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Olex Focas Private Limited v. Skoda Export Company Limited
Factual and Procedural Background
The appellants, an Australian company, and respondent No. 1, a Czech company, entered into a contract for the execution of the Kandla Bhatinda pipeline Project in India. Respondent No. 1 and respondent No. 2, a Government of India company, had a separate agreement concerning the phased handover of the pipeline to respondent No. 2. Disputes arose between the appellants and respondent No. 1, leading the appellants to file notices for arbitration with the International Court of Arbitration of the ICC. Respondent No. 1 challenged these notices, but the challenges were withdrawn. Arbitral proceedings commenced in 1996, during which appellants filed an application (OMP 232/97) seeking a restraint order against respondent No. 2 from releasing payments to respondent No. 1 under their contract, or alternatively, for such amounts to be deposited with the court. An interim ex-parte order was initially granted but later the learned Single Judge dismissed the application, finding no prima facie case and no evidence that respondent No. 1 was likely to dissipate assets. The appellants appealed this dismissal.
Legal Issues Presented
- Whether the appellants were entitled to an injunction under Section 9 of the Arbitration and Conciliation Act, 1996, restraining respondent No. 2 from releasing payments to respondent No. 1.
- Whether respondent No. 1’s financial position justified the grant of such an injunction to protect the enforceability of the arbitral award.
- Whether an injunction under Section 9 could be granted against a non-party to the arbitration, namely respondent No. 2.
Arguments of the Parties
Appellant's Arguments
- Appellants contended that the learned Single Judge erred in dismissing the injunction application despite evidence, including a Dun and Bradstreet report, showing respondent No. 1’s net worth as nil.
- They argued that respondent No. 1 was effectively insolvent and there was a risk that the arbitration award would be rendered nugatory if payments were made to respondent No. 1 without restraint.
- They relied on a judgment of the Australian High Court criticizing respondent No. 1’s conduct, which they claimed was overlooked by the learned Judge.
- They urged urgent protection of their interests to preserve the enforceability of the arbitral award.
Respondent No. 1's Arguments
- Respondent No. 1 denied insolvency, asserting its financial position had improved and there was no risk of dissipating assets.
- They challenged the maintainability of the application under Section 9, especially the request for injunction against respondent No. 2, who was not a party to the arbitration.
- They argued that the financial relationship between respondents No. 1 and 2 was not before the court and that claims and counterclaims were ongoing.
- Respondent No. 1 requested that if any deposit was ordered, it be made with their Czech banker to adjust interest liabilities.
Respondent No. 2's Arguments
- Respondent No. 2 denied any liability to respondent No. 1 and asserted counterclaims against respondent No. 1.
- They rejected any obligation to pay amounts to respondent No. 1 and thus argued against any injunction restraining payments.
Table of Precedents Cited
No precedents were cited in the provided opinion.
Court's Reasoning and Analysis
The court examined the detailed reasoning of the learned Single Judge who declined to grant the injunction. The critical point identified was that respondent No. 2 denied any liability to respondent No. 1, making it illogical to restrain respondent No. 2 from paying an amount it contended it did not owe. The court noted that respondents No. 1 and 2 were engaged in separate litigation concerning their claims and counterclaims, and it was premature to assume respondent No. 2 owed money to respondent No. 1. The court recognized the possibility that respondent No. 2 might ultimately be held liable, in which case appropriate interim arrangements could be considered. The court also acknowledged that respondent No. 1, a party to the arbitration, could be subjected to orders under Section 9 to secure enforcement of the award. The court sought a middle ground by ordering that any amounts received by respondent No. 1 from respondent No. 2 be deposited in a Czech bank (other than respondent No. 1’s usual banker) pending the outcome of enforcement proceedings, and restrained respondent No. 1 from dealing with such amounts until further orders. This approach avoided deciding contentious issues such as the solvency of respondent No. 1 or the liability of respondent No. 2, and the permissibility of injunctions against non-parties under Section 9.
Holding and Implications
The appeal is disposed of by directing that any amount received by respondent No. 1 from respondent No. 2 pursuant to their contract be deposited by respondent No. 1 in a Czech bank other than its usual banker to await the outcome of enforcement of the arbitral award, and that respondent No. 1 be restrained from dealing with such amount pending the award’s enforcement.
The decision directly affects the parties by providing a protective interim mechanism to preserve the subject matter of the award without resolving the underlying disputes about liability or solvency. No new precedent was established, and the court avoided ruling on the broader issues of injunctions against non-parties or the financial health of respondent No. 1 at this stage.
KHAN, J.
(1) APPELLANT's application OMP 232 of 1997 filed under Section 9 of Arbitration and Conciliation Act, 1996 stands dismissed vide order dated 5/11/1999. Aggrieved of this, they have filed this appeal to assail the dismissal order.
(2) APPELLANTS are an Australian Company while respondent No. 1 is a Czech Company and respondent No. 2 a Government of India Company. It appears that appellants and respondent No. 1 entered into a contract for execution of Kandla Bhatinda pipeline Project which was to supply refined petroleum products to northwestern regions in India. Pursuant thereto they are said to have undertaken execution of the project. While this execution was on respondent, No. 1 and 2, entered a separate agreement whereby respondent No. 1 agreed to handover the pipeline to respondent No. 2 in four separate phases, which was later handed over.
(3) MEANWHILE disputes arose between appellants on the one hand and respondent No. 1 on the other. Appellants filed two separate notices requesting for arbitration against respondent No. 1 with the International Court of Arbitration of the ICC. These notices were challenged by respondent No. 1 in AA Nos. 74/96 and 75/96, before this court which were later dismissed as withdrawn.
(4) IT further transpires that arbitral proceedings commenced sometime in 1996 and appellants moved this court in OMP 232/97 praying for restraint order against respondent No. 2, its agents and employees from taking any steps to release any payments to the respondent No. 1 in terms of contract between them dated 22/09/1993 to the extent of INR 68,33,03,992 (Rupees Sixty-eight crores fifty five lakhs three thousand nine hundred and ninety two) plus US$ 25,410,013 (US Dollars Twenty five million four hundred and ten thousand and thirteen) with interest etc. and alternatively for a direction to these respondents to deposit such amount with the Registry of this court.
(5) APPELLANTS obtained an interim ex-parte order on 19/12/1997. The application was contested by respondent No. 1 on the plea of jurisdiction as also on merit. Learned Single Judge over-ruled the jurisdiction objection but at the same time declined to grant any injunction as prayed for against respondent No. 2. While doing so the learned Judge found that appellant had failed to establish a prima facie case and to show that respondent No. 1 was likely to render the entire arbitration proceedings in fructuous by frittering away the properties or funds either before or during the pendency of arbitration proceedings or even during the interregnum period from the date of award and its execution. Respondent No. 1 was a solvent company and had not defaulted in honouring its financial obligations and that there was no cogent material available to grant an injunction against respondent No. 2
(6) THE appellant's are agrieved of this and their case is that learned Judge had fallen in error in reaching these conclusions and findings when the material on record showed to the contrary. They have placed on record a report of Dun and Bradstreet which showed the net worth of respondent No. 1 as nil and have also sought support from a judgement of the Australian High Court frowning upon the conduct of this respondent. According to them all this was overlooked by the learned Judge to decline the injunction.
(7) BOTH respondents No. 1 and 2 have filed objections to this appeal. Respondent No. 1 has taken the stand that its financial position had vastly improved in the course of time and that it could not be charged of frittering away its resources or hiding its assets to warrant an order being passed under Section 9 of the Act.
(8) IT is also pointed out that appellants' action was malafide because they had moved this court during pendency of arbitral proceedings at Lousana, Switzerland and if they were convinced of the merit of the claim, they could have as well sought redressal from the Arbitral Tribunal. It is also claimed that respondent No. 1 had raised counter claim of over 90 million dollars against the appellants which also deserved to be protected.
(9) RESPONDENT No. 2 has totally denied its liability towards Respondent No. 1 stating that no amount was payable by it to this respondent. In fact it had asserted its own counter claims against respondent No. 1 to the extent of US- $ 136, 438,336 (Rs. 15,892,876,412).
(10) LEARNED counsel for appellants Mr. Nigam reiterated the stand taken by him before learned Single Judge. He was at pains to show that respondent No. 1 had as good as gone broke and that there was an urgent need to secure the interests of appellants lest the award to be passed by the arbitrator was rendered useless. He referred to some data to indicate the alleged grim financial position of respondent No. 1.
(11) LEARNED Senior Counsel for respondent No. 1, Mr. Chidambaram argued that appellants OMP 232/97 was misconceived and otherwise not maintainable under Section 9 of the Act. He submitted that appellants could not ask for an injunction against respondent No. 2 which was not a party to the arbitral proceedings, more so, when the financial relationship between respondents No. 1 and 2 was not in issue before the court, and when otherwise these respondents were trading claims and counter claims. He also justified the impugned order and placed reliance on some documents showing that Respondent No. 1 was recouping the financial health and that there was no warrant for apprehension that it would defeat the award, if suffered by it.
(12) EVEN as we have examined of the detailed reasoning given by learned Single Judge for declining the injunction prayed for and with which we are called upon to take a contrary view, we find that the focal point was being missed in the thick of controversy. As it is appellants are asking for restraining Respondent No. 2 from paying any money to Respondent No. 1. But once Respondent No. 2 denies its liability towards Respondent No. 1, We fail to appreciate how a restraint order could be passed against Respondent No. 2. If no money was payable by it, how could it be restrained from paying it to Respondent No. 1 and even if it was, it would turn out to be an exercise in futility.
(13) WE are told that Respondents No. 1 and 2 are engaged in a separate battle to vindicate their claims and counter claims. Whose liability is what is still in the realm of unknown and it becomes presumptuous at this stage to say that Respondent No. 2 should be deemed owing money to Respondent No. 1 and restrained from parting with it.
(14) AT the same time, it could as well be that Respondent No. 2 would be ultimately held liable and in that event it would not be out of place to explore and provide for a suitable interim arangement to secure and protect the subject matter of the Award. It would be unnecessary in such a situation to examine whether an injunction could be passed against a third party under Section 9 of the Act. The question would not arise because party to arbitral proceedings (Respondent No. 1) herein could be subjected to any appropriate order to be passed under Section 9 so as to secure the enforceability of the Award.
(15) THIS apart at one stage learned Senior Counsel Mr. Chidambaram did not dispute the position that Respondent No. 1 could be ordered to deposit the amount received by it in a Bank pending enforcement of the Award. All that he wanted was that in that case amount be required to be deposited with the Czech Banker of Respondent No. 1 which would help adjust its interest liability. This was not, however, agreeable to Mr. Nigam who thought that Respondent No. 1 would take away the amount as this court would cease to have any jurisdiction over it.
(16) TO strike a via media we dispose of this appeal by an innocuous order providing as under:-
(i) As and when any amount would be received by respondent No. 1 from respondent No. 2 pursuant to their contract agreement dated 22-9-1993 it shall be deposited by this respondent in any Czech Bank, other than its banker so as to await the outcome of enforcement of the Award. (ii) Upon such deposit, respondent No. 1 shall stand restrained from dealing with this amount in any manner whatsoever, if the award goes against it, subject of course to appropriate orders which may be passed by the court enforcing the Award.
(17) THIS obviates the necessity of examining the rival issues raised by the parties regarding solvency or otherwise of Respondent No. 1 or whether Respondent No. 2 was liable to be in juncted, being a non-party and so on.
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