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Delhi High CourtIndian Cases

Bpl Communications Ltd. vs Punj Lloyd Ltd. on 3 November 2003

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Delhi High Court
Bpl Communications Ltd. vs Punj Lloyd Ltd. on 3 November, 2003
Equivalent citations: 2004IAD(DELHI)8, 2004(1)ARBLR46(DELHI), [2005]125COMPCAS41(DELHI), 108(2003)DLT198, 2004(1)RAJ256
Author: Mahmood Ali Khan
Bench: Mahmood Ali Khan
JUDGMENT

Mahmood Ali Khan, J.

1. Genesis of this controversy lies in application IA No.12085/02 filed by the defendant under Section 8 of the Arbitration and Conciliation Act, 1996 (for short the Act). The plaintiff filed a civil suit against the defendant with the averment that the plaintiff was engaged in the business of establishing communication network in India through its subsidiary. The defendants No.1 & 2 were the share holders of defendant No.3. Other share holders of defendant No.3 are mentioned in Annexure-A to the plaint. They are represented by defendant No.2 by virtue of power of attorney executed by them in favor of defendant No.3. Those share holders had agreed to sell and transfer their share to the plaintiff. The present suit is filed against them also. Defendants No.1 & 2 and the share holders mentioned in Annexure-A together held 3,33,75,280 equity shares of defendant no.3 which is 97.8% of the total equity paid up share capital. The defendants and other share holders mentioned in Annexure-A in February, 2001 desired to sell their share holding and the negotiations were held with the plaintiff. Accordingly, an agreement (share purchase agreement) was executed on 29.3.2001 between the parties for the purchase of entire 97.8% share held by the defendants no.1 & 2 and other share holders as mentioned in annexure A, in the defendant no.3. The total consideration payable for this transfer was Rs.209.996 crores. This transaction was subject to fulfilllment of certain conditions precedent. One of the condition was that the plaintiff would pay a sum of Rs.10 crores to the defendant upon execution of Escrow agreement which would have authorised Escrow agents to hold the equity shares which were to be sold to the plaintiff. Escrow agreement was executed on 12.4.2001 between the plaintiff, the defendants and AIA Capital India Pvt. Ltd (Escrow agent). On payment of Rs.10 crores the defendant and other share holders were to deposit 26% shares totalling Rs.88,62,200 with the Escrow Agent. A sum of Rs.5 crores paid to the defendant no.1 by cheque on 12.4.2001 which was acknowledged in the memorandum executed on 12.4.2001. It was also agreed that the balance of Rs.5 crores was to be paid on or before 30.4.2001. The plaintiff started complying with the conditions precedent to complete the transaction. The plaintiff is held and owned by various shareholders including foreign investors and the plaintiff had to obtain their prior consent and approval before going forward with the transaction so as to comply with the condition precedent in terms with the agreement. The plaintiff called a meeting of the shareholders at the first step. On 3.5.2001 the defendants and other shareholders mentioned in Annexure A served a notice on the plaintiff demanding the balance of Rs.5 crores. The plaintiff was trying to obtain the consent and approval of the foreign shareholders, therefore, sought extension of time by letter dated 28.5.2001 in terms of the agreement. The shareholder of the plaintiff, however, refused to accord their approval for the purchase of share of defendant no.3. Crucial condition precedent, therefore, could not be satisfied and the plaintiff became entitled to the refund of advance payment of Rs.5 crores from the defendant no.1. On 3.6.2001 the plaintiff served a notice terminating the share purchase agreement and demanding the refund of Rs.5 crores. As a counter blast the defendant no.1 & 2 and other shareholders mentioned in Annexure A on 4.6.2001 and 5.6.2001 sent notices of termination of the share purchase agreement to the plaintiff. The defendants also sent a letter to the Escrow Agent on 5.6.2001 requiring it to release the shares held by it. The defendants illegally forfeited the amount purportedly under Clause 27.2.1 of the share purchase agreement. The clause is void and unenforceable in law being a stipulation in the nature of a penalty. The plaintiff through an advocate served a notice on the Escrow agent on 5.6.2001 requiring it to hold back the share. The plaintiff was entitled to the refund of the amount of Rs.5 crores advanced by virtue of clause 27.2.4 of the share purchase agreement. The defendants no.1 & 2 however in breach of Escrow agreement and share purchase agreement wrote to Escrow agent to hand over the Escrow document to the person authorised by them without informing the plaintiff. The Escrow agent got in touch with the plaintiff by letter dated 12.6.2001 in view of the conflicting instructions to him. The plaintiff again demanded refund of Rs.5 crores from the defendant by letter dated 18.6.2001 raising objection against the alleged forfeiture of the said sum. The agreement had become void because of non fulfilllment of the conditions precedent i.e non approval of the shareholders of the plaintiff which resulted in the termination of the share purchase agreement and Escrow agreement and release of Escrow agent. Consequently, the parties were restored back to their original position that obtained before the agreement was entered into by entering into an agreement dated 12.7.2001. It was an implied term of the said agreement that the defendant would refund Rs.5 crores when the shares will be returned to the defendant. On 12.7.2001 the Escrow agent returned the share to the defendant and the defendants became liable to refund the amount immediately after receiving the original share certificate and share transfer deeds. The defendants were under obligation to repay the advance of Rs.5 crores to the plaintiff. On 19.9.2001 BPL Broadband Networks ltd a sister concern of the plaintiff against whom the defendant no.1 was claiming some money wrote to the defendant no.1 that after adjustment the alleged outstanding payment from the advance of Rs.5 crores already paid by the plaintiff to the defendant for the purchase of the shares the balance may be refunded as per agreement dated 12.7.2001. But the defendant no.1 did not agree to this arrangement. Despite reminders the defendants no.1 & 3 have not cared to repay the balance. They are liable to pay interest at the rate of 20% per annum from 12.7.2001 till the date of payment. A sum of Rs.1,60,00,000 has accrued as interest till the date of filing of the suit. The plaintiff sought the following relief in the suit:-

a) declare that clause 27.2.1 of the Share Purchase Agreement is in a stipulation in the nature of penalty and hence void and unenforceable.
b) declare that the forfeiture of the sum of Rs.5 crores by the defendants no.1 & 2 and the other shareholders as mentioned in Annexure A is illegal and void.
c) pass a decree for the sum of Rs.6,60,00,000 (Rs.six crores sixty lacs only) against the defendants no.1 & 2 and the other shareholders as mentioned in Annexure A (Sellers) jointly and severally Along with future and pendente lite interest at the rate of 24% per annum thereon till the date of payment of the same to the plaintiff.
d) in the alternative, declare that the plaintiff is entitled to the relief against forfeiture and consequently pass a decree directing the defendants no.1 & 2 the other shareholders as mentioned in Annexure A to pay the sum of Rs.5,00,00,000 together with interest @ 24% per annum from 12.7.2001 until payment.
2. At the hearing counsel for the plaintiff has stated that relief in paragraph (a), is not pressed as the plaintiff has already sought amendment of the plaint for deletion of this relief in IA No.143/03. The relief in clause (a) is sought to be substituted by a relief “declare that the share purchase agreement dated 29.3.2001 has been mutually terminated by the parties with effect from 12.7.2001 and hence is of no force and effect.”

3. The defendants did not file the written statement instead they have filed the present application IA No.12085/02 under Section 8 of the Act for making reference of the dispute between the parties for resolution by arbitration. In the application after referring to the relief claimed in the suit it was contended that the issues which arise in the suit are whether clause 27.2.1 of the share purchase agreement was null and void; whether the alleged forfeiture of Rs.5 crores by the defendant no.1 and 2 and other sellers was illegal and void and; whether the defendant and or the other shareholders were liable to pay Rs.5 crores Along with interest to the plaintiff. It was submitted that all these issues arose in connection with the share purchase agreement dated 29.3.2001 executed between the plaintiff and the defendants and other shareholders and the defendant no.3 company which stipulated that all disputes arising out of and in relation to the said agreement would be referred to an arbitrator. Clause 23 of the share purchase agreement which provided for arbitration was reproduced and it was submitted that in view of the arbitration clause the suit was not maintainable and the claim of the plaintiff was liable to be referred to the arbitrator under Section 8 of the Act. Copy of the share purchase agreement dated 29.3.2001 was annexed to the application.

4. The plaintiff contested this application and in the reply alleged that the subject matter of this suit was not the subject of any arbitration agreement; the defendant by their conduct have waived and/or abandoned the alleged arbitration agreement so became disentitled to the relief under Section 8 of the Act; there did not exist any valid arbitration agreement between the parties and; the disputes are not arbitrable. It was further alleged that the defendant no.1 had filed a caveat in the court on 25.10.2001 in anticipation of this suit requesting that before hearing any application filed by the plaintiff a notice of the application be given to them. The defendant as such did not think that the arbitration proceedings could be initiated in connection with the dispute. Even otherwise they waived and abandoned their right under the arbitration agreement. After the service of the notice the suit was taken up for hearing by the court on 3.12.2002. The defendant had ample opportunity to file an application under Section 8 of the Act but it did not file before the case was listed. On 3.12.2002 counsel for the defendant appeared and made detailed submissions on the substance of the dispute and thereby waived their right to refer the dispute, if at all, to the arbitration. It would be clear from the order of this court passed on 3.12.2002. Six days after the order was passed on 10.12.2002 instead of filing an application under Section 8 of the Act the defendants filed a substantive appeal FAO(OS) No.415 and 417 of 2002. The defendants also filed their replies to each of the applications filed by the plaintiff disclosing the entire case on merit and their submission on the substance of the dispute. For this reason application under Section 8 deserves to be dismissed. Even otherwise the prayer made in the application has no merit. The defendants never intended to invoke and enforce the arbitration agreement. They never invoked the arbitration clause. Sections 5 & 8 of the Act curtail the right of a litigant to seek redressal before a judicial forum so they are to be strictly construed. The arbitration clause even otherwise stand superseded by agreement dated 12.7.2001 and do not survive to be invoked. The arbitration agreement dated 29.3.2001 perished on the execution of the new agreement dated 12.7.2001. Other allegations made in the application were also repudiated.

5. Admittedly the plaintiff had entered into an agreement dated 29.3.2001 for purchase of shares of defendant no.3 for consideration and in accordance with the terms of agreement it had advanced a sum of Rs.5 crores to the defendant. On 12.4.2001, a memorandum was executed between the parties to the suit and Escrow Agent which acknowledged the payment of Rs.5 crores and as per plaintiff partially modified the terms of earlier agreement. But later on it failed to obtain the consent and approval of its shareholders to this deal, therefore, was unable to buy the shares and pay the balance amount due. The plaintiff then demanded the refund of the balance amount of Rs.5 crores from the defendant which refused to oblige. On 12.7.2001 the parties entered into another agreement whereby they allegedly terminated and cancelled the share purchase agreement dated 29.3.2001. According to the plaintiff the implied term of the new agreement was that the shares, which were in the custody of Escrow Agent pending completion were to be returned to the defendants and the amount of Rs.5 crores paid by the plaintiff to the defendants no.1 & 2 shall be refunded back to the plaintiff. Escrow agent on 12.7.2001 returned the shares to the defendants but the amount of Rs.5 crores is not refunded by the defendants to the plaintiff. The plaintiff accordingly filed a civil suit for recovery of the amount of Rs.5 crores together with interest accrued thereon. The relief claimed in the suit have already been reproduced in the aforementioned paragraphs. The plaintiff has challenged to the right of the defendant to forfeit the amount of Rs.5 crores purportedly by virtue of clause 27.2.1 of the share purchase agreement dated 29.3.2001. The plaintiff had filed an application for amendment of the plaint for substituting clause (a) of prayer clauses for seeking declaration that the agreement dated 29.3.2001 has been terminated by the parties with effect from 12.7.2001 and so it was inoperative and ineffective.

6. The share purchase agreement dated 29.3.2001, inter alia, stipulated that all disputes arising out and in relation to the said agreement will be referred to arbitration. Clause 23 of the said agreement provided as under:-

7. Any dispute or difference between the parties, arising out of or in connection with the Agreement shall be solved amicably by discussions and negotiations. Unresolved disputes or differences if any shall be referred to arbitration in accordance with the provisions of the Arbitration and Conciliation Act, 1996. The venue of the arbitration shall be at Bangalore.

8. The defendants were served with the summons of the suit and have filed the instant application under Section 8 of the Act with the prayer that the dispute, which has arisen between the parties out of and in relation to the agreement dated 29.3.2001, subject matter of the suit, were subject of the arbitration agreements, therefore, it is required to be referred to an arbitrator for resolution. This application is resisted by the plaintiff primarily on the plea that the share purchase agreement dated 29.3.2001 was superseded by the subsequent agreement dated 12.7.2001.

9. The application is filed under Section 8 of the Act. Before adverting on the facts of the case, is will be necessary to understand the scope and ambit of this provision in the light of various pronouncements of Supreme Court. It is apt to reproduce Section 8 as under:-

“8. Power to refer parties to arbitration where there is an arbitration agreement-
(1)A judicial authority before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party so applies not later than when submitting his first statement on the substance of the dispute, refer the parties to arbitration.
(2)The application referred to in sub-section (1) shall not be entertained unless it is accompanied by the original arbitration agreement or a duly certified copy thereof.
(3) Notwithstanding that an application has been made under sub-section(1) and that the issue is pending before the judicial authority, an arbitration may be commenced or continued and an arbitral award made.”
10. The Supreme Court in P.Anand Gajapathi Raju & Others Vs. P.V.G.Raju (dead) & Others, has held that language of Section 8 is pre-emptive in nature. Therefore, in cases where there is an arbitration clause in the agreement, it is obligatory for the Court to refer the party to arbitration in terms of their arbitration agreement and nothing remains to be decided after such an application is made except to refer the disputes to an Arbitrator. In Hindustan Petroleum Corporation Limited Vs. M/s. Pinkcity Midway Petroleums, , it was held that it is clear that if, in an agreement between the parties, there is a clause for arbitration, it is mandatory for the Civil Court to refer the disputes to an Arbitrator. It was further held that Section 16 of the Act has empowered the Arbitrator to rule its own jurisdiction including rule on any objection with respect to the existence or validity of the arbitration agreement. The Court referred to the judgment of Supreme Court in M/s. Konkan Railway Corporation Limited & Another Vs. M/s. Rani Construction Private Limited, where with reference to the powers of the Arbitrtor under Section 19, the Supreme Court had held thus:-

“19. It might be that though the Chief Justice or his designate might have taken all due care to nominate an independent and impartial arbitrator, a party in a given case may have justifiable doubts about that arbitrator’s independence or impartiality. In that event, it would be open to that party to challenge the arbitrator under Section 12, adopting the procedure under Section 13. There is no reason whatever to conclude that the grounds for challenge under Section 13 are not available only because the arbitrator has been nominated by the Chief Justice or his designate under Section 11.”
11. The Supreme Court then proceeded to hold in paras-20 and 21 of the judgment as under:-

“20. It might also be that in a given case the Chief Justice or his designate may have nominated an arbitrator although the period of thirty days had not expired. If so, the arbitral tribunal would have been improperly constituted and be without jurisdiction. It would then be open to the aggrieved party to require the arbitral tribunal to rule on its jurisdiction. Section 16 provides for this. It states that the arbitral tribunal may rule on its own jurisdiction. That the arbitral tribunal may rule `on any objections with respect to the existence or validity of the arbitration agreement’ shows that the arbitral tribunal’s authority under Section 16 is not confined to the width of its jurisdiction, as was submitted by learned counsel for the appellants, but goes to the very root of its jurisdiction. There would, therefore, be no impediment in contending before the arbitral tribunal that it had been wrongly constituted by reason of the fact that the Chief Justice or his designate had nominated an arbitrator although the period of thirty days had not expired and that, therefore, it had no jurisdiction.
21. The schemes made by the Chief Justices under Section 11 cannot govern the interpretation of Section 11. If the schemes, as drawn go beyond the terms of Section 11, they are bad and have to be amended. To the extent that the appointment of arbitrators by the Chief Justice of India scheme, 1996, goes beyond Section 11 by requiring, in clause 7, the service of a notice upon the other party to the arbitration agreement to show cause why the nomination of an arbitrator, as requested, should not be made, it is bad and must be amended. The other party needs to be given notice of the request only so that it may know of it and it may, if it so chooses, assist the Chief Justice or his designate in the nomination of an arbitrator.”
12. In Smt.Kalpana Kothari Vs. Smt. Sudha Yadav & Others, , Supreme Court elucidated the scope of Section 8 of the Act vis-a-vis Section 34 of repealed Arbitration Act of 1940 as follows:-

“Section 34 of the 1940 Act provided for filing an application to stay legal proceedings instituted by any party to an arbitration agreement against any other party to such agreement, in derogation of the arbitration clause and attempts for settlement of disputes otherwise than in accordance with the arbitration clause by substantiating the existence of an arbitration clause and the judicial authority concerned may stay such proceedings on being satisfied that there is no sufficient reason as to why the matter should not be referred to for decision in accordance with the arbitration agreement, and that the applicant seeking for stay was at the time when the proceedings were commenced and still remained ready and willing to do all things necessary to the proper conduct of the arbitration. This provision under the 1940 Act had nothing to do with actual reference to the arbitration of the disputes and that was left to be taken care of under Sections 8 and 20 of the 1940 Act. In striking contrast to the said scheme underlying the provisions of the 1940 Act, in the new 1996 Act, there is no provision corresponding to Section 34 of the old Act and Section 8 of the 1996 Act mandates that the Judicial Authority before which an action has been brought in respect of a matter, which is the subject matter of an arbitration agreement, shall refer the parties to arbitration if a party to such an agreement applies not later than when submitting his first statement. The provisions of the 1996 Act do not envisage the specific obtaining of any stay as under the 1940 Act, for the reason that not only the direction to make reference is mandatory but notwithstanding the pendency of the proceedings before the Judicial Authority or the making of an application under Section 8(1) of the 1996 Act, the arbitration proceedings are enabled, under Section 8(3) of the 1996 Act to be commenced or continued and an arbitral award also made unhampered by such pendency.”
13. The Supreme Court again examined Section 8 of the Act in Sukanya Holdings (P) Ltd. Vs. Jayesh H.Pandya & Another, . After quoting the provisions of Section 8 of the Act, the Supreme Court in paras-12 to 17 has laid down as under:-

12.Except Section 8, there is no other provision in the Act that in a pending suit, the dispute is required to be referred to the arbitrator. Further, the matter is not required to be referred to the Arbitral Tribunal, if: (1) the parties to the arbitration agreement have not filed any such application for referring the dispute to the arbitrator; (2) in a pending suit, such application is not filed before submitting first statement on the substance of the dispute; or (3) such application is not accompanied by the original arbitration agreement or duly certified copy thereof. This would, therfore, mean that the Arbitration Act does not oust the jurisdiction of the civil court to decide the dispute in a case where parties to the arbitration agreement do not take appropriate steps as contemplated under sub-sections (1) and (2) of Section 8 of the Act.
13.Secondly, there is no provision in the Act that when the subject matter of the suit includes subject-matter of the arbitration agreement as well as other disputes, the matter is required to be referred to arbitration. There is also no provision for splitting the cause or parties and referring the subject-matter of the suit to the arbitrators.
14.Thirdly, there is no provision as to what is required to be done in a case where some parties to the suit are not parties to the arbitration agreement. As against this, under Section 24 of the Arbitration Act, 1940, some of the parties to a suit could apply that the matters in difference between them be referred to arbitration and the court may refer the same to arbitration provided that the same can be separated from the rest of the subject-matter of the suit. The section also provided that the suit would continue so far as it related to parties who have not joined in such application.
15.The relevant language used in Section 8 is: “in a matter which is the subject of an arbitration agreement”. The Court is required to refer the parties to arbitration. Therefore, the suit should be in respect of “a matter” which the parties have agreed to refer and which comes within the ambit of arbitration agreement. Where, however, a suit is commenced – “as to a matter” which lies outside the arbitration agreement and is also between some of the parties who are not parties to the arbitration agreement, there is no question of application of Section 8. The words “a matter” indicate that the entire subject-matter of the suit should be subject to arbitration agreement.
16.The next question which requires consideration is -even if there is no provision for partly referring the dispute to arbitration, whether such a course is possible under Section 8 of the Act. In our view, it would be difficult to give an interpretation to Section 8 under which bifurcation of the cause of action, that is to say, the subject-matter of the suit or in some cases bifurcation of the suit between parties who are parties to the arbitration agreement and others is possible. This would be laying down a totally new procedure not contemplated under the Act. If bifurcation of the subject-matter of a suit was contemplated, the legislature would have used appropriate language to permit such a course. Since there is no such indication in the language, it follows that bifurcation of the subject-matter of an action brought before a judicial authority is not allowed.
17.Secondly, such bifurcation of suit in two parts, one to be decided by the Arbitral Tribunal and the other to be decided by the civil court would inevitably delay the proceedings. The whole purpose of speedy disposal of dispute and decreasing the cost of litigation would be frustrated by such procedure. It would also increase the cost of litigation and harassment to the parties and on occasions there is possibility of conflicting judgments and orders by two different forums.”
14. This Court in J.B. Dadachanji Vs. Ravinder Narain & Another, has held that before reverting the disputes between the parties under Section 8 of the Act for arbitration, the Court must adjudicate whether the disputes raised fall within the ambit of arbitration clause or not, without any substance.

15. The principles of law laid down in the aforesaid judgments may be summed up as given below:-

1.The provision of Section 8 is pre-emptory in nature and is mandatory.
2.The mandate of Section 8 can be invoked by a party to an action before a judicial authority by filing an application.
3. The application invoking Section 8 may be filed in any action, not necessarily the civil suits, which is brought before “a judicial authority”, which does not necessarily imply a Civil Court established under Civil Procedure Code and a Court as defined by clause (e) of Section 2 of the Act
4.The application for referring the disputes to an Arbitrator may be made by a party “not later than when submitting his first statement on the substance of the dispute”. Before invoking the powers of the judicial authority under Section 8, the party applying, must not have submitted the statement on the substance of the dispute, in the proceeding in which application is filed, or in a proceeding between the parties to the arbitration agreement before a Court or judicial authority prior to the present action.
5.Reference to an Arbitrator under this provision can be made if the action before the judicial authority is a matter, which is “the subject matter of an arbitration agreement”. The subject matter before a judicial authority must completely identify with the subject of the arbitration agreement. Reference of part of the subject matter of an action before the judicial authority to arbitration to which arbitration agreement applies, is not contemplated. If requirements of the ingredients of sub-section (1) of Section 8 are satisfied, the Court has no option or discretion, but it is mandatory for it to make reference of the subject matter of the action before it to arbitration in accordance with the arbitration agreement.
6.Parties to the action before judicial authority and the arbitration agreement should be the same.
7.The application shall be accompanied by the original arbitration agreement or a duly certified copy thereon.
8. The judicial authority will not refuse making a reference under Section 8, merely on the ground that a dispute about existence and validity of the arbitration agreement or jurisdiction of the Arbitrator has been raised since the Arbitrator would have jurisdiction to decide these objections under Section 16 of the Act. The judicial authority before making reference would have to be satisfied that the subject matter of the action before it and the subject of the arbitration agreement are identical and may examine the arbitration agreement and the subject matter of the action before it for giving a finding in this regard.
9.Unless the judicial authority before whom the application under Section 8 has been filed is a Court, as defined within the meaning of Section 42 read with clause (e) of Section 2 of the Act, the judicial authority shall not entertain subsequent proceedings arising under the arbitration agreement by virtue of Section 42 of the Act.
10.After a reference of the subject of arbitration made by the judicial authority to an arbitration under Section 8, nothing remains to be decided in the action.
16. The facts of the present case may now be tested on the touch stone of the above preposition of law. The application has been filed by the defendant in a civil suit. Both the plaintiff and the defendant are parties to an arbitration agreement (share purchase agreement dated 29.3.2001). They are also parties to that subsequent agreement dated 12.4.2001 by which the earlier agreement dated 29.3.2001 was allegedly abrogated. The application has been filed by the defendant before filing their written statement. The share purchase agreement between the parties stipulated purchase of 97.8% of share holding of defendants Nos.1 and 2 and other share holders whose names are mentioned in Annexure-A to the plaint, in defendant No.3 Company. Pursuant to clause 27.2.24 of the agreement dated 29.3.2001, the plaintiff out of Rs.10 crores advance paid a sum of Rs.5 crores to the defendant and the defendants placed 26% of the shares in the custody of Escrow Agent in accordance with Escrow agreement. The plaintiff, before making the payment of balance of advance of Rs.5 crores, failed to obtain the consent and approval of its shareholders to go through the share purchase deal with the defendants and consequently, it is alleged to have cancelled the deal. The defendant declined to refund the amount of Rs.5 crores received by them from the plaintiff on the premises that it was liable to be forfeited in terms of the agreement. The dispute between the parties is in regard to this advance of Rs.5 crores, which according to the plaintiff, is liable to be refunded in terms of clause 27.2.24 of the share purchase agreement dated 29.3.2001 as the deal fell through, whereas the defendant/applicant repudiated this claim on the ground that this amount was liable to be forfeited and has been forfeited strictly in accordance with the agreement. The entire suit of the plaintiff is based on the terms and conditions contained in the share purchase agreement dated 29.3.2001 and the memorandum dated 12.4.2001. Though the counsel for the plaintiff has stated that the relief, as claimed under clause (a) of the prayer clause is being given up and an application for deleting this relief has already been filed, but relief (d) is also against the invocation of clause 27.2.1 of the share purchase agreement for exercising for power of forfeiture of the advance given by the plaintiff to the defendant. Therefore, whether the relief in clause (a) is given up or not, the main question will be whether the forfeiture of the amount of Rs.5 crores by the defendant is in accordance with the terms and conditions of the share purchase agreement dated 29.3.2001 read with the memorandum dated 12.4.2001 or not. The consequence of the memorandum dated 12.4.2001 executed between the parties qua the share purchase agreement dated 29.3.2001 will also be a question for consideration. Moreover, by the application (IA 143/03), the plaintiff is seeking substitution of relief of declaration with the relief that the hire purchase agreement dated 29.3.2001 had been mutually terminated by the parties w.e.f. 12.7.2001 and was not enforceable and effective. If this amendment is carried out, still the question for determination will remain as to what are the rights and liabilities of the parties arising under the share purchase agreement dated 29.3.2001. The defendants have allegedly exercised the powers given under share purchase agreement for withholding the amount of Rs.5 crores which is required to be decided in this suit. Relief in clause (.c) of prayer clause is about the recovery of damages with interest by the plaintiff from the defendants and the shareholders, who are mentioned in Annexure -A. This relief is also claimed on the basis of the breach of the terms and conditions of the agreement dated 27.2.2001 read with memorandum dated 12.4.2001. This issue also requires examination of the rights and obligations of the parties in the share purchase agreement dated 29.3.2001 and the memorandum dated 12.4.2001.

17. Argument of learned counsel for the defendants/applicants is short and simple. It is argued that the entire claim of recovery of Rs.5 crores or damages of Rs.6,60,00,000/- made by the plaintiff in the case is on the premises that the terms and conditions of the share purchase agreement read with memorandum has been breached by the defendant and the defendants had no right to forfeit the amount of Rs.5 crores. It is argued that the claim made in the suit is based on share purchase agreement dated 29.3.2001. The share purchase agreement provided for arbitration of the disputes between the parties arising out of and in relation to the execution of this agreement. According to him, the subject of the suit is thus fully covered by the subject matter, which is arbitrable under the arbitration agreement dated 29.3.2001. It is also argued that the question whether the memorandum dated 12.4.2001 has abrogated the share purchase agreement dated 29.3.2001 and arbitration clause perished with the cancellation, is not to be decided by this Court and in these proceedings since objections as to the existence and validity of the arbitration agreement and the jurisdiction of the Arbitrator can be raised by the parties before the Arbitrator by virtue of Section 16 of the Act. He relies upon the judgments of the Supreme Court in M/s. Konkan Railway Corporation Limited (supra) and P.Anand Gajapathi Raju & Others (supra).

18. Conversely, the arguments of learned counsel for the plaintiff are three-fold. Firstly, the share purchase agreement dated 29.3.2001 has been rescinded and cancelled by a subsequent agreement dated 12.4.2001. Therefore, the arbitration agreement which was part of the share purchase agreement, also perished with it and the disputes which arose between the parties are no more arbitrable under this agreement. The second contention is that the relief for declaration of clause 27.2.1 of the share purchase agreement dated 29.3.2001 is null and void and unenforceable and has been given up and that the agreement dated 12.4.2001 does not provide for arbitration of the disputes, therefore, the subject matter of this suit is not the subject of the arbitration agreement any more. So the dispute between the parties in the suit is not referable for arbitration. Third argument is that though the defendant did not file his written statement disclosing the defense in substance in the suit, but the defendant had filed FAO(OS) 417/02 challenging the order of this Court dated 4.12.2002 by which interim injunction order under Order 39 Rules 1 and 2 CPC was granted in favor of the plaintiff and that in the memorandum of appeal, which is Annexure-I to the reply of the plaintiff to the instant application. The defendants had disclosed defense in substance. As such, the defendants have not fulfillled one of the conditions precedent for invoking the powers under sub-section (1) of Section 8 of the Act. So the dispute cannot be referred to the Arbitrator. Learned counsel for the plaintiff has placed strong reliance on Govind Ram Bhatia Vs. Atama Prakash Arora & Ors., 1990(74) Indian Law Reports (Cuttack) 1100 and the judgment of Supreme Court in Union of India Vs. Kishori Lal Gupta & Bros., and another order of Madhya Pradesh High Court in Century Spinning and Manufacturing Company Vs. Motilal Dhariwal, in support of his arguments.

19. To controvert, the counsel for the defendants has argued that a caveat was filed in the case and counsel appeared on behalf of the defendants on the first date of hearing on the application. It is argued that an objection to the grant of ad-interim injunction to the plaintiff was raised in view of the arbitration agreement and that the defendant has filed an appeal against the order in which also, it had raised objection to the maintainability of the suit and the competence of the jurisdiction of the Court in view of the arbitration agreement. It was specifically pleaded that the subject matter of the suit is liable to be referred to the Arbitrator under Section 8 of the Act. It was submitted that as an abundant caution, the grounds for challenging the order of this Bench were also mentioned. Therfore, the argument that the defendants have submitted the statement on the substance of the dispute before the instant application was filed, is devoid of any merit and should be rejected.

20. In the foregoing paragraphs, it has already been observed that the claim of the plaintiff in the suit has its foundation in the share purchase agreement dated 29.3.2001. The plaintiff is claiming recovery of an advance of Rs.5 crores made by it to the defendants in accordance with the terms and conditions of an agreement and have also been challenging the defendants’ refusal to repay the said amount when the share purchase transaction failed to materialise. The claim for damages is also based on witihholding of the amount of Rs.5 crores by the defendants unjustly and in violation of the conditions of the share purchase agreement. The subject matter of this suit is the subject of the arbitration agreement, as contained in the share purchase agreement dated 29.3.2001, which has already been reproduced above. No part of this suit falls outside the said arbitrary agreement. Copy of the arbitration agreement has already been filed by the defendants/applicants, cause of action of which is not in dispute. Under it, the dispute which arises out of any relation to this agreeent, are referable for adjudication to an Arbitrator.The argument of learned counsel for the plaintiff based on the judgment of the Supreme Court in Sukanya Holding Private Limited (supra) that the subject in the suit cannot be split up and part of it alone could not be referred for arbitration under the agreement, does not apply to this case. The entire subject matter of the suit is covered by the arbitration clause.

21. The next argument of learned counsel for the plaintiff also does not have any force in view of the judgments in M/s. Konkan Railway Corporation Ltd. & Another (supra) and P.Anand Gajapathi Raju & Others (supra) as well as of this Court in FAO(OS) No.417/2002 dated 13.12.2002. This Court has clearly laid down that the objection as to the existence and validity of an arbitration agreement may be raised before an Arbitrator under Section 16 of the Act and the judicial authority is not required to go into it while deciding the application under Section 8. In view of the authoritative pronouncement made in the above judgments, the question whether the subsequent agreement dated 12.4.2001 has cancelled and superseded the share purchase agreement dated 29.3.2001 and that the arbitration agreement has also perished, therefore, is not tenable before this Court. Such an objection may appropriately be raised before the Arbitrator. The agreement dated 12.4.2001 indeed does not have an arbitral clause. But whether the arbitration clause, as contained in the agreement dated 29.3.2001, exists or is valid or whether the Arbitrator has jurisdiction to arbitrate the reference, will be decided only on the examination of that agreements.

22. In Union of India Vs. Kishori Lal Gupta & Bros.(supra), , a subsequent agreement came up for consideration to decide whether it had abrogated the earlier agreement which contained an arbitration agreement and it was observed that it represented the common intention of the parties to substitute it for an earlier contract between them and it had given rise to new cause of action by obliterating the earlier contracts and the parties could look to it alone for enforcement of their claim. Therefore, there could be no question that the arbtiration clause, which, whether a substantive or collatoral term, was nevertheless an integral part of the said contract, must be deemed to exist along with them as a result of the said settlement. The question was considered in a proceeding, which arose out of the challenge to an arbitration Award. The objection as to the existence and validitiy of the Award, as noticed above, can be raised before the Arbitrator by virtue of Section 16 of the Act. While observing this question, the effect of subsequent memorandum is necessarily to be taken into consideration. Similarly, Madhya Pradesh High Court in Century Spinning & Manufacturing Company (supra) was considering the question whether the contract entered into between the parties established a new contract between them or had the effect of keeping earlier contract between the parties alive by merely altering the time of performance and the quality of goods to be supplied. It was held that the parties have absolutely agreed that the subsequent contract shall be fulfillled and they will not have claim or any other objection whatsoever in regard to the outstanding contract. It was further held on a reading of the terms of the subsequent contract that the parties were governed by the new contract. The suit filed by the plaintiff was also based on that contract. The question had arisen in a civil suit. The question was not whether the Court while deciding the application under Section 8 of the Act can decide whether the agreement dated 29.3.2001 was abrogated and substituted by the agreement dated 12.4.2001, which would govern their rights and whether the arbitration agreement contained in the first agreement still survives or not. These questions squarely fell in the jurisdiction of the Arbitrator in view of Section 16 of the Act. Therefore, no advantage of the cited judgments can be taken by the plaintiff in these proceedings.

23. Coming to the third contention that the defendants in the FAO(OS) 417/02, which was filed against the order of this Bench dated 4.12.2002, had submitted their substance of defense on merits of the case also. Even at the risk of repetition, it may be stated that the defendants in the memorandum of appeal at the outset stated that the subject matter of the suit was covered by the arbitration agreement dated 29.3.2001 and that by virtue of Section 8 of the Act, subject of the suit was required to be referred to arbitration, thereafter they had pleaded the grounds of their challenge to the order of this Court otherwise on merits. The Division Bench disposed of the appeal on 13.12.2002 by passing the following order:-

“After hearing counsel for the parties, we are of the view that since the appellant herein (defendant before the learned Single Judge) could not file reply to the applications under Order 1 Rule 8 CPC under Section 8 of the Arbitration Act, under Order 39 Rules 1 and 2 CPC and under Order 38 Rule 5 CPC, therefore, their grievance is that they were not properly heard. In order to do justice, we order that let the appellant file reply to these applications by 16th December, 2002 with an advance copy to the counsel for the respondent (plaintiff before the learned Single Judge) who may file rejoinder/reply within two days thereafter. The matter is already fixed before the learned Single Judge for 20th December, 2002 and we hope that the matter will be heard on that date and till then the impugned order be kept in abeyance but the parties shall maintain status quo in respect of the shares. With these observations, the appeal stands disposed of.”
24. From the order, it appears that the defendants had submitted to the Court that they were not properly heard. So the defendants were allowed to file reply to the applications. It was thereafter that the present application under Section 8 of the Act was filed. Therefore, there is no substance in the argument that the defendants had disclosed their defense on merits or before the instant application was filed by them. The judgment in Govind Ram Bhatia (supra) is distinguishable. It arose out of a proceeding under Arbitration Act, 1940. The question was whether the said proceedings were liable to be stayed by virtue of Section 34 of the said Act. It was held that one of the pre-conditions for stay of the proceedings under Section 34 was that the defendant/applicant should clearly show by making specific averments in the application and affidavit that he was ready and willing to do all that was necessary for proper conduct of the arbitration proceedings before filing of the suit and was still ready and willing after the suit was filed. The Court held that all the essential requirements of Section 34 were not fulfillled. In that case, the defendant/applicant had submitted to the jurisdiction of the Trial Court and had obtained partial stay of the operation of the Trial Court order. So the facts are clearly distinguishable. Reference to the judgment of Supreme Court in The State of Uttar Pradesh & Another Vs. M/s. Janki Saran Kailash Chandra & Another, is also made where it was held that taking other steps in the suit proceedings connotes the idea of doing something in aid of the progress of the suit or submitting to the jurisdiction of the Court for the purpose of adjudication of the merits of the controversy in the suit. It was held that the defendant had submitted to the jurisdiction of the Court regarding the merits of the controversy relating to inventory and injunction and in order to obtain a stay of the Trial Court’s order, put forth its own defense case for consideration of this Court in addition to the plaintiff’s case to take summons on the plaintiff/respondent to appear and contest in the appeal. The Court observed that the appeal being in continuation of this suit submitted to appellate jurisdiction of this Court would amount to submitting to the jurisdiction of the Trial Court also. For the aforesaid reasons, it was observed that there can be no question of exercise by the Trial Court with regard to passing of a stay order under Section 34 of the Arbitration Act because the applicant had become incompetent. But in the instant case, the defendant in the memorandum of appeal had raised objection that the subject matter of the suit was arbitrable under the arbitration agreement dated 29.3.2001. A perusal of these judgments will clearly show that the principle of law laid down in the judgment are distinguishable and are not attracted to the present suit.

25. The result of the above discussion is that the subject of this suit is liable to be referred to arbitration in accordance with the arbitration agreement, as contained in the agreement dated 29.3.2001. The application is allowed.

26. Subject of the suit is referred for arbitration to the sole Arbitrator in accordance with the arbitration agreement dated 29.3.2001 to Mr.Justice (Retired) K.S.Gupta, a former Judge of this Court. The parties shall appear before the Arbitrator on 18.11.2003 and submit their claim and counter-claim before the Arbitrator. The Arbitrator shall enter upon the reference and shall make and publish the Award in accordance with law. The Arbitrator shall be paid by the parties in equal share, the fee at the rate of Rs.7,000/- per sitting with maximum of ten sittings plus 10% charges for secretarial assistance.

27. A copy of the order shall be sent to the Arbitrator.

28. The application stands disposed of.