~Prudentia Conscientia Ingenium Occursus, 2016~

BCWCLC-005R

IN THE HONBLE SUPREME COURT OF ZELCOVA

(Special Appellate Jurisdiction)
SLP No ***** of 2016

IN THE MATTER OF
_____________________________________________________________________
Coatland Coal Corporation Zelcova Private Limited (CCZPL) Petitioner
v.
Thermopowergen Private Limited (TPL)

Respondent

MEMORANDUM FOR THE RESPONDENT

COUNSEL FOR RESPONDENT

~Memorandum for the Respondent~

TABLE OF CONTENTS

TABLE OF CONTENTS ............................................................................................................ i

LIST OF ABBREVIATIONS ....................................................................................................ii
INDEX OF AUTHORITIES.................................................................................................... iii
STATEMENT OF JURISDICTION.......................................................................................... v
STATEMENT OF FACTS ....................................................................................................... vi
ISSUES RAISED .....................................................................................................................vii
SUMMARY OF ARGUMENTS ........................................................................................... viii
ARGUMENTS ADVANCED ................................................................................................... 1
1.

2.

This SLP is not maintainable before the Honble Court: ................................................ 1

1.1

Special Leave Petition is a discretionary remedy: ................................................... 1

1.2

There must exist exceptional circumstances to exercise the power: ....................... 2

1.3

No exceptional circumstances in the present case: .................................................. 3

The arbitration agreement is opposed to public policy and hence invalid:..................... 3

2.1.

Defining Public Policy of Zelcova: ......................................................................... 3

2.2.

There is no valid arbitration agreement in the present case: ................................... 4

2.3.

Determination of Seat of Arbitration to be Malaylaka: ........................................... 8

3. There exist no ground for interference under Section 8 of the Arbitration and
Conciliation Act, 1996: ........................................................................................................ 10
3.1.

Requisite conditions to invoke Section 8 are not satisfied in the present case:..... 11

3.2.

The High Court erred in vacating the stay of bank guarantee: .............................. 15

PRAYER .................................................................................................................................. 18

~Memorandum for the Respondent~

LIST OF ABBREVIATIONS

AIR

All India Reporter

Paragraph

Anr

Another

ArBLR

Arbitration Law Reporter

Art.

Article

Ed.

Edition

EWHC

England and Wales High Court

HC

High Court

Honble

Honourable

Ltd.

Limited

Ors.

Others

SC

Supreme Court

SCC

Supreme Court Cases

SCR

Supreme Court Reports

Sec.

Section

SLP

Special Leave Petition

UOI

Union of India

Vol.

Volume

ii

~Memorandum for the Respondent~

INDEX OF AUTHORITIES
Statutes
Indian Companies Act, 1956...................................................................................................... 7
Indian Companies Act, 2013...................................................................................................... 7
Indian Contract Act, 1872 ...................................................................................................... 6, 7
The Arbitration and Conciliation Act, 1996 ............................................. 3, 4, 6, 7, 8, 9, 10, 11
The Constitution of India, 1950 ................................................................................................. 1
Supreme Court Cases
Associate Builders v. Delhi Development Authority, 2014 (4) ARBLR 307 ........................... 4
Bharat Aluminium Company v. Kaisar Aluminium Technical Services INC., (2012) 9 SCC
552 ...................................................................................................................................... 8, 9
Bihar State Mineral Development Corporation and Anr. v. Encon Builders (I) (P) Ltd., (2003)
7 SCC 418 .............................................................................................................................. 6
Booz Allen and Hamilton Inc. v. SBI Home Finance Ltd. & Ors., AIR 2011 SC 2507 ......... 14
Branch Manager, Magma Leasing & Finance Limited & Anr. v. Potluri Madhavilata & Anr.,
(2009) 10 SCC 103............................................................................................................... 11
Himadri Chemicals Industries Ltd. v. Coal Tar Refining Co., (2007) 8 SCC 110 .................. 16
Jagdish Chander v. Ramesh Chander, 2007 (6) SCALE 325 .................................................... 6
Jamshed Hormusji Wadia v. Board of Trustees, Port of Mumbai, AIR 2004 SC 1815 ............ 2
K. K. Modi v. K. N. Modi, (1998) 3 SCC 573 .......................................................................... 5
M.R. Engineers and Contracts Pvt. Ltd. v. Som Datt Builders Ltd., 2009(7) SCC 696 .......... 17
M/s. Dozco India Pvt. Ltd. v. M/s. Doosan Infracore Co. Ltd., JT 2010 (12) SC 198 .............. 9
M/s. System for International Agencies v. M/s. Rahul Coach Builders Pvt. Ltd., Arbitration
Petition No.6 Of 2014 ............................................................................................................ 6
Mathai @ Joby v. George & Anr., (2010) 4 SCC 358 ............................................................... 2
N. Suriyakala v. A. Mohandoss and Ors., (2007) 9 SCC 196 ................................................... 1
ONGC v Saw Pipes, (2003) 5 SCC 705 .................................................................................... 4
Pritam Singh v. The State, AIR 1950 SC 169............................................................................ 2
S.B.P. & Co. v. Patel Engineering Ltd. & Anr., (2005) 8 SCC 618 ........................................ 11
Sadhanathan P.S.R v. Arunachalam, AIR 1980 SC 856 ............................................................ 1
State Of Uttar Pradesh & Anr. v. Janki Saran Kailash Chandra & Anr., 1973 AIR 2071....... 14
Sukanya Holdings (P) Ltd. v. Jayesh H. Pandya, (2003) 5 SCC 531 .......................... 10, 12, 14
TDM Infrastructure Pvt. Ltd. v. UE Development India Pvt. Ltd., (2008) 14 SCC 271 ........... 7
iii

~Memorandum for the Respondent~

Tirupati Balaji Developers Pvt. Ltd. v. State of Bihar, AIR 2004 SC 2351 .............................. 2
High Court Cases
Arthi Jethani v. Daehsasn Trading (India) Pvt. Ltd., 2011 (4) AD DEL 5 .............................. 14
ITC Classic Finance Ltd. v. Grapco Mining and Co. Ltd., AIR 1997 Cal 397 ......................... 6
Jaiprakash Hyundai Consortium v. Satluj Jal Vidyut Nigam Ltd., OMP No. 251/2003 ......... 15
M/s. Johnson Rubber Ind Ltd. v. M/s. Shree Conveyor System Pvt. Ltd., C.M(M)
No.960/2013 & C.M.No.14494/2013 .................................................................................. 14
M/s. R.R Enterprises v. C.M.D Of M/s. Garware-Wall Ropes, (2013) ILR I Delhi 248 ........ 13
M/s. Addhar Mercantile Private Limited v. Shree Jagdamba Agrico Exports Pvt. Ltd.,
Arbitration Application No. 197 of 2014 ............................................................................... 7
Punjab Dairy Development Corporation v. Suresh Kumar, AIR 1999 P&H 235 ................... 14
Sah Petroleums Ltd. v. Sah Petroleums Ltd., Suit (Lodging) No.1725 of 2012........................ 7
Suresh Arjundas Bakhtiani v. UOI & Anr., 1991 (1) BomCR 26 ..................................... 13, 15
Teamco Private Ltd. v. T.M.S. Mani, AIR 1967 Cal 168 .......................................................... 6
Foreign Decisions
A v. B, (2007) 1 All E.R. (Comm) 591...................................................................................... 9
Bolivinter Oil S.A. v. Chase Manhattan Bank N.A., [1984] 1 LLR 392 ................................. 16
Czarnikow v. Roth Schmidt, [1922] 2 K.B. 478 ........................................................................ 3
Enercon GmbH & Wobben Properties GmbH v. Enercon (India) Ltd., [2012] EWHC 689 .... 8
Nav. Amazonica v. Cle.Internat. de Seguros, (1998) 1 Lloyds Rep ........................................ 9
Richardson v. Mellish, (1824) 2 Bing 229 ................................................................................. 3
Shashoua & Ors. v. Sharma, [2009] EWHC 957. ...................................................................... 8
Whitworth Street Estates v. James Miller, (1970) AC 583........................................................ 9
Books and Commentaries
Ansons Law Of Contract, (J Beatson, 28th Edition Oxford University Press, Oxford, 2002) ... 3
Halsburys Laws of England, Vol. 2 (5th edn., 2005) ............................................................... 9
RS Bachawat, LAW OF ARBITRATION AND CONCILIATION, Vol. 1 (Anirudh Wadhwa, Anirudh
Krishnan, eds. 5th Edn., 2010, LexisNexis Butterworths). .................................................. 10
Other Authorities
M.V. Sundararaman, Scope of Enquiry of Civil Courts Under Section 8 of the Arbitration and
Conciliation Act, 1996, (2004) JUNE PL (Jour) .................................................................. 10

iv

~Memorandum for the Respondent~

STATEMENT OF JURISDICTION
The Petitioner has approached this Honble Court under Article 136 of the Constitution of India,
1950. The Respondent accepts the jurisdiction while contesting its maintainability.

~Memorandum for the Respondent~

STATEMENT OF FACTS
Zelcova is common law country similar to India. Malaylaka is a country similar to that of
USA. Forslyeth is the financial capital of Zelcova. Thermopowergen Private Limited (TPL)
is a subsidiary of Zelcova Powergen Limited (ZPL), registered under the Companies Act,
2013 of Zelcova. Coatland Coal Corporation Zelcova Private Limited (CCZPL) also
registered under the same Act, is a subsidiary of Malaylaka Power Solutions Private Limited
(MPPL) situated at Malaylaka.
TPL and CCZPL entered into a Coal Supply Agreement (Agreement) for a period of three
(3) years with CCZPL starting from 1st May, 2014 pursuant to TPLs obtaining a government
contract for electricity supply. As per the agreement due to delay in payment beyond 100
days, CCZPL requested advance payment for further shipments. TPL cited failure in quality
control test as per Clause 18.1 of the Agreement as the reason for withholding payments.
CCZPL contested the said clause due to non-intimation of the quality test failure within 7
days. It also contended that payments were due for the old shipments and refused further
supply until payment including an advance payment.
Due to disputes relating to payment, CCZPL invoked Arbitration clause as per 33.1 of the
Agreement which stated that both Parties agree to arbitrate in Malaylaka, and the law of
Malaylaka will apply to this Agreement.
Meanwhile TPL obtained a stay on invocation of Bank Guarantee from the City Civil Court.
CCZPL filed objections along with an interim application under Section 8 of the Arbitration
and Conciliation Act, 1996. No order was passed by the Court and thus CCZPL approached
the High Court which passed the following two orders:
a) TPL misled Forlyeth District Court by not disclosing the Arbitration clause,
therefore set asides the stay granted by the said Forslyeth Court and Directs the TPL
to extend the bank guarantee.
b) Dismissed the plea of CCZPL for arbitration under clause 33 of agreement, as
clause 33.1 is against the public policy of Zelcova.
Aggrieved CCZPL has filed this appeal.

vi

~Memorandum for the Respondent~

ISSUES RAISED
1. Whether this Petition under Art. 136 of the Constitution maintainable;
2. Whether the arbitration agreement is opposed to public policy and hence
invalid;
3. Whether TPL misled the Court by not disclosing the Arbitration Agreement and
there exist ground for interference under Section 8 of the Arbitration and
Conciliation Act, 1996.

vii

~Memorandum for the Respondent~

SUMMARY OF ARGUMENTS
1. THIS SLP IS NOT MAINTAINABLE BEFORE THE HONBLE COURT
The Respondent respectfully submits that the Petitioner has erred by approaching this
Honble Court in this matter as an SLP is a discretionary remedy and the Court in a
catena of decisions has imposed restrictions on exercise of this discretion. An SLP
requires exceptional circumstances; the same do not exist in the present case.
2. THE

ARBITRATION AGREEMENT IS OPPOSED TO PUBLIC POLICY AND HENCE

INVALID:

The Respondent submits that the alleged arbitration agreement is opposed to public policy
as it ousts the jurisdiction of the Courts in Zelcova. Further, the conditions for a valid
arbitration agreement under Section 7 of The Arbitration and Conciliation Act, 1996
(The Act) are not satisfied as two Zelcovan parties cannot agree to arbitration under a
foreign law. The seat of arbitration being in Malaylaka renders the agreement invalid and
opposed to public policy of Zelcova.
3. THERE

EXIST NO GROUND FOR INTERFERENCE UNDER

SECTION 8

OF THE

ARBITRATION AND CONCILIATION ACT, 1996:

Sec. 8 of The Act empowers a judicial authority to refer parties to arbitration when there
is an arbitration agreement, if a party so applies. It is submitted that in the present case the
application of the Section is not attracted since the requisite conditions are not satisfied in
the present case. The subject matter of the suit is not the same as the subject matter of the
agreement and the bank guarantee is not covered by the alleged arbitration clause.
Moreover, the Petitioner submitted to the jurisdiction by filing a detailed statement of
objections before filing an application under Sec. 8. Further, the High Court erred in
vacating the stay of bank guarantee by failing to notice the fraud committed by the
Petitioner and since the Respondents have no remedy under Section 9 of the Act, the bank
guarantee should be stayed.

viii

~Memorandum for the Respondent~

ARGUMENTS ADVANCED
1. THIS SLP IS NOT MAINTAINABLE BEFORE THE HONBLE COURT:
The Petitioner in the present case has approached this Honble Court by virtue of its
jurisdiction under Art. 136 of The Constitution of Zelcova, 1950 which provides for Special
Leave Petition. The Respondent respectfully submits that the Petitioner has erred by
approaching this Honble Court in this matter as an SLP is a discretionary remedy [1.1]
which requires exceptional circumstances to exercise its power [1.2] which do not exist in the
present case [1.3].
1.1

Special Leave Petition is a discretionary remedy:

The Respondent submits that the Petitioner has invoked the special appellate power
granted to this Honble Court. This Honble Court has the power to grant special leave
to appeal from any judgment, decree, determination, sentence or order in any case or
matter, passed or made by any Court or tribunal in the territory of Zelcova under Art.
136 of the Constitution.1 This Article grants wide discretion to the Supreme Court to
take up any matter. But the Supreme Court itself has imposed limitations upon its power
and it will use this discretionary power sparingly and in exceptional cases alone.2
This Court in the case of N. Suriyakala v. A. Mohandoss and Ors. 3observed as under:
"Article 136 of the Constitution is not a regular forum of appeal at all. It is a residual
provision which enables the Supreme Court to interfere with the judgment or order of
any court or tribunal in India in its discretion." (Emphasis supplied)
It is submitted that under Art. 136 it is up to the Supreme Court to grant special leave. It
does not confer a right on a party to appeal to the Supreme Court. It only confers a wide

136. Special leave to appeal by the Supreme Court

(1) Notwithstanding anything in this Chapter, the Supreme Court may, in its discretion, grant special leave to
appeal from any judgment, decree, determination, sentence or order in any cause or matter passed or made by
any court or tribunal in the territory of Zelcova
(2) Nothing in clause (1) shall apply to any judgment, determination, sentence or order passed or made by any
court or tribunal constituted by or under any law relating to the Armed Forces.
2

Sadhanathan P.S.R v. Arunachalam, AIR 1980 SC 856.

N. Suriyakala v. A. Mohandoss and Ors., (2007) 9 SCC 196.

~Memorandum for the Respondent~

discretionary power on the Supreme Court to interfere in suitable cases.4 The very
conferment of the discretionary power defies any attempt at exhaustive definition of
such power. The power is permitted to be invoked not in a routine fashion but in very
exceptional circumstances as and when a question of law of general public importance
arises or a decision sought to be impugned before the Supreme Court shocks its
conscience. The Supreme Court would not under Art. 136 constitute itself into a
tribunal or court for settling disputes and reduce itself to a mere court of error.5
Thus it is clear that the power under Art. 136 is to be exercised sparingly and only when
the special circumstances warranting the exercise of the power exist, i.e. the conscience
of the Court should be shocked.
1.2 There must exist exceptional circumstances to exercise the power:
It is pertinent to submit that this Honble Court has held that the wide discretionary power
has to be exercised sparingly and in exceptional cases only.6 As far as possible, a uniform
standard should be adopted in granting special leave in wide range of matters which come
up for hearing under this Article. Generally speaking, the Court will not grant special
leave, unless it is shown that special circumstances exist, that substantial and grave
injustice has been done and that the case in question presents features of sufficient gravity
to warrant a review of the decision appealed against.7 The power under Art. 136 is an
extraordinary power to be exercised in rare and exceptional cases and on well-known
principles.8
It is most respectfully submitted that this Honble Court in a catena of judgments held
that the Court will grant special leave only when the High Court has misunderstood the
principles that govern its exercise and when there is a patently erroneous interpretation of
law by the High Court.

Tirupati Balaji Developers Pvt. Ltd. v. State of Bihar, AIR 2004 SC 2351.

Mathai @ Joby v. George & Anr., (2010) 4 SCC 358.

Pritam Singh v. The State, AIR 1950 SC 169,171.

Jamshed Hormusji Wadia v. Board of Trustees, Port of Mumbai, AIR 2004 SC 1815 ( 33). [Jamshed
Hormusji Wadia]
8

Jamshed Hormusji Wadia, AIR 2004 SC 1815.

~Memorandum for the Respondent~

1.3 No exceptional circumstances in the present case:

It is submitted that in the instant case, even if there was an error committed by the High
Court, it was open to the Petitioner to challenge the same before a Division Bench in
appeal, or under Art. 133 of the Constitution which provides for appeal in civil cases. To
invoke the power of this Court under Art. 136 which is to be invoked only in cases of
grave injustice, is wholly misconceived and an abuse of the law. The Respondent pleads
that there are no circumstances that warrant the interference of the Honble Court and that
the petition of the herein is liable to be dismissed.
2. THE

ARBITRATION AGREEMENT IS OPPOSED TO PUBLIC POLICY AND HENCE

INVALID:

The Respondent submits that the alleged arbitration agreement is opposed to public policy as
it ousts the jurisdiction of the Courts in Zelcova [2.1]. Further, the conditions for a valid
arbitration agreement under Section 7 of The Act are not satisfied [2.2] as two Zelcovan
parties cannot agree to arbitration under a foreign law [2.2.1]. The seat of arbitration being in
Malaylaka [2.3] renders the agreement invalid and opposed to public policy of Zelcova.
2.1. Defining Public Policy of Zelcova:
Public policy imposes certain limitations upon the freedom of persons to contract. An
ostensibly valid contract may be tainted by illegality. The origins of the policy of the law,
or public policy are ancient and obscure. It has been described as an unruly horse.9
Certain aspects of public policy are more susceptible to change than others, though the
policy of the law has on some subjects been worked into a set of tolerably definite rules.10
At common law an agreement which purports to oust the jurisdiction of the Court is
contrary to public policy and void.11 It is the policy of the common law that citizens have
the right to have their legal position determined by the ordinary tribunals.
The Appellant submits that the term public policy has not been defined in Zelcovan
law. Thus it relies on the interpretation of the term by the Supreme Court. The Court has

Richardson v. Mellish, (1824) 2 Bing 229, Per Burrough J. at p. 252.

10

Ansons Law Of Contract, (J Beatson, 28th Edition Oxford University Press, Oxford, 2002).

11

Czarnikow v. Roth Schmidt, [1922] 2 K.B. 478.

~Memorandum for the Respondent~

held that in determining whether an act is opposed to public policy the following are
relevant:

Contrary to the fundamental policy of Indian law;

Contrary to the interests of India;

Contrary to justice and morality; or

Patently illegal.12

Although the decision was rendered in terms of Sec. 34 of The Act, it is still useful for the
determination of the meaning of public policy in the Indian context. The Respondent submits
that in the present case, the arbitration agreement is not valid and is opposed to public policy.
2.2.There is no valid arbitration agreement in the present case:
Section 2 (1) (b) of The Act defines an arbitration agreement13 in terms of Section 7 of
The Act, which spells out the requirement of a valid arbitration agreement.14
Section 7 of The Act has been subjected to judicial interpretation by this Honble Court in
several cases. In the case of K. K. Modi v. K. N. Modi15, the Supreme Court has laid down
the following requisites for a valid arbitration agreement:

12

Associate Builders v. Delhi Development Authority, 2014 (4) ARBLR 307(SC); ONGC v. Saw Pipes, (2003)
5 SCC 705.
13

Definitions.
(1) In this Part, unless the context otherwise requires,
(b) arbitration agreement means an agreement referred to in section 7.
14

7. Arbitration agreement.
(1) In this Part, arbitration agreement means an agreement by the parties to submit to arbitration all or certain
disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether
contractual or not.
(2) An arbitration agreement may be in the form of an arbitration clause in a contract or in the form of a separate
agreement.
(3) An arbitration agreement shall be in writing.
(4) An arbitration agreement is in writing if it is contained in
(a) a document signed by the parties;
(b) an exchange of letters, telex, telegrams or other means of telecommunication which provide a record of the
agreement; or
(c)an exchange of statements of claim and defence in which the existence of the agreement is alleged by one
party and not denied by the other.
(5) The reference in a contract to a document containing an arbitration clause constitutes an arbitration
agreement if the contract is in writing and the reference is such as to make that arbitration clause part of the
contract.
15

K. K. Modi v. K. N. Modi, (1998) 3 SCC 573. [K.K. Modi]

~Memorandum for the Respondent~

i. must contemplate that the decision of the tribunal will be binding on the
parties to the agreement;
ii. must contemplate that substantive rights of parties will be determined by the
agreed tribunal;
iii. must contemplate that the tribunal will make a decision upon a dispute which
is already formulated at the time when a reference is made to the tribunal;
iv. jurisdiction of the tribunal to decide the rights of parties must be derived either
from the consent of the parties or from an order of the Court or from a statute,
the terms of which make it clear that the process is to be an arbitration;
v. the tribunal will determine the rights of the parties in an impartial and judicial
manner with the tribunal owing an equal obligation of fairness towards both
sides; and
vi. agreement of the parties to refer their disputes to the decision of the tribunal
must be intended to be enforceable in law.16
It is submitted that, in the present case, the Petitioner contends that the dispute is a
subject matter of an arbitration agreement as follows:
Both Parties agree to arbitrate in Malaylaka, and the law of Malaylaka will
apply to this Agreement17
However, Respondent submits that the contention of the Petitioner is wholly
misconceived. There exists no valid arbitration agreement as per the law set out
above. The clause does not contemplate the existence of a dispute, it does not specify
that the parties intend to settle the particular disputes by arbitration nor does it
elucidate the binding nature of any decision arrived at by an arbitral proceeding. In
the case of Bihar State Mineral Development Corporation and Anr v. Encon Builders
(I) (P) Ltd.18, the Hon'ble Supreme Court has held that the essential elements of
arbitration agreement are as follows:
1. There must be a present or a future difference in connection with some
contemplated affairs.

16

K. K. Modi (1998) 3 SCC 573.

17

Moot Problem pg. 2.

18

Bihar State Mineral Development Corporation and Anr. v. Encon Builders (I) (P) Ltd., (2003) 7 SCC 418.

~Memorandum for the Respondent~

2. There must be the intention of the parties to settle such difference by a private
tribunal.
3. The parties must agree in writing to be bound by the decision of such tribunal.
4. The parties must be ad idem.
In the present case the above conditions are not satisfied and hence there is no valid
arbitration agreement between the parties.
The mere use of the words `arbitration' or `arbitrator" in a clause will not make it an
arbitration agreement.19Any ambiguity and vagueness in the arbitration clause would
render the same invalid and unworkable.20 In the present case Clause 33.1 is vague on
the question of reference and the finality of the decision in the adjudication
proceedings.
In M/s. System for International Agencies v. M/s. Rahul Coach Builders Pvt. Ltd.21, the
Supreme Court refused a petition under Section 11 of The Act holding that the Arbitration
Clause was vague and uncertain. The said principle is squarely applicable to the case at
hand. The clause under consideration does not contain the manner of appointment of
arbitrators, it does not state that the disputes will be finally settled by the arbitral tribunal,
nor does it suggest that the parties will be bound by such decisions. Thus, the failure of
certain terms in the agreement makes it unenforceable and void.
2.2.1. Two Zelcovan parties cannot exclude applicability Zelcovan laws:
Section 23 of the Zelcovan Contract Act, 1872 (Contract Act) which prohibits
agreements against public policy, read with Section 28 of the Contract Act which
prohibits agreements restraining legal proceedings leads to the conclusion that two
Zelcovan parties cannot agree to arbitrate outside Zelcova. The Supreme Court has
held that the intention of the legislature would be clear that Zelcovan nationals should

19

Jagdish Chander v. Ramesh Chander, 2007 (6) SCALE 325.

20

ITC Classic Finance Ltd. v. Grapco Mining and Co. Ltd., AIR 1997 Cal 397; Teamco Private Ltd. v. T.M.S.
Mani, AIR 1967 Cal 168.
21

M/s. System for International Agencies v. M/s. Rahul Coach Builders Pvt. Ltd., Arbitration Petition No.6 Of
2014, decided on 16th February 2016 (Supreme Court).

~Memorandum for the Respondent~

not be permitted to derogate from Zelcovan law.22 This is part of the public policy.23
Zelcovan parties choose a foreign governing law for their contracts will be a violation
of public policy and hence such contracts are void under Section 23 of the Contract
Act. The decision of the Supreme Court in TDM Infrastructures followed by the
Bombay High Court in Addhar Mercantile is categorical on this point. The same is
applicable in the present case as both the Parties are registered under the Zelcovan
Companies Act and are therefore Zelcovan parties. The exclusion of Zelcovan law is
thus a blatant violation of the above said dictum of the Supreme Court. The Supreme
Court of India has held that, if both the companies are incorporated in India, the
arbitration agreement concluded between them shall be construed to be a domestic
arbitration agreement and not an International Commercial Arbitration. The Court
also placed Section 2(1)(f)(ii) of The Act on a higher pedestal than Section 2(1)(f)(iii)
of The Act remarking that the latter will only be applicable in cases where Section
2(1)(f)(ii) of The Act does not apply in its entirety. Thus, the Court limited the
application of Section 2(1) (f) (iii) of The Act to cases where the body corporate is an
association or a body of individuals unregistered or unincorporated under Zelcovan
Companies Act, 1956.24 In the present case both parties are registered under the
Zelcovan Companies Act, 2013 and therefore the ratio of the above authorities will
apply to them.
2.2.2. The substantive law applicable to the Agreement is the Zelcovan Contract Act,
1872:
Section 28(1)(a) of the Contract Act makes it clear that in an arbitration under Part I
of The Act to which section 2(1)(f) of The Act does not apply, there is no choice but
for the Tribunal to decide the dispute by applying the Zelcovan substantive law
applicable to the contract. This is clearly to ensure that two or more Zelcovan parties
do not circumvent the substantive Zelcovan law, by resorting to arbitrations. The
provision would have an overriding effect over any other contrary provision in such

22

TDM Infrastructure Pvt. Ltd. v. UE Development India Pvt. Ltd., (2008) 14 SCC 271. [TDM
Infrastructures].
23

M/s. Addhar Mercantile Private Limited v. Shree Jagdamba Agrico Exports Pvt. Ltd., Arbitration Application
No. 197 of 2014 decided on 12th June 2015 (Bom HC) [Addhar Mercantile]; Sah Petroleums Ltd. v. Sah
Petroleums Ltd., Suit (Lodging) No.1725 of 2012 decided on 6th July 2012 (Bom HC).
24

TDM Infrastructures, (2008) 14 SCC 271.

~Memorandum for the Respondent~

contract. On the other hand, where an arbitration under Part I is an International

Commercial Arbitration within Section 2(1)(f) of The Act, the parties would be free to
agree to any other substantive law and if not so agreed, the substantive law applicable
would be as determined by the Tribunal. The section merely shows that the legislature
has segregated the domestic and international arbitration. Therefore, to suit India,
conflict of law rules have been suitably modified, where the arbitration is in India.25
Two or more Zelcovan parties cannot circumvent the substantive Zelcovan Law by
resorting to arbitration.
2.3. Determination of Seat of Arbitration to be Malaylaka:
The Respondent humbly submits that in the present case the arbitration agreement has to be
interpreted to decide whether the designation of Malaylaka is the venue or seat of
arbitration. This Court has drawn a distinction between a seat and venue which would be
quite crucial in the event, the arbitration agreement designates a foreign country as the
seat/ place of the arbitration and also select The Act as the curial law/ law governing the
arbitration proceedings. The Court further clarified that the choice of another country as the
seat of arbitration inevitably imports an acceptance that the law of that country relating to
the conduct and supervision of arbitrations will apply to the proceedings. 26 The principle to
be applied while determining the seat is first and foremost the express intention of the
parties. The English case of Shashoua & Ors. v. Sharma27lays down the principle as
follows:
When therefore there is an express designation of the arbitration venue as London and
no designation of any alternative place as the seat, combined with a supranational body
of rules governing the arbitration and no other significant contrary indicia, the
inexorable conclusion is, to my mind, that London is the juridical seat and English law
the curial law
In Enercon GmbH & Wobben Properties GmbH v. Enercon (India) Ltd.28 arbitration
agreement did not specify the seat of the arbitration, named the venue as London but also
provided that the Zelcovan Arbitration and Conciliation Act 1996 should apply. The

25

Bharat Aluminium Company v. Kaisar Aluminium Technical Services INC., (2012) 9 SCC 552. [BALCO].

26

BALCO, (2012) 9 SCC 552.

27

Shashoua & Ors. v. Sharma, [2009] EWHC 957.

28

Enercon GmbH & Wobben Properties GmbH v. Enercon (Zelcova) Ltd., [2012] EWHC 689 (Comm), 23
March 2012.

~Memorandum for the Respondent~

English court found that determination of the seat was a question for the Indian courts
because the issue of the arbitral seat was already pending before them, the claimants had
engaged fully in the Indian proceedings, and because of the comity between England and
India. Nonetheless, the English court held, obiter, that the objective intention of the
parties was for London to be the seat, and that there was no significant contra indicia to
this. The essential task was to give effect to the objective intention of the parties. Case
law and commentary both signify that the seat is in most cases sufficiently indicated by
the country chosen as the place of the arbitration, and that for such choice of place not to
be given effect as the seat there would need to be clear evidence that (i) the parties agreed
to choose another seat for the arbitration; and (ii) that choice would be effective to endow
the courts of that country with the jurisdiction to supervise and support the arbitration.
In the absence of some express and clear provision to the contrary, it must follow that an
agreement that the curial or procedural law of arbitration is to be the law of X has the
consequence that X is also to be the seat of the arbitration. The lex fori is then the law
of X, and accordingly X is the agreed forum of the arbitration. A further consequence is
then that the courts which are competent to control or assist the arbitration are the Courts
exercising jurisdiction at X.29 In the absence of a clear indication to the contrary, there is
a presumption that the place where the arbitration is to take place will constitute its seat of
arbitration.30 In the case of an agreement as to the seat of arbitration is analogous to an
exclusive jurisdiction clause.31. When the parties by express agreement have agreed that
the law juridically controlling the arbitration being Malaylaka law, the seat of arbitration
to be in Malaylaka impliedly one can easily say that they have excluded Part I of The Act.
As a result, the seat being outside Zelcova, the proposed arbitration will be an
international commercial arbitration seated outside Zelcova, and thus Part I of the
Arbitration and Conciliation Act cannot apply to the case at hand, applying the principle
in BALCO.32 This precludes an application under Sec. 8 of The Act.

29

Halsburys Laws of England, Vol. 2 (5th edn., 2005) referring to the approval of the classic statement by the
House of Lords in Whitworth Street Estates v. James Miller, (1970) AC 583, or to quote the words of Lord
Justice Kerr in Nav. Amazonica v. Cle.Internat. de Seguros, (1998) 1 Lloyds Rep. 116.
30

M/s. Dozco Zelcova Pvt. Ltd. v. M/s. Doosan Infracore Co. Ltd., JT 2010 (12) SC 198.

31

A v. B, (2007) 1 All E.R. (Comm) 591.

32

BALCO, (2012) 9 SCC 552.

~Memorandum for the Respondent~

3. THERE

EXIST NO GROUND FOR INTERFERENCE UNDER

SECTION 8

OF THE

ARBITRATION AND CONCILIATION ACT, 1996:

Sec. 8 of The Arbitration and Conciliation Act, 1996 empowers a judicial authority to refer
parties to arbitration when there is an arbitration agreement, if a party so applies. It is
submitted that in the present case the application of the Section is not attracted since the
requisite conditions are not satisfied in the present case [3.1]. The subject matter of the suit is
not the same as the subject matter of the agreement and the bank guarantee is not covered by
the alleged arbitration clause [3.1.2]. Moreover, the Petitioner submitted to the jurisdiction by
filing a detailed statement of objections before filing an application under Sec. 8 [3.1.3].
Further, the High Court erred in vacating the stay of bank guarantee [3.2] by failing to notice
the fraud committed by the Petitioner and since the Respondents have no remedy under Sec.
9 of the Act, the bank guarantee should be stayed [3.2.1]. A judicial authority includes a court
defined under Sec. 2(e) of The Act. Sec. 8 states as follows:
Power to refer parties to arbitration where there is an arbitration agreement.
(1) A judicial authority before which an action is brought in a matter which is the
subject of an arbitration agreement shall, if a party so applies not later than when
submitting his first statement on the substance of the dispute, refer the parties to
arbitration.
(2) The application referred to in sub-section (1) shall not be entertained unless it is
accompanied by the original arbitration agreement or a duly certified copy thereof.
(3) Notwithstanding that an application has been made under sub-section (1) and that
the issue is pending before the judicial authority, an arbitration may be commenced
or continued and an arbitral award made.
To attract Sec. 8, the subject of dispute in the pending suit should be the subject of the
arbitration agreement.33 The party has to apply before filing his first statement in the suit. If
the substance of dispute in the suit and the arbitration agreement is the same, court has no
discretion. Certain exceptions have been carved out of Sec. 8 when it would be permissible
for the court/judicial authority to decline to refer the parties to arbitration and the arbitration
agreement notwithstanding, continue adjudication of the proceedings. 34 When the subject33

RS Bachawat, LAW OF ARBITRATION AND CONCILIATION, Vol. 1 (Anirudh Wadhwa, Anirudh Krishnan, eds.
5th Edn., 2010, LexisNexis Butterworths).
34

M.V. Sundararaman, Scope of Enquiry of Civil Courts Under Section 8 of the Arbitration and Conciliation
Act, 1996, (2004) JUNE PL (Jour) 13.

10

~Memorandum for the Respondent~

matter of the suit/legal proceedings includes subject-matter of the arbitration agreement as

well as other disputes, the parties cannot be referred to arbitration.35 In the present case, since
the dispute includes not only those issues allegedly covered by the arbitration clause, but also
disputes arising out of a bank guarantee, not covered under the said clause, Sec. 8 is not
applicable.
3.1.Requisite conditions to invoke Section 8 are not satisfied in the present case:
From a plain reading of the Section, certain conditions are to be satisfied for applying
Sec. 8 of The Act. These conditions were listed by this Honble Court in the case of
Branch Manager, Magma Leasing & Finance Limited & Anr. v. Potluri Madhavilata &
Anr..36 The following are the requisites:
a. That there exists an arbitration agreement;
b. That action has been brought to the court by one party to the arbitration
agreement against the other party;
c. That the subject matter of the suit is same as the subject matter of the arbitration
agreement;
d. That the other party before he submits his first statement of the substance of the
dispute, moves the court for referring the parties to arbitration; and
e. That along with the application the other party tenders the original arbitration
agreement or duly certified copy thereof.
For a valid application under Sec. 8 of the Act, all the five conditions stated above must
be satisfied. In the present case, the following are observed:
1. There is no valid arbitration agreement between the parties;
2. The matter that has been brought before the judicial authority is not the subject of
the arbitration agreement; and
3.

The Petitioner has made an application u/s 8 after submitting the first statement
on the substance of the dispute.

Hence, the prerequisite conditions are not satisfied.

35

Sukanya Holdings (P) Ltd. v. Jayesh H. Pandya, (2003) 5 SCC 531 [Sukanya Holdings].

36

Branch Manager, Magma Leasing & Finance Limited & Anr. v. Potluri Madhavilata & Anr., (2009) 10 SCC
103.

11

~Memorandum for the Respondent~

3.1.1. There must be a valid arbitration agreement:

The Respondent submits that, while deciding an application under Sec. 8, the
Court must decide the validity of the arbitration agreement. The judicial
authority, in the absence of any restriction in the Act, has necessarily to decide
whether, in fact, there is in existence a valid arbitration agreement and whether
the dispute that is sought to be raised before it is covered by the arbitration
clause.37 A mechanical reference to arbitration is not contemplated. As
submitted above by the Respondent in 2.1, the Arbitration agreement between
CCZPL and TPL is not valid and hence arbitration cannot be invoked.
3.1.2. The subject matter of the suit should be the same as the subject matter of the
arbitration agreement:
The Respondent humbly submits that the subject matter of the suit is not the same as
the subject matter of the arbitration agreement. The subject matter of the suit is the
Bank Guarantee and the Court has jurisdiction to interfere in the invocation of the
bank guarantee. Encashment of a bank guarantee is always subject to the result of
litigation or arbitration between the parties to the main contract. That is no ground for
holding that the arbitration clause contained in the main contract becomes part and
parcel of the contract of bank guarantee which is undoubtedly a separate and
independent contract between different parties.
The relevant language used in Sec. 8 is in a matter which is the subject matter of an
arbitration agreement; Court is required to refer the parties to arbitration. Therefore,
the suit should be in respect of 'a matter' which the parties have agreed to refer and
which comes within the ambit of arbitration agreement.38
3.1.2.1.

Arguendo, existence of valid arbitration agreement does not oust

jurisdiction of Civil Court

In Sukanya Holdings39 the Supreme Court held that the 1996 Act does not oust the
jurisdiction of the civil court to decide the dispute in a case where the parties to
the arbitration agreement does not take appropriate steps mentioned under sub-s

37

S.B.P. & Co. v. Patel Engineering Ltd. & Anr., (2005) 8 SCC 618.

38

Sukanya Holdings, AIR 2003 SC 2252.

39

Sukanya Holdings, AIR 2003 SC 2252.

12

~Memorandum for the Respondent~

(1) and (2) of the Act. Where a suit is commenced - "as to a matter" which lies
outside the arbitration agreement and is also between some of the parties who are
not parties to the arbitration agreement, there is no question of application of Sec.
8.
The Court in Sukanya Holdings40 held that:
The High Court by its judgment and order dated 18.9.2001 rejected
application under Section 8 of the Act. The Court arrived at the conclusion
that in the suit apart from the relief of dissolution and accounts, plaintiff has
prayed for other reliefs. All the defendants to the suit are not parties or
partners in the partnership firm and the terms of the partnership deed
including the arbitration clause are not binding to them. Only part of the
subject matter could at the most be referred to the arbitration. The Court also
negatived the alternative prayer for referring part of the subject matter in
respect of those parties who are parties to the partnership agreement which
contains arbitral clause. The Court arrived at the conclusion that such
procedure is not contemplated under the Act. The object and purpose of the
Act is to avoid multiplicity of the proceedings and not to allow two forums
simultaneously to proceed with the matter.
Hence, the Respondent humbly submit that if a suit is filed against parties, some
of which are bound by the Arbitration agreement, while others are not, in such
circumstances a common suit will lie against the parties. Two different remedies
in respect of same cause of action are not maintainable. The claim relating to the
enforcement of a bank guarantee is not covered by the arbitration clause and is not
referable to arbitration.41 Hence, bank guarantee is not a matter of dispute under
the arbitration and agreement and therefore the Respondents can bring the matter
of invoking the bank guarantee before the Court.
3.1.3. Petitioner has waived its rights by filing a detailed Statement of objections:
Sec. 8 of the Act clearly provides that the application had to be made not later than
submitting the first statement on the subject matter of the dispute. In the present case,
the Petitioner has filed the application under Sec. 8 after the filing of a detailed
statement of objections and is hence precluded from claiming reference to arbitration.
Courts have refused to allow applications before it which had been filed after the

40

Ibid.

41

Suresh Arjundas Bakhtiani v. UOI & Anr., 1991 (1) BomCR 26.

13

~Memorandum for the Respondent~

issues were framed. The Court expressly rejected the contention that since the matter
had been raised in the Written Statement that was enough.42 CCZPL had appeared
before the Court and filed a detailed statement of objection to the said stay
application. CCZPL by doing so has submitted to the jurisdiction of the court and has
waived its right to Arbitration.
The interpretation of Sec. 8 while deciding Sukanya Holdings43supports the view
that such an application cannot be filed after the first statement on the substance of
the dispute has been filed by the applicant.44 Not only filing of the written statement
in a suit, but filing of any statement, application, affidavit filed by a Defendant
prior to the filing of the written statement will be construed as 'submission of a
statement

on

the

substance

of

the

dispute',

if

by

filing

such

statement/application/affidavit, the Defendant shows his intention to submit himself

to the jurisdiction of the court and waive his right to seek reference to arbitration.45
Though Sec. 8 does not prescribe any time-limit for filing an application under that
section, and only states that the application under Sec. 8 of The Act should be filed
before submission of the first statement on the substance of the dispute, the scheme
of The Act and the provisions of the section clearly indicate that the application
thereunder should be made at the earliest. A party who willingly participates in the
proceedings in the suit and subjects himself to the jurisdiction of the court cannot
subsequently turn around and say that the parties should be referred to arbitration in
view of the existence of an arbitration agreement. Whether a party has waived his
right to seek arbitration and subjected himself to the jurisdiction of the court,
depends upon the conduct of such party in the suit.46 In State Of Uttar Pradesh &
Anr. v. Janki Saran Kailash Chandra & Anr.,47 an application for time to file
written statement was considered to be a step in the proceedings. While comparing
the scope of Section 34 of the 1940 Act vis-a-vis the scope of Sec. 8 of the 1996

42

M/s. R.R Enterprises v. C.M.D Of M/s. Garware-Wall Ropes, (2013) ILR I Delhi 248.

43

Sukanya Holdings, AIR 2003 SC 2252.

44

Arthi Jethani v. Daehsan Trading (India) Pvt. Ltd., 2011 (4) AD DEL 5.

45

Booz Allen and Hamilton Inc. v. SBI Home Finance Ltd. & Ors., AIR 2011 SC 2507. [Booz Allen].

46

Booz Allen, AIR 2011 SC 2507.

47

State Of Uttar Pradesh & Anr. v. Janki Saran Kailash Chandra & Anr., 1973 AIR 2071.

14

~Memorandum for the Respondent~

Act, what is necessary is disclosure of the entire substance in the main proceeding
itself and not taking part in the supplemental proceeding.48 Punjab Dairy
Development Corporation v. Sudesh Kumar49 the court held that the defendant had
taken a number of adjournments to enable him to file his written statements; this
was held to be sufficient to disentitle him to seek reference to arbitration. Thus in
the present case, applying the ratio in all the above said decisions, filing of detailed
statement of objections by the Petitioner disentitles reference to arbitration.
3.2. The High Court erred in vacating the stay of bank guarantee:
The invocation of bank guarantee by the Petitioner is intended to overreach the
adjudicative process, provided under the terms of the agreement. This is a fraudulent
attempt on the part of the Petitioner so as to justify grant of an injunction order; and the
Respondents shall suffer irretrievable injustice and injury in the event the bank guarantees
are permitted to be encashed.
Further, the Respondent submits that in similar matters the Courts have granted interim
stay. In this regard it is relevant to note the case of Jaiprakash Hyundai Consortium v.
Satluj Jal Vidyut Nigam Ltd.,50 where the Court held as under:The courts have carved out only two exceptions. A fraud in connection with such a
bank guarantee would vitiate the very foundation of such a bank guarantee. Hence if
there is such a fraud of which the beneficiary seeks to take the advantage, he can be
restrained from doing so. The second exception relates to cases where allowing the
encashment of an unconditional bank guarantee would result in irretrievable harm or
injustice to one of the parties concerned. Since in most cases payment -of money
under such a bank guarantee would adversely affect the bank and its customer at
whose instance the guarantee is given, the harm or injustice contemplated under this
head must be of such an exceptional and irretrievable nature as would override the
terms of the guarantee and the adverse effect of such an injunction on commercial
dealings in the country."

48

M/s. Johnson Rubber Ind Ltd. v. M/s. Shree Conveyor System Pvt. Ltd., C.M(M) No.960/2013 &
C.M.No.14494/2013 (Stay), decided on 16th October 2014 (Delhi High Court).
49

Punjab Dairy Development Corporation v. Suresh Kumar, AIR 1999 P&H 235.

50

Jaiprakash Hyundai Consortium v. Satluj Jal Vidyut Nigam Ltd., OMP No. 251/2003. This judgement was
upheld by a Division Bench in the case of Satluj Jal Vidyut Nigam Ltd. v. Jai Prakash Hyundai Corsortium AIR
2006 Delhi 239 where in 26 it was held/; Hence, we uphold the impugned order to the extent it relates to passing
of the injunction order in favor of contractor and against the department against encashment of bank guarantees
in question.

15

~Memorandum for the Respondent~

The question of enforcement or non-enforcement of bank guarantee is not amenable to

arbitration, without even impleading the bank as a party thereto. The arbitration clause
contained in the main contract does not cover the dispute as to the enforcement of the
bank guarantee by the beneficiary.51
The Courts have culled out two exceptions to the general rule of non-interference by the
Courts, namely (i) fraud and (ii) the resulting of irretrievable injustice or harm. In the
case of Bolivinter Oil S.A. v. Chase Manhattan Bank52 it was stated that an injunction
may be granted where it is proved that the bank knows that any demand for payment
already made or which may thereafter be made will clearly fraudulent. Fraud of an
egregious nature which would vitiate the very foundation of such a Bank Guarantee or
letter of credit and the beneficiary seeks to take advantage of the situation.53
The Respondent submits that there is fraud on behalf of the Petitioner. As per the
payment clause under the Agreement, payments were subject to receipt of shipment at
Forsyleth port and only after clearance of quality test as set forth in the Agreement. It is
further submitted that two earlier shipments have failed the quality tests due to which
payments have been withheld by TPL, and hence CCZPL cannot invoke the bank
guarantee as they have failed to perform their duty under the contract.
If under the terms of the contract the obligations have to be performed in a certain
sequence, one of the parties to the contract cannot require compliance with the
obligations of the other party without in the first instance performing his own part if
under the contract it is to be performed by it earlier. This principle squarely applies to
the present case because until and unless the shipments made by CCZPL had complied
with the quality tests thereby performing their obligation under the contract, no question
arises of bank guarantee being invoked and invocation of the same is fraudulent.

51

Suresh Arjundas Bakhtiani v. UOI & Anr., 1991 (1) BomCR 26 10.

52

Bolivinter Oil S.A. v. Chase Manhattan Bank N.A., [1984] 1 LLR 392.

53

Himadri Chemicals Industries Ltd. v. Coal Tar Refining Co., (2007) 8 SCC 110.

16

~Memorandum for the Respondent~

3.2.1. The Respondent has no remedy under Section 9 of the Arbitration and
Conciliation Act, 1996:
Arguendo there exists a valid arbitration agreement and the Court exercises its power
under Sec. 8 to refer the parties to arbitration, the Respondents cannot maintain an
application under Sec. 9 of the Act for stay of bank guarantee.
The subject matter of Bank Guarantees are independent contracts and unless a specific
arbitration clause is mentioned in the bank guarantee or a clear reference to the
Arbitration clause contained in other supplementary contract between the parties is
made therein, Sec. 9 of the said Act cannot be invoked by the parties to the Bank
Guarantees. It is their case that the subject matter of Bank Guarantees, not containing
the arbitration clause, cannot be called for in question before this Court by invoking
Sec. 9 of the above said Act. The subject matter Bank Guarantee also does not refer to
any arbitration clause in any contract between the parties. The Apex Court reported in
M.R. Engineers and Contracts Pvt. Ltd. v. Som Datt Builders Ltd.54 the learned Judge
found that the arbitration clauses cannot be incorporated with the Bank Guarantees
therein since mere reference to the original contract will not make the arbitration
clause be read into Bank Guarantees.

54

M.R. Engineers and Contracts Pvt. Ltd. v. Som Datt Builders Ltd., 2009(7) SCC 696.

17

~Memorandum for the Respondent~

PRAYER
In light of the issues raised, arguments advanced and authorities cited, the counsel for the
Appellant humbly prays that this Honble court may be pleased to:
1. Stay the invocation of the bank guarantee provided by TPL to CCZPL and reverse the
order of the High Court directing extension of Bank Guarantee;
2. Hold that Clause 33.1 of the Agreement between the Petitioner and Respondent is
opposed to public policy;
3. Hold that there is no valid arbitration agreement between the parties and uphold the
judgment of the High Court to that extent;
4. Pass any or other such orders that it may deem fit in the interest of justice.

Dated this 3rd day of April 2016.

Sd/COUNSEL FOR RESPONDENT

18