Madras High Court · 2009

THE HON'BLE MR. JUSTICE P.JYOTHIMANI Application No.3965 of 2009 ORDER This application is filed under Section 9 of the Arbitration and Conciliation Act, 1996 (for brevity, "the Act") for a direction against the respondent to furnish security by way of an irrevocable and unconditional bank guarantee for a sum of Rs.5 Crores pending conclusion of the arbitration proceedings.

2.

The facts leading to the filing of the said application are as follows: The applicant is a private company registered under the provisions of the Companies Act having registered office at Mumbai. The shareholders of the applicant-Company include Tata Capital Limited, affiliates of IL&FS Investment Managers Limited and Infrastructure Development Finance Corporation and the applicant-Company was promoted by AFL Private Limited, which is one of India's foremost service providers in logistic, freight forwarding and transportation. The object of the applicant-Company is to carry out business of a merchant air cargo operation.

2.

The respondent-Company is also a private company registered under the Companies Act having registered office at Mumbai. The respondent is stated to have been promoted by two individuals, namely Joseph Doss and Elizabeth Doss with a share capital of Rs.10 Lakhs divided into 1,00,000 equity shares of Rs.10 each. However, according to the applicant, the respondent is not having any significant assets.

2.

On the basis that the respondent-Company is engaged in the business of aircraft maintenance, an agreement was entered on 1.11.2007 by the applicant with the respondent, by which the respondent would provide aircraft maintenance service to the applicant in accordance with program of the applicant and the directives of the Directorate General of Civil Aviation.

2.

According to the applicant-company, the terms of the said agreement dated 1.11.2007 are unjust and inequitable due to the reason that under one of the clauses, the applicant was to pay an onerous amount of Rs.30 Lakhs per month to the respondent even when services were not availed from the respondent. The applicant has, in fact, paid Rs.2.60 Crores to the respondent, which was sought to be justified by the respondent towards the cost/expenses incurred by it. However, it is the case of the applicant that the respondent has not incurred any such costs/expenses

2.

Another clause of the said agreement dated 1.11.2007, excludes the provision of various equipment from the scope of the respondent's obligation and devolves such responsibility on the applicant which according to the applicant is against the practice. The applicant is stated to have incurred an expense of Rs.1 Crore in procuring equipment.

2.

According to the applicant, the respondent has not performed its obligation as per the said agreement dated 1.11.2007, which is revealed by the fact that till 15.7.2008 no approval was obtained from the Directorate General of Civil Aviation which is necessary for carrying out the obligations under the agreement and there is no iota of evidence to show that the respondent has even made an application seeking such approval.

2.

While as per the agreement dated 1.11.2007 the applicant's requirement was relating to the maintenance of aircraft to meet "8A" standard, the respondent has obtained approval only in respect of "4A" standard. While the agreement contemplates maintenance services to be rendered at Bangalore and Chennai, the respondent got approval only in respect of Chennai and the respondent has no operation at Bangalore.

2.

The respondent has not even informed the applicant about the appointment of qualified engineers, including line engineers and quality control engineers and moreover, such appointments should be of engineers who have all requisite qualification and approval from the Directorate General of Civil Aviation. It is due to that reason the applicant had to avail services from third party by incurring expenses in excess of Rs.90 Lakhs.

2.

When an aircraft - Boeing 737-300 leased by the applicant for its operations landed at Chennai airport on 19.6.2008, the respondent having taken the documents refused to return the same to the applicant and demanded exorbitant amount for return of those documents. In spite of the criminal compliant given, the respondent failed to hand over the documents which were absolutely necessary since the aircraft was taken out on lease from its owner  GE Commercial Aviation Services.

2.

When the applicant appointed an independent consultant to carry out technical audit of the respondent's capabilities, the respondent has not cooperated and ultimately, the applicant came to know that the respondent has no technical capability at all.

2.

The applicant agreed to make further payments to the respondent for returning the said documents and it is under such circumstances, the respondent raised a claim of Rs.14 Crores and the applicant was forced to enter another agreement with the respondent on 6.12.2008 and had to part with a sum of Rs.1 Crore in exchange of 32 cartons of documents received from the respondent. According to the applicant, this conduct of the respondent is harassment.

2.

It is stated that the respondent has filed an application in O.A.No.134 of 2009 before this Court under Section 9 of the Act and obtained an order, against which the appeal has been filed by the applicant and the same is pending. In view of the urgency in handing over the aircraft to GE Commercial Aviation Services, the applicant had to furnish bank guarantee for Rs.1.50 Crores under protest, to seek modification of the exparte ad interim order granted by this Court.

2.

As per the second agreement dated 6.12.2008, there is an arbitration clause and according to the applicant, it is entitled to claim an amount of Rs.5 Crores and issued a notice on 21.7.2009. In these circumstances, the present application is filed for the relief stated above.

3.1. In the counter affidavit, it is stated that Rs.5 Crores amount intended to be claimed by the applicant before the Arbitral Tribunal is a notional amount and not liquidated damages. It is stated that even in the notice dated 10.10.2008, the applicant has not made any allegation or claim against the respondent and therefore, this application is an abuse of process of law.

3.2. It is stated that in O.A.No.134 of 2009 filed by the respondent, the applicant has taken the ground of jurisdiction but the applicant has chosen to file this application under Section 9 of the Act before this Court.

3.3. It is stated that if the applicant challenges the agreement dated 6.12.2008, even the arbitration clause will go and therefore, the present application is not maintainable. That apart, all other allegations raised against the respondent are denied.

3.4. It is stated that the ability of the respondent was known to the applicant even before the first agreement was entered. The respondent is possessing all required infrastructure, expertise, skilled manpower, etc. It is stated that the agreement dated 1.11.2007 was not entered due to inducement and that when the agreement was entered there was different management and the present management of the applicant having accepted the agreement has made false allegations.

3.5. While it is admitted that the respondent has undertaken to maintain the aircraft, it is stated that the agreement was entered after analyzing the pros and cons. It is the case of the respondent that the applicant did not obtain licence for commercial operation and therefore, the respondent was put to loss and the obligation is on the part of the applicant. It is stated that the validity or otherwise of the agreement was never raised by the applicant even in O.A.No.134 of 2009 filed by the respondent and that the applicant is liable to pay a sum of Rs.30 Lakhs per month as retainer fees. It is stated that whether the applicant procures aircraft or not, the respondent has to maintain infrastructure, personnel, staff and equipment to carry out maintenance activities and that the respondent has always been ready with all the equipment from 1.1.2008 onwards. It is stated that for the payment of retainer fees there is no obligation on the respondent to justify the amount payable and the respondent has been incurring loss since it was always ready to provide maintenance and that the two agreements were entered with consensus.

3.6. It is stated that the respondent has availed category 'C' approval much earlier and CAR 145 approval was also obtained soon after the agreement was signed and as far as the approval from Directorate General of Civil Aviation is concerned, the same can be obtained only after the aircraft lands. The aircraft landed only on 18.6.2008 and thereafter, within a short span of time approval was obtained.

3.7. The respondent also denied the allegation that "8A" standard approval was not obtained by it. As per the agreement, existence of certain spares, sealant, expendables and consumables has to be established to the Directorate General of Civil Aviation for obtaining approval and inasmuch the same were to be provided by the applicant as per the agreement and the applicant failed to provide the same, the "8A" standard approval could not be obtained and the applicant alone is responsible for the same.

3.8. It is stated that the aircraft which has landed at Chennai did not fly thereafter and in such circumstances, rendering maintenance at Bangalore is not an issue at all. It is also false to state that the applicant has engaged third party for maintenance. The respondent had to suspend the operation in September, 2008 since the aircraft was abandoned by the applicant. Since the respondent is a maintenance agency and the agreement has not been terminated, the respondent is justified in having possession of the documents.

3.9. It is stated that the complaint given against the respondent by the applicant is false. The appointment of an independent consultant is also denied. It is also denied that the respondent has no technical capability. The claim of Rs.14 Crores is also denied. About the pendency of an appeal against the order in O.A.No.134 of 2009, it is the case of the respondent that it is not known to it. The claim of damages is not admitted. The statement that the applicant has furnished a bank guarantee for Rs.1.50 Crores under protest is also denied and it is stated that the claim of Rs.5 Crores being a notional claim cannot be a basis for approaching this Court under Section 9 of the Act.

4. On the factual aspect of the matter, while considering the issue based on the affidavits filed by both the parties, there is no difficulty to prima facie come to a conclusion that both the parties have raised contentious issues which are practically to be decided by the Arbitral Tribunal.

5. The complaint of the applicant itself is that the applicant has given a notice for arbitration on 21.7.2009. A reference to the said arbitration notice given by the applicant shows that the applicant, at least for the present, quantified the damages and compensation to be in excess of Rs.5 Crores. The said amount is approximately quantified by the applicant under various heads.

6. In the first agreement entered between the parties on 1.11.2007, under Clause 21 the applicant has agreed to pay Rs.30 Lakhs per month to the respondent for every month of delay beyond 1st February, 2008 till start of operation of airline. The said clause is as under: "21. Compensation: This contract will come in to effect from 1st February 2008 and in the event of delay in commencing the maintenance operation, Quikjet will compensate Bharat Aviation by paying an amount of INR: 30,00,000/- per month for every month of delay beyond 1st February 2008 till start of operation of airline to cover minimum cost as retainer fee. " The clause is clear that it is not based on the operation, but it is by the delay caused by the applicant the above said amount is payable. Admittedly, the applicant has paid Rs.2.60 Crores to the respondent in that regard as stated by the applicant. Now, it is the case of the applicant that the said clause is unjust. This is squarely an issue to be decided by the Arbitral Tribunal to come to a conclusion as to whether the amount stated to have been paid as per the said clause has to be restored to the applicant or not.

7. Again, under Clause 27 of the agreement the respondent is excluded from the obligation of providing equipment. The said clause is as follows: "27. Exclusion: Equipments like main jacks, engine stand, APU cradle, Fish Pole, GPU, Air Starter and engine compressor wash should be provided by the operator and does not come under the purview of this contract. " It is the case of the applicant that this clause is also unjust. It is relevant to point out that even under Clause 23, which is as follows, spares are to be supplied by the applicant with approved certificates: "23. Spares: All spares (rotables, consumables and expendable) should be supplied by Quickjet with relevant approved certificates. " It is in this regard, the applicant claimed Rs.1 Crore on the ground that the applicant had to unjustly deliver equipment, spares, etc. Again, this is an issue which is within the realm of the Arbitral Tribunal to decide whether such clause in respect of the maintenance operator is reasonable or not and it is not for this Court, at this stage, to decide under Section 9 of the Act.

8. The next important issue which has been raised in regard to the conduct of the respondent is that as per Clause 2 of the agreement, which is as follows, the maintenance program and flight schedule at each station is up to "8A" checks, whereas the respondent has obtained approval only for "4A" checks and therefore, the respondent is not qualified for the nature of service which is required for the applicant: "2. Carry out maintenance and certification as per DGCA approved maintenance program and flight schedule at each station, i.e., up to 8A checks at MAA and BLR and Transit maintenance at BOM, CCU, HYD, DEL and any other airport station Quikjet planned to operated in the future. " It is also the case of the applicant that even that "4A" standard was available only at Chennai and not at Bangalore. For this allegation, the respondent, as it is seen in the counter affidavit, has stated that such approval is obtained from the Directorate General of Civil Aviation only on the landing of the aircraft. According to the respondent, the fault is on the part of the applicant. Therefore, this again is an issue to be decided on fact by the Arbitral Tribunal.

9. The one other aspect of the claim as it is seen in the application is that the applicant has incurred an amount in excess of Rs.90 Lakhs for availing services from third party due to reason that the respondent has failed to perform the same. This is also factually denied in the counter affidavit. This issue also has to be decided by the Arbitral Tribunal.

10. Yet another point which is raised is that the applicant was compelled to enter into the second agreement dated 6.12.2008 and the applicant had to part with Rs.1 Crore for the purpose of receiving the documents in respect of an aircraft. It is the case of the respondent in the counter affidavit that the respondent is entitled to retain the documents till the amounts are paid. To decide whether this amount has to be returned to the applicant or not is again a factual issue which can be decided only by the Arbitral Tribunal.

11. Even the claim of the applicant which is going to be made before the Arbitral Tribunal is expected to be of an approximate value of Rs.5 Crores. As correctly stated by the respondent, it is not a case where the applicant is entitled to liquidated damages as per the terms of the agreement for the purpose of asking for a security for the said amount. The Arbitral Tribunal is yet to decide the genuineness of such demands, especially when the demands are specifically denied by the respondent in the counter affidavit.

12. Again, whether the agreements are to be treated as void due to coercion or fraud, etc. is not for this Court to decide under Section 9 of the Act. It is well settled that under Section 9 of the Act, this Court is empowered to pass orders on interim measures of protection which, of course, includes "securing the amount in dispute in the arbitration", which in the normal circumstances mean that the amounts which are ascertainable and prima facie found liable by the respondent to the applicant, like that of the liquidated damages as per the stipulations in the contract and in cases where the amount claimed before the Arbitral Tribunal itself is heavily contested on each and every head, it is not possible at this stage to prima facie decide the entitlement of the applicant. I am, therefore, of the considered view that the applicant is not entitled to any interim protection under Section 9 of the Act.

13. Apropos the contention regarding maintainability of an application under Section 9 of the Act, it is relevant to refer to the judgment of the Supreme Court in Sundaram Finance Limited v. NEPC India Limited, [1999] 2 SCC 479 wherein it is held that when a person applies to a Court under Section 9 of the Act it implies that there is a final and binding arbitration agreement in existence. The operative portion of the said judgment is as follows: "19. When a party applies under Section 9 of the 1996 Act, it is implicit that it accepts that there is a final and binding arbitration agreement in existence. It is also implicit that a dispute must have arisen which is referable to the Arbitral Tribunal. Section 9 further contemplates arbitration proceedings taking place between the parties. Mr.Subramanium is, therefore, right in submitting that when an application under Section 9 is filed before the commencement of the arbitral proceedings, there has to be manifest intention on the part of the applicant to take recourse to the arbitral proceedings if, at the time when the application under Section 9 is filed, the proceedings have not commenced under Section 21 of the 1996 Act.

In order to give full effect to the words before or during arbitral proceedings occurring in Section 9, it would not be necessary that a notice invoking the arbitration clause must be issued to the opposite party before an application under Section 9 can be filed. The issuance of a notice may, in a given case, be sufficient to establish the manifest intention to have the dispute referred to an Arbitral Tribunal. But a situation may so demand that a party may choose to apply under Section 9 for an interim measure even before issuing a notice contemplated by Section 21 of the said Act. If an application is so made, the court will first have to be satisfied that there exists a valid arbitration agreement and the applicant intends to take the dispute to arbitration. Once it is so satisfied, the court will have the jurisdiction to pass orders under Section 9 giving such interim protection as the facts and circumstances warrant.