Siddhivinayak Realities Pvt. Ltd vs Tulip Hospitality Services Ltd. & Ors

This appeal concerns a hotel known as Centaur Hotel situated at Juhu, Mumbai, which formerly belonged to the Hotel Corporation of India under the control of the Union Government. Pursuant to its policy of disinvestment, the Government of India transferred the said hotel to M/s. Tulip Hospitality Services Private Limited, being the respondent No.1 in this appeal.

By a Master Asset Purchase Agreement ( referred to as 'MAPA') dated 31st March, 2005, the respondent No.1 agreed to sell and the appellants agreed to purchase the Centaur Hotel at Juhu, Mumbai, along with other assets for the price of Rs. 349.06 crores. Under the said Agreement, the parties agreed to make an escrow arrangement in order to secure the payment to be made by the appellants to the respondents as per the said Agreement. Accordingly, the advocates of the respective parties, Mr. Anand Bhatt and Mr. Suresh Talwar were appointed as joint escrow agents and various documents were deposited by the respondents with them. The Agreement provided that in the event of default being committed by the respondents, the appellants would be entitled to invoke the escrow arrangement and the appellants would have various options, including the option to become a 50% share holder of respondent No.1-company and call upon the escrow agents to hand over to the appellants all the escrow documents relating to the respondent No.1- company and to transfer 22,00,000 shares of the respondent No.1-company held by the respondent No.3 in favour of the appellants. In addition, the appellants were entitled to receive the undated resignation letters, resolutions for appointment of Directors and transfer of shares in favour of the appellants with the right to appoint three Directors on the Board of the respondent No.1- company. Apart from the above, out of the four original Directors of the respondent No.1, two would resign and along with the three Directors to be appointed by the respondent No.1, there would in all be five Directors, three being the nominees of the appellants and two being the nominees of the respondent No.2. The appellants paid a sum of Rs.75 crores to the respondent No.1 at the time of the signing of the Agreement. Subsequent to the said payment, a newspaper report was published in the "Times of India" titled "Centre refers City Centaur Deals to CBI" . On account of such publication, Mr. Anand Bhatt representing the appellants wrote to Mr. Suresh Talwar who was representing the respondents on 21st July, 2005 stating that in the light of the said Article a cloud had been cast on the title of the respondents to the Centaur property till such time as the CBI completed its probe and gave a clean chit to the transaction under which the Hotel Corporation of India disinvested the said hotel in favour of the respondent No.1 In his reply dated 6th October, 2005, the learned advocate for the respondents while referring to the media reports in respect of the CBI enquiry, also referred to an agreement entered into by the respondent No.1 with Nirmal Lifestyle Limited for the development of a shopping mall and supermarket in the hotel complex. It was stated that the appellants were fully aware of the existence of the Agreement between the respondent No.1 and Nirmal Lifestyle and that Nirmal Lifestyle was a part of the joint venture of the appellants. A reference was made to the arbitration petition filed by Nirmal Lifestyle against the respondent No.1 and an order of injunction dated 6th June, 2005 passed against the respondent No.1 from selling the hotel property. It was further stated that the action taken by Nirmal Lifestyle made it impossible for the respondent No.1 to proceed with its obligations under MAPA and that the contract stood frustrated in view of such injunction. The respondents stated that they stood discharged from fulfilling their obligations under MAPA and that the amounts received by the respondents from the appellants would be refunded to the appellants after deduction of a sum of Rs. 2 crores within a reasonable time. The respondents requested the appellants either to agree to such a course of action or to concur with their appointment of an arbitrator.

The Escrow Agents will hold and release the Escrow Documents as per the terms set out in the Escrow Letter."

In the event the purchaser (the appellants herein) chose to become 50% share holder of the vendor company (the respondent No.1 herein), certain consequences were to follow as contained in paragraph 15.3.2 :-

The aforesaid petition was disposed of on 8th March, 2006, with the order dated 24th January, 2006, being treated as final with liberty to the parties to apply to the Arbitrator for cancellation or modification of the order. Pursuant to the aforesaid order passed by the High Court on 24th January, 2006, the appellants' learned Advocate called upon the Escrow Agents to fix a meeting to take action on the letter dated 12th December, 2005. The Escrow Agents by their letter dated 13th February, 2006 fixed 16th February, 2006 for passing of necessary direction. In response to the aforesaid notice given by the Escrow Agents, the respondents' advocate by his letter dated 15th February, 2006 informed the Escrow Agents and the appellants that the respondents had filed an appeal against the aforesaid order dated 24th January, 2006 and prayed for an adjournment for a period of six weeks. Since no one appeared for the respondents before the Escrow Agents on 16th February, 2006, the matter was adjourned till 28th February, 2006 for direction. Once again an adjournment was sought for by the respondents but pursuant to the direction given by the Escrow Agents on 28th February, 2006, the appellants filed their statement of claim.

The Tribunal, however, refused to modify the order dated 24th January, 2006 and rejected the interim application filed by the respondents by order dated 27th April, 2006. The said order of the Tribunal was challenged by the respondents in Arbitration Petition (L) No.218/06 and the High Court by its order dated 4th May, 2006 set aside the order passed by the Arbitrator on 27th April, 2006 and requested the Arbitrator to reconsider the application made by the respondents afresh on its own merits without being influenced by the earlier orders dated 24th January, 2006 or 8th March, 2006. The interim application filed by the respondents under section 17 of the Arbitration and Conciliation Act, 1996 was thereafter heard by the Tribunal on 16th June, 2006 and by its order dated 23rd June, 2006 the Tribunal went into and decided the question of bias which had been disregarded in the earlier orders and expedited the arbitration proceedings upon restraining the appellants herein from proceeding before the Escrow Agents pending the arbitration.

On the basis of the aforesaid findings, the Bombay High Court dismissed the appellants' application under Section 37 of the Arbitration and Conciliation Act and chose not to interfere with the finding arrived at by the Tribunal. The instant appeal has been filed by the appellants before the High Court against the aforesaid judgment and order passed by the Bombay High Court on 4th September, 2006.

Mr. Divan submitted that from the order passed by the High Court in Arbitration Petition No.434/2005 on 24th January, 2006, it would be evident that the High Court was also of the view that the agreement between the parties casts an obligation on both the sides. It was observed that an Escrow Arrangement is in place to see that both the parties are performing their obligations as per the contract and that merely because an arbitration clause had been invoked, the power given to the Escrow Agents by Clause 14 of the Agreement did not get suspended and, therefore, though the arbitration clause had been invoked, the Escrow Agents would be entitled to decide the question as to whether a default had been committed and as to which party has committed the default. Subsequently, when the matter was taken up by the learned Arbitrator, he was of the view that in view of the aforesaid order of the High Court, he could not prevent the Escrow Agents from proceeding. Mr.Divan submitted that apart from executing the Terms Sheet on 8th March, 2005, and MAPA on 31st March, 2005, an Undertakingcum-Indemnity had also been executed by the parties on 31st March, 2005, in favour of the Joint Escrow Agents specifying the functions of the Joint Escrow Agents and it was reiterated that the duties of the Joint Escrow Agents would be limited to holding of the escrow documents and handing over the same in the circumstances set out in the escrow letter. The decision as to whether the events contemplated had been triggered would be independently decided by the Joint Escrow Agents. Further the Joint Escrow Agents would not be bound by the provisions of MAPA, as defined therein, save and except under the provisions of the escrow letter. Mr. Divan submitted that the appellants were always ready and willing to perform their obligations under MAPA but having regard to the newspaper report appearing in the Times of India on 21st July, 2005, it had informed the respondent No.1 that since a cloud had been cast on the title of the respondent No.1, it would be in a position to complete the transaction as contemplated under the MAPA only after the probe by the CBI was completed and the CBI confirmed that the purchase of the Centaur property from Hotel Corporation of India was not irregular. Without responding to the said letter immediately, the respondent No.1 on 6th October, 2005, contended that the MAPA had stood frustrated and that respondent No.1 stood discharged from performing their obligations under MAPA.

In the aforesaid circumstances, we are not inclined to interfere with the judgment of the learned Arbitral Tribunal as confirmed by the High Court and the instant appeal stands dismissed accordingly. We, however, make it clear that if the learned Arbitrator finds that there has been a default in working out the MAPA by either of the parties to the agreement, the parties will be entitled to enforce the consequences arising out of the Escrow arrangement irrespective of the award of the learned Arbitrator on all other aspects of the disputes between the parties. There will be no order as to costs.