FA/290/2008 1/14 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD FIRST APPEAL NO. 290 OF 2008 WITH CIVIL APPLICATION NO. 734 OF 2008 IN FIRST APPEAL NO. 290 OF 2008 FOR APPROVAL AND SIGNATURE: HONOURABLE MR.JUSTICE H.B.ANTANI ================================================= ====================== 1 Whether Reporters of Local Papers may be allowed to see the judgment? NO 2 To be referred to the Reporter or not? NO 3 Whether Their Lordships wish to see the fair copy of the judgment? NO 4 Whether this case involves a substantial question of law as to the interpretation of the Constitution of India, 1950 or any Order made thereunder? NO 5 Whether it is to be circulated to the Civil Judge? NO ================================================= ====================== ARFEES INDUSTRIES LIMITED – APPELLANT VERSUS GUJARAT GAS COMPANY LIMITED – RESPONDENT ================================================= ====================== APPEARANCE: MR JR NANAVATI, SENIOR ADVOCATE WITH MR TUSHAR MEHTA FOR THE APPELLANT. MR SI NANAVATI, SENIOR ADVOCATE WITH MR DEVANG NANAVATI AND MR RASHESH PARIKH FOR THE RESPONDENT. ================================================= ====================== CORAM : HONOURABLE MR.JUSTICE H.B.ANTANI Date : 06/02/2008 ORAL JUDGMENT FA/290/2008 2/14 JUDGMENT FIRST APPEAL NO. 290 OF 2008 1. ADMIT. The respondent appears on caveat. Learned Advocate Mr. Rashesh Patel waives service of process of admission for the respondent. Learned Counsel Mr. J. R. Nanavati with learned Advocate Mr. Tushar Mehta for the appellant and learned Counsel Mr. S. I. Nanavati with learned Advocate Mr. Rashesh Patel for the respondent have requested the Court to dispose of this appeal finally. Therefore, this appeal is taken up for final hearing. 2. The appellant is a limited Company incorporated under the provisions of the Companies Act, 1956 and the respondent is also a limited Company having its office as mentioned in the cause- title of the appeal. The appellant and the respondent had entered into three different agreements dated 22-07-2006: (i) Overseas Equipment Finance Lease Agreement, (ii) Domestic Finance Lease Agreement; and (iii) Service Agreement. The appellant wanted to set up Natural Gas Fuel Captive Power Plant on a finance lease basis. The respondent is engaged in the business of leasing, buying equipment and machineries, undertaking turn-key assignments for erecting, installing and commissioning of the equipments relating to electricity generation. As per the terms and conditions entered into by the parties, if the dispute arises between the parties, then it is required to be settled by way of amicable settlement and direct negotiation, and if the dispute cannot be settled through negotiation, then it can be referred to the Arbitrator. It is submitted that the appellant gave bank guarantees for all the three agreements to the respondent. As per the terms and conditions of the agreement, the respondent was under an obligation to install three generators initially. The three generators were installed by the respondent and the project was started in the month of March 2007. After the commissioning of the work, serious problem arose with regard to the operation of the generator which resulted in FA/290/2008 3/14 JUDGMENT tripping of the plant. The other two generators also created lot of problems which ultimately resulted into the tripping of the plant. The appellant could only use 45% of the actual capacity of the plant because of the tripping of the plant. As a result of the aforesaid shortcoming, the appellant produced the material which was of a inferior quality. The appellant suffered loss in business and requested the respondent to do the needful in the matter, but the request was not heeded by the respondent. Meanwhile, the respondent went on enchashing the bank guarantees and ultimately, when the bank guarantees were not renewed, the respondent terminated the contract on 30-08-2007. In the notice, it was stated by the respondent that on termination of the contract, if the delivery of the equipments was not made, then necessary steps to take back the possession of equipments will follow. On 13-09- 2007, the respondent wrote a letter to the appellant and threatened to take the equipments which were lying at the premises of the appellant and installed under the terms of the agreements. Therefore, the appellant preferred an application being Civil Miscellaneous Application No. 862 of 2007 under Section 9 of the Act on 20-09-2007 before the Hon'ble City Civil Court No. 9, Ahmedabad for interim measures as provided therein. After considering the submissions of both the sides, the learned Judge rejected the petition vide judgment and order dated 20-12-2007. Being aggrieved by the aforesaid order, the appellant has preferred the present appeal under Section 37 (1) of the Arbitration and Conciliation Act, 1996 (“the Act”, for short). 3. Learned Counsel Mr. J. R. Nanavati appearing for the appellant submitted that the learned judge referred to Clause 20.2 of the agreement and observed that, as per the said clause, the parties were required to solve the problems through negotiation, but the parties had made no efforts so as to infer the compliance of Clause 20.2 of the agreement. The learned Counsel further FA/290/2008 4/14 JUDGMENT submitted that, therefore, the learned Trial Court held that though the petition remains maintainable but because of non-compliance of Clause 20.2, it definitely disentitles the petitioner who has no respect or regard for the agreed terms to claim any relief. The learned Counsel also pointed out that the learned Trial Judge has observed that even though there was lapse of three months, the petitioner – lessee had not initiated the proceedings for the appointment of the Arbitrator, as per the law, till the date of hearing of the application preferred under Section 9 and, therefore, the petitioner is not entitled to claim any relief in its favour. It is further submitted by the learned Counsel that the learned Judge has committed egregious error in holding that the judgments cited by the petitioner-lessee IDCOL Vs. UTKAL Moulders Limited, 2004 (3) Arb LR 313 (Ori) and New Bank of India Vs. Asia Corporation Securities, 2000 (3) Arb LR 687 (Bom) have no applicability to the facts of the present case. The learned Counsel placed reliance on various terms and conditions of the three agreements entered into between the parties i.e. Overseas Equipment Finance Lease Agreement, Domestic Equipment Finance Lease Agreement and Services Agreement and more particularly, Condition No. 10 – lessor's obligation, No. 11 – lessee's obligation, No. 13 – Installation and commissioning, condition No. 16 – transfer price and termination and condition No. 20 - Governing law, arbitration and jurisdiction of the agreement and submitted that the applicant was justified in invoking the provisions of Section 9 of the Act in the facts and circumstances of the case. Thus, learned Counsel Mr. Nanavati submitted that in view of the averments made in the application and the documents which are produced by a separate bunch of papers, the application deserves to be allowed and the order passed by the learned Judge be quashed and set aside. 4. Learned Counsel Mr. Sudhir Nanavati appearing on FA/290/2008 5/14 JUDGMENT behalf of the respondent submitted that the learned Judge has assigned valid and proper reasons while deciding the application preferred under Section 9 of the Act vide Exh. 20 and it does not call for any interference by this Court. The learned Counsel submitted that the learned Judge rightly held that, as per Clause 7.2, though the lessee agreed to ensure renewal of the bank guarantee at least one month before the expiry period of the bank guarantee, the lessee had not done so. Due to non-payment of the rent, there was material violation of the terms of the agreement by the lessee and the learned Judge held that the lessor was entitled to have the lease equipment. It is next contended by the learned Counsel that the learned Judge has exhaustively dealt with Clause 20.2 of the terms of the agreement and held that in view of non-compliance of Clause 20.2 though the petition under Section 9 is maintainable it would disentitle the petitioner who has not complied with the terms and conditions to claim any relief. The learned Counsel submitted that the learned Judge held that the appellant had never contemplated or intended to initiate the arbitral proceedings in a reasonable time and, therefore, on that ground also, the learned Judge has rightly rejected the contention raised by the appellant. Thus, the learned Counsel representing the respondent submitted that considering the submission canvassed on behalf of the appellant, and after going through the various terms and conditions of the agreement between the parties, the learned Judge came to the conclusion that there was no substance in the application preferred by the appellant under Section 9 of the Act, and as the application is devoid of merits, it has been dismissed. The learned Counsel has placed reliance on the judgment rendered in Navbharat Ferro Alloys Limited Vs. Continental Float Glass Limited, 1998 (1) Arb LR 492 and submitted that applying the ratio laid down in the said judgment, as the equipments are not the subject-matter of arbitration in the present application, the applicant-lessee is not entitled to retain the equipments. The learned Counsel relied on another judgment M/s FA/290/2008 6/14 JUDGMENT Sundaram Finance Limited Vs. M/s NEPC India Limited, AIR 1999 SC 565 and submitted that the ratio laid down in that case is that the Court will have to be satisfied that there exists a valid arbitration agreement and the applicant intends to take the dispute to arbitration and once it is so satisfied the Court will have the jurisdiction to pass orders under Section 9 giving such interim protection as the facts and circumstances warrant. It was submitted by the learned Counsel that, however, in the facts of the present case, the learned Judge was of the view that though there existed a valid arbitration agreement, the applicant did not intend to take the dispute to arbitration and, therefore, the learned Judge was right in rejecting the application. The learned Counsel also submitted that the learned Judge relied upon the judgment rendered in the matter between Firm Ashok Traders Vs. Gurumkhdas, AIR 2004 SC 1433 and held that the party invoking the provisions of Section 9 of the Act may not have actually commenced the arbitration proceedings, but must be able to satisfy the Court that arbitral proceedings are actually contemplated or manifestly intended and positively going to commence within a reasonable time. Thus, on that ground also, the application preferred under Section 9 is not maintainable. Thus, the learned Judge, after considering the submissions at length, rejected the application preferred by the petitioner under Section 9 of the Act. 5. I have heard learned Counsel Mr. J. R. Nanavati with learned Advocate Mr. Tushar Mehta for the appellant and learned Counsel Mr. Sudhir I. Nanavati with learned Advocates Mr. Rashesh Patel and Mr. Devang Nanavati for the respondent at length. I have also perused the order passed by the learned Judge and the reasons assigned therein. I have also gone through the three agreements which are referred to by the learned Counsel for both the sides. As all the three agreements have similar clauses pertaining to the controversy involved in this matter, for the sake of convenience, I FA/290/2008 7/14 JUDGMENT have dealt with the clauses referred to 'Overseas Equipment Finance Lease Agreement' only, and any reference to 'the agreement' would mean reference to 'Overseas Equipment Finance Lease Agreement'. 6. I have perused Clauses 20.2 and 20.3 of the agreement which is heavily relied on by both the parties. They read as under:- “20.2 Prior to submitting to the arbitration tribunal any Dispute, the Parties shall use their reasonable efforts to reach an amicable solution by means of direct negotiation. If the Parties have not reached an agreement within 30 (thirty) days as from the date that the interested Party notifies its intention to solve the Dispute in an amicable manner, the senior manager of each Party shall negotiate an amicable settlement of the pending matter. In case the senior managers fail to reach an agreement within 10 (ten) days as from their involvement in the matter, the Parties may refer such Dispute to arbitration in accordance with Clause 20.3 below. 20.3 All Disputes shall be settled through arbitration proceedings in accordance with the Indian Arbitration and Conciliation Act, 1996. The Parties agree to refer any Dispute to an arbitral tribunal comprising of 3 (three) arbitrators, one each to be appointed by each Party and the two arbitrators so appointed shall jointly appoint the third arbitrator who shall be the presiding arbitrator of the arbitration tribunal. The costs of the arbitrator appointed by each Party shall be borne by such Party. The Parties agree to bear in equal proportion all the costs related to the third arbitrator and the expenses incurred for conducting arbitration hereunder. The arbitrators shall have powers to award only such remedy as is contemplated by this Agreement, including as appropriate, injunctive relief. In the event that both Parties fail to agree to the appointment of the third arbitrator, the matter shall be decided in accordance with the Applicable Law.” It is true that the said clause provides firstly, for direct negotiation and secondly, in case of failure, for negotiation by the Senior Manager of each party before resorting to arbitrating proceedings as provided under Clause 20.3. The learned Counsel FA/290/2008 8/14 JUDGMENT for the appellant has pointed out to the Court as many as five letters informing the respondent to rectify the recurring problem. Under such circumstances, it cannot be held that the party did not resort to Clause 20.2 before invoking Clause 20.3. In fact, if it is seen closely, the steps taken by the applicant can at the most be said to be to be part of those steps as contemplated under Clause 20.2. And, therefore, the finding of the learned Judge that both the parties did not hold direct negotiation and, therefore, the relief cannot be granted is erroneous. Similarly, the finding that there was delay of three months in approaching the Court for interim relief is equally erroneous. On perusal of Clause 20.2, it becomes clear that the aggrieved party cannot directly approach the Court without resorting to Clause 20.2. The appellant has taken the steps as contemplated in Clause 20.2 of the agreement. The learned Counsel for the respondent has submitted that the equipments are not the subject-matter of the arbitration and, therefore, the appeal is liable to fail. This aspect is considered in case of Navbharat Ferro Alloys Limited Vs. Continental Float Glass Limited, 1998 (1) Arb LR 492 (supra). In the facts of that case, the matter was referred to arbitration and the subject- matter was already determined by the arbitrator before approaching the Delhi High Court. However, in the case on hand, the subject- matter is not yet determined and, therefore, it cannot be said whether the equipments form the subject-matter of the arbitration or not. That being so, the ratio laid down in the judgment cited by the learned Counsel of the respondent is not applicable to the facts of the present case. As regards another judgment i.e. M/s Sundaram Finance Limited Vs. M/s NEPC India Limited (supra) cited by the learned Counsel for the respondent, it is submitted that the learned Judge has not been satisfied that the applicant intended to take the FA/290/2008 9/14 JUDGMENT dispute to arbitration and, therefore, he was right in rejecting the application. It is to be noted that the learned Counsel for the appellant has repeatedly submitted at the bar that the appellant is ready and willing to initiate the proceedings for arbitration. In the circumstances, it cannot be held that the appellant does not intend to take the dispute to arbitration. At this stage, it would also be proper to refer to paras 14 and 20 of the aforesaid judgment: “14. Under the 1996 Act the Court can pass interim orders under Section 9. Arbitral proceedings, as we have seen, commence only when the request to refer the dispute is received by the respondent as per Section 21 of the Act. The material words occurring in Section 9 are "before or during the arbitral proceedings." This clearly contemplates two stages when the Court can pass interim orders, i.e., during the arbitral proceedings or before the arbitral proceedings. There is no reason as to why Section 9 of the 1996 Act should not be literally construed. Meaning has to be given to the word "before"occurring in the said section. The only interpretation that can be given is that the Court can pass interim orders before the commencement of arbitral proceedings. Any other interpretation, like the one given by the High Court, will have the effect of rendering the word "before"in Section 9 as redundant. This is clearly not permissible. Not only does the language warrants such an interpretation but it was necessary to have such a provision in the interest of justice. But for such a provision no party would have a right to apply for interim measure before notice under Section 21 is received by the respondent. It is not unknown when it becomes difficult to serve the respondents. It was, therefore, necessary that provision was made in the Act which could enable a party to get interim relief urgently in order to protect it's interest. Reading the section as a whole it appears to us that the Court has jurisdiction to entertain an application under Section 9 either before arbitral proceedings or during arbitral proceedings or after the making of the arbitral award but before it is enforced in accordance with Section 36 of the Act.” “20. When a party applies under Section 9 of the FA/290/2008 10/14 JUDGMENT 1996 Act it is implicit that it accepts that there is a final and binding arbitration agreement in existence. It is also implicit that a dispute must have arisen which is referable to the arbitral tribunal. Section 9 further contemplates arbitration proceedings taking place between the parties. Mr. Subramaniam is, therefore, right in submitting that when an application under Section 9 is filed before the commencement of the arbitral proceedings there has to be manifest intention on the part of the applicant to take recourse to the arbitral proceedings if, at the time when the application under Section 9 is filed, the proceedings have not commenced under Section 21 of the 1996 Act. In order to give full effect to the words "before or during arbitral proceedings" occurring in Section 9 it would not be necessary that a notice invoking the arbitration clause must be issued to the opposite party before an application under Section 9 can be filed. The issuance of a notice may, in a given case, be sufficient to establish the manifest intention to have the dispute referred to arbitral tribunal but a situation may so demand that a party may choose to apply under Section 9 for an interim measure even before issuing a notice contemplated by Section 21 of the said Act. If an application is so made the Court will first have to be satisfied that there exists a valid arbitration agreement and the applicant intends to take the dispute to arbitration. Once it is so satisfied the Court will have the jurisdiction to pass orders under Section 9 giving such interim protection as the facts and circumstances warrant. While passing such an order and in order to ensure that effective steps are taken to commence the arbitral proceedings, the Court while exercising jurisdiction under Section 9 can pass conditional order to put the applicant to such terms as it may deem fit with a view to see that effective steps are taken by the applicant for commencing the arbitral proceedings. What is apparent, however, is that the Court is not debarred from dealing with an application under Section 9 merely because no notice has been issued under Section 21 of the 1996 Act.” Paragraph 14 of the judgment very clearly conveys the scope of Section 9 whereas paragraph 20 of the judgment enables the Court to pass conditional order to put the applicant to such terms as it may deem fit with a view to see that effective steps are taken by the applicant for commencing the arbitral proceedings. This view was also referred to in Firm Ashok Traders Vs. FA/290/2008 11/14 JUDGMENT Gurumkhdas, AIR 2004 SC 1433, which is referred to by the learned Judge. I have gone through various terms and conditions of the three agreements i.e. Overseas Equipment Finance Lease Agreement, Domestic Equipment Finance Lease Agreement and Services Agreement and more particularly, terms pertaining to the lessor's obligation, the lessee's obligation, Installation and commissioning, the transfer price and termination and the Governing law, arbitration and jurisdiction. It is obvious that a dispute has arisen between the parties. Both the parties have denied that the breach was on their part and submitted that each has sustained loss on account of the fault of the other. It is alleged by the appellant that the respondent has not rectified the persistent problem and instead, it has encashed the bank guarantee from time to time. On the other hand, it is alleged by the respondent that the appellant has not renewed the bank guarantee. In any case, these are the disputes which this Court would refrain from dealing with in view of provision of Clause 20.3 and especially when the appellant is ready and willing to initiate arbitration proceedings. It is also to be noted that the word 'dispute' as defined in the agreement means 'any dispute, controversy or disagreement between the parties arising out of or in connection with this agreement and / or the interpretation / implementation of any provision hereof' and, therefore, the question with respect to 'detention of the equipments' would certainly come under the ambit of the 'dispute'. In the light of foregoing discussion, needless to say that the other terms and conditions are not required to be dealt with exhaustively. Now, turning to the point of interim relief, it is appropriate to refer to Section 9 of the Act, which is reproduced hereinbelow: FA/290/2008 12/14 JUDGMENT “9. Interim measures, etc. by Court. - A party may, before or during arbitral proceedings or at any time after the making of the arbitral award but before it is enforced in accordance with Section 36, apply to a court - (i) for the appointment of a guardian for a minor or a person of unsound mind for the purposes of arbitral proceedings; or (ii) or an interim measure of protection in respect of any of the following matters, namely:- (a) the preservation, interim custody or sale of any goods which are the subject-matter of the arbitration agreement; (b) securing the amount in dispute in the arbitration; (c) the detention, preservation or inspection of any property or thing which is the subject-matter of the dispute in arbitration, or as to which any question may arise therein and authorising for any of the aforesaid purposes any person to enter upon any land or building in the possession of any party, or authorising any samples to be taken or any observation to be made, or experiment to be tried, which may be necessary or expedient for the purpose of obtaining full information or evidence; (d) interim injunction or the appointment of a receiver; (e) such other interim measure of protection as may appear to the court to be just and convenient, and the Court shall have the same power for making orders as it has for the purpose of, and in relation to, any proceedings before it.” The case of the appellant broadly falls under sub-clause (c) of sub-section (ii) of Section 9 of the Act. The said clause provides for an interim measure of protection in respect of the detention, preservation or inspection of any property or thing which is the subject-matter of the dispute in arbitration, or as to which any question may arise therein and authorising for any of the aforesaid FA/290/2008 13/14 JUDGMENT purposes any person to enter upon any land or building in the possession