SHIN SATELLITE PUBLIC CO. LTD. v. M-S JAIN STUDIOS LTD

Citation: [2006] 1 S.C.R. 933

Court: Supreme Court of India

Bench: C.K. THAKKER

Case summary

SHIN SATELLITE PUBLIC CO. LTD. v. M-S JAIN STUDIOS LTD.pdf

Judgment text

SHIN SATELLITE PUBLIC CO. LTD. v. MIS JAIN STUDIOS LTD. JANUAkY 31, 2006 [C. K. THAKKER, J.

] Arbitration-Arbitration and Conciliation Act, 1996-Section 11(6)~ Contract Act, 1872-Section 28-Arbitration Agreement-Doctrine· of Severability-Appointment of Arbitrator-Agreement between petitioner and respondent company for availing broadcasting services of petitioner by respondent-Clause 23 providing for arbitration in case of dispute between the parties-This clause makes the arbitrator's determination final and binding between the parties declaring that parties had waived the rights of appeal or objection in any jurisdiction-Clause 20 explicitly providing for severability of agreement-Petitioner sending a letter/notice to respondent ' demanding for arbitration-Respondent alleging that arbitration dause not legal and valid-Petitioner filing application uls 11(6) of the Act-Held, Objectionable part as to finality and restraint in approaching a court oflaw is clearly severable as it is independent of dispute being referred to and · resolved by an arbitrator-The agreement is legal, lawful and enforceable and offending part can be separated and severed using a 'blue pencil'- Hence arbitrator appointed.

Section 11(6)-Loss of right to make appointment of arbitrator as per arbitration agreement-Respondent failing to appoint arbitrator in terms of arbitration agreement even though letter I notice issued to it by petitioner to do so-Petitioner filing application u/s 11(6) for appointment of arbitrator-Respondent now seeking time to make appointment of an arbitrator-Held, . at this belated stage the respondent cannot be permitted to take advantage of its own fault-Refusing the prayer, held, respondent having failed to appoint the arbitrator the person nominated by petitioner appointed as Sole Arbitratcr. Section 20-Arbitration-Change of place whether permissibley Arbitration agreement providing Delhi as the place for arbitration-Prayer to refer the dispute for arbitration in London or in Singapore where other arbitrations going on between the same parties-Held, prayer cannot be granted.

The petitioner, a company registered under the laws of Thailand, carries on satellite business and provides broadcasting and internet services to various companies/firms in the world. The respondent is an Indian Company. An agreement was entered into between the petitioner and the respondent. Clause 23 of the agreement provided for arbitration in case of dispute. Clause 23 contained a condition that the arbitrator's determination would be treated as final and binding between the parties and the parties had waived all rights • of appeal or objection in any jurisdiction. Clause 20 of the agreement declared that if any provision is held invalid, illegal or unenforceable, it would not affect other clauses. A dispute arose between the parties. The petitioner sent a letter/ notice to the respondent for referring the dispute to an arbitrator stating therein that it had appointed Hon'ble Mr. Justice M. L.

Pendse (retired) as its arbitrator and called upon the respondent to appoint an arbitrator. The respondent replied that arbitration clause was not legal and valid. The petitioner filed an application u/s 11(6) of the Arbitration and Conciliation Act 1996 praying for appointment of an arbitrator. The respondent contended that the Arbitration Agreement was not legal and valid as arbitration clause takes away completely the right of the parties to challenge the award passed by the arbitrator. It was also pleaded that since disputes were to be resolved by arbitration under the rules of UNCITRAL, arbitration may be held in London or in Singapore where arbitration proceedings were going on between the parties. The petitioner submitted that since agreement itself provides for severability, ignoring the objectionable part giving finality to arbitration award, the remaining parts can be enforced. Allowing the Arbitration Petitio11, the Court HELD : I. I.

A court of law will read the agreement as it is and cannot rewrite nor create a new one. The contract must be read as a whole and it is not open to dissect it by taking out a pa1 t treating it to be contrary to law and by ordering enforcement of the rest if otherwise it is not permissible. But it is well settled that if the contract is in several parts, some of which are legal and enforceable and some are unenforceable, lawful parts can be enforced provided they are severable. In several cases, courts have held that partial invalidity in contract will not ipso facto make the whole contract void or SHIN SATELLITE PUBLIC CO. LTD. v. JAIN STUDIOS LTD. 935 '( unenforceable. Wherever a contract contains legal as well as illegal parts ) and objectionable parts can be severed, effect has been given to legal and valid parts striking out the offending parts. (942-G; 943-B] 1. 2.

The proper test for deciding validity or otherwise of an agreement or order is 'substantial severability' and not 'textual divisibility'. It is the duty of the court to severe and separate trivial or technical part by retaining the main or substantial part and by giving effect to the latter if it is legal, lawful and otherwise enforceable. In such cases, the Court must consider the question whether the parties could have agreed on the valid terms of the agreement had they known that the other terms were invalid or unlawful. If the answer to the said question is in the affirmative, the doctrine ofseverability would apply and the valid terms of the agreement could be enforced, ignoring invalid terms.

To hold otherwise would be " to expose the covenanter to the almost inevitable risk of litigation which in nine cases out of ten he is very ill able to afford, should he venture to act upon his own opinion as to how far the restraint upon him would be held by the court to be reasonable, while it ~ may give covenantee the full benefit of unreasonable provisions if the '1 covenanter is unable to face litigation. " [946-C-E) Halsbury 's Laws ofEngland (Fourth Edition); Volume 9; Para 430; p. 297, Chitty on Contracts (29th Edition); Volume I; pp. 1048-49, referred to. SBP & Company v. Patel Engineering Ltd. , (2005) 8 SCC 618, referred to Goldsoll v. Goldman, (1914) 2 Ch 603, Attwood v. Lamont, (1920) 2 KB 146, Kall-Kwik Printing (UK. ) Limited v. Frank Clearence Rush, (1996) FSR 114, Coringa Oil Co. v. Koegler, ! LR (1876) 1 Cal 466, Babasahed Rahimsaheb v. Rajaram Raghunath, AIR (1931) Born 264 and Union Construction Co. (P) Ltd. v. ChiefEngineer, Eastern Command, Lucknow & Anr.

, AIR (1960) All 72, relied upon. Re Davstone Estates Ltd. 's Leases, Manprop, Ltd. v. O'Dell & Ors. , [1969) 2 All ER 849, referred to. 2. In the present case, clause 23 relates to arbitration. It is in various ·,. parts. The first part mandates that, if there is dispute between the parties, it shall be referred to and finally resolved by arbitration. It clarifies that the rules of UNCITRAL would apply to such arbitration. It then directs that the arbitration shall be held in Delhi and will be in English language. It stipulates that the costs of arbitration shall be shared by the parties equally. The r offending and objectionable part, no doubt, expressly makes the arbitrator's determination "final and binding between the parties" and declares that the parties have waived the rights of appeal or objection" in any jurisdiction". The said objectionable part, however, is clearly severable as it is independent of the dispute being referred to and resolved by an arbitrator.

Hence, even in the absence of any other clause, the part as to referring the dispute to arbitrator can be given effect to and enforced. By implementing that part, it cannot be said that the Court is doing something which is not contemplated by the parties or by 'interpretative process', the Court is re-writing the ... contract which is in the nature of 'novatio ·. The intention of the parties is explicitly clear and they have agreed that the dispute, if any, would be referred to an arbitrator. To that extent, therefore, the agreement is legal, lawful and the offending part as to the finality and restraint in approaching a Court of law can be separated and severed by using a 'blue pencil'. (945-F-H; 946-A-B] 3. The agreement in the instant case can be enforced on an additional ground as well. Clause 20 (Severability) expressly states that if any provision r ofthe agreement is held invalid, illegal or unenforceable, it would not prejudice the remainder.

Clause 20 makes the matter free from doubt. The intention of the parties is abundantly clear and even if a part of the agreement is held unlawful, the lawful parts must be enforced. Reference of a dispute to an arbitrator, by no means can be declared illegal or unlawful. To that extent, therefore, no objection can be raised by the respondent against the agreement. (946-E-G) 4. It may be stated here that on behalf of the respondent, it was submitted that if the matter is referred to arbitration in London or in Singapore, it had no objection. But as the Arbitration Agreement provides 'Delhi' as the venue and since that part of the agreement is enforceable, the prayer of the respondent cannot be granted. Since there is failure on the part of the respondent in making an appointment of an arbitrator in accordance with the agreement, the prayer for grant of time to make an appointment of an arbitraror cannot be granted.

At this belated stage, now, the respondent cannot be permitted to take advantage of its own default. Hon'ble Mr. Justice M. L. Pendse (Retired) is accordingly appointed as Sole Arbitrator. [946-H; 947-A- D) CIVIL ORIGINAL JURISDICTION : Arbitration Petition No. I of2005. } SHIN SATELLITE PUBLIC CO. LTD. v. JAIN STUDIOS LTD. [THAKKER.. l. ]937 (Under Section 11(6) of the Arbitration and Conciliation Act. ) Arun H. Mehta, Ankit Singhal and Nikhil Nayyar for the Petitioner. K. N. Bhat, Neeraj Kumar Jain, Aditya Kumar Chaudhary, Bharat Singh, Sanjay Singh and Ugra Shankar Prasad for the Respondent. The Judgment of the Court was delivered by C. K. THAKKER, J. This Arbitration Petition is filed by the petitioner, Shin Satellite Public Co. Ltd. against the respondent, M/s Jain Studios Ltd. under sub-section (6) of Section 11 of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as 'the Act'). It is prayed in the application that Hon'ble Mr. Justice M. L.

Pendse (Retired) be appointed as Sole Arbitrator, or in the alternative, any other retired Judge of a High Court may be appointed as an Arbitrator. The Hon'ble the Chief Justice of India has nominated me to exercise power under sub-section (6) of Section 11 of the Act and that is how the matter has been placed before me for passing an appropriate order. ) It is the case of the petitioner that it is a Company registered under the laws of Thailand, having its principal office in Thailand. The petitioner carries • on the satellite business and has got three satellites in the orbit, viz. , Thaicom- 1, Thaicom-2 and Thaicom-3. The petitioner, through above satellites, provides broadcasting and internet services to various Companies/ firms in the world. The respondent is a Company duly registered under the Companies Act, 1956 having its registered office at New Delhi.

According to the petitioner, an agreement was entered into between the parties on August 10, 1999 for availing broadcasting services of the petitioner by the respondent. The agreement, inter alia, provided for supply of satellite services, payment of fees, etc. Clause 23 provided for arbitration in case of dispute arising from the interpretation or from any matter relating to the performance ofthe agreement or rights or obligations of the parties. Since the dispute arose between the parties, the petitioner, through advocate addressed a letter/notice to the respondt:1t on September 9, 2004 demanding for arbitration under clause 23. The petitioner, in the said letter. stated that it had appointed Hon'ble Mr. Justice M. L. Pendse (Retired) as its arbitrator and called upon the respondent to appoint an arbitrator. The petitioner.

however, received a letter dated 7th October, 2004 from the respondent's advocate contending that the arbitration clause was not legal and valid and clause 23 of the Arbitration Agreement could not be termed as ·Arbitration Clause'. According to the 938 SUPREME COL:RT REPORrS [20061 I S. C. R. petitioner, thus. the r~spondent failed to appoint an arbitrator which compelled the petitioner-company to file present application under Section 11 (6) of the Act. A prayer was, therefore, made to make an appointment of an arbitrator. On March 17, . "! 005, notice was issued on the application. The learned counsel appeared on behalf of the respondent and waived service of notice. Time was sought to file counter-affidavit. which was granted. A reply-affidavit was then filed by the respondent urging therein that the Arbitration Agreement was not legal and valid.

It was conh:nded that Clause 23 contained a condition that the arbitrator's determination would be treated as 'final and binding between the parties' and the parties had waived 'all rights ofappeal or objection in any jurisdiction'. It was also submitted that the disputes were to be resolved by arbitration under the rules of United Nations Commission on International Trade Law (UNCITRAL). Whereas Agreement in question dated August I0, 1999 provided that th severable, it could be implemented by applying the 'blue pencil' test. The legal position in India is not different. In Coringa Oil Co. v. Koegler, /LR (1876) I Cal 466, a clause in the agreement stated that all disputes be referred to arbitrator of two competent London Brokers and their decision would be 'final'. Dealing with the question of legality of such clause, the Court held that the contract could be enforced by excluding the part as regards challenge to such award.

It would not affect the jurisdiction of the court, and to that extent, the clause is not enforceable. The other stipulation, however, would not become void or inoperative. In Babasaheb Rahimsaheb v. Rajaram Raghunath, AIR (1931) Born 264, there were several clauses in the contract. When the question as to enforceability came up before the court, it was held that if different clauses in an agreement are separable, the fact that one clause is void does not necessarily cause the other clauses to fail. - In Union Construction Co. (Pi ltd. v. Chief Engineer, Eastern Command, Lucknow and A11r.. AIR [1960] All T!. , a similar contention was raised that the Arbitration Agreement giving finality and conclusiveness was . - / SHIN SATELLITE PUBLIC CO. LTD. v. JAIN STUDIOS LTD. [THAKKER. J. ]945 -> illegal and unenforceable as it was hit by Section 28 of the Contract Act. \ Clause 68 of the Arbitration Agreement, which was similar to the case on hand, read thus: "68.

Arbitration-All disputes, between the parties to the Contract arising out of or relating to the Contract, other than those for which the decision of the C. W. E. or of any other person is by the Contract expressed to be final and conclusive, shall after written notice by either party to the Contract to the other of them be referred to the sole arbitration of an Engineer. Officer to be appointed by the authority mentioned in the tender documents. Unless the parties otherwise agree, such reference shall not take place until after the completion, alleged completion or abandonment of the Works or the determination of the Contract. The venue of Arbitration shall be such place or places as may be fixed by the Arbitrator in his sole discretion. The award of the Arbitrator shall be final, conclusive and binding on both parties to the Contract.

" (emphasis surplied) The Court held that the sub-clause making the award 'final and conclusive' was clearly separable from the main clause which made reference to an arbitrator imperative. "The existence of the sub-clause or the fact that the sub-clause appears to be void does not in any way affect the right of the I parties to have recourse to arbitration and does not make a reference to an \ arbitrator any the less an alternative remedy. " In the present case, clause 23 relates to arbitration. It is in various parts. The first part mandates that, if there is a dispute bttween the parties, it shall be referred to and finally resolved by arbitration. It clarifies that the rules of UNCITRAL would apply to such arbitration. It then directs that the arbitration shall be held in Delhi and will be in English language. It stipulates that the costs of arbitration shall be shared by the parties equally.

The offending and objectionable part, no doubt, expressly makes the arbitrator's determination -,,. "final and binding between the parties" and declares that the parties have waived the rights of appeal or objection "in any jurisdiction". The said · objectionable part, in my opinion, however, is clearly severable as it is independent of the dispute being referred to and resolved by an arbitrator. 946 Sl IPREME COURT REPORTS [20061 I S. C. R. Hence, even in the absence of any other clause, the part as to referring the dispute to arbitrator can be given effect to and enforced. By implementing that part, it cannot be said that the Court is doing something whi-:h is not contemplated by the parties or by 'interpretative process', the Court is rewriting the contract which is in the nature of 'novatiu'. The intention of the parties is explicitly clear and they have agreed that the dispute, if any, would be referred to an arbitrator.

To that extent, therefore, the agreement is legal, lawful and the offending part as to the finality and restraint in approaching Court of law can be separated and severed by using a 'blue pencil'. The proper test for deciding validity or otherwise of an agreement or order is 'substantial severability' and not 'textual divisibility'. It is the duty of the court to severe and separate trivial or technical part by retaining the main or substantial part and by giving effect to the latter if it is legal, lawful and otherwise enforceable. In such cases, the Court must consider the question whether the parties could have agreed on the valid terms of the agreement had they known that the other terms were invalid or unlawful. If the answer to the said question is in the aff:rmative, the doctrine of severability would apply and the valid terms of the agreement could be enforced, ignoring invalid terms.

To h_old otherwise wou Id be "to expose the covenanter to the almost inevitable risk of litigation which in nine cases out of ten he is very ill able to afford, should he venture to act upon his own opinion as to how far the restraint upon him would be held by the court to be reasonable, while it may give the covenantee the full benefit of unreasonable provisions if the covenanter is unable to face litigation. " The agreement in the instant case can be enforced on an additional ground as well. As already noted, clause 20 (Severability) expressly states p that ifany provision of the agreement is held invalid, illegal or unenforceable, it ~ould not prejudice the remainder. In my view, clause 20 makes the matter free from doubt. The intention of the parties is abundantly clear and even if a part of the agreement is held unlawful, the lawful parts must be enforced. Reference of a dispute to an arbitrator, by no means can be declared illegal or unlawful.

To that extent, therefore, no objection can be raised by the respondent against the agreement. It may be stated here that on behalf of the respondent, it was submitted that if the matter is referred to arbitration in London or in Singapore, it had no objection. But as the Arbitration Agreement provides 'Delhi' as the venue and since that part of the agreement is enforceable, the prayer of the SHIN SATELLITE PUBLIC CO. LTD. v. JAIN STUDIOS LTD. [Tl-IAKKER,J. ] 947 respondent cannot be granted. Finally, it was submitted by the respondent that if this Court is not upholding the objection of the respondent and is inclined to grant the prayer of the petitioner, some time may be granted to the respondent to make an appointment of an arbitrator. It was not done earlier because according to the respondent, clause 23 was not enforceable. The learned counsel for the petitioner objects to such a prayer.

According to him, a letter/notice was issued and in spite of request by the petitioner, the respondent had failed to exercise his right to appoint an arbitrator. At this belated stage, now, the respondent cannot be permitted to take advantage of its own default In my opinion, since there is failure on the part of the respondent in making an appointment of an arbitrator in accordance with the agreement, the prayer cannot be granted. For the foregoing reasons, the arbitration petition stands allowed and Hon'ble Mr. Justice M. L. Pendse (Retired) is accordingly appointed as Sole Arbitrator. In the facts and circumstances of the case, there shall be no order as to costs. K. G. Arbitration petition allowed.