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Ms Hero Exports v. Ms Tiffins Barytes
Factual and Procedural Background
The petitioner sought an order for appointment of an arbitrator based on a Memorandum of Understanding (MOU) dated 08.07.2007, which contained an arbitration clause providing for disputes to be referred to a sole arbitrator under the Arbitration and Conciliation Act, 1996, with the venue at New Delhi. The petitioner alleged that the respondent had represented ownership of mines at Bellary and promised supply of iron ore, for which the petitioner paid Rs. 14.5 crores. The respondent allegedly failed to honor this commitment and did not return the money. The MOU included a commitment by the respondent to pay Rs. 9.5 crores in a time-bound manner, but most cheques issued were dishonoured except one for Rs. 1 crore. The petitioner thus invoked Section 11 of the Arbitration and Conciliation Act, 1996, seeking appointment of an arbitrator.
The respondent contended that the MOU was procured under coercion and extortion, rendering it unenforceable. It claimed the MOU and cheques were signed under duress with police involvement and lodged a complaint with Chennai Police on 23.07.2007. The respondent also issued a notice on 24.07.2007 asserting the invalidity of the MOU and filed a suit seeking declaration that the MOU was not binding and for recovery of Rs. 6.5 crores. The respondent relied on a Supreme Court judgment (India Household and Health Care Ltd. v. LG Household and Healthcare Ltd.) and urged the court to refrain from appointing an arbitrator under Section 6 of the Act.
Legal Issues Presented
- Whether the court should appoint an arbitrator under Section 11 of the Arbitration and Conciliation Act, 1996, despite the respondent's contention that the MOU containing the arbitration clause was procured by coercion and is unenforceable.
- Whether the existence of criminal proceedings and a civil suit challenging the validity of the MOU preclude the appointment of an arbitrator.
- What is the scope of the court's discretion in appointing an arbitrator when the validity of the arbitration agreement itself is disputed.
Arguments of the Parties
Petitioner's Arguments
- Reliance on the MOU dated 08.07.2007 which contains a valid arbitration clause.
- Alleged that the respondent represented ownership of mines and promised supply of iron ore, for which the petitioner paid Rs. 14.5 crores.
- Claimed that the respondent did not honor payment commitments and dishonoured most cheques except one.
- Invoked Section 11 of the Arbitration and Conciliation Act, 1996, seeking appointment of an arbitrator to resolve disputes under the MOU.
Respondent's Arguments
- Alleged that the MOU and cheques were procured under coercion and extortion, involving police complicity.
- Lodged a complaint with Chennai Police and relied on the resulting criminal proceedings.
- Issued a notice asserting the invalidity of the MOU.
- Filed a civil suit seeking declaration that the MOU is not binding and recovery of Rs. 6.5 crores.
- Relied on the Supreme Court judgment in India Household and Health Care Ltd. v. LG Household and Healthcare Ltd. to argue against the appointment of an arbitrator under Section 6 of the Act.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| India Household and Health Care Ltd. v. LG Household and Healthcare Ltd. (2007) 5 SCC 510 | Fraud vitiating agreements as a valid defence to appointment of arbitrator; reliance on Section 45 of the Arbitration and Conciliation Act concerning international arbitration. | The Court distinguished this precedent as it involved international arbitration under Section 45 of the Act, which was not applicable in the present domestic arbitration matter. The Court noted that accepting the respondent's plea would undermine the speedy dispute resolution mechanism under the Act. |
Court's Reasoning and Analysis
The Court acknowledged that the respondent challenged the validity of the MOU containing the arbitration clause by alleging coercion and extortion. However, the Court noted that the respondent itself had invoked the arbitration clause by issuing an arbitration notice, despite simultaneously disputing the MOU's validity. The Court emphasized the well-established principle under Section 16 of the Arbitration and Conciliation Act, 1996, that the arbitrator has jurisdiction to decide on the arbitrability of the dispute and the validity of the arbitration agreement after considering evidence.
The Court observed that no criminal court had yet made any finding against the petitioner; charges had not been framed. Therefore, the Court found no reason to refuse exercising its discretion to appoint an arbitrator. The Court distinguished the Supreme Court's decision in India Household and Health Care Ltd. v. LG Household and Healthcare Ltd., noting that the decision related to international arbitration and involved non-obstante provisions not applicable here.
The Court further reasoned that entertaining unadjudicated and interested allegations at this stage would defeat the objective of speedy dispute resolution under the Arbitration and Conciliation Act. Accordingly, the Court found the respondent's objections to be insubstantial and not a bar to appointing an arbitrator, while clarifying that the respondent could still contest the validity of the MOU in due course before the arbitrator or appropriate forum.
Holding and Implications
The Court appointed Mr. Justice P.K. Balasubramaniam (Retd. Judge of the Supreme Court) as the Sole Arbitrator to adjudicate the disputes between the parties under the MOU.
The petition was allowed, and no costs were imposed. The Court’s decision ensures that the arbitration process is initiated without being impeded by preliminary challenges to the validity of the arbitration agreement, thereby upholding the principle of minimal judicial intervention at the initial stage of arbitration. The respondent remains free to raise substantive challenges regarding the MOU’s validity during the arbitration or in appropriate proceedings. No new precedent was set beyond the application of established principles regarding arbitration jurisdiction and appointment.
JUDGMENT
S. Ravindra Bhat, J.
1. The petitioner claims an order for appointment of an arbitrator. Reliance has been placed on Memorandum of Understanding entered into with the respondent on 08.07.2007 which contains the following arbitration Clause:
In the event of any future disputes including any disputes, doubt or question that may or shall arise between the said PARTIES or their administrators, or legal representatives or successor-in-interest, either arising out of this MOU, including but not limiting to the interpretation of this MOU, then every such dispute, doubt or question shall be referred to the Arbitration of a Sole Arbitrator, and in accordance with the provisions of the Arbitration and Conciliation Act, 1996. The venue of the Arbitration shall be at New Delhi.
2. The petitioner adverts to certain transactions whereby the respondent had represented that it owned mines at Bellary and that it could generate about 500,000 metric tonnes per annum. The petitioner alleges having paid Rs. 14.5 crores to the respondent pursuant to an understanding concerning supply of iron ore. It is alleged that the respondent did not honour the commitment and also did not return the money. The petitioner, therefore, alleges that a Memorandum of Understanding containing an arbitration Clause was entered into with the respondent on 08.07.2007. In terms of the said agreement, it is alleged that the respondent agreed to pay Rs. 9.5 crores in a time bound manner. The petitioner alleges that cheques were issued to it; however, all of them were dishonoured except one cheque for Rs. 1 crore. On the strength of these allegations, the petitioner seeks appointment of an arbitration under Section 11 of the Arbitration and Conciliation Act, 1996.
3. The respondent contends that the Memorandum of Understanding was procured under coercion and extortion and therefore unforceable. It is alleged that cheques and Memorandum of Understanding were signed on the date alleged when the respondent was forced to do so with the connivance of a police officer. The respondent adverts to a complaint having been lodged in that regard with the Police at Chennai on 23.07.2007. It also relies upon a notice dated 24.07.2007 whereby the invalidity of Memorandum of Understanding was set up.
4. It is urged by the respondent that Chennai Police has filed the charge-sheet before the competent Court on 02.07.2008 and the Court has taken cognizance and issued a notice/summons to the accused. It is also urged that the respondent has recently filed a suit seeking declaration that the Memorandum of Understanding is not binding and also sought recovery of Rs. 6.5 crores. On the basis of these contentions, it is submitted that the Court should desist from passing the order under Section 6 of the Act. Learned Counsel further relies upon the judgment of the Supreme Court, reported as India Household and Health Care Ltd. v. LG Household and Healthcare Ltd. (2007) 5 SCC 510.
5. The factual narrative indicates that the respondent is setting up nullity of the document which contains the arbitration Clause. Yet, interestingly, the said respondent issued the arbitration notice on 24.07.2007. Of course, that notice also adverts to the Memorandum of Understanding being void. However, the claim for arbitration cannot be ignored by this Court.
6. The jurisdiction of an arbitrator to decide upon arbitrability of the dispute after considering evidence, in terms of Section 16 of the Arbitration and Conciliation Act, 1996, is no longer undeniable. The respondent itself invoked the arbitration Clause, even while impeaching the validity of the Memorandum of Understanding. This Court is of the opinion that till date, there is finding of any criminal court - even charges have not been framed against the petitioner. In such circumstances, the Court cannot refuse to exercise its discretion.
7. As far as the order in Household and Healthcare Ltd case (supra) is concerned, no doubt some observations were made by the Supreme Court about fraud vitiating agreements and being a valid defence where appointment of arbitrator is sought. Significantly however, the court rested its decision on the non-obstante provisions, i.e. Section 45 of the Act, concerning international arbitration, for this case such considerations do not exist. Furthermore, departure of the respondents' plea would mean giving credence to interested and unadjudicated allegations, which would be destructive of the speedy mechanism contemplated under the Act.
8. For the above reasons, this Court is of the opinion that the objections of the respondent are insubstantial, and cannot hinder the Court from appointing an Arbitrator. However, nothing in this order shall be construed as precluding the respondent from setting up a case of invalidity of the Memorandum of Understanding, or the non-existence of the same, as the case may be, in accordance with law.
9. Subject to the observations, in the preceding paragraph, the Court hereby appoints Mr. Justice P.K. Balasubramaniam, (Retd. Judge of the Supreme Court), Chairman, E. Committee, Room No. 313, IIIrd floor, Lok Nayak Bhawan, Khan Market, New Delhi, PH: 24632072, 22774177, as Sole Arbitrator to adjudicate the inter se disputes between the parties. The learned Arbitrator shall fix his fees and indicate other terms.
10. The petition is allowed in the above terms. No costs.
Order Dasti.
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