O.M.P. 46/2003 & 480/2003 Page 1 of 34 #F-49B & 51 * IN THE HIGH COURT OF DELHI AT NEW DELHI + O.M.P. 467/2003 NATIONAL BUILDING CONSTRUCTION CORPORATION LTD. ..... Petitioner Through Mr. Neeraj Kishan Kaul, Senior Advocate with Ms. Ginny Jetley Rautray and Ms. Supriya Jain, Advocates versus ANTIA ELECTRICALS PVT. LTD. ..... Respondent Through: Mr. Naresh Markanda, Senior Advocate with Mrs. Kamlesh Mahajan, Advocate AND + O.M.P. 480/2003 ANTIA ELECTRICALS PVT. LTD. ..... Petitioner Through: Mr. Naresh Markanda, Senior Advocate with Mrs. Kamlesh Mahajan, Advocate versus NATIONAL BUILDING CONSTRUCTION CORPORATION LTD. & ORS. ..... Respondents Through Mr. Neeraj Kishan Kaul, Senior Advocate with Ms. Ginny Jetley Rautray and Ms. Supriya Jain, Advocates % Date of Decision : 9th July, 2010 CORAM: HON'BLE MR. JUSTICE MANMOHAN 1. Whether the Reporters of local papers may be allowed to see the judgment? 2. To be referred to the Reporter or not? Yes. 3. Whether the judgment should be reported in the Digest? Yes. O.M.P. 46/2003 & 480/2003 Page 2 of 34 J U D G M E N T MANMOHAN, J (ORAL) 1. One of the primary questions that arises for consideration in the present proceedings is whether the arbitration clause contained in the main contract executed between the principal employer and the contractor is incorporated by reference in the sub-contract executed between the contractor and the sub-contractor and if so, whether the said clause is inapt or inapplicable with reference to the sub-contract between the parties. 2. The relevant facts of these two cases are that on 28th September, 1982 a contract was executed between National Building Construction Corporation Ltd. (in short “NBCC”) and President of State Company for Contracts of Industrial Projects (in short “SCCIP”) by virtue of which NBCC was awarded work of construction of Industrial Buildings and Main Railway Stations of Baghdad for Iraqi Dinar (in short “ID”) 20861528.2. The relevant provisions of the aforesaid main contract are reproduced hereinbelow :- ―Tenth– In case of any dispute between the two contracting parties, the case will be forwarded to an Arbitration Committee to be formed as follows:- a) Both the parties have to appoint an arbitrator for each of them. b) Both the arbitrators have to agree on one third arbitrator who will be the President of the Committee. c) In case both the arbitrators cannot agree on the appointment of the 3rd arbitrator as the President of the Committee within a period of 14 days from the O.M.P. 46/2003 & 480/2003 Page 3 of 34 dates of their appointment, both the parties have the right to approach the competent court for appointment of the President as per procedures mentioned in the civil proceedings Law or as per any other procedure or Law or resolution relating to the Arbitration matters. SPECIAL CONDITIONS OF CONTRACT 8.–The advance bills will be paid to 2nd Party at 75% in US Dollars and 25% in Iraqi Dinars. The US Dollar portion will be transferred to the bank fixed by the 2nd party. The rate of conversion per Iraqi Dinar is equal to US Dollars 3.377778. GENERAL CONDITIONS OF CONTRACT CLAUSE 17. Governing Law: 17.0 The Contract shall be and shall be deemed to be an Iraqi Contract and shall be governed by and construed according to the Laws in force in Iraq and Iraqi Courts shall have exclusive jurisdiction to hear and determine all actions and proceedings arising out of the Contract and the Contractor hereby submits himself to the jurisdiction of the Iraqi Courts for any such actions and proceedings. 45.1- If any dispute or difference of any kind whatsoever shall arise between the Employer or the Engineer and the Contractor in connection with or arising out of the contract or the carrying out the Works (whether during the progress of the works or after their completion, and whether before or after the termination or abandonment of the Contract) it shall in the first place be referred to and settled by the Engineer, who within a period of (90) days after being requested by either party to do so shall give written notice of his decision to the Employer and the Contractor. Save as hereinafter provided, such decision in respect of every matter so referred shall be final and binding upon the Employer and the Contractor until the completion of the work, and shall forthwith be given effect to by the Contractor who shall proceed with the Works with all due diligence, whether he or the Employer requires Arbitration as hereinafter provided or not. If the Engineer has given written notice of his decision to the Employer and the Contractor and no claim to Arbitration has been communicated to him by either the Employer or the Contractor within a period of (90) days from receipt of such notice the said decision shall remain final and binding upon the Employer and the Contractor. If the Engineer shall fail to give notice of his decision as aforesaid within a period of (90) days after being requested as aforesaid, or if either the O.M.P. 46/2003 & 480/2003 Page 4 of 34 Employer or the Contractor be dissatisfied with any such decision then and in any such case either the Employer or the Contractor may within (90) days after receiving notice of such decision or within (90) days after the expiration of the first named period of (90) days (as the case may be required that the matter or matter in dispute be referred to Arbitration as hereinafter provided. The Employer and the Contractor shall each appoint an independent member to a Committee of Arbitration and the two members thus appointed shall agree upon a third member to act as a Chairman of the Committee. If agreement on the appointment of a Chairman cannot be reached within 14 days from the last date of the their appointment then the Employer or the Contractor shall each have the right to request a competent court to appoint the third member in accordance with proceedings provided in the Iraqi Code of Civil Procedures. The Committee of Arbitration shall have full powers to open up review and revise any decision, opinion, direction, certificate or variation of the Engineer and neither party shall be limited in the proceedings before the Committee of Arbitration to the evidence or arguments put before the Engineer for the purpose of obtaining his said decision. No decision given by the Engineer in accordance with the foregoing provisions shall disqualify him from being called as a witness and giving evidence before the Committee of Arbitrators on any matter whatsoever relevant to the dispute or difference referred to the Arbitrators as aforesaid. The reference to arbitration may proceed notwithstanding that the Works shall not be or be alleged to be complete, provided always that the obligations of the Employer, the Engineer and the Contractor shall not be altered by reason of the Arbitration being conducted during the progress of the Works 45.2- The venue of Arbitration shall be in Iraq. The party requiring Arbitration shall pay the fees and other costs of Arbitration which shall be finally borne by the party against whom the Arbitration award shall be taken.‖ (emphasis supplied) 3. On 12th March, 1983, a separate sub-contract was executed between NBCC and Antia Electricals Pvt. Ltd. (in short “AEPL”) for electrification of the aforesaid railway stations for an amount of ID O.M.P. 46/2003 & 480/2003 Page 5 of 34 631627.617. The relevant terms of the aforesaid sub-contract are reproduced hereinbelow :- ―1. MODE OF PAYMENT The Corporation will pay to the Contractor all the sums against the electrical items contracted in lot 1,2,3 and 4 with the SCCIP less a discount of 21% which amounts to a total sum of ID 631627.617 (Iraqi Dinars SIX HUNDRED AND THIRTY ONE THOUSAND SIX HUNDRED AND TWENTY SEVEN AND FILS SIX HUNDRED AND SEVENTEEN ONLY) The payment shall be released in the following manner to the Contractor; 1. 80% of the amount of actual work done shall be paid in US Dollars at a fixed rate of 1 ID = 3.377778 U.S. Dollars. The payment of US Dollar portion shall be made by remitting the amount directly by transfer to the bank account of the Contractor in the country designated by him. 2. 20% of the amount of actual work done shall be paid in Iraqi Dinars. The payment of Iraqi Dinar’s portion shall be made either by cheque or by remitting the due amount directly to the Contractor’s bank account in Iraq as designated by the Contractor.‖ 4.4.- Monthly progress running bills of for work done and technical fees shall be paid within one week of receipt of money from Clients. 4.7- All conditions mentioned in the Contract with the Clients by the Corporation shall be applicable to the Contractor on a back-to-back basis except for those mentioned in this agreement.‖ (emphasis supplied) 4. On 19th January, 1987, the contract was completed to the satisfaction of the Iraqi client, SCCIP and on 24th November, 1988 the final bill was prepared. On 18th August, 1992, AEPL served a legal notice upon NBCC seeking release of balance payment. On 31st August, 1995 and 27th February, 1996, NBCC released RBI bonds of O.M.P. 46/2003 & 480/2003 Page 6 of 34 Rs. 1.50 Crores and Rs. 42.10 lakhs to AEPL as payment for work done. 5. On 27th May, 1997, 24th June, 1997, 3rd July, 1997, 28th December,1998 and 4th May, 1999, APEL repeatedly requested NBCC to release the balance payment. 6. On 8th June, 1999 in a meeting held between officials of NBCC and AEPL, “NBCC assured AEPL that the matter would be resolved at the earliest as per the terms of the contract conditions‖. However, on 16th March, 2000 and 26th May, 2000, NBCC rejected the claim of AEPL and denied its liability to make any further payment. 7. On 11th December, 2000, AEPL invoked the arbitration clause and appointed its nominee arbitrator. By this letter, AEPL called upon NBCC to appoint its nominee arbitrator. On 11th January, 2001, NBCC appointed its nominee arbitrator. Since during the arguments lot of emphasis was placed by all the counsel on the aforesaid two letters, the same are reproduced hereinbelow :- A) Letter dated 11th December, 2000 Antelec Ltd. 73, Jollly Maker Chambers No. II (Antia Group of Companies) Nariman Point, Mumbai-400 021. Ref. No. AEPL/102-A/00/6086 December 11, 2000 The Chairman-cum-Managing Director, National Buildings Construction Corpn. Ltd. NBCC House, Lodhi House, NEW DELHI-110 003 O.M.P. 46/2003 & 480/2003 Page 7 of 34 Respected Sir, Sub: Contract pertaining to Electrification work related to AI Qaim-Akashat Railway Project, Iraq. From time to time we had been requesting your goodself alongwith other officers of the Corporation for payment of the balance dues. In the meeting held on 8.6.99 the parties had agreed to settle the account and NBCC had assured us that the matter would be resolved at the earliest. Thereafter, there has been a lot of dilly-dallying on the part of NBCC which has now convinced us that NBCC is in no mood to honour its solemn commitments under the contract. In fact, vide letter dated 6.10.2000 the DGM(Finance) has conveyed to us that ―Your claim is not tenable under contractual provisions‖. In that view of the matter, disputes having arisen between us are required to be settled through arbitration as provided in the contract. As per the agreement, the arbitral tribunal is to consist of 3 members, one each to be appointed by us and NBCC and the third arbitrator to be appointed by the said two arbitrators. We hereby nominate Mr. Justice (Retd.) P.K. Palli, C/o Sh. A.V. Palli, 48 Lawyer’s Chambers, Supreme Court of India, Tilak Marg, New Delhi-110 001 (Residence: H-33, Sarita Vihar, New Delhi) as our nominee arbitrator and call upon you to nominate your nominee arbitrator within a period of 30 days from today, failing which we shall be constrained to proceed as per law. Thanking you, Yours faithfully, For ANTIA ELECTRICALS PVT. LTD. Sd/- S.N. Antia Director B) Letter dated 11th January, 2001 No. Engg(CC)/Arbtn/267/139 Date : 11th January, 2001 In the matter of arbitration between:- M/s. Antia Electricals Pvt. Ltd. New Delhi. …Claimant AND M/s. NBCC Limited O.M.P. 46/2003 & 480/2003 Page 8 of 34 Finance Division Foreign Works, H.O . …Respondent Regarding the disputes arisen out of the contract pertaining to electrification work related to construction of passenger Building, Engine shed and Sick Line Buildings at Kubaisa, Iraq-Agreement dated 3.8.1985. Whereas disputes have arisen between the above noted parties in respect of the above cited works and whereas the disputes arising between the parties under the aforesaid contract are required to be referred to the Arbitration Committee, comprising of two arbitrators, to be appointed by both the parties one each, who in turn have to agree on one third arbitrator to be the President of the Committee. AND WHEREAS the Claimant, vide their letter No. AEPL/182-A/00/6066 dated 11.12.2000 (copy enclosed), has intimated Shri Justice (Retd.) P.K. Palli, C/o Shri A.V. Palli, 48, Lawyer’s Chambers, Supreme Court of India, Tilak Marg, New Delhi – 110 001 (Residence: H-33, Sarita Vihar, New Delhi) as their nominee Arbitrator. Therefore, I, A.K. Sarkar, Chairman-cum-Managing Director, National Buildings Construction Corporation Limited, New Delhi in pursuance of the same, do hereby nominate Shri V.K. Anand, Director of NBCC, as the Respondent’s nominee Arbitrator for deciding and making the reasoned award regarding the claims/disputes of the Claimant and also the counterclaims of the Respondent, if any. Sd/- (A.K. Sarkar) Chairman-cum-Managing Director 8. Since NBCC raised a preliminary issue regarding jurisdiction of the Arbitral Tribunal, the Tribunal vide order dated 12th May, 2002 by a majority of 2:1 rejected the objections raised by NBCC. Some of the relevant observations of the Arbitral Tribunal are reproduced hereinbelow :- 37. The fundamental question is what was the intention of the parties. The intention of the parties is an essential element of the arbitral proceedings. The intention of the O.M.P. 46/2003 & 480/2003 Page 9 of 34 parties in this case is clear. The parties wanted to submit the disputes to arbitration in India. This is clear from Clause Tenth which makes no reference to Iraqi laws or Iraqi procedure or Iraqi venue. 38. We are fortified in this conclusion of ours by the letter of the CMD who acting on clause Tenth referred the matter to the Arbitration Committee by appointing his nominee arbitrator. The clause Tenth was very much before him when wrote the letter dated 11.1.2001. 39. Russell says: ―The court should if the circumstances allow lean in favour of giving effect to the arbitration clause to which the parties have agreed, and seek to give effect to their intentions‖.[p.28] Inconsistent Clauses 40. Mustill & Boyd in Commercial Arbitration say: ―It may happen that the contractual documents contained two or more apparently inconsistent provisions as to arbitration. In such a situation, the court will usually try to save the submission to arbitration either by effecting a reconciliation between the clauses, or by construing one clause as applicable to the exclusion of the others.‖ [Commercial Arbitration 2nd ed. P.106]. 41. Clause Tenth in our opinion must be held to be the arbitration agreement between the contractor and the sub- contractor to the exclusion of clause 45 which, as we have said, applies only to the contractor and the Iraqi party when the work is in progress in Iraq. Intention of the parties 42. Counsel for the Corporation submitted that clause 45 is the real arbitration agreement in the back to back contract and not Clause Tenth……………….. xxxx xxxx xxxx xxxx 52. There are four good reasons why we should prefer clause Tenth to Clause 45, firstly, it is later in point of time. Clause Tenth was inserted in the contract in 1982 while clause 45 was printed in 1980. Secondly, clause Tenth is typed while clause 45 is printed. It is settled law that where in the printed matter some alteration is desired by typing the typed matter supersedes the printed matter to that extent. [See Mool Chand Vs. Associated Agencies AIR 1942 Mad. O.M.P. 46/2003 & 480/2003 Page 10 of 34 139; Ratilal Vs. dalmia Cement AIR 1943 Bom. 229]. Thirdly, clause 45 lands us in absurdities. Counsel suggests that the parties go to Iraq and find out two arbitrators—men well versed in Iraqi laws and procedure. They in turn will appoint a ―Chairman‖—again a man of Iraqi law. The Iraqi laws will be applied. The sittings will be in Iraq. Iraqi courts will have jurisdiction. Iraqi lawyers will have to be engaged. The award will be passed according to Iraqi laws. God knows how the award of a totalitarian country will be enforced in India. 53. Fourthly, clause 45 contemplates international arbitration when one party is a foreign national. Therefore, it makes provisions in favour of Iraqi laws. Clause Tenth deals with domestic arbitration where both parties are Indians. To apply clause 45 to a case where both parties are Indians is to fit somehow a square peg in a round hole. 54. Clause Tenth contemplates nothing of the kind. It is a straight forward arbitration agreement to which Indian substantive and procedural laws applies. Both parties are Indians and they intended arbitration to be governed by their own laws. That is what CMD thought. By virtue of the authority vested in him he appointed an Indian arbitrator. His letter dated 11.1.2001 is well worded. It seems to have been drafted by a lawyer. It uses the word ―whereas‖ twice. ―Whereas‖ means a recital of past events. It is a familiar term known to draftsman when he drafts deeds of indenture. It is a formal deed of reference. The recital speaks of past outstanding disputes and the need to resolve them by arbitration. 55. On the whole we are satisfied that we are on a firm ground when we vote in favour of clause Tenth Clause 45 is impractical, impossible and its application will lead to absurd results and injustice. Absurdity in construction of contracts must always be avoided. We have to consider the consequences which will follow the adoption of clause 45. With regret we decline the invitation of Mr. Seth, learned counsel for NBCC, to hold our sittings in Iraq. The acceptance of clause 45 will expose the Tribunal to ridicule. It leads to results which are contrary to the legitimate objects of arbitration. xxxx xxxx xxxx xxxx 59. In international commercial arbitration at least one of the parties is a national of any country other than India or a body corporate which is incorporated in any country other than India. [Section 2(f) of the Act]. To such an arbitration under section 28(b) the foreign law, for example Iraqi law, shall apply if so designated by the parties as applicable to the O.M.P. 46/2003 & 480/2003 Page 11 of 34 substance of the dispute. Therefore, clause 45 applied to NBCC, an Indian corporate body when it entered into a contract with an Iraqi client. The parties agreed that the law applicable will be Iraqi law. 60. This is not the case here. Why should the arbitration be held on a foreign soil? Why should it be based in Iraq when parties are Indians? Why should Iraqi laws apply? The Act says Indian law shall apply to Indian arbitration. There is no satisfactory answer to these questions. Parties did not agree that a foreign legal system will govern them when after the completion of the work they have nothing to do with Iraq. We put clause 45 out of our way as wholly inapplicable to our case. 61. Clause 45 is a non-domestic agreement. Clause Tenth is a domestic agreement. Domestic is applicable while non- domestic has no application to this case. xxxx xxxx xxxx xxxx 65. CMDs come and CMDs go. But NBCC goes on forever. It is a body corporate. It has a perpetual succession and a common seal. [See Section 34 of the Companies Act, 1956]. CMD acts in the name of NBCC. The referring order dated 11.1.2001 says: ―Therefore, I A.K. Sarkar, Chairman-cum-Managing Director, National Building Construction Corporation Ltd. New Delhi in pursuance of the same, do hereby nominate Shri V.K. Anand, Director of NBCC, as the Respondent’s nominee Arbitrator for deciding and making the reasoned award regarding the claims/disputes of the Claimant and also the counter claims of the Respondent, if any.‖ 66. Therefore, if the action impugned is not outside the scope of his duties CMD’s order is binding on NBCC. He is no ordinary director. IN his own person he represents the company. His order has a sanctity and a legal validity. For years NBCC had ―dillydallied‖ over the appointment of its arbitrator, Antia complained to CMD. Impressed by the justice of the complaint, CMD appointed his company’s nominee arbitrator. He only did his duty. What is wrong with it? 67. His order excludes the application of Iraqi law now sought to be introduced before us. On his view the Indian Law will apply. If this is so how can NBCC now argue to the contrary. His inclination in favour of the Indian Law is apparent from the fact that Mr. Anand, his nominee, was profoundly and happily ignorant of Iraqi Laws. If CMD’s O.M.P. 46/2003 & 480/2003 Page 12 of 34 view had been in favour of Iraq he would have appointed an expert of Iraqi laws. It seems to us that both parties were clear in their minds that arbitration will be held in India according to the Indian Law. The truth is Iraqi Law is a red herring and non-issue. xxx xxxx xxxx xxxx 70. Clause 17 of the Contract on which Mr. Seth laid a good deal of stress has no application to the sub-contractor. Clause 17 says: ―The contract shall be deemed to be an Iraqi Contract and shall be governed by and construed according to the Laws in force in Iraq and Iraqi courts shall have exclusive jurisdiction to hear and determine all actions and proceedings arising out of the Contract and the Contractor hereby submits himself to the jurisdiction of Iraqi Courts for any such actions and proceedings‖. 71. The clause brings out two things clearly. One that it applies to the contractor who has entered into contract with the Iraqi State Company for Contracts and not to the sub- contractor. Two that the clause becomes dysfunctional after the work is over and the Indian Company, namely, NBCC, has left Iraq with all its tools and tackles. xxxx xxxx xxxx xxxx 77. NBCC did construction work for the Iraqi Republic. They had their office, staff, employees there for conducting business. They left Iraq years ago. Iraqi courts have no jurisdiction over the parties now. If Iraqi Government today has a claim against NBCC they must follow their defendant to his place of residence. NBCC is a resident Indian Company. The aggrieved party must come to India. It is ridiculous to argue that Antia should go to Iraq to commence arbitration proceedings against NBCC where neither the contractor nor sub-contractor are stationed in Iraq. 78. The fundamental principle is that the court cannot entertain an action against a non-resident defendant who is absent in the foreign country. Physical presence is essential. xxxx xxxx xxxx xxxx 80. Both in time and space the situation has completely changed. What was true is 1982 in Iraq is not true in 2002 in India. Iraqi laws were relevant in 1982. But the Iraqi system of law does not determine the choice of law once for all for every situation. Now the Iraqi laws are out of place. They no longer govern the present parties in India. O.M.P. 46/2003 & 480/2003 Page 13 of 34 A Comparison 81. It will be helpful if we compare and contrast clause Tenth with Clause 45. Clause 45 deals with International Commercial Arbitration. International Commercial Arbitration can take place in India or outside India. Under clause 2(1)(f)(iv) it is an International Commercial Arbitration as one of the