REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL ORIGINAL JURISDICTION
ARBITRATION PETITION NO. 17 OF 2007
M/S COMED CHEMICALS LTD. ... PETITIONER
VERSUS
C.N. RAMCHAND ... RESPONDENT
J U D G M E N T
C.K. THAKKER, J.
1. The present petition is filed by the
petitioner under Section 11 of the Arbitration
and Conciliation Act, 1996 (hereinafter
referred to as “the Act”) praying to Hon’ble
the Chief Justice of India to appoint third
Arbitrator as Presiding Arbitrator or to
appoint Sole Arbitrator as deemed fit in the
facts and circumstances of the case.
2
2. It is the case of the applicant that
it is a Company known as M/s Comed Chemicals
Ltd. registered under the Indian Companies Act,
1956. Mr. Ashwani Kapil is the authorized
signatory who has approached this Court. It is
stated in the application that the Company is
doing business in chemicals in the field of
bio-technology. To expand the business, the
Company floated a subsidiary company in the
name and style of Comed Biotech Ltd. For the
said purpose, it entered into a Memorandum of
Understanding (`MoU’ for short) and appointed
Dr. C.N. Ramchand (respondent herein) on
September 4, 2003 for the development of
products in the field of bio-industries and
manufacturing and marketing of such products.
After various meetings and negotiations, terms
and conditions were finalized between the
parties and the respondent was appointed as
Director (Technical) by the applicant Company.
A copy of the agreement has been annexed to the
Application. MoU also provided that the
3
respondent will work full time with the Company
at least for next eight years from the date of
signing of the agreement. According to the
Company, it invested large amount in the new
adventure and paid substantial sum as
remuneration to the respondent for the work.
3. It is the allegation of the Company
that the respondent did not take interest in
work and failed to attend Board Meetings held
in May and June, 2004 in spite of prior notice
and information in advance about such meetings.
A notice was issued by the Company to the
respondent on July 14, 2004 asking him to
remain present at the Board Meeting scheduled
to be held on July 30, 2004. The respondent,
however, sent a Letter of Resignation on July
17, 2004. The Company has alleged that not only
the respondent wanted to quit the Company
before completing the work assigned to him in
violation of the agreement, but he also
instigated other subordinate staff-workers to
leave the organization. Resultantly, other
4
staff members also resigned. In view of the
large investment by the Company, it refused to
accept the resignation of the respondent.
There was correspondence and exchange of legal
notices between the parties. It is, however,
not necessary to enter into the details thereof
in the present proceedings.
4. By a communication dated August 12,
2005, the applicant through his advocate sent a
notice to the respondent for appointment of an
arbitrator in accordance with Clause 12 of MoU
and informed him that the applicant-Company had
decided to appoint Ramesh H. Nanavati, retired
District Judge as his arbitrator. The
applicant called upon the respondent to state
whether he was agreeable to the said name. It
also stated that if he was not agreeable, he
could suggest any other name and/or appoint an
arbitrator for resolving the dispute failing
which the applicant would be constrained to
take appropriate action in accordance with law.
The respondent through his advocate informed
5
the Company on September 12, 2005 that he was
not agreeable to the arbitrator suggested by
the Company. He, however, suggested three
names. At Sl. No. 1, there was a name of Dr.
Sandeep H. Shah, President, Indian Psychiatric
Association.
5. In view of non-agreement between the
applicant and respondent, the Company filed
Arbitration Application No. 9 of 2006 under
Section 11 of the Act in the High Court of
Gujarat at Ahmedabad requesting the Hon’ble
Chief Justice of the High Court to appoint an
arbitrator. Notice was issued to the respondent
who filed his reply. In the reply, he asserted
that he is a `British national’ and hence any
question of arbitration between the applicant-
Company which is registered in India and the
respondent-British national would fall under
`International Commercial Arbitration’ as
defined in Section 2(1)(f) of the Act and under
Section 11(9) of the Act, it would be within
the power and authority of the Chief Justice of
6
India to deal with and decide such application
and the Chief Justice of a High Court has no
jurisdiction to entertain the application. In
support of the contention that he is a British
national, the respondent submitted requisite
material which went to show that he is British
national. In view of the above contention, the
Company sought permission from the High Court
to withdraw the petition so as to enable the
Company to make appropriate application to the
Hon’ble Chief Justice of India. The permission
sought for was granted and the application was
disposed of as withdrawn.
6. The Company then approached this Court
by filing the present application on May 22,
2007. Hon’ble the Chief Justice of India
designated me as his nominee to deal with and
decide the application preferred by the
Company. Notice was issued to the respondent
pursuant to which he appeared and filed a
counter-affidavit on February 12, 2008. The
7
Registry was directed to place the matter for
hearing.
7. I have heard the learned counsel for
the parties.
8. Learned counsel for the applicant-
Company submitted that the application deserves
to be allowed by appointing a third arbitrator
as Umpire or sole arbitrator in view of
difference between the applicant and the
respondent and failure to come to an agreement
to appoint an arbitrator acceptable to both the
parties. It was stated that the applicant
appointed Ramesh H. Nanavati, retired District
Judge as his arbitrator since the controversy
related to interpretation of agreement and
legal issues were involved. The respondent,
however, did not agree and suggested another
name. The applicant could not agree to that
name because of absence of legal background on
the part of the person sought to be appointed.
The Company, therefore, invoked Section 11 of
the Act by going to the High Court of Gujarat.
8
But in view of objection raised by the
respondent that he is a British national, the
application was withdrawn and thereafter the
applicant has approached this Court. It was,
therefore, prayed that the petition deserves to
be allowed by either appointing third
arbitrator as Umpire or by appointing sole
arbitrator to deal with dispute between the
parties.
9. The learned counsel for the
respondent, on the other hand, submitted that
the present application is not maintainable.
According to him, there is no dispute arising
out of legal relationship considered as
commercial covered by clause (f) of Section 2
(1) of the Act and hence the provisions of the
Act would not apply to the case on hand. It
was also submitted that the agreement in
substance, provides for supply of technical
know-how and expertise for payment of `fees’
and there is no element of `commerce’ which
could attract the provisions of the Act. It
9
was also urged that the respondent was
appointed by the Company as an employee and the
relation between the Company and the respondent
was of master and servant and to such cases,
the Act has no application. Clause (12) of the
Agreement on which strong reliance had been
placed by the Company cannot be termed as
`arbitration clause’. In absence of legal,
valid and enforceable arbitration clause,
applicant-Company has no right to approach this
Court. It was, therefore, submitted that the
application deserves to be dismissed.
10. Having heard the learned counsel for
the parties, in my opinion, the petition should
be allowed. Clause (f) of sub-Section (1) of
Section 2 of the Act defines “International
Commercial Arbitration” and reads thus;
(f) “international commercial
arbitration” means an arbitration
relating to disputes arising out of
legal relationships, whether
contractual or not, considered as
commercial under the law in force in
India and where at least one of the
parties is–
10(i) an individual who is a national of,
or habitually resident in, any
country other than India; or(ii) a body corporate which is
incorporated in any country other
than India; or(iii) a company or an association or a body
of individuals whose central
management and control is exercised
in any country other than India; or(iv) the Government of a foreign country.
11. Chapter II of the Act deals with
“Arbitration Agreement” and declares that all
disputes arising between the parties would be
governed by the provisions of the Act. Chapter
III provides for “Composition of Arbitral
Tribunal”. Section 10 enacts that the parties
are free to determine number of arbitrators,
but such number shall not be an even number.
In case of failure to determine number of
arbitrators, the Arbitral Tribunal shall
consist of a sole arbitrator. Section 11
relates to appointment of arbitrators. It
states that in case of failure on the part of
the parties in arriving at an agreement to
11appoint an arbitrator, an application may be
made to the Chief Justice of India in case of
International Commercial Arbitration so that an
appropriate order may be passed for appointment
of arbitrator. It is on the basis of the above
provision that the applicant-Company has filed
this application.
12. I find no substance in the preliminary
objection raised by the learned counsel for the
respondent that there is no arbitration clause
in the Agreement. Clause 12 of the agreement
which provides for arbitration reads thus;
12. If there be any dispute
pertaining to meaning of this MoU or
of any nature, will be solved and
decided by appointing an independent
Arbitrator acceptable to all the
parties and if not solved by him can
be referred to court of law and for
which the jurisdiction will be
Vadodara.13. Bare reading of the above clause
leaves no room for doubt that it is an
`arbitration clause’ and expressly declares
12that any dispute pertaining to MoU would be
solved and decided by an arbitrator.
14. I am also unable to uphold the
argument of the learned counsel that there is
no International Commercial Arbitration.
The learned counsel for the respondent
submitted that there is no `commercial’ element
in the agreement and what was agreed between
the parties was to provide `technical know-how’
and `expertise’ to the applicant-Company for
which the respondent was to be paid `fees’.
15. The learned counsel in this connection
referred to Kamani Engineering Corporation
Ltd. & Ors. v. Societe De Traction Et
D’Electricite Societe Anonyme, & Ors., AIR 1965
Bom 114, Josef Meisaner GMBR & Co. v. Kanoria
Chemicals & Industries Ltd. & Anr., AIR 1986
Cal 45 and Mukesh H.Mehta & Ors. v. Harendra
Mehta, (1998) 92 Comp Cases 402. It was
submitted by the counsel that in the above
cases, it has been held that if the work
undertaken by a person is of a professional
13character and does not involve business or
trade, the contract cannot be said to be of
`commercial’ nature. Such contract does not
involve business or trade and there is no
element of participation in commercial activity
or in profit. Remuneration, if any, is in the
nature of `fees’. A person scrupulously keeps
himself away from any commercial relationship.
As such, provisions relating to arbitration
agreement in the field of commercial
arbitration are not attracted to these cases.
16. It may, however, be profitable to
refer to a decision of this Court in R.M.
Investment & Trading Co. Pvt. Ltd. v. Boeing
Co. & Anr., (1994) 4 SCC 541. There this Court
was called upon to consider the provisions of
Foreign Awards (Recognition and Enforcement)
Act, 1961. The question before the Court was
whether there was commercial relationship
between the parties as defined in Section 2 of
the Act and whether the Act would apply. In
that case, an Indian Company entered into an
14agreement with a Company registered in USA. The
Indian Company agreed to provide Boeing with
consultancy services for sale of Boeing
Aircraft in India. Agreement for purchase of
two Boeing Aircrafts was executed. A dispute
arose and the appellant claimed compensation
and remuneration for consultancy services. In
view of arbitration clause, the matter was
referred to arbitrator. It was contended by
the foreign Company that there was no
`commercial element’ and hence the application
was liable to be dismissed.
17. This Court, however, rejected the
contention. It was held that the agreement to
render consultancy service by the appellant to
the respondent was `commercial’ in nature and
there was commercial relationship between the
parties.
18.Referring to earlier cases, this
Court stated;
“It is not disputed that the sale of
aircraft by Boeing to customers in
15India was to be a commercial
transaction. The question is whether
rendering of consultancy services by
RMI for promoting such commercial
transaction as consultant under the
Agreement is not a “commercial
transaction”. We are of the view that
the High Court was right in holding
that the agreement to render
consultancy services by RMI to Boeing
is commercial in nature and that RMI
and Boeing do stand in commercial
relationship with each other. While
construing the expression “commercial”
in Section 2 of the Act it has to be
borne in mind that the Act is
calculated and designed to subserve
the cause of facilitating
international trade and promotion
thereof by providing for speedy
settlement of disputes arising in such
trade through arbitration and any
expression or phrase occurring therein
should receive, consistent with its
literal and grammatical sense, a
liberal construction.” [See: Renusagar
Power Co. Ltd. v. General Electric Co.
(SCC at p. 723-24 : SCR at p. 492) and
Koch Navigation Inc. v. Hindustan
Petroleum Corpn. Ltd.6 (SCC at p.262 : SCR at p. 75).] The expression "commercial" should, therefore, be construedbroadly having regard to the manifold
activities which are integral part of
international trade today”.(emphasis supplied)
19. It was further observed;
16
“While construing the expression
`commercial relationship’ in Section 2
of the Act, aid can also be taken from
the Model Law prepared by UNCITRAL
wherein relationships of a commercial
nature include “commercial
representation or agency” and
`consulting'”.20. Now, UNCITRAL Model Law on
International Commercial Arbitration as adopted
by the United National Commission on
International Trade Law defines the term
`commercial’ thus;
“The term `commercial’ should be
given a wide interpretation so as to
cover matters arising from all
relationship of a commercial nature,
whether contractual or not.
Relationship of a commercial nature
include, but are not limited to, the
following transactions; any trade
transaction for the supply or
exchange of goods or services;
distribution agreement; commercial
representation or agency; factoring
leasing, construction of works;
consulting; engineering, licensing;
investment, financing; banking;
insurance; exploitation agreement or
concession; joint venture and other
forms of industrial or business
cooperation; carriage of goods or
passengers by air, sea, rail or
road.” [Foot-note to Article 1 (1)]
17(emphasis
supplied)21. Before more than three decades, in
Union of India v. D.N. Revri & Co., (1976) 4
SCC 147, this Court stated;
“It must be remembered that a contract
is a commercial document between the
parties and it must be interpreted in
such a manner as to give efficacy to
the contract rather than to invalidate
it. It would not be right while
interpreting a contract, entered into
between two lay parties, to apply
strict rules of construction which are
ordinarily applicable to a conveyance
and other formal documents. The
meaning of such a contract must be
gathered by adopting a common sense
approach and it must not be allowed to
be thwarted by a narrow, pedantic and
legalistic interpretation”.
22. Very recently, in Citibank N.A. v. TLC
Marketing PLC & Anr., (2008) 1 SCC 481, this
Court held that commercial contract must be
broadly construed with a view to give efficacy
to such contract rather than to invalidate it.
Clauses of the contract must be liberally
interpreted. Narrow and technical approach
18
should be avoided. [see also Russel on
Arbitration (1997); p.60]
23. The other issue which has been raised
by the learned counsel for the respondent is
that the respondent was appointed as an
employee by the applicant-Company and there is
relationship of master and servant between the
parties. A contract in question is a contract
of employment to which the Act does not apply.
The submission of the Company, on the other
hand, is that looking to the agreement as a
whole, it cannot be said that the respondent
was a mere employee. The relevant clauses of
the agreement go to show that it was a contract
of trade and business, which is a commercial
transaction and Clause 12 clearly gets
attracted.
24. It has not been disputed by the
applicant-Company that if the contract is
merely of an employment and the relationship
between the parties is of master and servant,
the matter cannot be referred to Arbitral
19
Tribunal. But if the respondent is engaged by
the applicant Company to perform functions
which are inextricably linked with functions
which could be undertaken by a businessman or
by a Company and such activities form an
integral part of his activities, there is
element of `commerce’. In that case, the
provisions of the Act would clearly apply.
25. In the instant case, the respondent
has been appointed as Director (Technical) and
has been allotted 40% equity shares in the
subsidiary Company (Comed Bio-Tech Ltd.). Over
and above that, he was to be paid salary and
other benefits in lieu of services rendered by
him. Para 3 of the Agreement required the
respondent to undertake certain
responsibilities.
26. They are as under;
“Responsibility of DR. C.N. RAMCHAND
1. Will be responsible for the selection
of machineries, instruments, staff
selection including technical staff and
arrange for the same.
20
2. He will arrange for successful
operation of the research center.
3. To arrange and coordinate with the
group companies in the area of the
product planning, product development
and arrange for the stage up the level
of the launching in the market.
4. He will be chief executive officer in
the Comed Bio Tech Ltd. in al
operational matters.
5. He will be responsible to develop new
bio molelcules as per the discussion
with his utmost care integrity.
27. The applicant-Company wanted to
venture into the field of bio-technology which
was not previously chartered or traversed by it
(novel bio-products). The respondent possessed
special knowledge and to get the benefit of
such research and expertise, an agreement had
been entered into by the parties and respondent
had been appointed Director of the subsidiary
Company.
28. Now, it is well settled that a
Director is not a mere employee or servant of
the Company. In Lee v. Lee’s Air Framing Ltd.,
1961 AC 12, it was held that a Director is a
21
controller of the company’s affairs and is not
a mere servant of the Company. Such Director
may have to work also as an employee in a
different capacity. Gower and Davies’
Principles of Modern Company Law, (17th Edn.
pp. 370-76) also deals with duties of Director
viz-a-viz as an employee of the Company and
makes it clear that a Director per se cannot be
said to be an employee or servant of the
Company.
29. In Ram Pershad v. Commissioner of
Income Tax, New Delhi (1972) 2 SCC 696, this
Court held that a Managing Director may have a
dual capacity. He may be both, a Director as
well as an Employee.
30. The Court stated;
“7. Though an agent as such is not a
servant, a servant is generally for
some purposes his master’s implied
agent, the extent of the agency
depending upon the duties or position
of the servant. It is again true that
a director of a company is not a
servant but an agent inasmuch as the
company cannot act in its own person
but has only to act through directors
who qua the company have the
22relationship of an agent to its
principal. A Managing Director may
have a dual capacity. He may both be a
Director as well as employee. It is
therefore evident that in the capacity
of a Managing Director he may be
regarded as having not only the
capacity as persona of a director but
also has the persona of an employee,
as an agent depending upon the nature
of his work and the terms of his
employment. Where he is so employed,
the relationship between him as the
Managing Director and the Company may
be similar to a person who is employed
as a servant or an agent for the term
“employed” is facile enough to cover
any of these relationships. The nature
of his employment may be determined by
the articles of association of a
company and/or the agreement if any,
under which a contractual relationship
between the Director and the company
has been brought about, whereunder the
Director is constituted an employee of
the company, if such be the case, his
remuneration will be assessable as
salary under Section 7. In other
words, whether or not a Managing
Director is a servant of the company
apart from his being a Director can
only be determined by the article of
association and the terms of his
employment”.
31. The Court then referred to Anderson v.
James Sutherland (Peterhead) Limited where Lord
Normand at p. 218 said:
23
“… the managing director has two
functions and two capacities. Qua
Managing Director he is a party to a
contract with the company, and this
contract is a contract of
employment; more specifically I am
of opinion that it is a contract of
service and not a contract for
service.”
32. Thus, from settled legal position as
also from the functions to be performed by the
respondent, I hold that the respondent was
working in dual or double capacity, i.e. (i)
as an employee, and (ii) as a Director. In
the later capacity, however, he was the Chief
Executive Officer of the subsidiary Company
and had to look after all operational matters.
The functions to be performed by him were
supervisory and related to policy making
decisions in the affairs of the Company, as
observed by this Court in Ram Pershad. Any
dispute between the applicant-Company and the
respondent would, therefore, be covered by
Clause 12 of the Agreement which provides for
arbitration. Hence, the contention of the
learned counsel for the respondent that the
24
respondent was merely an employee and there
was no element of business, trade or commerce
has no substance and must be rejected.
33. For the foregoing reasons, in my
opinion, the application filed by the Company
must be allowed by holding that the case is
covered by clause (f) of sub-section (1) of
Section 2 of the Act. It is a case of
International Commercial Arbitration and is
covered by Clause 12 of MoU. Since there is a
dispute between the parties, it has to be
decided by an arbitrator. The clause extracted
hereinabove provides for an arbitrator i.e.
sole arbitrator and hence only one arbitrator
should be appointed. I, therefore, appoint Mr.
Madhukar Fanse, retired Judge, City Civil
Court, Ahmedabad as the sole arbitrator to
decide the dispute between the parties.
……………………………………………J.
(C.K. THAKKER)
NEW DELHI,
November 06, 2008.
25