(The judgement of the Court was delivered by M.CHOCKALINGAM,J.) Challenge is made to an order of the learned single Judge of this Court made in O.P.No.355 of 2006 whereby the award of the Arbitrator was confirmed by dismissing the O.P.
2. The Court heard the learned counsel for the appellant and also for the respondent and made a scrutiny of all the materials available.
3. The appellants filed the said O.P. challenging the award dated 17.7.2004 made by the sole arbitrator for the following facts and circumstances.
(a) The appellants are the husband and wife, while the first respondent is the sister's son of the first appellant. The second respondent is the close associate of the parties. The appellants and the respondents commenced two companies, one by name Think Business Network, TBN(US) based in United States and the other TBN(IN) based in India. The appellants are having 51% of shares and the respondents 49% in the company based in United States and had equal shares in TBN(IN) in the company based in India. The companies were commenced in October 1996 and carried on the business activities till 2000 2001. The object of the software service of TBN (US) was to locate the customers who were in requirements of software service and after doing so, it should place orders before TBN(IN). It is also agreed that the TBN(IN) should perform the service and provide to TBN(US). The US based company should pay for the service rendered by the other and in turn, the TBN(US) should provide to its customers and recover the money from them. A customer called 'Kinzan' was located by TBN(US). They wanted service from TBN(IN). For the service rendered by Indian based Company for the customer 'Kinzan', payment was not made by TBN(US) though 'Kinzan' has paid the amount to TBN(US). The TBN(IN) took a stand that till TBN(US) pays TBN(IN) for the software service performed in favour of 'kinzan'. TBN(IN) should continue to retain the ownership of the copyright in respect of the software. Therefore, TBN(US) should not permit 'Kinzan' to use the copyright. In view of the same, there was a rift between the parties. The appellant filed a suit against TBN(US).
(b) The petitioners/appellants floated a Company called 'Dhyan Infotech Pvt.Ltd. and diverted its business in favour of the newly created company. The first respondent was the Director of the U.S. based Company and he was excluded from the entire process. The appellants made allegations against the first respondent and refused to provide accounts and removed him from the Directorship. Under such circumstances, the first respondent filed a comprehensive suit in the Superior Court in California in which proceedings, they agreed for arbitration. Both the appellants and the respondents are U.S. citizens. Admittedly, the parties agreed for two arbitrations, one in respect of the company in U.S. and the other in respect of the company in India. Insofar as US Company is concerned, it was agreed that the arbitral proceedings should be placed before the Superior Court at California and it should be proceeded with. In respect of both arbitral proceedings, Mr.Rao, a Chartered accountant at Chennai was appointed as a sole Arbitrator. Insofar as the arbitral award in respect of the Indian based Company is concerned, it was agreed by all the parties and it was also placed before the Superior Court at California and it was not challenged, but the arbitral award made by the said sole Arbitrator in respect of the U.S. based Company was challenged before the learned single Judge of this court in O.P.No.355 of 2006.
4. The appellants challenged the award in the said O.P. mainly on the following grounds :
i) The award was opposed to the principles of natural justice.
ii) The Arbitrator has misconducted himself and has acted in a biased manner. iii) The Arbitrator has travelled beyond the scope of reference and decided the matters and rights of Companies who were not parties to the Arbitration Agreement.
5. The learned single Judge after looking into the materials available and hearing the submissions made, rejected all the contentions putforth by the petitioner side and confirmed the award. Hence, this appeal at the instance of the petitioners.
6. Advancing the arguments on behalf of the appellants, the learned senior counsel would submit that the agreement specifies that the difference and disputes relating to the Company where to be referred to arbitration as detailed in paragraph 2. Para 4 of the Agreement provides that Arbitration and Conciliation Act, 1996, shall apply. Para 6 of the Agreement provides that the Arbitrator was at liberty to convey, discuss, reply, receive or accept the order to the related parties by e-mail, fax, and other accepted modes of transmission. Placing reliance on Sections 18 and 24(3) of the Arbitration Act, the learned counsel would submit that under
Section 18, both the parties to the arbitration proceedings should be treated equally and to be given full opportunity to present their case.
Section 24(2) of the Act provides that all statements, documents and information submitted to the Arbitration Tribunal by one party shall be communicated to the other party. The above principles constitute the principles of natural justice.
7. Learned counsel further submits that in the instant case, it would be seen that the hearing that had taken place is one sided. The Arbitrator has heard and received information from each parties in the form of e-mails and in the form of questionnaire and has not furnished the same to the other parties. It would be quite evident from page 2 of the Award under the head "hearing and proceedings", the Arbitrator has had information from individuals parties found in Exhibit B, C, C and E and considered only the information furnished by the respondents without furnishing the same to the other parties and without the other parties knowing its contents. Much reliance was placed by the respondents on Clause 6 of the Arbitration Agreement before the learned Single Judge. The said clause only enables the Arbitrator to convey or receive communications by email, fax etc. but did not permit the Arbitrator to decide the issue of one party communicating the same to the other party. In fact, it may not be permissible for the parties to even agree upon such procedure in view of
Section 24(3) of the Act, which mandates information to be given to the other parties.
Section 24(3) is not in controversy between the parties. Section 24(1),
25,26 of the Act would clearly indicate "unless and otherwise agreed upon by the parties" but the same was absent in
Section 24(3). In fact, appellant No.2, has not even answered the questionnaire which was sent to her on 4.1.2004 which would be evident in page Nos.100 and 101 of the paper book. It would be seen from Exhibits B,C and D that the Arbitrator has sent the questionnaire to the parties only in July 2004 and got the answers from three of the parties. From the available materials, it would be quite clear that the Arbitrator has sent e-mails to the respective parties. None of the said information had been communicated to the other. Therefore, there was violation of mandatory provisions contained in
Section 24(3) of the Act. Hence, the Award has to be set aside for violation of mandatory provisions.
8. Added further learned counsel, the Award was opposed to various provisions of the Arbitration and Conciliation Act.
Section 23(1) of the Act provides that the parties should state the facts supporting their claim, the points to the issue and the relief or remedies sought for, while the other party should state the defence, unless the other party agrees to certain statements.
9. In the instant case, there was no claim statement made by the parties containing any claim or relief. Apart from that,
Section 19(2) of the Act provides for the parties to agree on the procedure which however is subject to Part I which contains
Sections 2 to
43. Hence, it would be quite clear that
Section 23(1) of the Act was mandatory and was not subject to any contract to the contrary. The procedure to be followed could be agreed but the requirement to file a claim statement containing the claims and relief/s was mandatory. In the instant case,
Section 23 of the Act has not been complied with.
10. It is pertinent to point out that number of reliefs granted by the Arbitrator was not even found in the answer to the questionnaire submitted by the parties. In the course of the award, the Arbitrator has held that the amount of US$2,90,000 is payable to TBN-IN by TBN-US. The claim is not even found in the answer to the questionnaire submitted by the first respondent. Equally, in page No.14 of the Award, the Arbitrator has held that TBN-US shall get compensated from Dhyan Infotech and the said Indian Company shall pay 25% to gross receipts in the EMS and other Software to TBN-US which again is not found in any claim by the first respondent, even in the answer to the questionnaire submitted by him. Thus, it would be quite clear that the award has proceed to decide upon the matters which were not found in any claim putforth. Apart from the above, the Award was opposed to
Section 28 of the Arbitration and Conciliation Act. The said provision provides that Arbitral Tribunal should decide in accordance with the terms of the contract and shall take into account the usage of the trade applicable to the transaction.
11. The Arbitration Agreement was entered into between the parties who were Directors/shareholders of TBN-US. Dhyan Infotech was not a party to the Arbitration Agreement. The award directs the Indian Company to pay TBN-US for the use of its alleged intellectual property rights in EMS and also software to an extent of 25% of gross receipts. Since Dhyan Infotech was not a party to the Arbitration Agreement, the rights of the said Company cannot be adjudicated, the direction was opposed to the Indian law, since intellectual property rights cannot be assigned for non-payment of monies. The Award was also opposed to Section 81 of the Act also. The parties have not been treated equally and given equal opportunity. The Arbitrator had hurriedly conducted the proceedings and passed the award without providing opportunity. The questionnaire were sent in piece meal by the Arbitrator only in July 2004. There was hardly time for the parties to know about the answers given by the other parties or even to require the Arbitrator to furnish information. On 8.7.2004, the Arbitrator has addressed the first respondent to the effect that the first respondent wants the accounts of TBN-US to be audited and has suggested that he would make a trip to the U.S. and audit the accounts. The Arbitrator had offered his services and requested information for visa and had asked for expenses. The first petitioner had replied to the effect that there are not enough funds for TBN-US to pay for the audit. Thereafter, there was exchange of e-mails between the first and the third respondent/Arbitrator. As could be seen from the exchange of e-mails on 15.7.2004, the first respondent has addressed the Arbitrator regarding the alleged misappropriation of TBN EMS software by Dhyan Infotech and also made certain suggestions and two days thereafter, the Award has been passed. Apart from that, it is also seen from the award that the Arbitrator reckoned the figures which are not borne out by any of the exhibits on record. The calculation made by the Arbitrator appears to have been made on the basis of the personal information received from the first respondent behind the back of the appellants. This would also vitiate the Award. All would indicate that the third respondent/Arbitrator acted in bias.
12. The learned counsel took the Court to the letter addressed by the first respondent to the third respondent/Arbitrator on 15.7.2004 which according to him would indicate bias and misconduct on the part of the third respondent/Arbitrator. The Arbitration Award has been made beyond the terms of the reference. The Award would clearly go to show that it dealt with the Companies who are not parties to the Arbitration Agreement. Dhyan Infotech is not a party to the Arbitration Agreement at all. The mail at pages 163 and 165 of the paper book addressed by the first respondent to the third respondent would make out a case of bias of the third respondent against the appellants and in favour of the first respondent. The document would indicate a private conversation which clearly reveals the private interaction between the first respondent and the third respondent which would vitiate the Award. All the above would clearly indicate that the award suffered by all the above reasons mentioned, since it is violative of all mandatory provisions of law and it has got to be set aside, but the learned single Judge has not paid its attention on any one of these aspects, but has affirmed the award accepting the contentions putforth by the respondent side. Hence, the judgement of the learned single Judge has got to be set aside.
13. In support of the contention, the learned counsel for the appellants relied on the following judgments:
4. The parties herein agree to co-operate, furnish relevant date and handover possession during the period of arbitration for early award of arbitration and further agree that the provisions of the Arbitration and Conciliation Act, 1996 shall apply, provided they are not inconsistent or repugnant to this agreement;
5. The arbitrator will decide the matter within 4 months. But in case the matter could not be decided within 4 months, the time to make the award shall be extended by one more month. The cost of arbitration and the expenses shall be met out of the company's funds.
6. The arbitrator may ask for auditing of books of account of the company to a period relevant to the arbitration, for finalisation of the accounts of the company, may appoint consultants or advisors to value the assets of the company, may take administrative assistance for other related matters of arbitration. The arbitrator is at liberty to convey, discuss, reply, receive- accept and order to the related parties herein communication by email, fax and other accepted modes of transmission during the arbitration process."
Under the said agreement, the sole Arbitrator Mr.Rajeshwara Rao, Chartered Accountant, Mylapore, Madras was appointed in respect of two companies, TBN-US based in United States and TBN-IN, based in India. Two arbitral proceedings were initiated, pending the suit in the Superior Court of California. The said Arbitration Agreement was entered in India. It is also an admitted position that two arbitral awards came to be made by the same Arbitrator, following the same procedure. The arbitral award in respect of the disputes between the parties insofar as India was concerned, it was not adjudicated by either of the parties but insofar as the award made by the Arbitrator in respect of the disputes arose in TBN-US based in United States, the arbitral award is challenged before the Court. It is also borne by documentary evidence that before the Superior Court in California, the parties would submit the arbitral awards for confirmation but the appellants filed O.P. before this Court. Preliminary objections were raised as to the jurisdiction of this Court by the respondents but the same was rejected by the Court. The said order has become final, since it was not appealed against. Apart from that, in Clause 4 of the Agreement, it was agreed that the provisions of the Arbitration and Conciliation Act, 1996, provides that they were not inconsistent or repugnant to the Agreement.
17. The Award was challenged by the appellants on the grounds that it was in violation of mandatory provisions under
Sections 23 and
34 of the Arbitration and Conciliation Act. Apart from that, it dealt with the third parties and thus exceeded the terms of the Agreement and it is also hit by bias.
Sections 23 and
24 of the Arbitration and Conciliation Act, 1996 reads as follows:
" 23. Statement of claim and defence. (1) Within the period of time agreed upon by the parties or determined by the arbitral tribunal, the claimant shall state the fact supporting his claim, the points at issue and the relief or remedy sough, and the respondent shall state his defence in respect of these particulars, unless the parties have otherwise agreed as to the required elements of those statements.
(2) The parties may submit with their staements all documents they consider to be relevant or may add a reference to the documents or other evidence they will submit.
(3) Unless otherwise agreed by the parties, either party may amend or supplement his claim or defence during the course of the arbitral proceedings, unless the arbitral tribunal considers it inappropriate to allow the amendment or supplement having regard to the delay in making it.
24. Hearings and written proceedings. - (1) Unless otherwise agreed by the parties, the arbitral tribunal shall decide whether to hold oral hearings for the presentation of evidence or for oral argument, or whether the proceedings shall be conducted on the basis of documents and other materials:
Provided that the arbitral tribunal shall hold oral hearings, at an appropriate stage of the proceedings, on a request by a party, unless the parties have agreed that no oral hearing shall be held.
(2) The parties shall be given sufficient advance notice of any hearing and of any meeting of the arbitral tribunal for the purposes of inspection of documents, goods or other property.
(3) All statements, documents or other information supplied to, or applications made to the arbitral tribunal by one party shall be communicated to the other party, ad any expert report or evidentiary document on which the arbitral tribunal may rely in making its decision shall be communicated to the parties."
18. Admittedly, both the parties did not putforth their claim statements and also did not claim in respect of their respective claims and objections to their claims. On appointment, the sole Arbitrator has issued questionnaire in piece meal and the same were also answered. In clause 6 of the agreement, it is found that the Arbitrator could convey or receive the communication by e-mail, fax etc.
19. The first contention putforth by the appellants side that the parties were not allowed to place their claim statement and the defence statement from the opposite part cannot be countenanced for two reasons. The disputed parties are all based in United states and the Chartered Accountant appointed as sole Arbitrator was based at Madras, India. Taking into consideration, the said fact, clause 6 should have been incorporated to the effect enabling the Arbitrator to convey or receive communications through e-mail, fax etc. Apart from that, insofar as arbitral award in respect of Indian based company TBN-IN is concerned, the same procedure was adopted to which the appellants have not raised even the little finger but have followed the same procedure and the said Award is also was not challenged. Under such circumstances, now the appellants cannot be permitted to state that proper procedure was not adopted.
20.
section 24(3) of the Act mandates that all statements, documents or other information supplied to, or applications made to the arbitral tribunal by one party shall be communicated to the other party. In the instant case, admittedly, after the questionnaire were served upon the appellants on the one side and the respondents on the other and the answers were also obtained therefor, neither the questionnaire served upon one party and the answer received therefrom was communicated to the other party enabling to understand what was actually claimed by the other party and how the claims of the first party was defended by the other party. Thus, both the parties were kept in darkness. It is possible and permissible to agree upon some procedure, but the Arbitrator cannot go against the mandate to pass on the information given by one party to the other party. As per Section 24 of the Act, unless otherwise agreed by the parties, the Arbitrator was duty bound to communicate all the statements, documents and other information supplied by one party to the other party. In the instant case, the arbitral agreement does not stand contrary to the provisions under
section 24(3) of the Act.
21. It could be seen from the available materials, a communication was sent by the Arbitrator on 14.7.2004 which reads as follows:
"find attached is the list of questions. Please reply at the earliest. I will be making the award by 17th July. I have given the reasons in my earlier email. I am also attaching the mail addressed to your wife, since I do not have her email id. If she is still in India, I will forward the same to her. Please forward."
In reply, the first appellant has sent a communication to the Arbitrator on 16.7.2004 which reads as follows:
"I had forwarded your email to my wife. Since she is in India, she requested she would need a few more days. However she mentioned that she will get it completed by Sunday (Sat 18th) and send it to me and I will forward it you in return."
22. When the Arbitrator has sent the questionnaire awaiting the reply to take a decision and when the same was replied by the first appellant as seen above, the Award came to be passed on 17.7.2009 which would be quite clear that even before the receipt of the answers for the questionnaire from the first appellant, the Arbitrator was haste in making the Award.
23. In the instant case, it is quite evident that the Arbitrator has traversed beyond the jurisdiction by fastening the liability on the third party, the companies, who are not parties to the contract.
24. The learned counsel for the respondents pointing to Clause 2 of the Arbitration Agreement would submits that it speaks about the differences and disputes relating to the Company pertaining to the business relationship and commercial transactions with Think Business Network Private Limited, India and other related parties and all matters connected by procedure, legal obligations for the above matters, which in the considered opinion of the Court, these clauses cannot be taken as a shelter by the Arbitrator to go beyond the terms of the Agreement. It remains to be stated that the Arbitrator has granted number of reliefs which were not the subject matter of reference or the answers to the questionnaire submitted by the parties. The Arbitrator had held that the amount of US$2,90,000 is payable to TBN-IN by TBN-US. It did not find place in the questionnaire. Apart from that, he has also found that TBN-US should get compensated from Dhyan Infotech Pvt. Lt. and the Indian Company shall pay TBN-US for use of its IP rights in the EMS and other software to the extent of 25% of the gross receipts booked by Dhyan Infotech for EMS and also for its use in the next 8 years, which was actually not a claim made by the first respondent in the questionnaire. Thus, it would be quite clear that the Arbitrator has proceeded to decide the matters which neither find place in the claim nor in the answers to the questionnaire. Thus, it can be stated that it was opposed to
Section 23 read with
Section 18 of the Act.
25.
Section 28(3) makes it clear that the Arbitral Tribunal should decide in accordance with the terms of the contract. It is evident from the Arbitration Agreement that it was entered into between four parties namely, the petitioners and the respondents who are Directors and shareholders of the Companies and Dhyan Infotech Private Limited against whom the liability was fastened is not a party to the Arbitration Agreement. Dhyan Infotech Private Limited and the said Indian Company was directed to pay for the use of the alleged intellectual property rights.
26. The contentions putforth by the respondent's side that such a direction for payment cannot be outside the scope of the terms of the agreement, since it would come under clause 2 of the agreement. This contention cannot be countenanced so long as Dhyan Infotech Pvt.Ltd was a third party to the arbitration agreement. The rights and liabilities of the said Company cannot be adjudicated upon.
27. The learned counsel for the appellants assailing the award stated that the personal knowledge of the Arbitrator had a role to play in framing the questions found in the questionnaire. The learned counsel pointing to page 144 of the typed set of papers would state that "It is to the notice of the arbitrator that a company called 'DHYAN INFOTECH PRIVATE LIMITED' has been incorporated in India and from the place where management of TBN India is taking place and has the same address in USA also as that of TBN US. The company is incorporated with your existing co-directors in these companies and the new company formed also has the similar objects as that of the existing companies referred above", which according to the learned counsel can also stand a good reason to set aside the award and also in view of the decision taken in AIR 1970 SC 967 (Dewan Singh v. Champat Singh) wherein it is held as follows:
"This agreement does not empower the arbitrators either specifically or by necessary implication to decide the disputes referred to them on the basis of their personal knowledge. The recital in that agreement that the arbitrators may decide the disputes referred to them in "whatever manner" they think does not mean that they can decide those disputes on the basis of their personal knowledge. The proceedings before the arbitrators are quasi-judicial proceedings. They must be conducted in accordance with the principles of natural justice. The parties to the submission may be in the dark as regards the personal knowledge of the arbitrators. There may be misconceptions or wrong assumptions in the mind of the arbitrators. If the parties are not given opportunity to correct those misconceptions or wrong assumptions, grave injustice may result. It is nobody's case that the parties to the submission were informed about the nature of the personal knowledge, the arbitrators had and that they were given opportunity to correct any misconception or wrong assumption. Further in the present case there were as many as five arbitrators. It is not known whether the award was made on the basis of the personal knowledge of all of them or only some of them. Arbitration is a reference of a dispute for hearing in a judicial manner. It is true that parties to an agreement of reference may include in it such clauses as they think fit unless prohibited bylaw. It is normally an implied term of an arbitration agreement that the arbitrators must decide the dispute in accordance with the ordinary law: see Chandris v. Isbrandtsen Moller co., 1951-1 KB 240 that rule can be departed from only if specifically provided for in the submission."
the award has got to be set aside.
28. In the instant case, the arbitrator has proceeded to make an award by denying the opportunity of putting forth the case and to meet the claim of the other side. The natural justice would require not only giving opportunity but sufficient and reasonable opportunity, since it is the essence of fair adjudication. The principles of natural justice should be strictly followed in order to prevent miscarriage of justice.
29. Apart from all the above, regarding the violation of mandatory provision of the Act, the Court is able to see bias which is evident in the strict sense of the terms. It is contended by the respondent side that the question of bias was not raised in the petition, but, this contention, cannot be accepted, since it has specifically averred. It would be more apt to reproduce the contents of the letter dated 15.7.2004 sent by the first respondent to the Arbitrator which reads as follows:
"I have furnished the proof required to show that Ram/Raj have misappropriated the Think EMS software for their new company Dhyan Infotech. Please let me know if you have any questions.
If you are able to make the ruling that the software has been misappropriated, then kindly include the attached proof as part of your arbitration award so that it will be more binding if Ram/Raj choose to contest the award in US courts......."
The above passage written by the respondent to the Arbitrator is not in the nature of the answers to the questionnaire but in the nature of persuasion to make an award for misappropriation.
30. A reading of the above letter would indicate that it is in suggestive nature so that an order could be passed in favour of the respondent. The contention put forth by the respondent side that the message was given on 15.7.2004, but the award came to be passed on 17.7.2004 and hence, the Arbitrator has not looked into his message, cannot be of no avail to the respondent for the simple reason that it was a fax message which would have reached him immediately. The tenor of this communication coupled with the refusal to grant time to the appellant for answering the questions as found in the questionnaire on 15.7.2004 as requested by the appellant on 14.7.2004 would clearly indicate that the award was an outcome of bias.
31. The Act mandates that the Arbitrator should apply his mind into the terms of the contract entered into between the parties and decide the rights and liabilities, but, in the instant case, the Arbitrator has proceeded to pass an award even against the third parties who were not parties to the contract or arbitral agreement and thus, he has travelled beyond the contract.
32. Thus, the Court is able to see that in the instant case, the appellants were not given the statements of claim and defence made by the opposite party to putforth its case and thus, they were prevented from presenting their case and the arbitral award also dealt with the dispute not contemplated and not falling within the terms of the submissions to the Arbitrator. As stated above, it contains matter beyond the scope of arbitration. Apart from all the above, it is a case where the Court is able to notice that the principles of natural justice being offended and also against the public policy and it was also hit by bias.
33. In view of all the above, the learned single Judge should have set aside the award but has taken a contrary view which in the considered opinion of the Court, does not stand the scrutiny of law. Hence, the order of the learned single Judge has got to be set aside and the award under challenge has also to be set aside. Accordingly, the appeal is allowed leaving the parties to bear their costs. Consequently, connected M.P.No.1 of 2009 is closed.
(M.C., J.) (R.P.S., J.) 27.08.2009 Index : Yes/No Internet : Yes/No vsi M.CHOCKALINGAM, J. AND R.SUBBIAH, J. vsi OSA.No.256 of 2009 27.08.2009