IN THE HIGH COURT OF GUJARAT AT AHMEDABAD SPECIAL CIVIL APPLICATION No. 852 of 2012 With SPECIAL CIVIL APPLICATION No. 7039 of 2012 With SPECIAL CIVIL APPLICATION No. 7056 of 2012 For Approval and Signature:
HONOURABLE THE CHIEF JUSTICE MR.BHASKAR BHATTACHARYA HONOURABLE MR.JUSTICE J.B.PARDIWALA ========================================= ================ 1 Whether Reporters of Local Papers may be allowed to see the judgment ?
2 To be referred to the Reporter or not ?
3 Whether their Lordships wish to see the fair copy of the judgment ?
Whether this case involves a substantial question of law as 4 to the interpretation of the constitution of India, 1950 or any order made thereunder ?
5 Whether it is to be circulated to the civil judge ?
========================================= ================ IONIK CASTINGS PRIVATE LIMITED & 2 - Petitioner(s) Versus TATA CAPITALS LIMITED & 4 - Respondent(s) ========================================= ================ Appearance :
MR VISHWAS K SHAH for Petitioner(s) : 1 - 3.MR MASOOM K SHAH for Petitioner(s) : 1 - 3. MR. ANSHIN H. DESAI for Respondents.
========================================= ================ HONOURABLE THE CHIEF JUSTICE CORAM :
MR.BHASKAR BHATTACHARYA and HONOURABLE MR.JUSTICE J.B.PARDIWALA Date :11/10/2012 CAV ORDER (Per : HONOURABLE MR. JUSTICE J.B. PARDIWALA) As a common question of law arises in this batch of writ- petitions, the same were heard together and are being disposed of by this common judgment and order.
2. The petitioners are debtors of the respective non-banking financial company, registered with the Reserve Bank of India, under the Reserve Bank of India Act, 1934. The petitioners had availed of a loan facility from the non-banking financial company. At the time of availing of the loan facility, the petitioners had entered into a loan agreement with the non- banking financial company. One of the terms of the loan agreement provides for arbitration in the event if any disputes or differences arise between the parties under the agreement. For better adjudication of the controversy in question, we reproduce the Clause of Arbitration, as contained in the loan agreement, as under:-
"12. Arbitration, jurisdiction & Governing Law
12.1 All claims disputes or differences whatsoever which may at any time hereafter arise between the parties hereto concerning this Agreement or its construction or effect or as to the rights, duties, obligations or liabilities of the parties hereto or either of them under or by virtue of or in connection with this Agreement or any document executed or security created pursuant hereto or otherwise as to any other matter in any way connected with, or arising out of or in relation to the subject matter of this Agreement (including, without limitation, enforcement of security) shall be referred to the arbitration of a sole arbitrator appointed by the company. The arbitration shall be conducted in accordance with and subject to the provisions of the Arbitration & Conciliation Act 1996, or any statutory modification or re-enactment thereof for the time being in force. The place of arbitration shall be as mentioned in Serial No. [15] of the Schedule [1].
12.2 The provisions of this Agreement relating to arbitration shall not prejudice the Company's rights to take criminal proceedings against the Borrower and / or any other proceedings which would by their nature not be subject to the arbitration provisions of this Agreement.
12.3 This Agreement and the relation between the parties shall be government by and interpreted in accordance with the laws of India. "
3. One of the prayers in this batch of petitions, is to declare the aforesaid Clause 12 of the loan agreement as null and void ab initio, on the ground that the arbitration clause is one sided and thus, opposed to the public Policy.
4. The second ground of challenge in all the three writ- petitions, is to the constitutional validity of Section 45-I(f) of the Reserve Bank of India Act, 1934, being ultra vires the constitution of India, and consequently, to direct the respondent No.3 i.e. the Reserve Bank of India, to cancel the registration certificate of the respondent No.2 as a non-banking financial company, granted under Section 45-I(f) of the Reserve Bank of India Act, 1934.
5. Mr. Vishwas K. Shah, the learned counsel appearing for the petitioners, submitted that the arbitration clause in the loan agreement is discriminatory, and favours only the creditor company. According to Mr. Shah, such a clause in a contract is opposed to public policy and, therefore, such an agreement is a void agreement not enforceable in law.
6. For deciding whether the agreement is void and not enforceable, we have to refer to Section 23 of the Contract Act, which is quoted hereinbelow:-
"23. What considerations and objects are lawful, and what not. - The consideration or object of an agreement is lawful, unless --
it is forbidden by law; or is of such a nature that, if permitted, it would defeat the provisions of any law; or is fraudulent; or involves or implies injury to the person or property of another; or the court regards it as immoral, or opposed to public policy.
In each of these cases, the consideration or object of an agreement is said to be unlawful. Every agreement of which the object or consideration is unlawful is void."
Section 23 of the Contract Act inter alia states that the consideration or object of an agreement is lawful, unless the consideration or object of an agreement is of such a nature that, if permitted, it would defeat the provisions of law and in such a case the consideration or object is unlawful ad the agreement is void.
7. In Lachoo Mal v. Radhey Shyam, (1971) 1 SCC 619, the Supreme Court, while deciding whether an agreement was void and not enforceable under Section 23 of the Contract Act, held as under:-
“7..... what makes an agreement, which is otherwise legal, void is that its performance is impossible except by disobedience of law. Clearly no question of illegality can arise unless the performance of the unlawful act was necessarily the effect of an agreement".
8. We are of the view that there is no merit in the submission of Mr. Shah, as often parties appoint an Officer of one of the parties to the arbitration agreement, as a sole arbitrator, some times the agreement in terms so provides, like in the present case. This does not ipso facto makes the arbitration or the award contrary to any public policy.
9. Reference could be made to the observations made by the Supreme Court in the case of Indian Oil Corporation Limited & ors. Vs. Messrs Raja Transport Private Limited, reported in AIR 2009 SC (Suppl.) 2145(2). The Supreme Court made the following observation in paragraph 9 of the report:-
"9. Arbitration is a binding voluntary alternative dispute resolution process by a private forum chosen by the parties. It is quite common for governments, statutory corporations and public sector undertakings while entering into contracts, to provide for settlement of disputes by arbitration, and further provide that the Arbitrator will be one of its senior officers. If a party, with open eyes and full knowledge and comprehension of the said provision enters into a contract with a government/statutory corporation/public sector undertaking containing an arbitration agreement providing that one of its Secretaries/Directors shall be the arbitrator, he cannot subsequently turn around and contend that he is agreeable for settlement of disputes by arbitration, but not by the named arbitrator who is an employee of the other party. No party can say he will be bound by only one part of the agreement and not the other part, unless such other part is impossible of performance or is void being contrary to the provisions of the Act, and such part is severable from the remaining part of the agreement. The arbitration clause is a package which may provide for what disputes are arbitrable, at what stage the disputes are arbitrable, who should be the arbitrator, what should be the venue, what law would govern the parties etc. A party to the contract cannot claim the benefit of arbitration under the arbitration clause, but ignore the appointment procedure relating to the named Arbitrator contained in the arbitration clause."
10. Reference could also be made to the observations made by the Supreme Court in paragraph 19 of its report, in the case of Union of India Vs. Col. L.S.N. Murthy and anr., reported in 2012 1 SCC 718.
"19....... unless the effect of an agreement results in performance of an unlawful act, an agreement which is otherwise legal cannot be held to be void, and if the effect of an agreement did not result in performance of an unlawful act, as a matter of public policy, the court should refuse to declare the contract void with a view to save the bargain entered into by the parties and the solemn promises made thereunder."
11. Bearing the aforesaid principle in mind, we have no hesitation in rejecting the submission of Mr. Shah as regards the legality and validity of the arbitration clause, as raised in all the three writ-petitions and, we, accordingly, reject the same.
12. In so far as the challenge to the constitutional validity of Section 45-I(f) of the Reserve Bank of India Act, 1934 is concerned, we may only say that the validity of the said Section fell for our scrutiny in the case of Harkaish P. Bhadoria Vs. Union of India (Special Civil Application No. 14600 of 2011), and by our judgment and order pronounced today, we have upheld the constitutional validity of Section 45-I(f) of the Reserve Bank of India Act, 1934.
13. In the aforesaid view of the matter, we do not find any merit in these petitions, and are accordingly rejected. However, in the facts and circumstances of the case, there shall be no order as to costs.
(Bhaskar Bhattacharya, C.J.) (J.B. Pardiwala, J.) */Mohandas