Molasses Co. B.V. Vs. Mysore Mercantile Co. Ltd. & Ors  Insc 817 (16 November 2006)
O R D E R Petitioner and First Respondent entered into a contract of supply of
16,000 metric tonnes of Blackstrap Cane Molasses of Iranian origin.
contends that it performed its obligations under the contract and delivered
molasses in terms thereof. However, Respondent No.1 had arranged for its
financiers M/s Hazoor Sahib Chemicals Private Limited to open an irrevocable
letter of credit. Respondent No.1 and the said financier failed to perform its
obligations to pay in terms of the letter of credit.
alleged that the Respondent Nos.1 and 2 in collusion with said Hazoor Sahib
Chemicals caused Petitioner to part with possession of molasses by deceit and
sold the same to Respondent No.3. Respondent No. 3 caused the molasses to be
stored in custom bonded tanks belonging to Konkan Storage Systems Private
Limited, who fraudulently represented itself to be the importer of the
application under Section 9 of the Arbitration and Conciliation Act, 1996 (for
short, 'the 1996 Act') was filed before the District Court at Ernakulam in
January 2005, which was marked as Arbitration OP No. 9 of 2005. An order of
status quo was passed. The parties thereafter sought to settle their dispute, wherefor
an agreement was entered into on or about 15.02.2005.
6 of the said agreement reads as under :
parties hereby agree to have the Arbitration O.P. No.9 of 2005 before the
District Court at Ernakulam disposed in terms of this agreement and seek
directions to Konkan Storage Systems (P) Ltd., to hold the Cargo at the
instance of the First Party and to deliver the same only on the instructions of
the First Party, also requiring Konkan Storage Systems Pvt. Ltd., to disregard
any instructions from Hazoor Sahib Chemicals Pvt. Ltd." Clause 9 of the
said contract provides that the agreement shall be governed by and construed in
accordance with Indian law.
in terms of the said agreement, Respondents herein conceded that none of them
had acquired any right, title or interest in molasses and recognized the title
of Petitioner therein. Respondent No. 3 also allegedly undertook to pay for the
entire molasses at the rates stipulated in the agreement within a period within
a period of 75 days from the date of the agreement, in regard whereto
Respondent Nos. 1 and 2 agreed to underwrite the performance of the said
terms of the said agreement, the District Court, Ernakulam, passed a consent
order. Petitioner, however, alleges that Respondent No.3 only paid for 5500
metric tonnes of molasses and failed to fulfill the other terms of the said
expiry of the period fixed for compliance of the terms thereof, Petitioner
approached the District Court seeking permission to act in terms of the
agreement. However, Respondent No.3 filed an Interlocutory Application seeking
for modification thereof as also for restraining it from invoking its
contractual rights. The application filed by Respondent No.3 was dismissed. The
Interlocutory Application filed by Petitioner was allowed by an order dated
02.06.2005. The legality and/or validity of the said order was questioned by
Respondent No.3 by preferring appeal thereagainst before the High Court of Kerala
in terms of Section 37 of the 1996 Act.
Division Bench of the Kerala High Court by its order dated 01.12.2005 opined
that the learned District Court exceeded its jurisdiction in permitting
Petitioner to sell the goods itself, opining :
judgment dated 29.06.05 all these appeals were dismissed. The Court also held
"in this case, whether time is essence of contract, whether the appellant
or other parties to the settlement violated the terms of the settlement, if so
there is any justification etc. are all matters to be decided by the arbitrator
if such issues are raised before the arbitrator". So the contention as to
who has committed the breach, who all had violated the terms of the agreement
are all subject matter of arbitration.
it is so, the court cannot enforce the agreement in terms of clause 4 in favour
of any party and grant permission to the 1st respondent to sell the Molasses.
In other words, when it is asserted by one party and denied by other regarding the
right under clause 4, and thus there arises a dispute pending resolution by
arbitration, it will be in excess of jurisdiction under section 9 of the Act to
permit the party to sell the goods and thus enforce the contract. It has to be
borne in mind that clause 7 gives the power to arbitrate and it is by virtue of
an arbitration clause that Arbitration OP itself is filed. So the court below
erred in enforcing clause 4 in permitting the petitioner himself to sell the
goods. The court in exercising the jurisdiction under section 9 only by way of
an interim measure, till the disputes are finally resolved by the Arbitrator.
Hence the order passed by the court below to the extent it permitted a party to
the agreement to sell the goods is concerned, is liable to be set aside."
An interim order passed by the District Court was set aside and it was directed
to appoint a commissioner to sell the cargo in public auction after due
and differences, thus, having arisen between the parties, the arbitration
agreement contained in Clause 7 of the agreement dated 15.02.2005 was invoked,
which was in the following terms :
dispute, difference of opinion or question as to the meaning, interpretation or
execution of this agreement that the parties hereto may be unable to settle by
mutual agreement shall be submitted to arbitration in the City and country of
the choice of the First Party, by a Committee of three Arbitrators, one to be
appointed by the First Party and one to be appointed jointly by the Second,
Third and Fourth Parties and the third Arbitrator to be appointed by the first
two Arbitrators or, failing agreement between them, by the President of the
Chamber of Commerce of the City, which is to be the venue of Arbitration. Any
majority decision reached by the Committee of Arbitrators so set up, shall be
final and binding on all Parties hereto." In terms of the said arbitration
agreement, by a letter dated 04.11.2005, Petitioner herein appointed an
arbitrator. It also specified the venue of the arbitration, stating :
note that the venue of arbitration shall be Amsterdam in the Netherlands. Please further note that SvG in
exercise of their right under the arbitration clause contained in the Agreement
have nominated Mr. S.J. Hoekstra residing at klipper 79, 2991 KL, Barendrecht, The
Netherlands as one of the arbitrators." By reason of the said notice,
Respondents herein jointly were asked to nominate their arbitrator and
communicate the nomination to Petitioner as also to the arbitrator nominated by
it, so that the third arbitrator could in turn be appointed and the process of
adjudication of the dispute commences.
notices were not served upon all the respondents.
No.3 responded to the said notice. However, notice could not be served upon the
Second Respondent. In the aforementioned situation, an application under
sub-section (6) of Section 11 has been filed, praying :
Appoint an arbitrator on behalf of the respondents.
Direct the appointment of the third arbitrator in terms of clause 7 of the
Agreement and the Act.
Pass any other or further orders and directions that this Hon'ble Court may deem just fit and proper in the
interests of justice and equity." Before us no counter affidavit has been
filed by Respondents despite opportunities having been granted in that behalf.
Respondent No.3 was not a party to the original agreement. However, the parties
hereto entered into an arbitration agreement when the matter was pending in the
Court of the District Judge. Clause 7 of the agreement contained the
arbitration clause, as referred to hereinbefore. It is this clause which is
sought to be enforced.
11 of the 1996 Act provides for appointment of arbitrators.
(2) of Section 11 postulates that the parties are free to agree on a procedure
for appointing the arbitrator or arbitrators, subject, of course, to the
provisions of sub-section (6) thereof. Sub-sections (5) and (6), which are
relevant for the purpose of this case, read as under :
Failing any agreement referred to in sub-section (2), in an arbitration with a
sole arbitrator, if the parties fail to agree on the arbitrator within thirty
days from receipt of a request by one party from the other party to so agree
the appointment shall be made, upon request of a party, by the Chief Justice or
any person or institution designated by him."
Where, under an appointment procedure agreed upon by the parties, -
party fails to act as required under that procedure; or
parties, or the two appointed arbitrators, fail to reach an agreement expected
of them under that procedure; or
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
1996 Act envisages party autonomy. The constitution of the arbitral tribunal in
the manner in which it is to be appointed concededly depends upon the type of
substantive agreement. When the parties to the agreement are to nominate one
arbitrator each on their behalf, the third arbitrator is appointed by the
not in dispute that Respondents herein have failed and/or neglected to appoint
an arbitrator in terms of the arbitration agreement.
submission was made by the learned counsel appearing on behalf of Respondents
that they would face immense difficulties in proceeding before an arbitral
tribunal at Amsterdam in Netherlands; but this Court in exercise of its jurisdiction under
Section 11(6) of the 1996 Act cannot supplant the agreement of the parties.
parties entered into the Arbitration Agreement with their eyes wide open. They
knew the terms thereof. This Court in exercise of its jurisdiction under
Section 11(6) of the 1996 Act cannot alter the terms of the contract.
idle to contend that there is no arbitration clause. It is furthermore not in
dispute that the applicant is a company carrying on business from Netherlands. The goods are also said to be of
would, therefore, not be correct to say that the agreement does not fall within
the scope of International Commercial Arbitration as defined in Section 2(1)(f)
of the 1996 Act. The identity and location of the Petitioner being a foreign
country would bring the case within the purview of International Commercial
this case, we are not concerned as to whether any of the respondents has
complied with his obligations under the contract or not, the same would fall
for determination by the Arbitral Tribunal, nor are we concerned with under
what circumstances the said agreement was entered into. The plea raised on
behalf of the respondents that by shifting the scene of activity to the Netherlands would be getting undue advantage of
situation to the Petitioner is again a matter wherewith we are not concerned at
this stage. The law applicable to the agreement may be the Indian law but the
same would not mean that the arbitration agreement is invalid.
Court cannot also direct appointment of a single Arbitrator in place of three
Arbitrators or change the place of Arbitration as provided for in the
agreement. The same would amount to alteration of terms of the agreement
entered into by and between the parties. In terms of Section 11(6) of the 1996
Act, the Court would derive jurisdiction only when a person being a party to
the Arbitration agreement fails to perform a function entrusted to it thereunder.
It is, therefore, not possible to accede to the request of the learned counsel
for the Arbitrator.
Lloyd Ltd. v. Petronet MHB Ltd. [(2006) (2) SCC 638], this Court cited with
approval the ratio laid down in Datar Switchgears Ltd. v. Tata Finance Ltd.
[(2000) 8 SCC 151] which was in the following terms :
far as Section 11(6) is concerned, if one party demands the opposite party to
appoint an arbitrator and the opposite party does not make an appointment
within 30 days of the demand, the right to appointment does not get
automatically forfeited after expiry of 30 days. If the opposite party makes an
appointment even after 30 days of the demand, but before the first party has
moved the court under Section 11, that would be sufficient. In other words, in
cases arising under Section 11(6), if the opposite party has not made an
appointment within 30 days of demand, the right to make appointment is not
forfeited but continues, but an appointment has to be made before the former
files application under Section 11 seeking appointment of an arbitrator. Only
then the right of the opposite party ceases."
again in You One Engineering & Construction Co. Ltd. & Anr. v. National
Highways Authority of India (NHAI) [(2006) 4 SCC 372], a learned Judge opined:-
"10The Arbitration agreement clearly envisages the appointment of the
presiding arbitrator by IRC. There is no qualification that the arbitrator has
to be a different person depending on the nature of the dispute. If the parties
have entered into such an agreement with open eyes, it is not open to ignore it
and invoke exercise of powers in Section 11(6)." In National Highways
Authority of India & Anr. v. Bumihiway DDB Ltd. (JV) & Ors. [(2006) 9
SCALE 564], it was opined:- "44The parties have entered into a contract
after fully understanding the import of the terms so agreed to from which there
cannot be any deviation. The Courts have held that the parties are required to
comply with the procedure of appointment as agreed to and the defaulting party
cannot be allowed to take advantage of its own wrong." It is also not a
case where Petitioner has waived its right under the arbitration agreement, as
was the case of B.S.N.L. & Ors. v. M/s Subhash Chandra Kanchan & Anr.
[2006 (9) SCALE 217].
Court appoints Justice R.C. Chopra, a former Judge of the High Court of Delhi
as an Arbitrator on behalf of Respondents herein. The learned Arbitrator shall
fix the quantum of his fees and other expenses. The learned Arbitrators
indisputably would appoint a third Arbitrator in terms of clause (vii) of the
agreement dated 15.2.1995. However, keeping in view the peculiar facts and
circumstances of this case to which, I had adverted to, the Arbitral Tribunal
may consider the desirability of making an award as expeditiously as possible.
The Respondents shall bear the cost of the applicant which is quantified at
learned Arbitrators shall, however, be at liberty to determine their venue in
regard to sub-Section (1) of Section 20 of the 1996 Act as and when necessary.