Energy Ltd. V. Wescare (I) Ltd.& ANR.  INSC 310 (27 April 2010)
IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL
NO.3874. OF 2010 [Arising out of SLP [C] No.27330 of 2008] Indowind Energy Ltd.
... Appellant Wescare (I) Ltd. & Anr. ... Respondents
appellant and respondents 1 and 2 are companies incorporated under the Companies Act, 1956. Wescare Care (I) Ltd., the first respondent (for short
`Wescare'), is in the business of setting up and operating/managing windfarms
and generation of power from Wind Electric Generators. Subuthi Finance Ltd -
second respondent (`Subuthi' for short) is a promoter of the appellant company
- Indowind Energy Ltd., (referred to as `Indowind'). On 24.2.2006 an agreement
of sale was entered into between Wescare and Subuthi. The agreement described
"Wescare (India) Ltd.
its subsidiary RCI Power Ltd" as the "seller/Wescare". It 2
described Subuthi Finance Ltd. and its nominee as "buyer" and as the
"promoters of Indowind Energy Ltd." Under the said agreement, the
seller agreed to transfer to the buyer certain business assets of the seller
for a consideration of Rs.98.19 crores, of which Rs.24.19 crores was payable in
cash and Rs.74 crores by issue of 74 lakhs shares (of the face value of Rs.10/-
at a premium of Rs.90/- per share). Clause 10 of the agreement relates to
arbitration. Clause 11 of the agreement relates to approval. The said clauses
are extracted below :
Governing Law and Jurisdiction.
AGREEMENT shall be governed by and interpreted in accordance with the laws of
India. The Parties submit to the exclusive jurisdiction of the court in the
city of Chennai, Tamil Nadu. Any dispute, difference, claims or questions
arising under this agreement or concerning any matter covered by this Agreement
or touching upon this Agreement, the same shall be referred to arbitration
before a sole arbitrator to be appointed by consent of Seller, Buyer/IW. The
decision/award of the Sole Arbitrator shall be final and binding on all
parties. The provisions of the Arbitration and Conciliation Act, 1996, with
such amendments thereto as may be applicable, shall apply to the proceedings.
The venue of the arbitration shall be Chennai and the language of the
Arbitration shall be English."
anything to the contrary herein contained in this AGREEMENT this agreement is
expressly subject to the approval of the respective Boards of
Directors/Shareholders by the Seller, the Buyer and Indowind Energy Limited and
if such approval is not obtained either by the Seller, the Buyer or IW on or
before 30th June 2006 this AGREEMENT shall be null and void and of no effect
whatsoever and all transactions done under the agreement shall be reversed with
all the costs and damages to the defaulting party."
Board of Directors of Wescare at its meeting held on 28.2.2006 accorded
approval to the agreement dated 24.2.2006. The Board of Directors of Subuthi at
its meeting held on 1.3.2006 approved the said agreement.
however no such approval by the Board of Directors of Indowind.
According to Indowind, Wescare sold 31 Wind Electric Generators (WEGs) to
Indowind on 15.3.2006 for a consideration of Rs.13,48,00,700/-, out of which Rs.4.5
crores was paid in cash and Rs.8.84 crores by allotment of 884,000 shares of
Indowind to Wescare. Further, towards the purchase of another 8 WEGs from
Wescare, Indowind allotted 58,000 shares.
According to Wescare, certain disputes arose between Wescare on the one hand
and Subuthi and Indowind on the other, in respect of the said agreement.
Wescare filed three petitions under section 9 of the Arbitration and
Conciliation Act, 1996 (`the Act', for short) against Subuthi and Indowind
seeking the following interim measures :
No.641/2007 to restrain Subuthi and Indowind from alienating, encumbering or
otherwise disposing of the 31 WEGs and the land appurtenant thereto.
NO.642/2007 to restrain Subuthi and Indowind from operating or running the WEGs
pending completion of arbitration proceedings.
OA NO.975/2007 to restrain Indowind from proceeding with the issue of initial
public offer, proposed under the Red Herring Prospectus issued by it, pending
final disposal of the arbitration proceedings.
said applications were dismissed by a learned Single Judge of the Madras High
Curt on 21.8.2007, holding as follows :
Indowind has not signed nor ratified the agreement dated 24.2.2006, the
maintainability of the applications under section 9 of the Act was doubtful.
the WEGs were purchased by Indowind after paying the entire sale consideration,
Wescare was not entitled to an injunction restraining Indowind from alienating
however clarified that whatever had been stated therein was in the context of
disposal of the applications seeking interim measures under section 9 of the
Act and nothing contained therein should be construed as findings on merits and
the Arbitrator should determine the issues raised before him uninfluenced by
the observations made in the said order.
Wescare filed a petition under section 11(6) of the Act against Subuthi and
Indowind for appointment of a sole arbitrator to arbitrate upon the 5 disputes
between them in respect of agreement dated 24.2.2006. Subuthi resisted the said
petition alleging that as the agreement dated 24.2.2006 did not contemplate any
transaction between Wescare and itself (Subuthi) and as no transaction took
place between Wescare and Subuthi under the agreement dated 24.2.2006, there
was no cause of action nor any arbitrable dispute between them. Indowind
resisted the petition on the ground that it was not a party to the agreement
dated 24.2.2006 entered into between Wescare and Subuthi; that it had not ratified
the agreement dated 24.2.2006 or acted upon it; that there was no arbitration
agreement between Wescare and Indowind;
transactions of purchase of 31 WEGs were neither covered by nor in pursuance of
the agreement dated 24.2.2006 and therefore the petition was liable to be
learned Chief Justice of the Madras High Court allowed the said application
under section 11 of the Act, by the impugned order dated 1.8.2008 and appointed
a sole arbitrator. The learned Chief Justice held that Indowind was prima facie
a party to the arbitration agreement and was bound by it, even though it was
not a signatory to the agreement dated 24.2.2006. His conclusion was based on
the following findings :
Execution of the agreement dated 24.2.2006 between Wescare and Subuthi
containing the arbitration agreement, was not in dispute.
Subuthi is one of the promoters of Indowind. Both of them had a common
registered office and common Directors. The correspondence emanating from
Indowind was signed by Raja Sukumar who was the signatory on behalf of Subuthi
in the agreement dated 24.2.2006. By lifting the corporate veil, it could be
seen that Subuthi and Indowind was one and the same party.
agreement dated 24.2.2006 described Subuthi as the promoter of Indowind and
also described Indowind as the nominee of Subuthi.
had entered into an agreement for purchase of the business assets of Wescare
for its nominee Indowind. The signatory to the agreement on behalf of Subuthi
was also a Director of Indowind.
agreement dated 24.2.2006 contemplated Indowind purchasing the assets of
Wescare including the WEGs. and making payment therefor, both in cash and by
allotment of shares. Indowind had in fact purchased from Wescare 39 WEGs. in
March, 2006, the consideration for which was paid partly in cash and partly by
allotment of shares, thereby indicating that Indowind acted in terms of the
agreement dated 24.2.2006.
Red Herring Prospectus issued by Indowind in connection with the public issue
of equity shares gives a clear indication that it is bound by the agreement
dated 24.2.2006 between Wescare and Subuthi (vide Risk Factor Nos.30 and 31).
Signature of a party is not a formal requirement of an arbitration agreement
either under sub-section (4)(b) and (c) or under sub-section (5) of section 7
of the Act. Therefore, Indowind could be held to be a party to the agreement
dated 24.2.2006, even if it had not executed the said agreement.
said judgment is challenged in this appeal by special leave. On the contentions
urged the following two questions arise for consideration:
Whether an arbitration clause found in a document (agreement) between two
parties, could be considered as a binding arbitration agreement on a person who
is not a signatory to the agreement? (ii) Whether a company could be said to be
a party to a contract containing an arbitration agreement, even though it did
not sign the agreement containing an arbitration clause, with reference to its
subsequent conduct? 10. Section 7 defines an arbitration agreement and it is
extracted below :
Arbitration agreement.--(1) In this Part, "arbitration agreement"
agreement by the parties to submit to arbitration all or certain disputes which
have arisen or which may arise between them in respect of a defined legal
relationship, whether contractual or not.
arbitration agreement may be in the form of an arbitration clause in a contract
or in the form of a separate agreement.
arbitration agreement shall be in writing.
arbitration agreement is in writing if it is contained in-- (a) a document
signed by the parties' 8 (b) an exchange of letters, telex, telegrams or other
means of telecommunication which provide a record of the agreement; or (c) an
exchange of statements of claim and defence in which the existence of the
agreement is alleged by one party and not denied by the other, (5) The
reference in a contract to a document containing an arbitration clause
constitutes an arbitration agreement if the contract is in writing and the
reference is such as to make that arbitration clause part of the
`party' is defined in section 2(h) as referring to a party to an arbitration
agreement. The term arbitration agreement is defined under section 2(b) as an
agreement referred to in section 7. An analysis of sub-sections (2), (3) and
(4) of section 7 shows that an arbitration agreement will be considered to be
in writing if it is contained in : (a) a document signed by the parties; or (b)
an exchange of letters, telex, telegrams or other means of telecommunication
which provide a record of the agreement; or (c) an exchange of statements of
claim and defence in which the existence of the agreement is alleged by one
party and not denied by the other, or (d) a contract between the parties making
a reference to another document containing an arbitration clause indicating a
mutual intention to incorporate the arbitration clause from such other document
into the contract.
11. It is
fundamental that a provision for arbitration to constitute an arbitration
agreement for the purpose of section 7 should satisfy two 9 conditions : (i) it
should be between the parties to the dispute; and (ii) it should relate to or
be applicable to the dispute. [See: Yogi Agrawal v. Inspiration Clothes & U
& Ors. - 2009 (1) SCC 372].
Wescare has not entered into any agreement with Indowind, referring to the
agreement dated 24.2.2006 containing the arbitration agreement, with the
intention of making such arbitration agreement, a part of the their agreement.
Nor is it the case of Wescare that there has been any exchange of statements of
claim and defence in which it had alleged the existence of an arbitration
agreement and the same had been accepted and not denied by Indowind in the
defence statement. It is also not the case of Wescare that any exchange of
letters, telex, telegrams or other means of telecommunication referred to and
provided a record of any arbitration agreement between the parties. It
therefore follows that neither sub-section (5) nor clauses (b) and (c) of
sub-section (4) of section 7 applies. Therefore, what remains to be seen is
whether there is any `document signed by parties', as provided in clause (a) of
sub-section (4) of section 7.
Wescare puts forth the agreement dated 24.2.2006 as an agreement signed by the
parties containing an arbitration agreement but the said agreement is signed by
Wescare and Subuthi and not by Indowind. It is not 10 in dispute that there can
be appointment of an arbitrator if there was any dispute between Wescare and
Subuthi. The question is when Indowind is not a signatory to the agreement
dated 24.2.2006, whether it can be considered to be a `party' to the
arbitration agreement. In the absence of any document signed by the parties as
contemplated under clause (a) of sub-section (4) of section 7, and in the
absence of existence of an arbitration agreement as contemplated in clauses (b)
or (c) of sub-section (4) of section 7 and in the absence of a contract which
incorporates the arbitration agreement by reference as contemplated under
sub-section (5) of section 7, the inescapable conclusion is that Indowind is
not a party to the arbitration agreement. In the absence of an arbitration
agreement between Wescare and Indowind, no claim against Indowind or no dispute
with Indowind can be the subject- matter of reference to an arbitrator. This is
evident from a plain, simple and normal reading of section 7 of the Act.
Learned counsel for Wescare referred to various clauses in the agreement dated
24.2.2006 to contend that it should be deemed to be an agreement
executed/signed by Indowind. Firstly it was submitted that the agreement was
entered into by Subuthi as promoter of Indowind and also described Indowind as
its nominee and the agreement was signed on behalf of Subuthi by a person who
was also a Director of Indowind. It is submitted 11 that the agreement also
specifically stated that Subuthi was desirous of purchasing certain assets of
Wescare for its nominee Indowind, and in fact, Indowind purchased the said
assets of Wescare. This according to the learned counsel for Wescare, led to an
irresistible conclusion that Indowind was acting in terms of the agreement
dated 24.2.2006 and therefore, it would be bound by the arbitration clause
15. It is
not in dispute that Subuthi and Indowind are two independent companies
incorporated under the Companies
Act, 1956. Each company is a separate and distinct
legal entity and the mere fact that two companies have common shareholders or
common Board of Directors, will not make the two companies a single entity. Nor
will existence of common shareholders or Directors lead to an inference that
one company will be bound by the acts of the other. If the Director who signed
on behalf of Subuthi was also a Director of Indowind and if the intention of
the parties was that Indowind should be bound by the agreement, nothing
prevented Wescare insisting that Indowind should be made a party to the agreement
and requesting the Director who signed for Subuthi also to sign on behalf of
Indowind. The very fact that parties carefully avoided making Indowind a party
and the fact that the Director of Subuthi though a Director of Indowind, was
careful not to sign the agreement as on behalf of Indowind, shows that the
parties did 12 not intend that Indowind should be a party to the agreement.
Therefore the mere fact that Subuthi described Indowind as its nominee or as a
company promoted by it or that the agreement was purportedly entered by Subuthi
on behalf of Indowind, will not make Indowind a party in the absence of a
ratification, approval, adoption or confirmation of the agreement dated
24.2.2006 by Indowind.
Clause 11 of the agreement dated 24.2.2006 categorically states that the
agreement shall be null and void and of no effect whatsoever unless it is
expressly approved by the respective Board of Directors/shareholders of
Wescare, Subuthi and Indowind. It is admitted that the Board of Directors of
Wescare and Subuthi approved the agreement. But the Board of Directors or the
shareholders of Indowind did not approve the agreement. In the absence of such
approval by Indowind, and in the absence of Indowind being a party or signatory
to the agreement dated 24.2.2006, it is ununderstandable as to how Indowind can
be deemed to be a party to the agreement dated 24.2.2006 and consequently a
party to the arbitration agreement contained therein.
Wescare referred to several acts and transactions as also the conduct of
Indowind to contend that an inference should be drawn that Indowind was a party
to the agreement or that it had affirmed and approved the agreement 13 or acted
in terms of the agreement. An examination of the transactions between the
parties to decide whether there is a valid contract or whether a particular
party owed any obligation towards another party or whether any person had
committed a breach of contract, will be possible in a suit or arbitration
proceeding claiming damages or performance. But the issue in a proceeding under
section 11 is not whether there was any contract between the parties or any
breach thereof. A contract can be entered into even orally.
contract can be spelt out from correspondence or conduct. But an arbitration
agreement is different from a contract. An arbitration agreement can come into
existence only in the manner contemplated under section 7. If section 7 says
that an arbitration agreement should be in writing, it will not be sufficient
for the petitioner in an application under section 11 to show that there
existed an oral contract between the parties, or that Indowind had transacted
with Wescare, or Wescare had performed certain acts with reference to Indowind,
as proof of arbitration agreement.
Constitution Bench of this Court in Economic Transport Organisation v. M/s.
Charan Spinning Mills (P) Ltd. - 2010 (2) SCALE 427 pointed out that court
examines a document from different perspectives in different types of cases.
This Court observed:
"20. In this context, it is necessary to remember that the nature of
examination of a document may differ with reference to the context in which it
is examined. If a document is examined to find out whether adequate stamp duty
has been paid under the Stamp Act, it will not be necessary to examine whether
it is validly executed or whether it is fraudulent or forged. On the other
hand, if a document is being examined in a criminal case in the context of
whether an offence of forgery has been committed, the question for examination
will be whether it is forged or fraudulent, and the issue of stamp duty or
registration will be irrelevant.
the document is sought to be produced and relied upon in a civil suit, in
addition to the question whether it is genuine, or forged, the question whether
it is compulsorily registrable or not, and the question whether it bears the
proper stamp duty, will become relevant. If the document is examined in the
context of a dispute between the parties to the document, the nature of
examination will be to find out that rights and obligation of one party
vis-`-vis the other party. If in a summary proceedings by a consumer against a
service provider, the insurer is added as a co-complainant or if the insurer
represents the consumer as a power of attorney, there is no need to examine the
nature of rights inter-se between the consumer and his insurer."
scope of examination of the agreement dated 24.2.2006, by the learned Chief
Justice or his Designate under section 11(6) is necessarily to be restricted to
the question whether there is an arbitration agreement between the parties. The
examination cannot extend to examining the agreement to ascertain the rights
and obligations regarding performance of such contract between the parties.
This Court in SBP & Co. v. Patel Engineering Limited [2005 (8) SCC 618] and
in National Insurance Co. Ltd.
Polyfab Pvt. Ltd. [2009 (1) SCC 267] has held that when an application is filed
under section 11, the Chief Justice or his Designate is required to decide only
two issues, that is whether the party making the application has approached the
appropriate court and whether there is an 15 arbitration agreement and whether
the party who has applied under section 11 of the Act, is a party to such
agreement. Therefore, the Chief Justice exercising jurisdiction under section
11 of the Act has to only consider whether there is an arbitration agreement
between the petitioner and the respondent/s in the application under section 11
of the Act. Any wider examination in such a summary proceeding will not be
20. In so
far as the issue of existence of arbitration agreement between the parties, the
learned Chief Justice or his Designate is required to decide the issue finally
and it is not permissible in a proceeding under section 11 to merely hold that
a party is prima facie a party to the arbitration agreement and that a party is
prima facie bound by it. It is not as if the Chief Justice or his Designate
will subsequently be passing any other final decision as to who are the parties
to the arbitration agreement. Once a decision is rendered by the Chief Justice
or his Designate under section 11 of the Act, holding that there is an
arbitration agreement between the parties, it will not be permissible for the
arbitrator to consider or examine the same issue and record a finding contrary
to the finding recorded by the court. This is categorically laid down by the
Constitution Bench in SBP. Therefore the prima facie finding by the learned
Chief Justice that Indowind is a party to the arbitration agreement is not what
is contemplated by the Act.
16 21 It
is no doubt true that if Indowind had acknowledged or confirmed in any
correspondence or other agreement or document, that it is a party to the
arbitration agreement dated 24.2.2006 or that it is bound by the arbitration
agreement contained therein, it could have been possible to say that Indowind
is a party to the arbitration agreement. But that would not be under section
7(4)(a) but under section 7(4)(b) or section 7(5). Be that as it may.
not the case of Wescare. In fact, the delivery notes/invoices issued by Wescare
do not refer to the agreement dated 24.2.2006. Nor does any letter or
correspondence sent by Indowind refers to the agreement dated 24.2.2006, either
as an agreement executed by it or as an agreement binding on it. We may now
refer to the several documents referred to and relied on by Wescare.
first is in regard to the sale of WEGs by Wescare to Indowind.
letter dated 15.3.2006 enclosing the invoice, the delivery notes dated
15.3.2006 given by Wescare to Indowind, the confirmation dated 15.3.2006 by
Wescare to Indowind relating to the sale of WEGs, relied on by Wescare, very
significantly do not refer to the agreement dated 24.2.2006. They are straight
and simple delivery notes and an invoice in regard to the sale of goods. They can
be independent transactions which do not depend on or 17 relate to the
agreement dated 24.2.2006. If they were with reference to the agreement dated
24.2.2006, it is strange that Wescare did not choose to refer to the said
agreement in any of these documents.
Strong reliance is placed on the Red Herring Prospectus issued by the Indowind
in connection with the public issue of its shares. We extract below the relied
upon portions of the prospectus :
We have agreed to takeover the assets of Wescare (India) Limited, subject to
approval of owners of assets and statutory formalities, but only a portion of
acquisition has been completed.
Company agreed to takeover wind mills along with land, infrastructure and
spares from Wescare India Limited. But due to non receipt of approvals from the
lenders/lessors, only a part of the total being 6.49 MW has been acquired by
us. The Company is not certain of completing the remaining acquisition. We had
paid the total amount for 39 windmills, however only 28 windmills were
delivered to us representing nearly 72% of the total money paid by us.
of our Promoters, Subuthi Finance Limited, has entered into an agreement dated
February 24, 2006 with Wescare (India) Limited for the acquiring wind mills and
other assets in the name of its nominee viz.
Energy Limited for a consideration aggregating approximately Rs.9819 lacs.
consideration for the above was to be partly settled in partly in cash (Rs.2419
lacs) and partly by way of shares (74 lacs) of Indowind Energy Limited.
(India) Limited has filed the following applications before the Hon'ble High
Court of Madras under Section 9 of the Arbitration and Conciliation Act, 1996 :
Application No. Applicant Respondents 1 O.A.No.641 of 2007 Wescare India (i)
Subuthi Finance Limited Limited (ii) Indowind Energy Limited 2 O.A.No.642 of
2007 -same as above- -same as above- 3 Appl. No.3808 of 2007 -same as above-
-same as above- 4 Appl. No.3808 of 2007 -same as above- -same as above- All above
applications are pending before the Hon'ble High Court of Madras. For further
details of the same, please refer section titled "Outstanding Litigations
and Material Developments" on page 190 of this Red Herring
of the Prospectus merely refers to Indowind agreeing to take over the wind
mills along with land, infrastructure and spares from Wescare. It does not
refer to the agreement dated 24.2.2006 nor does it state that the takeover of
the wind mills etc., was in pursuance of the agreement dated 24.2.2006. Para 31
of the Prospectus specifically states that Subuthi had entered into an
agreement dated 24.2.2006 with Wescare to acquire WEGs and other assets in the
name of its nominee Indowind. This has never been disputed by anyone. But what
is significant is that there is no acknowledgement or statement that the said
agreement was authorized to be entered on its behalf by Indowind or Indowind
had ratified or approved the said agreement. Para 31 also refers to the
applications under section 9 filed by Wescare and the interlocutory
applications filed in such applications. But then that also does not help as in
fact in the said application under section 9 19 the High Court has held that
Indowind is not a party to the agreement dated 24.2.2006 and therefore not a
party to an arbitration agreement.
Wescare relied upon two decisions of the US Court of Appeals to contend that a
person to be bound by an arbitration agreement need not personally sign the
written arbitration agreement. [FISSER v. International Bank - 282 F.2d 231
(1960) and J.J.Ryan & Sons, Inc. v. Rhone Poulene Textile, S.A. - 863 F.2d
315]. These decisions are of no assistance as they do not relate to a provision
similar to section 7 of the Indian Act.
view of the above, we allow this appeal, set aside the order of the High Court
appointing an Arbitrator in regard to the claims of Wescare against Indowind
and dismiss the application under section 11(6) of the Act filed by Wescare in
so far as Indowind is concerned. The appointment of Arbitrator in so far as
Subuthi is concerned, is not disturbed. It is however open to Subuthi to raise
all contentions including the contention relating to absence of arbitral
dispute, before the Arbitrator.
...............................J. (R V Raveendran)