Case: M/S. Wellington Associates Ltd Vs. Kirti Mehta

2. The brief facts as set out in the petition, to the extent necessary for the purpose of this application, are as follows. The petitioner is a company with its registered office at Les Cascades, Port Luis Republic of Muaritius. The respondent is the promoter and Managing Director of Ms C.M.M. Ltd., Mumbai. The petitioner entered into two agreements both dated 15.8.1995 with the respondent under which it was stated that the petitioner had agreed to subscribe to a private placement of two lots of 85,000 equity shares (each agreement comprising one lot of 85,000 equity shares, thereby aggregating to 1,70,000 shares) of C.M.M. Ltd. The shares were having face value of Rs. 10per share. They were agreed to be acquired by the petitioners at a premium of Rs. 20per share. The cumulative value amounted to Rs. 51 lakhs (1.70 lakhs x Rs. 30 per share). The shares were to be held by the petitioners for a period of one year from the date of subscription. It was stated that the respondent agreed and undertook to compulsorily purchase back from the petitioners the said shares after the expiry of the said period in the following manner : (i) under the Ist agreement, 85,000 with an assured return at the rate of 35% p.a. and (ii) under the 2nd agreement, 85,000 with an assured return at the rate of 29% p.a. It was stated that the respondent agreed that upon default by the respondent, the respondent would be liable to pay penal interest at 3% p.a. from the date of subscription till actual date of payment. Pursuant to the above agreements, a "subscription agreement" was later entered into on 25.9.95 between the petitioner (the subscriber), theand the C.M.M. company.3. On 26.9.95, Sigma Credit and Capital Services Pvt. Ltd., wrote to the petitioner stating that it had taken up the deal of C.M.M. Ltd. and that it would ensure the petitioner that the terms of the agreement between the prospective investor (petitioner) and C.M.M. Ltd.for the subscription and assured buy back, especially regarding the assured return and the confirmedwould be complied with by both the parties. The said company further undertook tothe 85,000 NRI shares of CMM Ltd., at the end of 12 months from the date of investment, at the rate of 25% p.a. in case the respondent failed to meet the commitment ofThe petitioner paid Rs. 51 lakhs to the respondent on 9.10.95 pursuant to the above agreements and 1,70,000 shares where allotted to the petitioner. By 8.10.96, the respondent did not buy back the shares. Nor did Sigma buy back the shares.4. On 11.7.1997, the petitioners lawyer issued a registered notice to the respondent complaining that after the lapse of one year from the date of subscription, neither the respondent nor Sigma Credit and Capital Services (P) Ltd. had honoured their commitments as per agreements dated 15.8.95 and letter dated 26.9.95. There was no response to this notice by the respondent or by Sigma. A further notice was issued by the petitioner on 19.4.99 stating that there was no response to the earlier notice, that the two agreements dated 15.8.95 contained an "arbitration clause" and that the petitioner desired that the disputes and differences be referred to arbitration. It was also intimated that the petitioners had appointed Justice M.L. Pendse, Retired Chief Justice, Karnataka High Court as their Arbitrator and that the respondent was being called upon to appoint his Arbitrator within 30 days from the date of receipt of the letter or else the respondent should confirm the appointment of Sri Justice M.L. Pendse. In default, the petitioners would proceed under the Arbitration and Conciliation Act, 1996. The respondent sent a reply on 28.5.1999 raising various contentions. One of the contentions was that the arbitration clause, namely, clause 5 in the agreements dated 15.8.95 used the word "may" and that the said clause was not mandatory but was an enabling provision and, therefore, fresh consent of parties for arbitration was necessary. On 16.6.99, the petitioners lawyers wrote back to the respondent stating that the interpretation put by the respondent on the arbitration clause was not correct. The respondent sent a further reply on 21.6.99. Petitioners lawyers sent a rejoinder on 2.7.99. Thereafter, the present petition was filed under section 11 of the Act seeking the appointment of arbitratorarbitrators.

Court's reasoning:
14. The more important question however is whether section 16 excludes the jurisdiction of the Chief Justice of India or his designate in this behalf if a question as to the existence of the arbitration clause is raised by the respondent in his reply to the petition filed under section 11. (I am not concerned with the question of the validity or effect of the arbitration clause, in the present case). In my view, section 16 does not take away the jurisdiction of the Chief Justice of India or his designate, if need be, to decide the question of the `existence of the arbitration agreement. Section 16 does not declare that except the arbitral tribunal, none else can determine such a question. Merely because the new Act permits the Arbitrator to decide this question, it does not necessarily follow that at the stage of section 11 the Chief Justice of India or his designate cannot decide a question as to the existence of the arbitrationindeed clause 5 does not amount to an `arbitration agreement, it will, in my view, be anomalous to ask the arbitrator to decide the question whether clause 5 is at all an arbitration clause. It is well settled and has been repeatedly held that the source of the jurisdiction of the arbitrator is the arbitration clause, (See Waverly Jute Mills case, AIR 1963 SC 90 above referred to). When that is the position, the arbitrator cannot, in all situations, be the sole authority to decide upon the "existence" of the arbitration clause. Supposing again, the contract between the parties which contained the arbitration clause remained at the stage of negotiation and there was no concluded contract at all. Then in such a case also, there is no point in appointing an arbitrator and asking him to decide the question as to the existence of the arbitration clause. But, I may point out that there can be some other situations where the question as to the "existence" of an arbitration clause can be decided by the arbitrator. Take a case where the matter has gone to the arbitrator without the intervention of an application under section 11. Obviously, if the question as to the existence of the arbitration clause is raised before the arbitral tribunal, it has power to decide the question. Again in a case where the initial existence of the arbitration clause is not in issue at the time of section 11 application but a point is raised before the arbitral tribunal that the said clause or the contract in which it is contained has ceased to be in force, then in such a case, the arbitrator can decide whether the arbitration clause has ceased to be in force. A question may be raised before the arbitrator that the whole contract including the arbitration clause is void. Now Section 16 of the new Act permits the arbitral tribunal to treat the arbitration clause as an independent clause and section 16 says that the arbitration clause does not perish even if the main contract is declared to be null and void. Keeping these latter and other similar situations apart, I am of the view that in cases whereto start withthere is a dispute raised at the stage of the application under section 11 that there is no arbitration clause at all, then it will be absurd to refer the very issue to an arbitrator without deciding whether there is an arbitration clause at all between the partiesIn my view, in the present situation, the jurisdiction of the Chief Justice of India or his designate to decide the question as to the `existence of the arbitration clause cannot be doubted and cannot be said to be excluded by section 16.Thus, unless the document filed by the party before the Chief Justice of India or his designate is an `arbitration agreement as defined in section 7 as explained above, requiring a reference in a mandatory sense, no reference, in my view, can be made to the arbitral tribunal. It is, as already stated, indeed implicitif an objection is raised by the respondent before the Chief Justice of India or his designate that the so called arbitration clause is not an arbitration clause at all falling within section 7that such a question will have to be decided in the proceedings under section 11 of the Act. Therefore, the contention raised by the learned counsel for the petitioner that the questionwhether clause 5 of the agreement amounts to an arbitration clauseis to be decided only by the arbitral tribunal is liable to be rejected.18. It is true that in Ador Samia Pvt. Ltd. v. Peekay Holdings Ltd. & others, 1999(8) SCC 572, it has been held that the Chief Justice or his designate under section 11(6) acts in an administrative capacity and he does not exercise any judicial function and that he has no trappings of a judicial authority. But this decision, in my view, cannot support the plea raised by the petitioner in his rejoinder. Even if the Chief Justice of India or his designate under section 11(12) is to be treated as an administrative authority, the position is that when the said authority is approached seeking appointment of an arbitratorarbitrator tribunal under section 11 and a question is raised that there is,no arbitration clause at all between the parties, the Chief Justice of India or his designate has to decide the said question.19. For the aforesaid reasons, this objection raised by the learned counsel for the petitioner isparties, in may view, used the words `may not without reason. If one looks at the fact that clause 4 precedes clause 5, one can see that under clause 4 parties desired that in case of disputes, the Civil Courts at Bombay are to be approached by way of areading clause 4 and clause 5 together, I am of the view that it is not the intention of the parties that arbitration is to be the sole remedy. It appears that the parties agreed that they can "also" go to arbitration also in case the aggrieved party does not wish to go to a Civil Court by way of a suit. But in that event, obviously, fresh consent to go to arbitration is necessary. Further, in the present case, the same clause 5, so far as the venue of arbitration is concerned, used word `shall. The parties, in my view, must be deemed to have used the words `may and `shall at different places, after duethe present case, we are not concerned with a clause which used the word `may while giving option to one party to go to arbitration. Therefore, I am not concerned with a situation where option is given to one party to seek arbitration. I am, therefore, not to be understood as deciding any principle in regard to such cases.23. Suffice it to say, that the words `may be referred used in clause 5, read with clause 4, lead me to the conclusion that clause 5 is not a firm or mandatory arbitration clause and in my view, it postulates a fresh agreement between the parties that they will go to arbitration. Point 2 is decided accordingly against the petitioner.Point 3:In the light of the finding on Point 2, it is obvious that I have to dismiss this petition. It may be that if the petitioner files a suit in Bombay, there can be considerable delay. But that is no ground to construe the clause differently. I may state, however, that in case a Civil suit is filed, it will be for the petitioner to seek an early disposal of the case and I have no reason to doubt that the civil Court will treat the request of the petitioner for early disposal with due consideration.