SUPREME COURT OF INDIA

 

Ludhiana Improvement Trust

 

Vs.

 

M/s Today Homes and Infrastructure (Pvt) Ltd.

 

C.A.No.6104 of 2008

 

(Altamas Kabir and Markandey Katju JJ.)

 

14.10.2008

 

JUDGMENT

 

Altamas Kabir, J.

 

1. Leave granted.

 

2. This appeal has been filed by the Ludhiana Improvement Trust, through its Administrator, and the State of    Punjab, against   the     order passed    by   the    Chief Justice of Punjab and Haryana High Court in a petition filed by the respondent herein under   Section 11 of    the Arbitration and Conciliation Act, 1996 (hereinafter referred to as `the 1996 Act') for the appointment of an    Arbitrator. In    the    said      application, which was numbered as Arbitration Case No.76 of    2007,    the   appellants herein were made respondents.

 

3.   The Ludhiana Improvement Trust (hereinafter referred to as "the Trust") was constituted under the Punjab Town Improvement Act, 1922 (hereinafter referred to as "the 1922 Act") for the planned development of the city of Ludhiana. For the purpose of construction of the City Centre in Ludhiana, the Trust, with the    intention of entering into a joint- venture with   developers in the private sector, invited bids by a Request of Proposal      document      dated       15.3.2005.               Bids were filed by interested parties by 10.5.2005 and   evaluation of the    Technical bids   was completed by   16.5.2005. In the final evaluation the respondent was found to be the highest bidder and a Letter of Intent was thereupon issued to him on 18.5.2005 for development of    the City Centre, Ludhiana. The    said    Letter of   Intent was alleged to have been approved by the Trust in its meeting held on 18.5.2005, which was attended by 7 out of its 10 members.

 

4.   The records indicate that on being issued the Letter of Intent the respondent deposited an amount of Rs.3.72 crores with the Trust towards security for the purposes of the contract. According to the Agreement, the respondent would ultimately be required to pay to the Trust an amount of (Rs.371.12 crores). The       records also reveal that possession of an area measuring 25.59 acres was handed over to the said respondent by the Trust on 24.5.2005. The Trust also appears       to   have entered into a    part-time agreement with the respondent and the HDFC Bank limited whereby it was agreed that the entire proceeds received      from     bookings of the area to be sold would be deposited in an Escrow Account with the HDFC Bank, out of  which 30% of the amount so deposited would be credited automatically to the account of the    Trust and    the balance 70% would  be available to    the    respondent No.1 for   the purpose of development of the City Centre. A Power of Attorney was also executed by the Trust in  favour of the respondent No.1 empowering the said respondent to act as its lawful attorney for the development work and  marketing of the City Centre.

 

5.   During the continuance of the agreement certain disputes arose and  certain allegations surfaced that under-hand dealings were being resorted to and up to 70% of the total amounts payable, by those who    had     booked      space    in     the    City    Centre, were    being received       in    cash    and     only       30% being received by means of cheques was being deposited in the Escrow account, resulting in huge losses to the Government of Punjab towards its share of revenue.

 

6.   Accordingly, the Trust issued a letter to the respondent No.1 on 12.9.2006 seeking an explanation regarding the    allegations to which a   reply was sent by the respondent No.1 on the very next day  denying the allegations and indicating that its accounts could  be scrutinized, and, if  the explanation  was   not  found to        be satisfactory, the dispute could be referred to arbitration.

 

7.   The suggestion made by the respondent No.1 was   rejected     by    the    Trust       by     its    letter dated 14th September, 2006, and in the said letter it was mentioned that an Arbitrator for auditing the accounts, would be appointed within the     next two days. According to the respondent No.1, the said action of the petitioner was not in keeping with    the     terms      and        conditions      of       the Agreement and clause 17 of the Concession Agreement      dated     24th     May,     2005,   and the petitioner ought to have invoked clause 17.1 (a)    and    (b)   of   the     said      Agreement       which provides for conciliation and settlement of disputes      in    an     amicable manner. The respondent   No.1 accordingly filed Arbitration Petition No. 263 of 2006 under Section 11(6)      of      the 1996 Act for appointment of an Arbitrator in accordance with clause 17 of the Concession Agreement. The    said    petition was    contested      by       the petitioner on the ground that no cause of action had accrued to the respondent No.1 for making such application.

 

8.   Subsequently, however, an   application was moved on behalf of the respondent No.1 on 9th August, 2007,      for      withdrawal        of         the arbitration case. The same was allowed and the said case was dismissed as withdrawn on 22nd August, 2007, with liberty as was prayed for. Thereafter, various      circumstances intervened. The Trust was dissolved by the Government on 14th September, 2006 and one of the major decisions taken was to revoke the Power of the Attorney granted in favour of the respondent No.1 from 5th October, 2006, upon    the    agreement       that     the   sales    and/or  leases of the Ludhiana City Centre property, which had been effected till then, which was approximately       22%     of     the     total    saleable area,    would      go     to      the      share      of        the petitioner       herein        which     would     have         the effect of validating the sales and leases      which had already taken place.

 

9.   It also appears that since the terms of the Memorandum of Settlement dated 6th October, 2006,    provided for     the     execution   of     a supplementary agreement, and nothing further was done in that regard, the respondent No.1 wrote a letter to the Trust on 29th December, 2006, requesting such       supplementary agreement to    be     executed. When   nothing more    was    heard   from     the     petitioners,         the respondent No.1 again addressed a letter to the    Trust    on    8th      June,     2007,   that    in       the absence of the procedure under clause 17.1 (a) and (b) the dispute should be settled by way of an amicable settlement.  Again on 30th June, 2007, another letter was written by the respondent No. 1 indicating the name of the Arbitrator from its side.                    The proposal was, however, rejected on the ground that in the absence of any dispute, merely on vague, false    or    motivated averments,      arbitration could not be resorted to. It was in such circumstances, that        the     application    under Section    11(6) of      the     Arbitration      Act       for appointment of an Arbitrator by the Court came to be filed.

 

10. In the proceedings under Section 11(6) of the    1996    Act,       it    was      contended   that         the Trust     had     awarded       the     contract         to        the respondent No.1 herein in keeping with all the norms and procedures and after bids had been invited by way of public advertisement. It was submitted that after the Technical and Financial bids submitted by the bidders were opened, the contract was awarded to the respondent No.1    herein, as    the      highest bidder.           Subsequently, disputes  arose between    the     parties       with       regard       to       the working    of     the    Agreement, which        prompted the     respondent       No.1 to  invoke the arbitration clause in the Agreement and on the     failure    of    the     appellant          herein          to appoint an Arbitrator, the respondent No.1 had applied to the Chief Justice of Punjab and     Haryana    under       Section 11(6)    of       the Arbitration and Conciliation Act, 1996, for the appointment of an Arbitrator.

 

11. On behalf of the appellant herein, it has been     contended       that     the       said        Agreement  itself was void having been entered into in suspicious circumstances and by perpetrating fraud     by altering       the    terms      of        the advertisement  inviting  bids       thereby enlarging        the     eligibility criteria  for participation in the bid, so that persons, who were otherwise ineligible, were given an entry  into   the     bidding process and ultimately the contract was awarded to one of    such     persons. Various       irregularities were     also       pointed    out     by     which    it  was claimed that     the     main Agreement  which contained  the Arbitration  Agreement was itself       void      and     hence       the     Arbitration Agreement could not also survive.

 

12. After    considering the    submissions      made on behalf of the respective parties, by placing reliance upon the decision of this Court in the     Case     of     Konkan Railway Corporation Limited and Anr. Vs. Rani Construction Private Limited1 which was followed in Hindustan Petroleum Corporation  Ltd.  vs.  Pinkcity Midway Petroleum2, the Hon'ble the Chief Justice took the view that having regard to Section 16 of the Arbitration and Conciliation   Act, 1996,    it     was     for    the Arbitrator   and     not    the     Chief     Justice   to decide the question of jurisdiction.

 

13. Incidentally, no reference has been made in the order of the Hon'ble Chief Justice to the    later     decision      of     the    Bench     of       Seven Judges    in     S.B.P.        and     Company       vs.        Patel Engineering       Ltd.       and     Anr.3,    wherein       the     views    expressed          by        the Constitution       Bench       in     the    Konkan        Railway case     (supra)       were     overruled        and       it        was asserted that an order passed by the Chief  Justice     or     his       delegatee       Judge,         on        an application        under       Section       11(6)      of           the aforesaid Act, would be a judicial order and  not an administrative order as had been held   in the Konkan Railway case(supra).

 

14. On the basis of his aforesaid finding, the Chief     Justice appointed      a     former       Chief Justice    of     India       as     Sole     Arbitrator            to adjudicate upon all the disputes between the parties,    including the   disputes which had been indicated in the order which has now been made before us in the instant appeal.

 

15. On      behalf        of      the     appellant          various submissions were made regarding the manner in which the contract had been awarded to the respondent company in violation of the provisions       of    Rule    94    of   the    Punjab       Town Improvement       Trust        Rules, 1939.  It   was contended that since the main Agreement had been      fraudulently obtained, even the Arbitration Agreement contained therein was void and unenforceable. The said contention was opposed by Mr. Shanti Bhushan, learned Senior Counsel appearing for the respondent- company,      and it    was       urged     that    the        High Court       had        quite correctly allowed the application   filed by     the     Company under Section 11(6) of    the Arbitration   and Conciliation Act, 1996. Mr. Shanti Bhushan contended that the main Agreement and the Arbitration Agreement contained   therein could       not        be     equated         as     they     were   for different purposes. According to Mr. Shanti Bhushan, even if the main Agreement was held to     be    void, it did     not affect   the Arbitration   Agreement which had         been included in        the    main       Agreement   for the purpose of deciding such issue.

 

16. Mr. Shanti Bhushan, submitted that even if it is accepted that the High Court ought to have    taken into consideration the later decision of the       seven-Judge             Bench    in the Patel Engineering case  (supra),        such        an omission could be rectified by this Court itself in these proceedings on the basis of the detailed submissions advanced on behalf of the parties.

 

17. We have considered the submissions of both the    parties     and     have   also   considered          Mr. Shanti Bhushan's submissions that the issues which had been left undecided by the High Court could be decided in these proceedings itself. However, in our view, such a course of action would have been justified if after considering          the      submissions         of         the respective       parties      the    High     Court          had arrived at a finding regarding the dispute between the parties. Unfortunately, relying on the earlier Constitution Bench decision of    this   Court    in    the   Konkan    Railway     case (supra),     the     High    Court   left    it    to        the learned Arbitrator appointed by it to decide the said issues under Section 16 of the 1996 Act,     which was contrary to the directions given by the seven-Judge Bench of this Court in the Patel Engineering case (supra), which categorically overruled the decision of the Constitution      Bench       in       the    Konkan    Railway case.     In fact, in sub-paragraphs (10) and (12) of Paragraph 47 of the said judgment, the seven-Judge Bench specifically indicated that     the    orders    which         had     already        been passed in applications under Section 11(6) of the 1996 Act, prior to the decision in the Patel Engineering case (supra), would be treated as valid, leaving all objections to be decided under Section 16 of the Act. It was also indicated that from the date of the judgment, however, the decision rendered in the    Patel    Engineering          case      (supra),    would govern    all    applications            and    even    pending applications under Section 11(6) of the 1996 Act.

 

18. We    have,    therefore,       no     option     but     to set aside    the    order    of   the       Chief     Justice and remit    the    matter    for      a    fresh     decision          in keeping with the decision of the seven-Judge Bench   in    S.B.P.    &     Company    vs.   Patel Engineering   Limited   and    Another4.

 

19. The appeal is disposed of accordingly.

 

20. There will be no order as to costs.

 

1[2002 (2) SCC 388]

2[2003 (6) SCC 503]

3[2005 (8) SCC 618]

4[2005 (8) SCC 618]