Ramco Super Leathers Ltd. and Another vs Associates India Financial Services (P) Ltd.

R. Banumathi, J.

Application No. 925 of 2002

This application is filed by the petitioner/plaintiff seeking for an order of temporary injunction restraining the respondent/defendant from in any

way bringing the property of the second plaintiff to sale in public auction, and selling the same by private auction in any manner.

Application No. 26 of 2003

The application is filed by defendant to refer the applicant and the respondents to Arbitration proceedings u/s 8 of the Arbitration and

Conciliation Act, 1996. For convenience, parties are referred as in their rank in the suit.

The first plaintiff Ramco Super Leathers Ltd. had borrowed a loan of Rs. 1,00,00,000 (Rs. one crore) under loan agreement dated 22.06.2001

[repayable in twelve equal monthly instalments. The second plaintiff/RSL Property Development Ltd., a sister concern of the first plaintiff, was the

guarantor. As a guarantor, the second plaintiff offered security of immovable property shown as schedule immovable property in survey No.

298/5.43 acres, Kuniamuthur Post, Coimbatore, shown in the plaint schedule. To that effect of offering immovable property as security, second

plaintiff has also executed an agreement creating charge. In the loan agreement between P-1 and the defendant, there is an Arbitration clause

enabling the parties to refer the matter to an Arbitrator and amicably resolving the matter. The second plaintiff is not a party to the Arbitration

agreement. According to the plaintiffs, there is no question of invoking any Arbitration clause as against the second plaintiff. The power of attorney

given by the second plaintiff on 22.06.2001 has been invoked ; and hence, the defendant has no right to deal with the immovable property.

Without settling the accounts, the defendant is now threatening to publish in newspapers that they are going to sell the property in public auction.

Hence, the plaintiffs have filed the suit for permanent injunction restraining the defendant and their men from in any manner bringing the property of

the second plaintiff forming subject matter of the agreement creating charge for sale.

The defendant has filed Application No. 26 of 2003 praying to refer the plaintiffs and defendant to Arbitrator to settle the matter. According to

the defendant, as per Clause 32 of the loan agreement, any dispute arising out of the agreement shall be referred to Arbitration. As per the

accounts, plaintiffs are liable to pay a sum of Rs. 22,30,000 which definitely constitutes an Arbitral dispute between the plaintiffs and the defendant.

Both the plaintiffs are jointly and severally liable to pay the outstanding dues. As per Clauses 32, 33.1, 33.2 and 33.3 plaintiffs have no cause of

action to file the present suit. The dispute has to be necessarily referred to the Arbitrator within the territorial jurisdiction of Delhi. Hence the

application.

This application is resisted by the respondent/defendant contending that the second plaintiff is not a party to the loan agreement dated

22.06.2001. Hence, the applicant/defendant cannot invoke Clause 32 of the loan agreement as against the second plaintiff. Even if the agreement

creating charge forms an integral part of the loan agreement, it would only be a matter between the first plaintiff and the defendant only ; and the

second plaintiff cannot become a party. The Arbitration clause and the jurisdiction clause in the loan agreement dated 22.06.2001 cannot be used

against the second plaintiff. Even as against the first plaintiff, there is no contentious dispute. After deducting the payments, the amount due would

be Rs. 23,30,545 which the first plaintiff is ready and willing to resolve and settle the matter amicably. Since there is no unresolved dispute, the

matter cannot be referred to the Arbitrator and thus the provisions of Section 8 of the Arbitration and Conciliation Act are not at all attracted.

Contending that u/s 8 of the Arbitration and Conciliation Act (hereinafter referred to as the Act) judicial authority has power to refer the parties

to Arbitration where there is an agreement containing an Arbitral clause. It is submitted that the parties are to be referred to Arbitration and that the

suit is not maintainable. Learned counsel for the plaintiff further submitted that all the clauses in the loan agreement forming part of agreement

creating charge, the defendant is not precluded from invoking Section 8 with regard to the second plaintiff also. In this regard, reliance is placed

upon J.K. Jain and others Vs. Delhi Development Authority and others, and Dwarkadas and Co. Vs. Daluram Goganmull, . It is submitted that the

agreement creating charge referring to the loan agreement containing Arbitration clause, that clause must be deemed to be incorporated in the

second agreement creating charge. Drawing the attention of the Court to the earliest point of time of filing the application, learned counsel for the

plaintiff prayed for dismissal of the suit.

Countering the arguments, learned senior counsel appearing for the plaintiffs submitted that the loan agreement does not form an integral part of

agreement creating charge which is a separate one and that Section 8 cannot be invoked as against the second plaintiff. Contending that when an

agreement creating charge itself does not contain Arbitral clause and in view of the defendants'' conduct in bringing the property to sale without

settling the accounts, which had given rise to the cause of action in filing the suit, learned counsel submitted that the petition as against the second

plaintiff is not maintainable.

Upon consideration of the submissions, averments in the affidavit and counter affidavit, in my considered view, the following points arise for

determination in these applications :

(i) Whether Arbitration clause in the loan agreement could be incorporated to the agreement creating charge and whether Arbitral clause could be

invoked as against second plaintiff also ?

(ii) Whether the dispute between the plaintiffs and the defendant has to be referred to Arbitration proceedings u/s 8 of the Act ?

There are three procedural requirements of an application for referring the parties to Arbitration, all of which must be cumulatively complied with

before the application is entertained by the judicial authority. The conditions are :

(i) the applicant shows that the action brought before the judicial authority is the subject matter of an Arbitration agreement ;

(ii) the application is filed not later than when submitting his first statement on the substance of the dispute ; and

(iii) the application is accompanied by the original Arbitration agreement or a duly certified copy thereof.

Section 8 of the Act authorises the judicial authority to refer the parties to Arbitration before which an action, in a matter which is the subject

matter of the Arbitration agreement, is pending or on application made to it by a party.

Admittedly, the first plaintiff borrowed a sum of Rs. one crore on 22.06.2001 and entered into a loan agreement [re]payable in twelve equal

monthly instalments. The second plaintiff/RSL Property Development Ltd., which is the sister concern of the first plaintiff, has offered their

immovable property in Survey No. 298 Kuniamuthur Post, Coimbatore, as security creating an agreement of charge on the same day, i.e.

22.06.2001.

As per condition, Clause 32.1 of the loan agreement in dispute arising out of the said agreement shall be referred to Arbitration. The said

clause reads as follows :

32.1. Any conflict, difference, controversies or disputes arising between the parties shall be resolved amicably at the first instance. Unresolved

disputes, if any shall be submitted/referred to the Arbitration of the sole Arbitrator. The sole Arbitrator shall be either the managing director or

Head, Commercial Business of Associates India Financial Services Limited, or any other person nominated by him/them. The Arbitration shall be

conducted in accordance with the provisions of Arbitration and Conciliation Act, 1996, rules thereunder, any amendments thereto and the

language of the Arbitration shall be English. The decision/Award of the Arbitrator shall be final/ conclusive and binding on the parties. The seat of

Arbitration shall be Delhi.

In para 4 of the plaint, it is averred that the plaintiff has already made payments and that only a balance amount of Rs. 22.30 lakhs is payable

and that the first plaintiff is ready and willing to pay this amount after settling the amount. In the counter affidavit filed by the respondent/ plaintiffs,

they have set forth various payments made by them and according to them, the balance as on 30.12.2002 is Rs. 23,30,545. Though the plaintiffs

contend that the amount could be amicably settled between the parties, in view of the rival contentions raised, this Court finds that there is a dispute

between the parties regarding the amount payable which definitely constitutes an arbitral dispute between the parties. In view of the Arbitration

Clause 32.1 in the loan agreement, the defendant/applicant is certainly entitled to file application u/s 8 of the Act seeking reference to Arbitration.

Since the dispute between the parties regarding the amount payable forming part of the subject matter of the Arbitration agreement u/s 8 of the

Act, the parties shall be referred to the Arbitration proceedings.

Now the suit is instituted before this Court for permanent injunction not to bring the second plaintiff''s property offered as security to sale. It is

to be seen whether the present dispute is the matter of Arbitration agreement. Determination of this question involves reference to the clauses in the

loan agreement and agreement creating charge and the plaint averments. The loan transaction involves two agreements, viz., agreement of loan -

between the first plaintiff and defendant, agreement of creating charge between second plaintiff and defendant. The second plaintiff is not a party to

the loan agreement which contains the Arbitral clause (Clause 32.1). The agreement creating charge does not contains the Arbitral clause. But the

agreement creating charge entered by the second plaintiff with defendant offering security to secure repayment of the dues certainly forms integral

part of the loan agreement. In my considered view, though the loan transaction involves two agreements, they form integral part of the same

[transaction]. The immovable property was offered as security only to secure repayment of the due by the borrower under the agreement. Thus the

agreement creating charge does not stand in isolation.

Clause 1 of the agreement creating charge also clearly manifests the intention of the parties. The enabling clause importing the clauses of loan

agreement to the agreement creating charges read thus :

This agreement creating charge shall form an integral part of the agreement. For the sake of brevity and to avoid repetition, the contents of the

agreement may be read as part of the agreement creating charge.

Thus, only to avoid repetition of incorporating of the clauses, the clauses in the loan agreement were not repeated in the agreement creating

charge. Taking advantage of non-mention of Arbitral clause, the second plaintiff cannot contend that the agreement creating charge is not part of

the loan agreement and that the second plaintiff is out of the Arbitration agreement. Thus, this Court is of the view that the Arbitration clause is

enforceable against the second plaintiff also.

At this juncture, it is worth referring to the following passage :

In Commercial Arbitration by Mustill and Boyd, Second Edition at page 105 :

''....the parties need not set out the terms of Arbitration agreement in the contract itself. It is sufficient for the clause to be incorporated by reference

either to a standard form of clause or to a set of trade terms which themselves include provisions requiring disputes to be submitted to Arbitration.

Nor need the contract itself be contained in a single document''.

The above passage has been quoted with approval in J.K. Jain v. Delhi Development Authority (supra).

In the above case in J.K. Jain v. Delhi Development Authority (supra), the Supreme Court held that though the Arbitration clause is not found

in the agreement, it is deemed to be part of the same because of the terms and conditions contained in the tender form. After referring to the above

passage, Supreme Court held thus :

As far as the present case is concerned, the Arbitration clause has not been included in the agreement itself. But it shall be deemed to be part of

the agreement, because the agreement specifically says that the terms and conditions contained in the tender form shall be binding between the

parties which obviously will include Clause 14 of the tender form, which admittedly requires any dispute between the parties to be referred to an

Arbitration.

In the light of the above decision of the Supreme Court, it is not open to the second plaintiff to contend that the dispute between her and the

defendant does not form subject matter of the Arbitration agreement.

Finding that the Arbitration clause in one contract could be imported to a subsequent contract in Dwarkadas & Co. v. Dularam Gaganmull

(supra), also held that an Arbitration clause in one contract can be imported into a subsequent contract provided that when it is so imported, it is

not inconsistent with the terms of the subsequent contract. On the above, I find the Arbitration clause found in the contract between the defendant

and the first plaintiff is necessarily to be imported into the agreement creating charge.

In fact, such incorporating of Arbitration clause to a subsequent contract is statutorily recognised in the new Act u/s 7(5) which reads thus :

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 the Arbitration clause part of the contract.

While so, it is not open to the plaintiff to urge the agreement creating charge is a separable one and is not an integral part of the loan agreement.

Learned counsel for the defendant is right in contending that in view of the clear provision of Section 7(5), the Arbitration clause in loan agreement

is necessarily to be incorporated to the agreement creating charge, and that the second plaintiff also is to be submitted to the Arbitration.

As per the Arbitration clause in the loan agreement, ''all matters, questions, disputes, differences and claims arising out of or concerning or

relating to the contract shall be referred to Arbitration''. The charge creating agreement and bringing the property to sale for the amount payable by

the principal borrower definitely forms subject matter of the Arbitration agreement. Thus, this application u/s 8 is certainly maintainable against the

second plaintiff also.

In this application, two fold reliefs are sought for viz., (i) to refer the parties to Arbitration; (ii) dismissal of the suit. This application is filed by

the defendant before filing the written statement as contemplated in Section 8 of the Act. Since this application is made within the time frame

allowable for such application, parties are to be referred to Arbitration on the questions - (i) the amount payable on the loan agreement; (ii)

whether the property of the second plaintiff could be brought to sale. In my view, on those questions, the parties are to be referred to Arbitration.

As per the Arbitration clause noted above, the seat of Arbitration shall be at Delhi which is clear from Clause 33.1 which reads as follows :

33.1. The request for the loan has been made in Delhi, the processing has taken place at Delhi, the sanction letter has been issued from Delhi, the

final signature has been affixed at Delhi by authorised representative to Associates India and the agreement has been concluded in Delhi.

However, it is open to the parties to further agree upon the seat of Arbitration in variance to the above clause.

The petitioner/defendant prays for the dismissal of the suit. No doubt, Section 8(3) permits both proceedings at the same time, one before the

Court, and other before the Arbitral Tribunal - but it is only at the discretion of the Court. Once the parties are referred to Arbitration, the choice is

that the parties have to get along with the Arbitration. They may or may not pursue the Arbitration proceeding. Under the above circumstances, the

suit need not be kept pending in the Court, and the suit is to be dismissed as prayed for by the petitioner/defendant.

The basis and the questions on which the parties are to be referred to Arbitration are (i) on the amount payable to defendant; (ii) to bring the

mortgaged property to sale; (iii) liability of the parties to pay the amount. For the reasons stated above, as the parties are referred to Arbitration as

per the Arbitration agreement, the suit is dismissed.

O.A. No. 26/2003

25.1. Therefore, this application filed u/s 8 of the Arbitration and Conciliation Act is allowed. The parties are referred to Arbitration on the

questions referred to in paragraph 24.

25.2. For the reasons stated above, the suit C.S. No. 916 of 2002 stands dismissed.

25.3. Resultantly, Application No. 925 of 2002 seeking temporary injunction is also dismissed.