Notice of Motion No.1532 of 2009,Suit No.1006 of 2009

20th August, 2009

Petitioner Counsel: Ms. RAJANI IYER,CHIRAG BALSARA , CHIRAG MODY,K. Ashar
Respondent Counsel: Mr. Y. P. NARULA,Dr. SAIF MAHMOOD

Cases Cited:
Owners and Parties Interested in the Vessel M.V. Baltic Confidence Vs. State Trading Corporation of India Ltd., (2001)7 SCC 473 [Para 5,19]
Ramco Super Leathers Ltd. Vs. Associates India Financial Services (P) Ltd., 2004(1) ARBLR 241 (Madras) : (2004)1 CompLJ 171 (Mad) [Para 5]
Rashtriya Ispat Nigam Ltd. Vs. Verma Transport Co., (2006)7 SCC 275 [Para 5,16]
Virender Yadav Vs. Aerosvit Airlines, 2008(3) ARBLR 445 (Delhi) : 153(2008) DLT 250 [Para 5]
Narula viz. Rashtriya Ispat Nigam Ltd. Vs. Nerma Transport Company, (2006)7 SCC 275 [Para 13]
Sukanya Holdings (P) Ltd. Vs. Jayesh H. Pandya, 2003(3) ALL MR 325 (S.C.)=(2003)5 SCC 531 [Para 15]
Syndicate Bank Vs. Channaveerappa Beleri, AIR 2006 SC 1874 [Para 18]
Karnataka State Financial Corporation Vs. N. Narasimahaiah, 2008(2) ALL MR 827 (S.C.)=AIR 2008 SC 1797 [Para 18]

JUDGMENT

JUDGMENT :- In this Notice of Motion the relief claimed by Defendant No.1 is that the Court should refer the parties to Arbitration. This request is based upon the plea that all conditions of Section 8 of the Arbitration and Conciliation Act, 1996 (for short the Act) are satisfied and complied with. Once they are so complied with, then, there is no alternative but to refer the parties to arbitration.

2. It is not in dispute that the Plaintiffs have filed the instant Suit against Defendant No.1 which is a Company incorporated under the Companies Act, 1956 and Defendant No.2 who has given his Personal Guarantee for the monies lent and advanced by the Plaintiff to Defendant No.1 under various facilities as more particularly set out in the plaint. The principal relief in the plaint is that this court should pass a decree in favour of the Plaintiff against the Defendants in the sum more particularly mentioned in prayer clauses (a) and (b) of the plaint so also Defendant Nos.1 and 2 be ordered and directed to specifically perform their obligations set out in the letter of sanction dated 21st June, 2007.

3. Mr. Y. P. Narula, learned Senior Counsel appearing in support of this Notice of Motion, which has been moved on behalf of the First Defendant, contended that the Suit claim is based upon documents, inter-alia, Global Accounts Receivable Management Agreement and Import Factoring Agreement copies of which are annexed as Annexures 'C-1' and 'C-2' to the plaint. He submits that a perusal of these agreements would indicate that as far as the agreement at Annexure 'C-1' is concerned, there is an arbitration clause and in that behalf he invites my attention to clause 23 of the agreement at Annexure 'C-1'. He submits that the letter of guarantee dated 5th September, 2007 must be seen in the backdrop of the agreements at Annexures 'C-1' and 'C-2' respectively. He submits that the letter of guarantee recites that in consideration of the Plaintiffs' sanctioning in favour of the Company (D-1) Trade Finance Facility under the agreements in question in the event, the Company fails or neglects or refuses for any reasons whatsoever to pay to the Plaintiffs the amount under the facility including any additional limits granted under the agreements, then, the Guarantor - Defendant No.2 guarantees to make payment of such amounts. Therefore, according to Mr. Narula, letter of guarantee cannot be seen de-hors the agreements at Annexures 'C-1' and 'C-2' but must be construed as part and parcel thereof. Therefore, joinder of the guarantor - Defendant No.2 is of no consequence at all. Once, there is a Arbitration Agreement under the agreements between the Plaintiff and Defendant No.1 and when all conditions laid down in Section 8 are satisfied, then, this Court must refer the parties to arbitration in terms of the aforementioned clause. The Suit and the Notice of Motion moved by the Plaintiffs therein cannot then proceed and must be dismissed.

4. Mr. Narula has taken me through the affidavit in support of the Notice of Motion and more particularly, paragraphs 3 thereof. He submits that both agreements that is Annexures 'C-1' and 'C-2' are containing an arbitration clause and once the Plaintiff and Defendant No.1 are signatories to these agreements, then, no other conclusion is possible. Therefore, the Notice of Motion be made absolute in terms of prayer clause (a).

5. Mr. Narula has relied upon the following decisions in support of his submissions:-

1. Owners & Parties Interest in the Vessel M.V. "Baltic Confidence" and Anr. Vs. State Trading Corporation of India Ltd. & Anr., (2001)7 SCC 473.

2. Ramco Super Leathers Ltd. & Anr. Vs. Associates India Financial Services (P) Ltd., 2004(1) ARBLR 241 (Madras), (2004)1 CompLJ 171 (Mad).

3. Rashtriya Ispat Nigam Ltd. & Anr. Vs. Verma Transport Co., (2006)7 SCC 275.

4. Virender Yadav Vs. Aerosvit Airlines & Ors., 2008(3) ARBLR 445 (Delhi), 153(2008) DLT 250.

6. On the other hand, Ms. Iyer, learned Senior Counsel for the Plaintiffs has contended that the Suit is filed not only against the principal borrower but also against a Guarantor. Section 8 of the Arbitration and Conciliation Act, 1996 is clear. The entire matter must be capable of being resolved by arbitration. It is not enough that there are agreements containing arbitration clauses between the Plaintiff and Defendant No.1. The entire subject matter of the Suit must be capable of being resolved by arbitration. In the present case, merely urging that the liability of Defendant No.2 - Guarantor is co-extensive with that of the principal borrower does not mean that the claim against Defendant No.2 also can be resolved by arbitration. That there is no agreement between the Plaintiff and Defendant No.2 for Arbitration is undisputed. That this is a Motion only by the First Defendant is also not disputed. However, even 'Qua' the First Defendant and the Plaintiff conditions of Section 8 are not satisfied and therefore, the motion deserves to be and should be dismissed. Ms. Iyer, learned Senior Counsel has taken him through the affidavit in reply filed on 22nd June, 2009 and more particularly, paragraph 4 thereof.

7. I have perused the Notice of Motion and the affidavits in support and reply. With the able assistance of the learned Senior Counsel appearing for both sides, I have also perused the decisions relied upon.

8. The only question that arises for determination is whether in this case conditions of Section 8 of the Arbitration and Conciliation Act are satisfied or not. A bare perusal of the same would make it clear that the parties can be referred to arbitration only if all the conditions stipulated therein are satisfied. The matter which is before the judicial authority must be the subject matter of an Arbitration Agreement, secondly, the application should be made before the party making the same submits his first statement on the substance of the dispute and thirdly, the application should be accompanied by original arbitration agreement or a duly certified copy thereof. In the present case, the second and third condition may have been satisfied by Defendant No.1/Applicant but the first and most crucial condition cannot be said to be satisfied. The Supreme Court has termed these conditions as condition precedent. In all such cases, what must be looked into and considered is whether the subject matter of the Suit is covered by the arbitration agreement or not. In this behalf, a reference will have to be made to the plaint. In the plaint the Plaintiffs have set out as to how the facilities were extended on a request made by Defendant No.1. The nature of the request made, the documents executed and the facilities extended are referred to in paragraphs 1 to 17 of the plaint. It is also stated that Defendant No.2 executed in favour of the Plaintiffs a letter of guarantee, which is personal. He has guaranteed repayment of the monies lent and advanced by the Plaintiff to Defendant No.1 under various facilities.

9. After setting out the defaults committed in repayment of the monies under the various facilities, it is contended that the Plaintiffs are entitled to recover the monies from Defendant No.1. In paragraph 31 page 12 of the plaint this is what is stated:-

"31. The Plaintiffs further submit that the Defendants be jointly and severally ordered and decreed to pay to the Plaintiffs an aggregate amount of Rs.45,83,33,816.85 (as per the particulars of claim annexed and marked Exhibits - 'EE-1 and 'EE-2' hereto) along with interest on Rs.45,85,816.85 @ 18% per annum from the date of the Suit till payment and/or realisation."

10. In such circumstances, the present Suit is filed with a prayer that the Defendants be jointly and severally ordered and decreed to pay to the Plaintiffs the amount specified in the prayer clauses of the plaint.

11. The arguments of Mr. Narula proceed on the basis that the agreements between the Plaintiff and Defendant No.1 contain an arbitration clause. The entire subject matter of the Suit is capable of being resolved by arbitration and joinder of Defendant No.2 is of no consequence. I am afraid it is not possible to accept this contention. There is substance in the argument of Ms. Iyer that the subject matter is not capable of being resolved by arbitration. The agreement in which there are arbitration clauses are executed by the Plaintiffs and Defendant No.1 only. Defendant No.2 is joined as a Defendant to the Suit and admittedly he is not a party to the agreements. He has been sued on account of the deed of guarantee executed by him on 5th September, 2007 (Exhibit 'D' page 62 of the plaint). He has been impleaded as a party Defendant as a decree has been prayed against him on the basis that the liability of the Defendants is joint and several. In such circumstances, there cannot be any arbitration to resolve these disputes in the Suit. The Arbitration cannot be qua the liability of Defendant No.2 as a Guarantor. The entire subject matter of the Suit is thus not capable of being referred to arbitration.

12. The argument of Mr. Narula that the letter of guarantee (Annexure 'D') executed by Defendant No.2 refers to the agreements between the Plaintiff and Defendant No.1. According to him, the liability to pay money arises under the facilities extended to Defendant No. 1 by the Plaintiff. It is repayment of the amount under these facilities that is guaranteed by Defendant No.2. If there were no facilities extended to Defendant No.1, then, the question of Defendant No.2 executing any guarantee would not have been arisen at all. Hence, considering the nature of the liability and Defendant No.2 guaranteeing to repay the sums in the event of failure or neglect or refusal to pay the sum by Defendant No.1, according to Mr. Narula, the claim in the Suit against Defendant No.2 cannot be seen independent of the liability of Defendant No.1 and the agreements in question.

13. It is not possible to accept these contentions for more than one reason. In the very decision relied upon by Mr. Narula viz. Rashtriya Ispat Nigam Limited and Another Vs. Nerma Transport Company, (2006)7 SCC page 275, the Hon'ble Supreme Court has observed that there is a clear departure from Section 34 of the Arbitration Act of 1940 and Section 8 of the 1996 Act. Section 34 contemplated stay of the Suit whereas Section 8 of the 1996 Act mandates a reference. Exercise of discretion by the Judicial Authority, which were the hallmark of Section 34 of the Old Act, has been taken away under the 1996 Act. The direction to make reference is not only mandatory, but the arbitration proceedings to be commenced or continued and conclusion thereof by an Arbitral Award remains un-hampered by such pendency. (See paragraphs 25 and 26 of this Judgment).

14. Thus, Section 8(1) and (2) have to be seen to appreciate the scheme under the 1996 Act, according to the Hon'ble Supreme Court. Once there is a mandate flowing, then, compliance with the pre-conditions has to be established according to the Supreme Court.

15. In Sukanya Holdings (P) Ltd. Vs. Jayesh H. Pandya reported in (2003)5 SCC 531 : [2003(3) ALL MR 325 (S.C.)], the Hon'ble Supreme Court in paragraphs 12 to 17 has observed thus:-

"12. For interpretation of Section 8, Section 5 would have no bearing because it only contemplates that in the matters governed by Part I of the Act, the judicial authority shall not intervene except where so provided in the act. Except Section 8, there is no other provision in th e Act that in a pending suit, the dispute is required to be referred to the arbitrator. Further, the matter is not required to be referred to the Arbitral Tribunal, if : (1) the parties to the arbitration agreement have not filed any such application for referring the dispute to the arbitrator; (2) in a pending suit, such application is not filed before submitting first statement on the substance of the dispute; or (3) such application is not accompanied by the original a arbitration agreement or duly certified copy thereof. This would, therefore, mean that the Arbitration Act does not oust the jurisdiction of the civil court to decide the dispute in a case where parties to the arbitration agreement do not take appropriate steps as contemplated under sub-sections (1) and (2) of Section 8 of the Act.

13. Secondly, there is no provision in the Act and when the subject matter of the suit includes subject-matter of the arbitration agreement as well as other disputes, the matter is required to be referred to arbitration. There is also no provision for splitting the cause or parties and referring the subject matter of the suit to the arbitrators.

14. Thirdly, there is no provision as to what is required to be done in a case where some parties to the suit are not parties to the arbitration agreement. As against this, under Section 24 of the Arbitration Act, 1940, some of the parties to a suit could apply that the matters in difference between them be referred to arbitration and the court may refer the same to arbitration provided that the same can be separated from the rest of the subject-matter of the suit. The section also provided that the suit would continue so far as it related to parties who have not joined in such application.

15. The relevant language used in Section 8 is: "in a matter which is the subject of an arbitration agreement". The court is required to refer the parties to arbitration. Therefore, the suit should be in respect of "a matter" which the parties have agreed to refer and which comes within the ambit of arbitration agreement. Where, however, a suit is commenced - "as to a matter" which lies outside the arbitration agreement and is also between some of the parties who are not parties to the arbitration agreement, there is no question of application of Section 8. The words "a matter" indicate that the entire subject-matter of the suit should be subject to arbitration agreement.

16. The next question which requires consideration is - even if there is no provision for party referring the dispute to arbitration, whether such a course is possible under Section 8 of the Act. In our view, it would be difficult to give an interpretation to Section 8 under which bifurcation of the cause of action, that is to say, the subject-matter of the suit or in some cases bifurcation of the suit between parties who are parties to the arbitration agreement and others is possible. This would be laying down a totally new procedure not contemplated under the Act. If bifurcation of the subject-matter of a suit was contemplated, the legislature would have used appropriate language to permit such a course. Since there is no such indication in the language, it follows that bifurcation of the subject-matter of an action brought before a judicial authority is not allowed.

17. Secondly, such bifurcation of suit in two parts, one to be decided by the Arbitral Tribunal and the other to be decided by the civil court would inevitably delay the proceedings. The whole purpose of speedy disposal of dispute and decreasing the cost of litigation would be frustrated by such procedure. It would also increase the cost of litigation and harassment to the parties and on occasions there is possibility of conflicting judgments and orders by two different forums."

16. In Rashtriya Ispat (Supra) the Hon'ble Supreme Court distinguished "Sukanya" for the reason that in the facts and circumstances of "Rashtriya Ispat" all parties before the Supreme Court were parties to the arbitration agreement and the question in regard to the jurisdiction of the arbitrator was capable of being decided by the arbitrator himself in terms of Section 16 of the Act.

17. This conclusion was reached by the Hon'ble Supreme Court in Rashtriya Ispat on the basis that there is no substance in the contention of the Respondent that two different cause of actions have been raised. On facts it was found that both illegal termination of a contract and Black listing of the firm are matters arising out of the same contract. Both causes of action arise out of the terms of the contract. When all other conditions of Section 8 are satisfied, then, there was no impediment in referring the parties to arbitration, is the conclusion reached by the Hon'ble Supreme Court. While reaching this conclusion the Supreme Court considered the substance of the dispute and held that once the substance of the dispute arose out of the contract and the parties to the arbitration agreement and parties before the Supreme Court are identical, then, the Hon'ble Supreme Court distinguished its earlier decision in "Sukanya".

18. In the matter before me, admittedly, both the Defendants are not parties to the arbitration agreement. Secondly, the Plaintiffs are claiming a money decree on the basis that the liability of both Defendants is joint and several. It cannot be said that the agreements Annexures C-1 and C-2 stands incorporated in the deed of guarantee (Annexure 'D'). That Mr. Narula had to urge that the same stands incorporated itself goes to show that the subject matter of the Suit and subject matter of the arbitration is not identical. His argument pre-supposes that if the agreements at Annexure C-1 and C-2 are held to be incorporated in the deed of guarantee, then, alone, the cause of action could be said to be one and the same or else, the subject matter of the Suit would have to be bifurcated. It is well settled that rights and liabilities of a surety and borrower are different and distinct and everything depends upon the terms of the guarantee (See AIR 2006 SC 1874 (Syndicate Bank Vs. Channaveerappa Beleri & Ors. and AIR 2008 SC 1797 : [2008(2) ALL MR 827 (S.C.)] (Karnataka State Financial Corporation Vs. N. Narasimahaiah & Ors.).

19. Reliance was placed by Mr. Narula on the decision of the Hon'ble Supreme Court in Owners and Parties Interested in the Vessel M.V. "Baltic Confidence" & Anr. Vs. State Trading Corporation of India Ltd. & Anr., (2001) 7 SCC page 473 there the terms and conditions of the Charter Party Agreements were incorporated in the Bill of Lading.

20. The question in that case was whether on construction of the terms and conditions of the Charter Party Agreement and the conditions in the Bill of Lading incorporating the condition of the Charter Party Agreement into it, clause 62 of the Charter Party Agreement (Arbitration clause) was applicable and attracted and whether the High Court's view that parties in the Suit are not bound by the arbitration agreement is correct or not. In paragraph 4 of this decision the Supreme Court made a reference to the Charter Party and clause 62. In paragraph 5 the reference was made to clause 1 of the condition of carriage of the Bills of Lading. The said paragraphs 5 and 6 of this decision read thus:-

"5. Clause 1 of the Conditions of Carriage of the Bills of Lading reads as follows:-

"All terms and conditions, liberties and exceptions of the Charter Party, dated as overleaf, including the law and arbitration clause, are herewith incorporated."

6. The question for consideration is whether the parties agreed that clause 62, the arbitration clause in the Charter Party Agreement shall be applicable to disputes arising under the Bills of Lading. For determination of this question, it is necessary to ascertain the intention of the parties to the Bills of Lading. This question has engaged the attention of courts in India and in England from time to time."

21. It is in the light of this factual position that the Hon'ble Supreme Court reached the ultimate conclusion on which Mr. Narula places heavy reliance. Thus, paragraph 19 of the Supreme Court's decision cannot be seen in isolation but must be seen in the backdrop of the terms and conditions of the Charter Party Agreements which were specifically incorporated in the Carriage Bill of Lading. Once there was a specific incorporation and the intention of parties was clear, that the Supreme Court held that the Judgment of the High Court to the contrary is erroneous and therefore, the Supreme Court proceeded to quash and set aside the same by allowing the appeal.

22. Before me, there is nothing in the letter of guarantee (Annexure 'D') by which one can hold that the agreements between the Plaintiff and Defendant No.1 together with the terms and conditions thereof including the arbitration clause, stand incorporated in the Deed of Guarantee. The Plaintiffs have treated this as two distinct matters and their cause of action is therefore not common. The intention of parties was not as apparent and clear as in the Supreme Court's decision. Therefore, this decision is clearly distinguishable.

23. The two decisions of High Court of Madras and Delhi relied upon by Mr. Narula once again are distinguishable. Before the learned Judge of the Madras High Court, the submission was that the agreement creating charge refers to the loan agreement which contains an arbitration clause. The argument was that this clause must be deemed to be incorporated in the second agreement creating charge.

24. The learned Judge therefore referred to the arbitration clause and the cause of action set out in the plaint and after making a reference to the agreements on facts concluded that the application under Section 8 was maintainable. The distinction that has been pointed out to me was not brought to the notice of the learned Single Judge. Further, the attention of the learned Single Judge was not invited to the judgments of the Hon'ble Supreme Court as well. In these circumstances, this Judgment does not assist Mr. Narula.

25. The matter before the learned Single Judge of Delhi High Court once again, must be seen in the light of the peculiar facts brought to its notice. The learned Single Judge referred to the arbitration clause contained in the carrier cargo sales Agent Agreement dated 20th October, 2004 and thereafter, considered the undisputed factual position that the clause governs the Plaintiff and Defendant No.1. There, the application under Section 8 was opposed on the ground that Defendant No.3 is not a party to the arbitration agreement between the Plaintiffs and Defendant No.1 and the claim of the Plaintiffs against Defendant No.3 is independent, based on fraud and collusion between Defendant Nos.1 and 3. (See paragraph 14 of this Judgment). However, after carefully perusing the plaint averments, the learned Judge concluded that the cause of action against both Defendant Nos.1 and 2 and Defendant No.3 is common. Merely because the Plaintiff has alleged collusion between Defendant Nos.1, 2 and 3 and made a reference of fraud and collusion between Defendant Nos. 1 and 3 does not mean that Defendant No.3 is sued in its independent capacity. In these peculiar facts, the learned Single Judge distinguished the judgment of the Hon'ble Supreme Court in Sukanya and made the observations in paragraph 23, which have been relied upon by Mr. Narula. These observations, with respect, must be seen in the peculiar factual background of the case before the Delhi High Court. These observations cannot be said to have any general application. The Supreme Court's decision in "Sukanya" is binding upon me. Once, the case before me is that parties to the Suit and parties to the arbitration agreement are not common so also the cause of action against them being distinct and separate, there is no alternative but to hold that the present application made by Defendant No.1 is not maintainable.

26. Once the above conclusion is reached, then, there is no alternative but to dismiss the present Notice of Motion. It is dismissed but without any order as to costs.

Notice of Motion dismissed.