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. 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

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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

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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

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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

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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

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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.

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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

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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—

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(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

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appoint 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

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that 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

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character 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

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agreement 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

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India 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 construed

broadly having regard to the manifold

activities which are integral part of

international trade today ”.

(emphasis supplied)

19. It was further observed;

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“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)]

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(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

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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

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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.

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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

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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, (17

th

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

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relationship 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:

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“... 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

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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.

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