiring the Applicant to return the lease deed as the answering respondent was under no obligation to further extend the time given to the Applicant to set up the crushing plant on the subject property. It is also incorrect to state that the answering respondent have acted contrary to the terms of the agreement, de horse the law. It is also most respectfully submitted that the answering respondent has acted only in accordance with the terms and conditions of the agreement, which were in fact, not abide by the Applicant”. 4. The applicant filed rejoinder. It is stated in re-joinder that the applicant company has incurred expenditure to a tune of Rs.2 Crores as on the date of termination of the agreement by the respondents and the dispute between the parties are required to be resolved by taking recourse to Clause 27 of the agreement dated 21.2.2008. It is also stated in the reply that the act of the respondents in assigning contract to third party without resolving the disputes has caused substantial loss to the applicant. 5. Heard learned counsel appearing for the parties. 6. Learned counsel appearing for the applicant submits that the respondents do not dispute the agreement dated 21.2.2008, which contained an arbitration clause. Such is the situation; it is impermissible for the respondents to resist the application seeking appointment of an arbitrator for resolution of the disputes between the parties that have arisen relatable to the agreement dated 21.2.2008. He would also contend that despite termination of the agreement, the arbitration clause subsists for resolution of the disputes. Learned counsel would also contend that the Project came to be delayed because of the non-execution of the lease deed within the stipulated time by the respondents and also for not providing finance of Rs.2 Crores by the respondents. According to the learned counsel, despite termination of the agreement, arbitration clause subsists for resolution of the disputes. In support of his submissions, reliance has been placed on the decision of Supreme Court in Magma Leasing & Finance Ltd. v. Potluri Madhavilata[1], Alva Aluminium Ltd., Bangkok v. Gabriel India Limited[2]. 7. Per contra; learned counsel appearing for the respondents submits that the agreement stipulates commencement of the crushing unit within 75 days from the date of issuance of Letter of Intent or latest by 15.4.2008 and as the applicant failed to install the unit within the stipulated time, the respondent terminated the agreement and as the termination is because of breach of the conditions of the agreement by the applicant, question of appointing arbitrator does not arise. He would also contend that there is no obligation on the part of the respondents under the terms of the agreement to provide finance of Rs.2 crores to the applicant towards setting up the crushing unit. As the agreement came to be terminated, the applicant cannot rely upon the arbitration clause in the agreement. 8. It is not in dispute that the applicant and the respondents entered into agreement dated 21.2.2008 with regard to installation of crushing unit in the premises of the respondents. There is a separate lease deed executed with regard to the site handed over to the applicant for installing the unit. Under the terms of the lease deed, the applicant agreed to pay Rs.1,000/- per month. The term of the lease is 60 months. As per the agreement-dated 21.2.2008, the applicant has to install the stone crushing plant within 75 days from the date of the agreement. The installation of the stone-crushing unit is not completed. The respondents cancelled the agreement under letter dated 14.5.2008. The applicant issued a legal notice dated 20.5.2008 to consider for extension of time. In response, the respondents sent email dated 7.6.2008 cancelling the lease deed. Consequent on the cancellation of the lease deed and termination of the agreement, the applicant invoked the arbitration clause in the agreement-dated 21.2.2008. Clause (27) of the Agreement reads as hereunder:- “ Any dispute arising out of or in connection with this Agreement, including any question regarding its existence, shall be finally resolved by one or more Arbitrators appointed by mutual consent in terms of Arbitration & Conciliation Act, 1996. Arbitration proceedings shall be conducted at Hyderabad, India in accordance with the laws of India. Maytas, may, without waiving any remedy under this Agreement, seek from any court of competent jurisdiction any interim or provisional relief that Maytas deems necessary to protect itself pending the establishment of the arbitral panel or the arbitral panel’s determination of the merits of the claim”. 9. A plain reading of the above-referred clause in the agreement does not give any room for doubt that the disputes between the parties are required to be resolved by one or more arbitrators appointed by mutual consent in terms of the Arbitration & Conciliation Act. The stand of the respondents is that because the contract came to an end by termination due to breach, the arbitration clause does not survive. This issue is squarely covered by the judgment of the Supreme Court in Magma Leasing case (1 supra), wherein it has been held that merely because the contract has come to an end by its termination due to breach, the arbitration clause does not perish nor is rendered inoperative; rather it survives for resolution of disputes arising “in respect of” or “with regard to” or “under “ the contract. 10. In National Insurance Co. Ltd. v. Boghara Polyfab (P) Ltd.[3], the Supreme Court examined the provisions of Section 11 of the Act and categorised the issues that may arise for determination in an application under Section 11 before the Chief Justice or his designate and the approach to be adopted qua the same. The Supreme Court held: “22.1 The issues (first category) which the Chief Justice/his designate will have to decide are:- a) Whether the party making the application has approached the appropriate High Court. (b) Whether there is an arbitration agreement and whether the party who has applied under Section 11 of the Act, is a party to such an agreement. 22.2. The issues (second category) which the Chief Justice/his designate may choose to decide (or leave them to the decision of the Arbitral Tribunal) are: (a) Whether the claim is a dead (long-barred) claim or a live claim. (b) Whether the parties have concluded the contract/transaction by recording satisfaction of their mutual rights and obligation or by receiving the final payment without objection. 22.3. The issues (third category) which the Chief Justice/his designate should leave exclusively to the Arbitral Tribunal are: (i) Whether a claim made falls within the arbitration clause (as for example, a matter which is reserved for final decision of a departmental authority and excepted or excluded from arbitration). (ii) Merits or any claim involved in the arbitration. The question whether there is an arbitration agreement and whether the party who has applied under Section 11 of the Act is a party to such an agreement in terms of the above decision falls in category (1) and has, therefore, to be decided by the Chief Justice or his designate. The above decision was followed in A.P. Tourism Development Corpn. Ltd. v. Pampa Hotels Ltd. 2010 (5) SCC 425 where also one of the questions that fell for determination was whether existence or validity of the arbitration agreement is a matter to be decided by the Chief Justice/designate while considering a petition under Section 11 of the Act or the same has to be decided by the Arbitrator. Relying upon the decision of this Court in SBP & Co. v. Patel Engg. Ltd. 2005 (8) SCC 618 and National Insurance Co. Ltd. v. Boghara Polyfab (P) Ltd. 2009 (1) SCC 267, the Supreme Court held that the question had to be decided by the Chief Justice or his designate. The Court observed: It is held in SBP &Co. v. Patel Engg. Ltd., and National Insurance Co. Ltd. v.Boghara Polyfab (P) Ltd. that the question whether there is an arbitration agreement and whether the party who has applied under Section 11 of the Act, is a party to such an agreement, is an issue which is to be decided by the Chief Justice or his designate under Section 11 of the Act before appointing an arbitrator. Therefore there can be no doubt that the issue ought to have been decided by the learned designate of the Chief Justice and could not have been left to the arbitrator. .................................................................... On account of the prospective overruling direction in SBP, any appointment of an arbitrator under Section 11 of the Act made prior to 26-10- 2005 has to be treated as valid and all objections including the existence or validity of the arbitration agreement, have to be decided by the arbitrator under Section 16 of the Act. The legal position enunciated in the judgment in SBP will govern only the applications to be filed under Section 11 of the Act from 26-10- 2005 as also the applications under Section 11(6) of the Act pending as on 26-10-2005 (where the arbitrator was not yet appointed)” 11. There is no dispute with regard to the existence of arbitration clause in the agreement dated 21.2.2008. Disputes have cropped up between the parties relatable to the installation of crushing plant in the premises of the respondents by the applicant. The said disputes are required to be resolved by taking recourse to Clause (27) of the Agreement dated 21.2.2008. In that view of the matter, I find that the applicant made out valid grounds for appointment of arbitrator for resolution of the disputes that have arisen between the parties, pursuant to the agreement-dated 21.2.2008. 12. Accordingly, the Arbitration Application is allowed appointing Sri Justice G.Bikshapathy, a retired High Court Judge, as arbitrator for resolution of the disputes that have arisen between the parties, pursuant to the Agreement dated 21.2.2008. The arbitrator is at liberty to fix his own fee. _____________________ B.SESHASAYANA REDDY, J Dt.20-08-2011 *RAR [1] (2009)10 Supreme Court Cases 103 [2] (2011)1 SCC 167 [3] 2009(1) SCC 267