SUPREME COURT OF INDIA
DHV BV
v.
Tahal Consulting Engineers Ltd. (Israel)
D.K.JAIN, J.
ARBITRATION PETITION NO. 17 OF 2006
SEPTEMBER 12, 2007
Section 11 of the Arbitration and Conciliation Act, 1996 - Arbitrators - Appointment of - Whether it can be laid as an abstract proposition that whenever contracted work is completed, all rights and obligations of parties under contract, ipso facto, come to an end and arbitration agreement also perishes with that contract - Held, no - Petitioner and Respondent No.1 (R-1) were consultant foreign companies - An agreement was signed between R-2 and R-1 with petitioner as sub-consultants for providing management consultancy for water project of R-2 - As per clause 1.10 of agreement R-2 had agreed to bear income-tax liability on payments to be made by it to R-1 through which petitioner, as sub-consultant was to receive all payments-Contract was duly performed and petitioner received last payment in January, 2003 - Subsequently, on receiving notices from Income-tax Department alleging non-payment of tax on remittances made by R-2 under contract, petitioner had to pay additional income-tax demand, to avoid penal consequences - Thereafter, petitioner asked R-1 and R-2 to reimburse amount paid by it - When respondents neither accepted their liability, nor referred matter to arbitration, petitioner filed petition under section 11(6) for appointment of arbitrator - Respondents contended that claim of petitioner was barred by limitation inasmuch as agreement in question was over in March, 2002 and last payment had been made in February, 2003 - Whether since it was obligatory upon R-2 to discharge tax liability in respect of payments made to sub-consultants and petitioner being a signatory to main contract, claim made by petitioner in respect of income-tax dues would fall within ambit of arbitration agreement between parties - Held, yes - Whether notwithstanding fact that payments against all invoices raised by petitioner stood paid, in light of agreement between parties in terms of clause 1.10, subsequent creation of an additional payment by Income Tax Department in respect of payments made by R-2 to petitioner through R-1 had given rise to a live dispute requiring settlement between parties in terms of arbitration agreement - Held, yes - Whether therefore, petition filed by petitioner was to be allowed - Held, yes
The petitioner was a foreign company providing
consultancy and engineering group services with expertise in water management
and water planning. Respondent No.1 (R-1)
was also a consultant foreign company based in Israel and respondent No.2 (R-2)
was the State Government the Water Resources Organisation. On 1-12-1997, an agreement was signed
between R-1 and R-2, with petitioner and two other concerns, as sub-consultants,
for providing management consultancy and technical assistance services for the
Tamil Nadu Water Resources Consolidation Project. As per clause 1.10 of the special conditions of the main
contract, R-2 had agreed to bear the Income-tax liabilities on payments to be
made by it to the consultant, sub-consultants and their personnel. Petitioner was to receive all the payments
through R-1, being the principal consultant.
The contract was duly performed and petitioner received all payments in
respect of the invoices raised by it for the services rendered. The last payment was received some time in
January, 2003. Thereafter, in February,
2004, the petitioner received notices from the Income-tax Department alleging
non-payment of tax on the remittances made by R-2 in respect of said
contract. Though the petitioner paid
the additional tax liability raised by the revenue under compulsion to avoid
penal consequences but, thereafter in terms of clause 1.10 of the special
conditions of the main contract, asked both the respondents to settle the
dispute amicably in terms of relevant clause of the general conditions of the
main contract. Both the respondents,
however, not only denied their liability to reimburse the amount paid by the
petitioner, but also refused to accede to its request demanding reference of
the disputes to the arbitration in terms of relevant clause of the main
contract. Consequently, the petitioner
filed the instant petition under section 11(6) before the Supreme Court for the
appointment of an arbitrator. The
respondents resisted the petition mainly on the grounds that the main contract,
under which the petitioner had demanded arbitration, had expired almost four
five years prior to the filing of the application and therefore, there was no
existing arbitration agreement between the parties.
The controversy in regard to the nature
of function to be performed by the Chief Justice or his designate under section
11 has been set at rest by a Seven-Judge Bench decision of the Supreme Court in
the case of SBP v. Patel Engineering Ltd. [2005] 8 SCC 618. [Para 11]
It is clear from the said judgment that
in order to set into motion the arbitral procedure, the Chief Justice or his
designate has to decide the issues, if raised, regarding territorial
jurisdiction and existence of an arbitration agreement between the
parties. In addition thereto, he can
also decide the question whether the claim was a dead one in the sense that the
parties have already concluded the transaction by recording satisfaction of
their mutual rights and obligations or have recorded satisfaction regarding
their financial claims. Nevertheless,
the Supreme Court made it clear that at that stage, it may not be possible to
decide whether a live claim made, is one which comes within the purview of the
arbitration clause and this question should be lefts to be decided by the
arbitral tribunal on taking evidence.
It is, therefore, plain that purely for the purpose of deciding whether
the arbitral procedure is to be set into motion or not, the CJ or his designate
has to examine and record his satisfaction that an arbitration agreement exists
between the parties and that in respect of the agreement, a live issue, to be
decided between the parties, still exists.
On being so satisfied, he may allow the application and appoint an
arbitral tribunal or a sole arbitrator, as the case may be. However, if he finds and is convinced that
the claim is a dead one or is patently barred by time, he may hold so and
decline the request for appointment of an arbitrator. [Para 12]
Applying those principles on the facts
of the instant case, the petition deserved to be allowed. [Para 13]
Under the special conditions of the
contract R-2, as a client, had taken upon itself the obligation to pay on behalf
of the consultants, sub-consultants and the personnel any taxes, dues, fees,
etc. imposed under the applicable law.
At the same time, as per clause (d) thereof, not only there was
an obligation to pay taxes, etc., in certain situations, reimbursement
of some of the amounts by the consultants to the client, which the client was
compelled to pay, was also postulated.
Obviously, such a situation might arise and that clause would be
enforceable even after the expiry of the contract on completion of the services
and on the payments having been made.
Therefore, it could not be laid as an abstract proposition that whenever
the contracted work is completed, all the rights and obligations of the parties
under the contract, ipso facto, come to an end and the arbitration
agreement also perishes with the contract.
Each case is required to be considered on its own facts. In the instant case, though it was true that
all the payments were to be made by R-2 to the consultants, but the obligation
to pay taxes was also in respect of the payments which were to be received by
the sub-consultants, namely, the petitioner in terms of sub-clause (a). Similarly, the petitioner as well as R-1
were under an obligation to reimburse to R-2 the amount, if any, paid by them
in terms of the said clause. Thus, it
was the performance of the contract that ha come to an end, but the contract
was still in existence insofar as the dispute arising under clause 1.10 thereof
was concerned. Therefore, there was no
merit in the plea of the R-2 that the petitioner had no direct contract with
them insofar as the payments of taxes were concerned, and therefore, the
dispute raised by them could not fall within the ambit of arbitration agreement
between R-2 -the client and R-1 -the consultant or that on completion of the
contract, the arbitration clause in the main contract got extinct. Therefore, an enforceable arbitration
agreement existed between the parties.
[Para 14]
The arbitration agreement was in clear
terms and brought within its ambit any dispute between the parties as to
matters arising pursuant to the main contract which could not be settled
amicably. Admittedly, the liability to
pay the taxes flowed from the contract and not otherwise. Having found that it was obligatory upon R-2
to discharge the tax liability in respect of the payments made to the
sub-consultants and the petitioner being a signatory to the main contract,
claim made by the petitioner in respect of the income-tax dues would fall
within the ambit of the arbitration agreement between the parties. [Para 16]
As regards the question as to whether
the said claim could be said to be stale in the sense that after the last
payment in January, 2003, none of the three parties had any pending claims
against each other insofar as the payments under the main contract were
concerned, notwithstanding the fact that payments against all the invoices
raised by the petitioner stood paid, in the light of the agreement between the
parties in terms of clause 1.10, subsequent creation of an additional payment
by the Income-tax department in respect of the payments made by R-2 to the
petitioner through R-1 had given rise to a live dispute requiring settlement
between the parties in terms of the arbitration agreement. Consequently, it was
axiomatic that prima facie, the claim made by the petitioner was not
barred by limitation. [Para 17]
Therefore, the petition was to be
allowed. [Para 18]