ORAL JUDGMENT (DR. D.Y CHANDRACHUD, J.):
The appeal arises from a judgment of a Learned Single Judge rejecting a Petition under Section 34 of the Arbitration and Conciliation Act, 1996. The Petition sought to challenge an award of an arbitral Tribunal consisting of three arbitrators.
2. The claim in arbitration arose out of an agreement dated 12 April 2002th at was entered into between the Appellant and the Respondent. The agreement envisaged that the Appellant proposed to organise “thirteen star studded” events which were to be produced and shot at Film City between June 2002 and February 2003. Under the agreement, the Respondent was to secure exclusive rights in respect of each of those events on the terms and conditions stipulated by the parties. Clause 1(b) of the agreement defines the expression “events” to mean and include thirteen shows, each of a duration of a minimum of three hours scheduled to be shot at Film City during the period between June 2002 and February 2003. The rights contemplated by the agreement under clause 1(c) include rights to record each event on any format, media sponsorship and the exhibition of the events, among other things. Clause 4 of the agreement stipulated as follows
“4. MFSCDC agrees and acknowledges that the consideration payable by SET to MFSCDC in terms of this Agreement shall be paid by SET to MFSCDC in the following manner:
i) Rs. 1,30,00,000/- (Rupees One crore thirty lakhs only) on execution of this agreement.
ii) Rs. 1,70,00,000/- (Rupees One crore Seventy lakhs only) on or after fifteen (15) days after execution of this Agreement.
iii) Rs. 75,23,000/- (Rupees Seventy Five Lakhs Twenty Three thousand only) for each of the Events, on or after seven (7) days after delivery of technically and creatively accepted master tapes for each of the Events and subject to MFSCDC furnishing to SET consents from all the participants and the NOC's required from relevant authorities for conducting the Event. The cheque should be drawn in favour of Hum Ek Hain Film City.”
Clause 7(a) provides that a person by the name of Shahab Ahmed of Montage would be fully responsible for the coordination and execution of the project. Admittedly, one event was produced and shot. The Respondent made a total payment of Rs. 3.60 crores.
3. The Appellant passed a resolution on 16 January 2003 and thereafter, issued a notice on 10 February 2003, disowning the agreement. The Respondent invoked arbitration and an arbitral Tribunal consisting of three former Judges of this Court was constituted. The Tribunal ruled on its jurisdiction under Section 16 on 19 October 2006 and having held that its jurisdiction was not ousted, rendered an arbitral award on 28 July 2008. The Appellant participated in the arbitral proceedings when the issue of jurisdiction was decided and thereafter, cross-examined in part one of the witnesses whose evidence was sought to be adduced by the Respondent. The Appellant thereafter withdrew from the arbitral proceedings. By its award dated 28 July 2008, the Tribunal (i) ordered and directed the Appellant to pay to the Respondent an amount of Rs. 3,16,30,770/- together with interest at the rate of 12% per annum; this being a refund of the amount of Rs. 3.60 crores advanced by the Respondent, after adjusting an amount of Rs. 43.69 lakhs in respect of the first event which was produced; (ii) allowed the claim of the Respondent for the payment of a sum of Rs. 1,61,27,759/- towards damages for the loss of profits. Interest has been awarded by the arbitral Tribunal at the rate of 12% per annum.
4. The Learned Single Judge upheld the arbitral award while dismissing the Arbitration Petition, but reduced the interest awarded from 12 per cent to 9 per cent.
5. On behalf of the Appellant, the following submissions have been urged in support of the appeal: (i) The agreement dated 12 April 2002 was not valid and was disowned by the Board of Directors for want of approval by the Board. The agreement contained hand written insertions; (ii) In defence to the claim in arbitration, the Appellant had levelled allegations of fraud and, in view of the judgment of the Supreme Court in N. Radhakrishnan v. Maestro Engineers,1 the arbitral Tribunal would have no jurisdiction to investigate into allegations of fraud and malpractice which can be settled only in a civil suit; (iii) The constitution of the arbitral Tribunal was contrary to the provisions of section 11, in view of the fact that the second Arbitrator was also appointed by the Respondent, upon the failure of the Appellant to nominate its arbitrator within a period of twenty one days of the receipt of the notice; (iv) The dispute in arbitration concerned third parties and hence, the subject matter was not capable of being arbitrated upon; (v) The amounts advanced by the Respondent were credited to an account which is not an account of the Appellant.
6. At the outset, it would be appropriate to address the submission that the arbitral Tribunal was not constituted in accordance with the provisions of Section 11 of the Arbitration and Conciliation Act, 1996. Section 34(2)(v) envisages that an arbitral award may be set aside by the Court if the composition of the arbitral Tribunal or the arbitral procedure was not in accordance with the agreement of the parties, unless such agreement was in conflict with a provision of Part I from which the parties cannot derogate or failing such agreement, was not in accordance with Part-I.
7. The arbitration agreement between the parties was in the following terms:
“19.2 All disputes and differences concerning or arising out of this Agreement shall unless the parties agree upon a Sole Arbitrator be referred to Arbitration of three Arbitrators as provided below. The following shall be the procedure for appointment of Arbitrators.
(a) SET shall appoint one Arbitrator and the MFSCDC shall appoint another Arbitrator and the two appointed Arbitrators shall appoint a third Arbitrator who shall act as the presiding Arbitrator.
(b) If either party fails to appoint an Arbitrator within 21 days from the date of receipt of the notice from the other party requiring him to appoint an Arbitrator then, in that event on the expiry of the said notice period of 21 days the other party issuing the notice shall have the right to appoint the second Arbitrator and the two Arbitrators so appointed shall appoint a third Arbitrator who shall act as a presiding Arbitrator.”
On behalf of the Respondent, it has been urged that (i) The objection to the constitution of the arbitral Tribunal was not raised when the jurisdiction of the arbitral tribunal was questioned under Section 16; (ii) As a matter of fact, the Appellant submitted a counter claim before the Tribunal and hence, accepted by its conduct that the Tribunal was duly constituted; (iii) Though a challenge to the constitution of the Tribunal was raised in the Petition under Section 34, this ground was not pressed at the hearing before the Learned Single Judge; and (iv) In any event, the constitution was in accordance with the provisions of Section 11.
8. In these proceedings, it has not been disputed that the challenge to the constitution of the arbitral Tribunal was not raised when the jurisdiction of the Tribunal was questioned under Section 16. Similarly, though a ground of challenge was taken in the Petition under Section 34, that was not urged during the oral submissions before the Learned Single Judge. Hence, we find considerable merit in the contention of the Respondent that it would not be permissible for the Appellant to raise the challenge to the constitution of the arbitral Tribunal for the first time in appeal. Be that as it may, and to render a complete adjudication, we have also considered the correctness of the ground urged in appeal on merits.
9. Section 11(2) stipulates that “subject to sub-section (6), the parties are free to agree on a procedure for appointing the arbitrator or arbitrators”. Section 11(6) provides as follows:
“(6) Where, under an appointment procedure agreed upon by the parties,-
(a) a party fails to act as required under that procedure; or
(b) the parties, or the two appointed arbitrators, fail to reach an agreement expected of them under that procedure; or
(c) a person, including an institution, fails to perform any function entrusted to him or it under that procedure,
a party may request the Chief Justice or any person or institution designated by him to take the necessary measure, unless the agreement on the appointment procedure provides other means for securing the appointment.”
Sub-section (2) of section 11 would thus indicate that parties are left with the freedom to agree on a procedure for appointing the arbitrator or arbitrators, subject to sub-section (6). Under sub-section (6)(a), if a party fails to act as required under that procedure which is agreed upon, a party may request the Chief Justice or a designated institution to take the necessary measure, unless the agreement on the appointment procedure provides other means for securing the appointment. The concluding part of sub-section (6) therefore, makes it clear that while a party who is aggrieved by the failure of the other to act in accordance with the agreed procedure for appointment may move the Chief Justice, unless the appointment procedure has provided any other means for securing the appointment of the arbitrator. In the present case, the appointment procedure was agreed upon by the parties in sub-clauses (a) and (b) of Clause 19.2 of the contract. Sub clause (b) of clause 19.2 envisages that if a party fails to appoint an arbitrator within twenty one days from the receipt of a notice from the other party requiring him to appoint an arbitrator, then upon the expiry of that period, the other party would have the right to appoint the second arbitrator. Thereupon the two arbitrators would appoint the third arbitrator. Hence, parties agreed to an appointment procedure which provides a means for securing the appointment of an arbitrator where a party has failed to act as required under the procedure envisaged in clause (a). There is no dispute factually during the course of the submissions that though the Appellant was called upon by a notice to appoint an arbitrator, it failed to do so within twenty one days following which the Respondent appointed the second arbitrator. Both the arbitrators were former Judges of this Court who then appointed a presiding arbitrator, also a former judge of this Court. This was, according to the procedure and the challenge must, therefore, fail.
10. The principal submission which has been urged before the Learned Single Judge and in appeal, is that the agreement was not valid and was disowned by the Board of Directors for want of approval of the Board. Now, in order to consider this challenge, it would be necessary to note that clause 85 of the Memorandum of Association of the Appellant vested in the Board of Directors the power to exercise all such powers and to do all such acts and things as the Company is authorised to exercise and do. Clause 86(18) authorises the Board to enter into negotiations and contracts. Sub clause (19) empowers the Board to delegate all or any of its powers, authorities and discretion subject to the ultimate control being retained by the Board. Clause 88 envisages appointment of a Managing Director, who is authorised by the Board to exercise such of the powers and discretion in relation to the affairs of the Company as are specifically delegated to him. A specific delegation was made on 26 November 1998, in a Board meeting.2 Under the delegation, the power to sign contracts and documents on behalf of the Company was delegated to the Managing Director. As regards the extent of the powers, it is clarified that the Managing Director shall have full powers. This was subject to the approval of the competent authority.
11. In the present case, the contract was entered into on behalf of the Appellant by its Managing Director, who was an IAS Officer and a Principal Secretary to the Government of Maharashtra in the Ministry of Culture. All contracts of the Appellant at the material time were executed by him. There was an express delegation of power to the Managing Director to enter into contracts and documents. Though this was subject to the approval of the competent authority, the delegation did not stipulate prior approval. The award of the arbitral Tribunal took note of the fact that copies of the Minutes of the Board Meetings of the Appellant had been produced and the witnesses for the Appellant had admitted that all these minutes did not reflect that the contracts which were to be executed or, which were actually executed by the Managing Director, were always placed before the meetings of the Board for prior consent or ex-post facto approval.3 Another important circumstance which must be placed in the balance is that the contract which was entered into on 12 April 2002 was witnessed by M. Sharma on behalf of the Appellant. Though he continued to be in the employment of the Appellant and was present in the course of the arbitral proceedings, the Appellant chose not to examine him in evidence. Finally, it must be noted that the contract was acted upon for a period of ten months between 12 April 2002 until it was disowned on 10 February 2003. In the meantime, payments of Rs. 1.3 crores and Rs. 1.7 crores were made, TDS certificates were handed over to the Appellant and one event was produced and telecast in respect of which payment was made.
12. On this factual foundation, the arbitral award cannot possibly be held to be in conflict with a public policy. The doctrine of indoor Management must necessarily apply in such a situation. The Respondent was entitled to proceed on the basis that the Managing Director with whom the contract was executed was authorised to enter into the contract. The Managing Director acted in pursuance of the delegation of authority to him by the Board. The challenge to the arbitral award on this ground must fail.
13. Counsel appearing on behalf of the Appellant has relied upon a judgment of the Supreme Court in U.P Rajkiya Nirman Nigam Ltd. v. Indure Pvt. Ltd. 1996 2 SCC 667 That was a case where, as observed by the Supreme Court, the Respondent had submitted a counter offer which had never been accepted by the Appellant. Apart from the draft agreement and the counter proposal, no independent contract was entered into between the parties. Since there was no signed agreement executed by a duly competent officer on behalf of the Appellant, the Supreme Court held that the doctrine of indoor management could not be extended to the formation of the contract or in regard to the essential terms of the contract. The facts in that case were, therefore, clearly distinct. The judgment of a Division Bench of this Court in Abdul Hamid Patel v. State of Maharashtra,5 was rendered in a petition filed in public interest. That was a case where there was an arbitrary allotment of land by the Appellant by which a huge tract admeasuring twenty acres was transferred to a joint venture company without issuing an advertisement or inviting tenders. The Division Bench noted that the allotment was contrary to the policy decision of the State Government and whereas the valuation of the property was Rs. 43.56 crores, the land had been allotted at a gross undervalue at only Rs. 3 crores. It was in the context of these facts and particularly while entertaining a public interest petition under Article 226 of the Constitution that the Court issued directions. The judgment of the Division Bench, therefore, would not advance the case of the Appellant in regard to the legality of the arbitral award in the present case.
14. The next submission that falls for evaluation is that an allegation of fraud has been levelled by the Appellant and hence arbitration would not be an appropriate remedy. During the course of the hearing, the submission under this head placed stress on the following factual assertions: (i) No sanction was obtained of the Board of Directors to the execution of the contract; (ii) Hand written changes were made in the agreement; (iii) The agreement was modified by a letter addressed by the Managing Director of the Appellant; and (iv) Payment was made into an account which was not of the Appellant. The principal ground which has been urged is that the agreement envisaged in Clause 4 that cheques for payments which were to be made by the Respondent to the Appellant would be drawn in favour of a designated account which, it is urged, was not an account maintained by the Appellant. Moreover, Clause 7 stipulated that Shahab Ahmed of Montage would be responsible for coordination of the project. The allegation is that the Managing Director of the Appellant colluded with Shahab Ahmed in his own personal interest and at the expense of the Appellant. Shahab Ahmed, it is urged, is a third party.
15. The arbitral Tribunal has noted that though it was alleged that the agreement was not entered into in good-faith, no evidence to prove a lack of good-faith or of any act of alleged collusion has been led on behalf of the Respondent. The arbitral award takes note of the fact that the Appellant had dealings with Shahab Ahmed since the year 2000 (much prior to the execution of the agreement between the Appellant and the Respondent) and there used to be a joint Bank Account which was operated by the Chief Accountant of the Appellant as well as by the said Shahab Ahmed. The Tribunal noted that this is an admitted position. The hand written additions and corrections in the agreement were found by the Tribunal to have been duly initialed. In the letter dated 17 April 2002 addressed by the Managing Director of the Appellant, it was stated that Shahab Ahmed would coordinate and liase with the Respondent in respect of the agreement. The arbitral tribunal observed that there was nothing surprising in incorporating provisions of the nature of Clause 4 of the agreement since the account was a joint account operated by the Chief Accountant of the Appellant. The evidence indicated that the Appellant had business relations with Shahab Ahmed even in 2000; and on 29 August 2000 when the Board of Directors of the Appellant resolved to hold five events of national integration for broadcast on Doordarshan, the Appellant appointed Shahab Ahmed as coordinator. The Tribunal noted that the Respondent had no reason to doubt the alleged lack of honesty or mala fides on the part of the Managing Director of the Appellant, the said Shahab Ahmed or the Chief Accountant of the Appellant.
16. In Maestro Engineers (supra) which was decided by the Supreme Court, the Appellant, in a partnership dispute, had raised various issues relating to the misappropriation of funds and malpractices on the part of the Respondents and allegations to that effect had been made in a notice addressed to the Respondents and before the Civil Court. On this basis, it was urged that having regard to the serious allegations pertaining fraud and malpractice, the dispute had to be tried in court and not before the arbitral tribunal. In this context, the Supreme Court held as follows:
“In our opinion, the contention of the Respondents relating to the jurisdiction of the Arbitrator to decide a dispute pertaining to a matter of this proportion should be upheld, in view of the facts and circumstances of the case. The High Court in its impugned judgment has rightly held that since the case relates to allegations of fraud and serious malpractices on the part of the respondents, such a situation can only be settled in court through furtherance of detailed evidence by either parties and such a situation cannot be properly gone into by the Arbitrator.” (emphasis supplied)
In other words, in the observation, which has been extracted above, the Supreme Court noted the existence of serious allegations of fraud and malpractices on the part of the Respondents who were parties to the contract. In the present case, as the arbitral Tribunal noted, the Appellant has not been able to produce any evidence to substantiate the allegation of malpractice on the part of the Respondent. As a matter of fact, it may be noted that one of the witnesses of the Appellant, V.J Rathod, who was in charge of the post of Joint Managing Director, admitted during the course of the cross-examination that the allegations made in his affidavit of evidence that the conduct of the Respondent was not bonafide or that the Respondent had full knowledge of the matter referred to was not based on his personal knowledge and that all the statements were made on presumption.6
Similarly, the witness stated that there was no document to support the allegation of collusion, which was made on presumption.7 In this view of the matter, it would be far fetched for the Appellant which had not even prima facie established that the Respondent was involved in any act of collusion, undue influence or malpractice, to assert that the arbitral Tribunal was deprived of its jurisdiction. A mere allegation of fraud or malpractice would not be sufficient to divest the arbitral Tribunal of jurisdiction, nor does the judgment of the Supreme Court in Maestro Engineers support such a proposition. If a mere allegation of fraud - however vague and bereft of material particulars - were to oust the jurisdiction of the arbitral tribunal, the efficacy of arbitration as an alternate dispute resolution mechanism would be eroded and undermined. The judgment in Maestro Engineers on the contrary indicates that there were serious allegations of fraud and malpractices on the part of the Respondents in that case, who were parties to the contract and it was on those facts that the Supreme Court held that the dispute ought to have been tried in the civil court.
17. For the reasons indicated above, we do not find that there is any reason to interfere in the appeal. The Learned Single Judge, consistent with the parameters of Section 34 was justified in declining to entertain the petition. The appeal shall accordingly stand dismissed. There shall be no order as to costs.
18. In view of the dismissal of the appeal, the Notice of Motion in the appeal does not survive and is disposed of.
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