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India – Swiss Timing Limited VS Organising Committee Commonwealth Games 2010 Regulations.

19 June, 2014

Introduction


By way of a background, this judgment was passed in an Arbitration Application filed by Swiss Timing Limited (“Swiss Timing”) under Section 11(4) and 11(6) of the Arbitration & Conciliation Act, 1996 (“Act“) seeking appointment of the nominee arbitrator for the Respondent Organising Committee Commonwealth Games 2010, Delhi (“OC”), and to constitute the arbitral tribunal by appointing the presiding arbitrator to adjudicate the disputes between the parties.

 

Facts 


Swiss Timing entered into an agreement dated March 11, 2010 (“Agreement”) with the OC for providing timing, score and result system (“TSR services”) as well as supporting services required for the conduct of the Commonwealth Games 2010. Certain amounts were to be paid by the OC to Swiss Timing in installments in consideration for the performance of their obligations enshrined in the Agreement. After the performance of the Agreement, Swiss Timing raised an invoice of CHF 1,249,500/- (Swiss Francs One Million Two Hundred Forty Nine Thousand Five Hundred only), representing 5% of the total service fees, payable upon completion of the Commonwealth Games 2010. This was pursuant to a sum of INR 15,00,000/- deposited by Swiss Timing as Earnest Money Deposit (“EMD”) for successfully completing the TSR services contemplated in the Agreement.

 
The OC raised two preliminary objections to the Arbitration Application. Firstly, it contended that Swiss Timing had not followed the dispute resolution mechanism expressly stipulated in the Agreement as no efforts were made to seek resolution of the disputes by negotiations and discussions prior to the formal invocation of arbitration. The OC defaulted in making the payment without justifiable reasons and instead sought extension of the performance bank guarantee by Swiss Timing to secure the performance of obligations. Swiss Timing on the other hand, contended that the performance bank guarantee had already been terminated and released upon completion of the Commonwealth Games 2010. Swiss Timing also argued that the Agreement did not provide for extension of the performance bank guarantee under the terms of the Agreement. Upon the request for payment being made, the OC issued a press communiqué declaring that part payments for 9 vendors, including. Swiss Timing, were withheld for ‘non-performance of the contract’. Swiss Timing protested against the aforesaid communiqué through a written communication and asserted that it had satisfactorily performed the obligations in the Agreement. Since the OC continued to dispute its liability to pay the amounts, Swiss Timing served a formal dispute notification on the OC under the provisions of the Agreement. Thereafter, despite exchanging several letters, when there was no response from the OC, Swiss Timing invoked arbitration and appointed its nominee arbitrator. The OC failed to respond to the arbitration notice, which prompted Swiss Timing to file the Arbitration Application before the Supreme Court.

 

OC’s Contentions

 

The OC raised two preliminary objections to the Arbitration Application. Firstly, it contended that Swiss Timing had not followed the dispute resolution mechanism expressly stipulated in the Agreement as no efforts were made to seek resolution of the disputes by negotiations and discussions prior to the formal invocation of arbitration.

Secondly, the OC put forth a case that the Agreement stood vitiated on grounds of being void-ab-initio. The OC alleged that Swiss Timing had engaged in corrupt, fraudulent, collusive or coercive practices in connection with the Agreement and, to canvass this ground, relied upon the registration of a criminal case against Mr. Suresh Kalmadi, the former chairman of the OC, along with some officials of Swiss Timing under the provisions of the IPC read with provisions of the Prevention of Corruption Act. In support of this proposition, the OC placed special emphasis and reliance on the judgment in the case of N. Radhakrishnan v. Maestro Engineers(Section 8) wherein the Supreme Court, despite agreeing that the subject matter of the civil suit fell within the ambit of the arbitration clause, held that the disputes can only be settled in court through furtherance of detailed evidence by either parties since the case related to serious malpractices. In this case the Court had held that the arbitrator cannot properly go into cases relating to allegations of fraud and serious malpractices.

 

On this basis, the OC also contended that there would be real danger of conflicting conclusions by two for a leading to unnecessary confusion, if the arbitration proceedings were allowed to continue along with the criminal trial.

 

 

Findings Of The Court

 
On the first issue raised by the OC, the Supreme Court said that there was enough material and evidence on record to establish that efforts were made by Swiss Timing to
resolve the dispute through discussions and negotiations before sending the arbitration notice. The Court therefore, dismissed this argument on the ground that it lacked merit.
The Supreme Court whilst rejecting the second objection raised by the OC, held that “As a pure question of law, I am unable to accept the very broad proposition that whenever a contract is said to be void-ab-initio, the Courts exercising jurisdiction under Section 8 and Section 11 of the Arbitration Act, 1996 are rendered powerless to refer the disputes to arbitration.” In arriving at this finding, the Court opined that that issues such as indulgence into corrupt practices would have to be established before the proper forum on the basis of oral and documentary evidence produced by the parties in support of their respective claims. .The Court concluded that grounds such as whether grant of the contract was manipulated in favour of Swiss Timing and whether the rates charged by Swiss Timing were exorbitant can be taken care of in the award.

 
The Court was of the considered opinion that the observations made in the case of N. Radhakrishnan were erroneous for two reasons, namely that they run counter to the ratio of the law laid down in Hindustan Petroleum v. Pinkcity Midway2, which was referred to but not distinguished, and also because the court did not take into consideration the judgment in the case of Anand Prajapathi Raju & Ors.v. P.V.G. Raju (Dead) & Ors. In light of these findings, the Supreme Court held that the judgment in N. Radhakrishnan was per- incurium and does not lay down the correct law. The Court took cognizance of the concept of separability of the arbitration clause/agreement from the underlying contract as statutorily recognised under Section 16 of the Act and the policy of least interference in arbitration proceedings provided in Section 5 of the Act, and held that, “A conjoint reading of Section 5 and Section 16 would make it clear that all matters including the issue as to whether the main contract was void/voidable can be referred to arbitration. Otherwise, it would be a handy tool available to the unscrupulous parties to avoid arbitration, by raising the bogey of the underlying contract being void.”

 
In this context, the Court distinguished the words “void” and “voidable” as defined in the Contract Act. While giving examples of cases where the court would be justified in declining reference to arbitration on coming to a conclusion that the contract is void without receiving any evidence, the Court stated that such cases would be few and isolated. The Court also held that it would not be possible to shut out arbitration even in cases where the defence taken is that the contract is voidable such as in cases covered under the circumstances narrated in Section 12 and Sections 14-18 of the Contract Act. The Court clarified that in such cases a contract will only become void when the party claiming lack of free consent is able to prove the same thus rendering the contract void. The Court held that in exercising powers under Section 11 of the Act, the conditions stipulated in Sections 8 and 45 of the Act will have to be considered by the Court and that to shut out arbitration at the initial stage would destroy the very purpose for which the parties had entered into arbitration.

 

Championing the conduct of arbitration simultaneously with criminal proceedings, the Court held that, “In an eventuality where ultimately an award is rendered by arbitral tribunal, and the criminal proceedings result in conviction rendering the underlying contract void, necessary plea can be taken on the basis of the conviction to resist the execution/enforcement of the award. Conversely, if the matter is not referred to arbitration and the criminal proceedings result in an acquittal and thus leaving little or no ground for claiming that the underlying contract is void or voidable, it would have the wholly undesirable result of delaying the arbitration. Therefore, I am of the opinion that the Court ought to act with caution and circumspection whilst examining the plea that the main contract is void or voidable. The Court ought to decline reference to arbitration only where the Court can reach the conclusion that the contract is void on a meaningful reading of the contract document itself without the requirement of any further proof.” 

 
In support of this finding, the Court relied upon Guru Granth Saheb Sthan Meerghat Vanaras v. Ved Prakash(this was actually placed on record by Swiss Timing although the Court records it as a case relied upon by the OC). In this case the Constitution Bench had held that no hard and fast rule can be laid down that civil proceedings in all matters ought to be stayed when criminal proceedings are also pending.

 
The Supreme Court also distinguished the facts of the present case from the facts of India Household and Healthcare Ltd. v. LG Household and Healthcare Ltd.relied upon by the OC to contend that Swiss Timing ought to be restrained from invoking arbitration. In doing so, the Court gave the following reasons: (a) there was no conviction in the present case, though the trial has been going on against the officials of both the parties; (b) there is no injunction or any other order restraining Swiss Timing from invoking arbitration; and (c) all the conditions precedent for invoking the arbitration clause have been satisfied by Swiss Timing. Citing the above reasons the Court held that the case of India Household and Healthcare Ltd. v. LG Household and Healthcare Ltd. was not applicable to the facts and circumstances of the present case.

 

Lastly, the Court referred to the unreported order of the Supreme Court in M/s Nussli (Switzerland) Ltd. v. Organizing Committee Commonwealth Game. 2010 dated April 11, 2012 where the dispute in almost identical circumstances was referred to arbitration. The Court held that the said order, which seemed to have been passed on a consensus between the parties to proceed with arbitration, did not lay down any law.

 

Decision
In light of the aforesaid findings, the Supreme Court allowed the Arbitration Application filed by Swiss Timing and constituted the Arbitral Tribunal by appointing Hon’ble Mr. Justice B.P. Singh (Retd.) as the second arbitrator for the OC and Hon’ble Mr. Justice Kuldip Singh (Retd.) as the chairman of the Arbitral Tribunal.

 

Ratio Decidendi

 
1. Issues such as indulgence into corrupt practices would have to be established by the parties before the appropriate forum on the basis of oral and documentary evidence in support of their respective claims. 

 
2.While exercising jurisdiction under Section 11 of the Act, the Court ought to decline to refer the parties to arbitration if it comes to the conclusion that the contract would is patently void on a meaningful reading of the contract document itself without the requirement of any further proof or evidence. However, such cases would be few and isolated.

 
3. It would not be possible to shut out arbitration even in cases where the defence taken is that the contract is voidable. In such cases, it would be appropriate to let the Arbitral Tribunal examine whether there is any substance in the plea of fraud raised by the respondents.

 
Conclusion

 
In this judgment, the Court has frowned upon the practice of adopting the defence that ‘the contract is void’ routinely along with the other usual grounds to avoid/delay reference to arbitration. The Court has further stressed that such a ground, if taken routinely, needs to be summarily rejected unless there is clear indication that the defence has a reasonable chance of success.

 
From a practical application of this judgment, if there is a cogent and justifiable case of fraud, it would be vital to plead the defence that the contract is void specifically and not routinely. Such a defence ought also to be adopted at the earliest and argued vociferously. The onus is therefore, on the respondent to establish that it has a strong case for barring the reference of disputes to arbitration and further that the defence of fraud goes to the very root of the matter thereby rendering the contract void without requiring any further proof therefor

 

End Notes:

 

1 (2010) 1 SCC 72

(2003) 6 SCC 503

(2000) 4 SCC 539

(2013) 7 SCC 622

(2007) 5 SCC 510

 

AZB

 

For further information, please contact:

 

Rajendra Barot, AZB & Partners

rajendra.barot@azbpartners.com

 

Percy Billimoria, AZB & Partners

percy.billimoria@azbpartners.com

 

Aditya Bhat, AZB & Partners

aditya.bhat@azbpartners.com

 

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