1996 Supreme(Cal) 228

HIGH COURT OF CALCUTTA
Ruma Pal, J.
PWH Analgen & Systeme GMBH
vs.
Damodar Ropeways & Construction Company Private Limited
ARBITRATION APPLICATION FOR STAY OF SUIT Matter No. 2781 of 1993
Decided On : June 17, 1996

The Court is bound to stay a suit under section 3 of the Foreign Awards (Recognition and Enforcement) Act, 1961 if the following conditions are fulfilled: (i) there must be an agreement to which Article II of the Convention set forth in the Schedule applies; (ii) a party to that agreement must commence legal proceedings against another party thereto; (iii) the legal proceedings must be "in respect of any matter agreed to be referred to arbitration" in such agreement; (iv) the application for stay must be made before filing the written statement or taking any other step in the legal proceedings; (v) the Court has to be satisfied that the agreement is valid, operative and capable of being performed; this relates to the satisfaction about the 'existence and validity' of the arbitration agreement; and (vi) the Court has to be satisfied that there are disputes between the parties with regard to the matters agreed to be referred; this relates to effect (scope) of the arbitration agreement touching the issue of arbitrability of the claims.

Headnote:

FOREIGN AWARDS (RECOGNITION AND ENFORCEMENT) ACT, 1961 - SECTION 3 - STAY OF SUIT - ARBITRATION AGREEMENT - CONSTRUCTION - SCOPE - WHETHER DISPUTES COVERED BY ARBITRATION AGREEMENT - WHETHER ARBITRATION AGREEMENT SUPERSEDED - WHETHER ARBITRATION AGREEMENT INVALID, INOPERATIVE OR INCAPABLE OF BEING PERFORMED - WHETHER BANK GUARANTEES INDEPENDENT CONTRACTS - WHETHER COURT CAN REFUSE STAY UNDER SECTION 3 OF THE ACT ON GROUND OF FRAUD.

Fact of the Case:

Damodar Ropeways & Construction Company Private Limited (Damodar) instituted a suit against PWH Analgen & Systeme GMBH and Ors. (PWH), the United Bank of India, Berliner Bank and Buckau Wolf India Ltd. The case of Damodar briefly stated was that it had entered into an agreement with PWH (referred to as the Consortium Agreement) by which it was inter alia agreed that Damodar would, as a partner of PWH, supply goods to fulfill a contract between PWH and a Japanese Company, Hazama-Gumi Ltd. Hazama had entered into a contract with PWH to set up a ropeway at Udaipur in Nepal. PWH was to provide guarantees in favour of Hazama relating to its contract with Hazama. In the consortium agreement Hazama has been referred to as the customer. Under the consortium agreement specified portions of the work awarded by Hazama to PWH was divided between Damador and PWH. The liability of the parties to the consortium agreement was to be calculated on the basis of each party's portion of the contract value. Damodar was required to provide counter guarantees in favour of PWH in proportion to its respective portion of the contract value. Such counter guarantees were required to be furnished by a bank in the Federal Republic of Germany in proportion of the bonds or guarantees provided by PWH in favour of Hazama. The suit which is sought to be stayed was instituted by Damodar against PWH, the United Bank of India, Berliner Bank and Buckau Wolf India Ltd. The case of Damodar briefly stated is that it had entered into an agreement with PWH (referred to as the Consortium Agreement) by which it was inter alia agreed that Damodar would, as a partner of PWH, supply goods to fulfill a contract between PWH and a Japanese Company, Hazama-Gumi Ltd. Hazama had entered into a contract with PWH to set up a ropeway at Udaipur in Nepal. PWH was to provide guarantees in favour of Hazama relating to its contract with Hazama. In the consortium agreement Hazama has been referred to as the customer. Under the consortium agreement specified portions of the work awarded by Hazama to PWH was divided between Damador and PWH. The liability of the parties to the consortium agreement was to be calculated on the basis of each party's portion of the contract value. Damodar was required to provide counter guarantees in favour of PWH in proportion to its respective portion of the contract value. Such counter guarantees were required to be furnished by a bank in the Federal Republic of Germany in proportion of the bonds or guarantees provided by PWH in favour of Hazama. Clause 45 of the Consortium Agreement provided : "45. Enclosures 45.1 The following enclosures are an integral part of this Consortium Agreement : 1. Contract between the Customer and PWH (Appendix 1) 2. Damodar's portion of the Tender/Contract Price and terms of payment (Appendix II) 3. Damodar's Scope of Supplies for Design, Fabrication, Civil Construction, Erection and Commissioning Works, Provision of Personnel and Services with Limits, Interfaces and Co-ordination Data (Appendix III) 4. Internal Time Schedule (Appendix IV) 45.2 If there is any contradiction between this document and any other contract document, the documents shall have precedence in the following sequence : 1. The Contract and all Contract Documents between the Customer and PWH (Appendix 1) 2. The Consortium Agreement between PWH and Damodar. 3. Appendix II and III to the Consortium Agreement. 45.3 The relevant enclosures hereto shall be kept up-to-date, and amendments thereof shall be executed by the parties as a result of agreed amendments to the Contract or agreed internal rearrangements within the Consortium." PWH contended that the claim of Damodar arose out of and/or in connection with the Consortium Agreement. It is claimed that the Consortium Agreement contained an Arbitration clause (Clause 43) which covered all the disputes in the plaint. It is submitted by PWH that the arbitration clause was of the widest amplitude and that since both India and the Federal Republic of Germany were covered by the 1961 Act, the Court was bound under the mandatory provisions of s. 3 of the 1961 Act to stay the suit.

Finding of the Court:

The Court held that the arbitration agreement in the consortium agreement was valid, operative and capable of being performed. The Court also held that the disputes between the parties were with regard to matters agreed to be referred and that the suit in its entirety is in respect of matters agreed to be referred to arbitration. The Court further held that the arbitration agreement was not superseded by the arbitration agreement in the contract between PWH and Hazama and that the bank guarantees were not independent contracts.

Issues: 1. Whether the arbitration agreement in the consortium agreement was valid, operative and capable of being performed? 2. Whether the disputes between the parties were with regard to matters agreed to be referred? 3. Whether the suit in its entirety is in respect of matters agreed to be referred to arbitration? 4. Whether the arbitration agreement was superseded by the arbitration agreement in the contract between PWH and Hazama? 5. Whether the bank guarantees were independent contracts?

Ratio Decidendi: 1. The arbitration agreement in the consortium agreement was valid, operative and capable of being performed because there was nothing to show that it was invalid, inoperative or incapable of being performed. 2. The disputes between the parties were with regard to matters agreed to be referred because the arbitration clause in the consortium agreement was of the widest possible content and covered all disputes in connection with the consortium agreement, including the question of the survival of the arbitration clause. 3. The suit in its entirety is in respect of matters agreed to be referred to arbitration because the plaint itself sufficiently discloses the nature of the disputes between the parties and the onus was on Damodar to show that the arbitration agreement does not cover the disputes raised. 4. The arbitration agreement was not superseded by the arbitration agreement in the contract between PWH and Hazama because the two arbitration agreements operated in different fields and the difference in the venues, laws and rules of arbitration mentioned in the two agreements were immaterial. 5. The bank guarantees were not independent contracts because Damodar had not treated the bank guarantees as independent contracts and had challenged the enforcement of the bank guarantees on the basis of fraud committed by PWH in the performance of its obligation under the consortium agreement.

Final Decision: The Court allowed the application and stayed the suit in its entirety.