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Mahesh Agarwal v. Indian Oil Corporation Limited & Ors.

Calcutta High Court

Jan 8, 2008

Judgment

Subsequent
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Factual and Procedural Background

This matter is a revisional application under Article 227 of the Constitution of India challenging the District Judge, Darjeeling's judgment and order dated 2 March 2006, which affirmed Orders No. 29 and 30 dated 18 April 2005 passed by the Civil Judge (Junior Division), Siliguri, in Misc. Case No. 8 of 2004 arising out of Title Suit No. 224 of 2003.

The material facts as set out in the opinion are:

Indian Oil Corporation Ltd. (IOL) appointed Agarwal Trading Company (a proprietorship) as a retail outlet dealer by an agreement dated 18 February 1970. Clauses 21 and 22 of that agreement are central to the dispute.
Clause 21 provided that disputes "arising on or out of" the agreement would be referred to the sole arbitration of the Managing Director of IOL (or a person appointed by the Managing Director) and that the Arbitration Act, 1940 (and its modifications) and rules would apply.
Clause 22 provided that the agreement would automatically terminate if the dealer was adjudicated an insolvent or a company wound up, and separately allowed termination by the company on breach by giving one month's written notice, the company being the "sole judge" of such fact.
On 21 December 2002 IOL officials took a sample from the dealer's outlet allegedly failing specification. A show-cause notice was issued on 1 January 2003 and the dealer replied on 10 January 2003. On 30 January 2003 the Area Manager (Sales) suspended sales and supply at the retail outlet for thirty days and advised deposit of Rs. 2,000 as penalty.
On 1 December 2003 Manish (or Mahesh — the opinion uses both names in different places) Agarwal, sole proprietor of Agarwal Trading Company, instituted Title Suit No. 224 of 2003 seeking, inter alia, declaration and perpetual injunction, challenging the suspension letter dated 30 January 2003 as illegal and void.
On 6 February 2004 the defendants filed an application under sections 5 and 8 of the Arbitration and Conciliation Act, 1996 seeking a direction to refer disputes to arbitration (registered as Misc. Case No. 8 of 2004). The plaintiff objected, saying the subject matter did not fall within the dealership agreement.
By Order No. 29 dated 18 February 2004 the Trial Judge allowed the defendants' application and directed the parties to take steps according to the Arbitration and Conciliation Act, 1996 in terms of the 1970 agreement; by Order No. 30 the Trial Judge dismissed the suit for lack of jurisdiction.
The plaintiff moved a revisional application under section 115A of the Code of Civil Procedure in Civil Revision Case No. 5 of 2005. The District Judge by judgment dated 2 March 2006 dismissed the revision, affirming the Trial Judge's orders. The present revisional application is brought under Article 227 before this Court.

Legal Issues Presented

Whether the disputes raised in the Title Suit (including the challenge to the suspension and related questions) fall within the arbitration clause (clause 21) of the dealership agreement and are therefore referable to arbitration.
Whether the question of termination of the dealership agreement — specifically termination on account of breach and the subsequent termination of the agreement (noted as having occurred on 12 July 2005) — is within the scope of the arbitration clause or outside arbitral jurisdiction.
Whether the Area Manager (Sales) had the power to suspend the dealer and whether that issue is for the Civil Court or for the Arbitral Tribunal.
Whether the Trial Court and the Revisional Court erred in referring the parties to arbitration and dismissing the suit for want of jurisdiction.

Arguments of the Parties

Petitioner's (plaintiff's) Arguments — as presented to the Court

The Area Manager (Sales) of IOL had no power to suspend the dealer and, accordingly, the suspension was illegal.
The disputes raised in the suit could not be settled by the Arbitral Tribunal under clause 21 because they did not fall within the purview of that clause.
Clause 21 did not contemplate termination of the agreement; therefore termination (including the termination that took place on 12 July 2005) could not be decided by an Arbitral Tribunal.
The Courts below therefore committed an error of jurisdiction in directing reference to arbitration.

Respondents' (defendants') Arguments — as presented to the Court

There exists an arbitration clause in the 18 February 1970 agreement; the Courts below were justified in referring the dispute to arbitration.
The Managing Director of IOL appointed Mr. Samar Ghosh as sole arbitrator and the arbitrator had entered upon the reference; the plaintiff (referred to as Mahesh Agarwal) participated in arbitration proceedings held on 23 February 2006.
The plaintiff had also filed an application under section 9 of the Arbitration and Conciliation Act, 1996 in the District Judge's Court (registered as Misc. Judicial (Arbitration) Case No. 39 of 2005), and thus the Title Suit was not maintainable as framed.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Renusagar Power Co. Ltd. v. General Electric Company, AIR 1985 SC 1156	Expressions like "arising out of", "in connection with", "relating to" the contract are of the widest amplitude and include questions as to existence, validity and effect (scope) of the arbitration agreement.	The Court relied on this principle to conclude that the arbitration clause in the 1970 agreement is widely worded and includes disputes touching termination of the agreement for breach of its terms.
P. Anand Gajapathi Raju v. P.V.G. Raju, 2000 (4) SCC 539	Sets out the conditions under sections 8(1) and 8(2) of the Arbitration and Conciliation Act, 1996 that must be satisfied before a court can exercise its power to refer parties to arbitration.	The Court applied the four conditions laid down (existence of arbitration agreement; action brought in Court by a party to the agreement; subject-matter of action same as arbitration agreement; and timing of the application to refer to arbitration) and held that the conditions were satisfied, making section 8 peremptory and obliging the Court to refer the parties to arbitration.

Court's Reasoning and Analysis

The Court proceeded by examining the arbitration and termination clauses in the 18 February 1970 agreement and the statutory framework governing reference to arbitration.

Clause 21 establishes that "any dispute arising on or out of" the agreement shall be referred to sole arbitration of the Managing Director or his appointee; the Court treated this language as broadly worded.
Clause 22 contains two distinct parts: (a) automatic termination upon adjudication of insolvency or winding up (events which can only be ordered by courts under relevant insolvency and company law), and (b) termination by the company on account of breach by giving one month's notice, the company being the "sole judge" of the fact of breach.
The Court noted the limited competence of an Arbitral Tribunal: it cannot order winding up of a company nor adjudicate a person as insolvent — such powers are conferred exclusively on courts under the Companies Act and the Presidency-towns/Provincial Insolvency Acts. Therefore the first part of clause 22 (automatic termination on insolvency/winding up) was not referable to arbitration.
Applying the Renusagar principle, the Court construed clause 21 as of "very wide" scope; expressions like "arising out of" bring within arbitration even disputes concerning the existence, validity or effect of the arbitration agreement and, accordingly, disputes touching termination for breach fall within the clause 21 arbitration scope.
Relying on P. Anand Gajapathi Raju, the Court enumerated the conditions under sections 8(1) and 8(2) of the Arbitration and Conciliation Act, 1996 that permit a court to refer matters to arbitration. The Court found these conditions satisfied (there was an arbitration agreement, a party had brought an action, the subject-matter overlapped with the arbitration agreement, and the application to refer was timely under the statutory scheme).
The Court emphasized that section 8 is peremptory: once the conditions are met the Court must refer the parties to arbitration and it is not required to decide the original action. The rights and remedies henceforth are governed by the Arbitration Act, including remedies to challenge an arbitral award.
The Court concluded that the Trial Judge properly referred the dispute to arbitration and dismissed the suit for lack of jurisdiction, and the District Judge correctly dismissed the revision under section 115A CPC since there was no jurisdictional error requiring interference.

Holding and Implications

DISPOSAL: The revisional application is rejected.

Direct consequences and immediate implications:

The orders of the Trial Court (Orders No. 29 and 30) directing reference to arbitration and dismissing the suit for lack of jurisdiction were affirmed by the District Judge and upheld by the Court in this revisional application.
The disputes (including disputes concerning termination for breach) fall within the broad arbitration clause (clause 21) and are to be resolved by the Arbitral Tribunal; however, matters requiring statutory powers of courts (such as winding up or adjudication of insolvency) are not referable to arbitration and stand apart.
The Court made no order as to costs and directed supply of an urgent xerox certified copy of the order to the applicant on compliance with formalities.

The opinion applies established precedent and statutory interpretation to the facts; it does not purport to create a new legal precedent beyond applying existing authorities (as reflected in the Court's reasoning).

Show all summary ...

Subhro Kamal Mukherjee, J.:— This is a revisional application under Article 227 of the Constitution of India against judgment and order dated March 2, 2006 passed by the learned District Judge, Darjeelmg in Civil Revision Case No. 5 of 2005 affirming order Nos. 29 and 30 both dated April 18, 2005 passed by the learned Civil Judge (Junior Division) at Siliguri, District Darjeeling, in Misc. Case No. 8 of 2004 arising out of Title Suit No. 224 of 2003 of the said Court.

2. The facts material for disposal of this revisional application are as under:

(a) Indian Oil Corporation (‘IOL’ in short) appointed Agarwal Trading Company, a proprietorship firm, as its retail outlet dealer for sales of petrol, high speed diesel and other allied petroleum products for Joratham in the State of Sikkim.

(b) Parties entered into an agreement on February 18, 1970. For the purpose of this revisional application we are concerned with the clauses 21 and 22 of the said agreement.

Under the said clause 21 any dispute arising on or out of the said agreement shall be referred to the sole arbitration of the Managing Director of IOL and if the said Managing Director is unable or unwilling to act as the sole arbitrator, the matter shall be referred to the sole arbitration of some other person appointed by the Managing Director, who is willing to act as such arbitrator. The award of the arbitrator so appointed shall be final, conclusive and binding on all parties to the agreement subject to the provisions of the Arbitration Act, 1940 or any statutory modification or re-enactment thereof and the rules made thereunder and in force shall apply to the arbitration proceedings.

The clause 22 runs as under: “Notwithstanding anything hereinabove contained, if the dealer shall be adjudicated an insolvent or being a company shall be resolved or ordered to be wound up then in such case this agreement shall automatically terminate and in the event of the breach by the dealer of any of the terms hereof the company shall be at liberty to terminate this agreement at any time by giving in advance one month's notice in writing to the dealer of which fact company shall be the sole judge.”

(c) The officials of IOL conducted an inspection and checking in the outlet of the said dealer and took sample on December 21, 2002. It is alleged that such sample was tested in the laboratory of IOL at Siliguri, but the sample did not meet the specification.

(d) On January 1, 2003 IOL issued a show cause notice to the dealer alleging adulteration of the products and directed the dealer to show cause as to why action against the dealer should not be initiated.

(e) On January 10, 2003 the dealer submitted his reply to the said show-cause.

(f) The Area Manager (Sales), Siliguri, IOL, on January 30, 2003 suspended the sales and supply at the retail outlet of the said dealer for thirty days. The dealer was advised to deposit Rs. 2,000/- in favour of IOL towards penalty for failure of the sample.

(g) On December 1, 2003, Manish Agarwal, the sole proprietor of the Agarwal Trading Company, as the plaintiff, instituted Title Suit No. 224 of 2003 in the Court of the learned Civil Judge (Junior Division) at Siliguri against IOL, the Senior Divisional Manager of IOL and the Assistant Manager (Sales) of IOL, inter alia, for declaration and perpetual injunction.

In the said suit the plaintiff, inter alia, prayed for a decree for declaration that the suspension letter dated January 30, 2003 issued by the Assistant Manager (Sales), Siliguri of IOL was illegal, arbitrary, void, ab initio and the same was not binding upon the plaintiff.

(h) The defendants on February 6, 2004 filed an application under sections 5 and 8 of the Arbitration and Conciliation Act, 1996 in the said suit, inter alia, seeking a direction on the parties to resort to arbitration proceedings in terms of the agreement dated February 18, 1970. The said application was registered as Misc. Case No. 8 of 2004 in connection with Title Suit No. 224 of 2003. In the said application the defendants contended that there existed an arbitration agreement between the parties and as such the Civil Court had no jurisdiction to try the suit; the parties should be referred to arbitration.

(i) The plaintiff contested the said application by filing a written objection alleging that the subject-matter of the suit did not fall within the ambit of the dealership agreement and as such the Civil Court had every jurisdiction to try an adjudicate the subject-matters of the suit.

(j) The learned Trial Judge by Order No. 29 dated February 18, 2004 allowed the application filed by the defendants and directed the parties to take steps according to the provisions of the Arbitration and Conciliation Act, 1996 in terms of the agreement dated February 18, 1970. The learned Judge held that there was an arbitration clause in the agreement dated February 18, 1970 and as such the dispute should be referred to arbitrator in terms of the clause 21 of the said agreement.

By order No. 30 the learned Judge dismissed the suit as the Civil Court lacked jurisdiction to entertain the dispute involved in the suit.

(k) Being aggrieved by, and dissatisfied with, the aforesaid orders dated April 18, 2005 the plaintiff moved a revisional application under section 115A of the Code of Civil Procedure in the Court of the learned District Judge, Darjeeling, which was registered as Civil Revision Case No. 5 of 2005.

(l) The learned District Judge by the impugned judgment and order dated March 2, 2006 dismissed the revisional application and affirmed the orders passed by the learned Trial Judge. The learned District Judge held that there was an arbitration clause in the agreement dated February 18, 1970 and as such the dispute, if any, must be settled through arbitration in terms of the said agreement.

(m) Being aggrieved the plaintiff has come up with this revisional application under Article 227 of the Constitution of India before this Court.

3. Mr. Milan Chandra Bhattacharya, learned Advocate, appearing on behalf of the petitioner, submits that the Area Manager (Sales) of the defendant No. 1 had no power to suspend the dealer and the disputes raised in the suit cannot be settled by the Arbitral Tribunal in terms of the clause 21 of the said agreement as the issues raised do not come within the purview of the said clause. Mr. Bhattacharya, further, submits that clause 21 never contemplates termination of the agreement. In the meantime by an order dated July 12, 2005 the dealership agreement of the plaintiff has been terminated. Mr. Bhattacharya, therefore, submits that the issue as to termination of dealership agreement cannot be decided by the arbitral Tribunal as there was no such clause in the agreement and, therefore, the Courts below committed error of jurisdiction in directing the parties to take steps for referring the disputes before the Arbitral Tribunal.

4. Mr. Saptangshu Basu, learned Advocate for the opposite parties, however, submits that there was an arbitration clause in the agreement and as such the Courts below were justified in referring the parties to arbitration. Mr. Basu submits that the Managing Director of IOL appointed Mr. Samar Ghosh as the sole arbitrator and the arbitrator has already entered upon the reference. The plaintiff, Mahesh Agarwal, participated in the arbitration proceedings held on February 23, 2006. Mr. Basu, also, submits that the plaintiff filed an application under section 9 of the Arbitration and Conciliation Act, 1996 against IOL and its officials in the Court of the learned District Judge, Darjeeling, which has been registered under Misc. Judicial (Arbitration) Case No. 39 of 2005. Mr. Basu, therefore, submits that as the plaintiff himself has filed an application under section 9 of the Arbitration and Conciliation Act, 1996 on November 21, 2005, this suit is not maintainable at the instance of the plaintiff.

5. Under the clause 21 of the agreement dated February 18, 1970 any dispute arising on or out of this agreement shall be referred to the sole arbitration of the Managing Director of the company.

6. However, in the clause 22 of the said agreement it was stipulated that notwithstanding anything contained in the said agreement if the dealer be adjudicated an insolvent or being a company be resolved or ordered to be wound up, in such case the agreement should automatically terminated and in the event of the breach by the dealer of any of the terms, the company shall, also, be at liberty to terminate the agreement at any time by giving in advance one month's notice in writing to the dealer of which fact company should be the sole judge.

7. I am unable to accept the contentions of Mr. Milan Chandra Bhattacharya, learned Advocate, appearing for the petitioner, that the issues involved in the present suit cannot be adjudicated by the Arbitral Tribunal or that since there is a separate clause concerning termination on certain events, the Arbitral Tribunal cannot decide the dispute concerning termination of the dealership in the event of the breach by the dealer of any of the terms mentioned in the said agreement. There are two separate parts in the said clause 22. The first part contemplates automatic termination of the agreement on certain events; the second part contemplates termination of the agreement on account of breach of the terms of the dealership agreement.

8. The Supreme Court of India in the case of Renusagar Power Co. Ltd. v. General Electric Company, reported in AIR 1985 SC 1156, holds that expressions such as “arising out of” or “in respect” of or “in connection with” or “in relation to” or “in consequence of” or “concerning” or “relating to” the contract are of the widest amplitude and content and include even questions as to the existence, validity and effect (scope) of the arbitration agreement.

9. In the agreement I have noticed that it was agreed by and between the parties that any dispute arising out of the said agreement should be referred to arbitration. In my view, this is a very widely worded arbitration agreement, which includes, within its scope, any dispute including the dispute touching termination of the agreement for breach of any of the terms stipulated by the company.

10. The power to order winding up of a company is contained under the provisions of the Companies Act and is conferred on the Court. Similarly, power to adjudicate a person as insolvent is contained in the provisions of the Presidency-towns Insolvency Act, 1909 and the Provincial Insolvency Act, 1920 and is conferred on the Courts exercising jurisdiction under the said Acts. The Arbitral Tribunal, notwithstanding any agreement between the parties, would have no jurisdiction to order winding up of a company or adjudicate a debtor as insolvent. Therefore, consciously in clause 22 it was agreed by and between the parties that in case the dealer be adjudicated as an insolvent or being a company be resolved or ordered to be wound up then in such case the agreement should automatically terminated.

11. The Supreme Court of India in the case of P. Anand Gajapathi Raju v. P.V.G Raju (dead), reported in 2000 (4) SCC 539, holds that the conditions, which are required to be satisfied under sections 8(1) and 8(2) of the Arbitration and Conciliation Act, 1996 before the Court can exercise its powers are:

(1) there is an arbitration agreement;

(2) a party to the agreement brings an action in the Court against the other party;

(3) subject-matter of the action is the same as the subject-matter of the arbitration agreement;

(4) the other party moves the Court for referring the parties to arbitration before it submits his first statement on the substance of the dispute.

12. This last provision creates a right in the person bringing the action to have the dispute adjudicated by the Court, once the other party has submitted his first statement of defence. But if the party, who wants the matter to be referred to arbitration, applies to the Court after submission of his statement and the party who has brought the action does not object there is no bar on the Court referring the parties to arbitration.

13. The language of section 8 is peremptory. It is, therefore, obligatory for the Court to refer the parties to arbitration in terms of their arbitration agreement. Nothing remains to be decided in the original action or the appeal arising therefrom. There is no question of stay of the proceedings till the arbitration proceedings conclude and the award becomes final in terms of the provisions of the new Act. All the rights, obligations and remedies of the parties would now be governed by the new Act including the right to challenge the award. The Court to which the party shall have recourse to challenge the award would be the Court as defined in clause (e) of section 2 of the new Act and not the Court to which an application under section 8 of the new Act is made. An application before a Court under section 8 merely brings to the Court's notice that the subject-matter of the action before it is the subject matter of an arbitration agreement. This would not be such an application as contemplated under section 42 of the Act as the Court trying the action may or may not have had jurisdiction to try the suit to start with or be the competent Court within the meaning of section 2(e) of the new Act.

14. The learned Trial Judge was, therefore, justified in referring the parties to arbitration when he found that there existed an arbitration agreement. He rightly dismissed the suit as the matter has to be decided by the Arbitral Tribunal. Similarly, the learned District Judge was right in dismissing the revisional application under section 115A of the Code of Civil Procedure as the learned Trial Judge did not commit any error of jurisdiction requiring interference by the Revisional Court.

15. The revisional application is, thus, rejected.

16. I make no order as to costs.

17. Urgent xerox certified copy of this order is to be supplied to the applicant, upon compliance of all formalities, expeditiously.

Revisional application rejected.

P.B