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2007 Supreme(SC) 310
SUPREME COURT OF INDIA
S.B. SINHA
India Household and Healthcare Ltd-PETITIONER
VERSUS
LG Household and Healthcare Ltd-RESPONDENT
Arbitration Petition 18 of 2005
DATE OF JUDGMENT: 08/03/2007
An application for the appointment of an arbitrator is not maintainable if the party fails to comply with the contractually agreed appointment procedure, or if the arbitration agreement is vitiated by fraud or conflicts with existing judicial injunctions.
Headnote:(A) Arbitration and Conciliation Act, 1996 - Sections 11(5) and 11(6) - Appointment of arbitrator - Power of the Court is judicial in nature - Where the entire contract is vitiated by fraud, the arbitration agreement also becomes void as fraud vitiates all solemn acts.
(B) Judicial Comity - A court exercising judicial functions would ordinarily not pass an order that makes a party violate a lawful injunction order passed by another competent court.
(C) Scope of Arbitration Agreement - Bifurcation of cause of action or parties to refer only a portion of the dispute to arbitration is not permitted under the Act.
(D) Procedure for Appointment - Parties must strictly comply with the agreed-upon mechanism for appointing arbitrators; an application for court appointment is premature if the prescribed procedure has not been followed.
Facts of the case:
An application was filed for the appointment of an arbitrator following a failure to agree on a nominee. The opposing party contended that the underlying agreements were vitiated by fraud and criminal conspiracy involving representatives. An interim injunction had already been granted by a court of competent jurisdiction restraining any action based on the said agreements. Additionally, some of the disputes involved a trademark owned by a third party not privy to the arbitration agreement.
Findings of Court:
The court found that the application was premature as the applicant had not appointed its own arbitrator as per the agreed mechanism. It further observed that the existence of a valid injunction order passed by another court must be respected under the doctrine of judicial comity. Moreover, disputes involving third-party trademarks cannot be bifurcated and referred to arbitration.
Issues: Whether the court should appoint an arbitrator when the contract is alleged to be vitiated by fraud, a prior injunction exists, and the agreed appointment procedure was not followed.
Ratio Decidendi: The court held that strict adherence to the contractually agreed procedure for appointing arbitrators is mandatory. Furthermore, a court will not issue orders conflicting with an existing injunction of another court, and the prohibition against bifurcating the subject-matter of a suit prevents the referral of partial disputes to arbitration.
Result: Application is dismissed being not maintainable at this stage.
S.B. SINHA, J :
This application under Sub-sections (5) and (6) of Section 11 of the Arbitration and Conciliation Act, 1996 (for short "the 1996 Act") has been filed for appointing an arbitrator on the respondents purported failure to do so in spite of notice dated 15.04.2005.
Allegedly, an agreement was entered into by and between the parties hereto on 8.05.2004. The said agreement contained an arbitration clause being Clause 12 thereof, the relevant portion whereof reads as follows:
"12.2In the event of any dispute or difference arising between the parties hereto or as to the rights and obligations under this agreement or as to any claim monetary or otherwise of one party to another, such dispute or difference shall be referred to arbitration of a common arbitrator, if agreed upon, otherwise to two or more arbitrators, one to be appointed by each of the parties to this agreement and such arbitration shall be governed by the Arbitration and Conciliation Act, 1996, for the time being in force. The venue for such arbitration shall be in India or as is mutually decided otherwise. Until a finality is achieved in the arbitration or litigation, the Licensor shall have no right to cancel the agreement and appoint any third party or enter into agreement with any party for the sale/ importation or manufacture of the products/ provision of services in the territory."
Respondent, however, contends that the said agreement was preceded by a Memorandum of Understanding dated 1.11.2003. Respondent further contends that the said purported Memorandum of Understanding and licence agreement dated 8.05.2004 are vitiated by a fraud of a very large magnitude fructified by a criminal conspiracy hatched between M/s. K.P. Jayram Pillai and Vijay R. Singh representing the petitioner and M/s. C.H. Kim and B.K. Jung representing the respondent. The petitioner - company bribed the said C.H. Kim and B.K. Jung for the purpose of creation of the aforesaid documents. They had already been convicted and sentenced to undergo imprisonment by the Korean Criminal Court. It was contended that they misused their official position to advance private benefit. There seems to be a substantial and reasonable nexus to promote personal advantage. There was furthermore no ostensible authority on their part to represent the company. The said Memorandum of Understanding also contravenes the Korean laws in terms whereof the execution thereof required the prior approval of and a duly executed power of attorney from the Representative Director and the Chief Executive Officer of the respondent which did not exist in the present case.
Respondent has also filed a suit in the Madras High Court wherein by an order dated 6.10.2005, a learned Single Judge of the said High Court directed:
"1. That 1. India Household and Health Care Limited, through Mr. Vijay R. Singh its Managing Director 2. Mr. K.P. Jayaram C/o India Household and Health Care Ltd. and 3. Mr. Vijay R. Singh, the respondents 1 to 3 herein, their agents, men, assigns, representatives, employees or any one claiming through or under them be and are hereby
restrained by an order of interim injunction until further orders of this Court directly or indirectly acting on the so called MOU dated November 1, 2003, the License Agreement and the minutes dated May 8, 2004 respectively, or deriving any other benefit based upon the so called MOU, the License Agreement and Minutes, in any manner whatsoever."
The said interim order has been confirmed by an order dated 21.01.2006 stating:
"That the order of interim injunction granted in pursuance of the order dated 06/10/2005
restraining the First, Second and Third Respondents, therein their agents, men, assigns, representatives, employees or any one claiming through or under them from directly or indirectly acting on the so called MOU dated November 1, 2003, the License Agreement and the minutes dated May 8, 2004, respectively, or deriving any other benefit based upon the so c
