K.K. Modi v. K..N.

Modi
(1998) 3 SCC 573
The present litigation has arisen
on account of disputes between

Group A
 Kedar N ath M odi, th e
y o u n ger bro th e r of Seth
Gujja r Ma i Modi a n d his
th re e sons - M.K.Modi,
Y.K. Modi a n d D.K.Modi
Group B
 Seth Gujja r Ma i Modi's
five sons - K.K.Modi, V.K.
Mod i, S.K.Modi. B.K.Modi
a n d U.K.Modi o n th e o n e
ha nd

 The Modi family owns or has a controlling interest in a number

of public limited companies. They also own various assets.
 Diffe r e n c e s a n d dispu t e s h a v e a rise n b e t w e e n Ke d a r
N a th M o di a n d his sons c o n stitu tin g G r o u p A a n d th e sons
of la te Gujja r Ma l Modi c o n stitu tin g G r o u p B o n th e o the r
hand.
Memorandum of Understanding

To resolv e th e se d iffe r e n c e s , n e g o tia tions to o k p la c e with th e h e lp of th e

 fin a ncia l institutions w h ic h h a d le n t m o n e y to th e se c o m p a nies a n d
throu gh w h o m subs ta n tia l p u b l ic f u n d s h ad been in ve s t e d in th e
c o m p a nies o w n e d a n d /o r c o n trolle d by th e se tw o gro u p s.
Rep resen ta tive s of se ve ra l b a nks, R eserv e Bank of In d ia a n d fin a n c ia l
 institutions w e re a lso in vite d to p a rtic ip a te . Ultim a tely, o n 24th of
J a n u a ry, 1989, a M e m o r a n d u m of Understa nding w a s a rrive d a t b e tw e e n
G ro u p A a n d G ro u p B.
The r e w e r e n u m erous cla uses in th e M e m o r a n d u m of Understa ndin g a rrive d a t
 b e tw e e n G ro u p A a n d G ro u p B.

 We a r e n o t c o n c e r n e d with th e o th e r c la uses, e x c e p t to n o te th a t th e d a t e
for c a rryin g o u t va lu a tio n , t h e d a t e of tran sfer, th e ap p o in t m ent o f
independent Chairmen of these companies which are to be split
and cer t ai n ot h er m at t ers sp eci fi ed i n t h e Mem or an du m o f Und ers t an d i ng
shall be done consultation with the Chairman, Industrial Finance
Corporation of India (IFCI).
Clause 9 provides as follows

 "Implementation will b e d o n e in consultation

with t h e financial institutions. For all disputes,
clarifications etc, in respect of implementation
of this agreement, the same shall be referred
t o t h e Cha i rm an, IFCI or his nominees w h o s e
decisions will be final and binding on both the
groups."
How did the dispute arose?

 Pursuant to the Memorandum of Understanding, M/s. S.B. Billimoria &

Company gave reports between January and March 1991. M/s. Bansi S.
Mehta & Company who were required to provide a scheme for splitting of
th e th r e e c o m p a nies by ta kin g in t o a c c o u n t th e va lu a tio n fixed by M/s.
S.B.
 Billimoria & Company, also sent various reports between November 1989
an d D ece m be r, 1 9 9 4 .
The members of both the Groups were dissatisfied with these reports. They
sent various representations to the Chairman and Managing Director of the
 Industrial Finance Corporation of India Ltd. in view of Clause 9 of the
Memorandum of Understanding.
The Chairman and Managing Director, Industrial Finance Corporation of
India formed a Committee of experts to assist him in deciding the questions
that arose. The Committee of Experts and the Chairman, IFCI had
discussions with both the groups. Meetings were also held with the
Chairman of the concerned companies who were independent Chairmen.
The discussions took place from 12th of March 1995 to 8th of December,
1995.
What happened after the
dispute arose?

 On 8th of December 1995, the Chairman , IFCI gave his detailed decision/ report . In his
covering letter of 8th of December, 1995, the Chairman and Managing Director, Industrial
Finance Corporation of India Ltd. has described this report as his decision on each dispute
raised or clarification sought. He has quoted in his covering letter that since that
m e m o ran d u m o f Un d ersta n d ing h a s a lr e a d y b e e n im p le m e n te d to a la rge ex tent d uring 1989
to 1995, with the d ecisio ns on the d ispute s /c la rifica tions gives by him n o w in th e e n c lo s e d
rep o rt, h e h a s h o p e d th a t it w o u ld b e p o ssible to imp le m e n t th e rem a ining p a rt o f th e
M e m o ran d u m o f Un d ersta n d ing . He h a s d ra w n a tte n tio n to p a ra g ra p h 9 o f his report w h e r e
h e h a s s ai d th a t it is n o w left to th e m e m b e rs o f G roups A a n d B to se ttle a m o n g st th e m selves
th e fa m ily m a tte r w ithout a n y further r e fe r e n c e to th e C h a irma n a n d Ma n a ging Directo r o f
th e In d ustrial Finan c e C o rporatio n o f In d ia. In p a r a g ra p h 7 o f th e le tter h e h a s sta te d th a t o n
th e b a sis o f th e to ta l va lu a tion o f Mo d i G ro u p a sse ts a n d liabilities a n d a llo c a tion th e r e o f
b e tw e e n G roups A a n d B a n d th e d ecisions given by him in th e rep o rt, a sum o f Rs. 2135.55
la khs w o uld b e p a ya ble by G r o u p B to G ro u p A. Th e said am o unt sho u ld be d e p o site d by
G r o up B w ith
IFC I a t its Delhi Reg i o n a l Office by 15th o f Jan ua ry , 1996 fa iling w hich Gr oup B w ill b e liable
to p a y in terest a t th e pre v a iling prim e le n d ing ra te o f th e S ta te Ba nk o f In d ia (w hich w a s
th e n
 16.5% p.a.).

This report w a s n o t file d in C ourt a s a n a w a r d n o r w a s a n y a p p lica tion file d by G ro u p B

to m a k e th e Re p o rt a rule o r d e c r e e o f th e C o ur t. Th e C h a irma n, M od ipon Ltd ., w h o w a s
a n i n d e p e n d e n t C h a irma n n o m i na te d by IFC I, h o w e v er, issu e d a series o f d irections fo r
im p lem e n ting or giving effe c t to th e Re p o rt o f 8th o f De c e m b e r, 1995.
What is the relation of the
dispute with arbitration?

 On 18th of May, 1996 the present appellants (Group B) filed an arbitration

petition under Section 33 of the Arbitration Act, 1940, bearing O.M.P. No. 58
of 1996 in the Delhi High Court challenging the legality and validity of the
said decision of the Chairman and Managing Director, IFCI dated 8.12.1995
on the basis that it was an award in arbitration proceedings between
Group A and Group B. In the petition other directions were also sought
against the Chairman, Modipon Ltd.
 On th e sa m e d a y G r o u p B a lso file d a Civil Suit No. 1394 of 1996 in th e
Delhi Hig h C o u rt to c h a lle n g e th e sa m e d e c isio n of th e C h a ir m a n a n d
M a n a gin g Dir e c tor, IFCI d a t e d 8.12.1995. The a v e r m e n t s a n d p r a y e rs
in this suit w e r e subs ta ntia lly th e sa m e a s th o s e in th e a rbitratio n
p e tition. In o n e p a r a g r a p h , h o w e v er, in th e pla int, it w a s sta te d th a t
th e sa m e relie fs w e r e b e in g cla im e d in a suit in th e e v e n t of it b e in g
h e ld th a t th e d e c isio n of th e C h a ir m a n a n d M a n a g in g Dir e c tor, IFCI
w a s n o t a n arbitratio n a w a r d b u t w a s just a d e c ision.
Present proceedings raise two
main questions

 The present proceedings raise two main questions

 Question 1 : Whether Clause 9 of the Memorandum of
Understanding dated 24th of January, 1989 constitutes an
arbitration agreement; and whether the decision of the Chairman,
IFCI dated 8th December, 1995 constitutes an award? and
 Question 2 : Whether Suit No. 1394/1996 is an abuse of the process
of court?
Whether Clause 9 of the Memorandum of
Understanding dated 24th of
January, 1989 constitutes an arbitration
agreement; and whether the decision of
the Chairman, IFCI dated 8th
December, 1995 constitutes
an award?

Question 1
Whether Clause 9 of the Memorandum of
Understanding dated 24th of January, 1989
constitutes an arbitration agreement?

 Among the attributes which must be present for an agreement to be considered as an arbitration
agreement are :
1. The arbitration agreement must contemplate that the decision of the tribunal will be binding on the
parties to the agreement,
2. That the jurisdiction of the tribunal to decide the rights of parties must derive 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,
3. Th e a g re e m e n t m ust c o n te m p la te th a t substa n tive rig h ts o f p a rtie s w ill b e d e te rm in e d by th e
a g re e d trib u n a l,
4. That 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,
5. That the agreement of the parties to refer their disputes to the decision of the tribunal must
be intended to be enforceable in law and lastly,
6. The agreement 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.

 This Court held that this was not an arbitration clause. It did not envisage that any
difference or dispute that may arise in execution of the works should be referred to the
arbitration of an arbitrator.
Whether the decision of the
Chairman, IFCI dated 8th December, 1995
constitutes an award?

 The authorities seem to agree that while there are no conclusive tests, by and
large, one can follow a set of guidelines in deciding whether the agreement is to
refer an issue to an expert or whether the parties have agreed to resolve disputes
through arbitration.
 Therefore our courts have laid emphasis on
1. Existence of disputes as against intention to avoid future disputes ;
2. Th e tribunal o r fo rum so chosen is i n te n d e d to a c t judicially a fter ta king into
a c c o unt rele v a nt e v id e n c e b e fo r e it a n d th e sub m issions m a d e by th e p arties
b e fo re it; a n d
3.
The decision is intended to bind the parties.
4.
Nomenclature used by the part ies may not be conclusive.
 One must examine t he t rue i nt ent and Purport of the agreement .
 There are, of course, the statutory requirements of a written agreement, existing
or future disputes and an intention to refer them to arbitration. (Vide Section 2
Arbitration Act 1940 and Section 7 Arbitration and Conciliation Act, 1996).
What did the court observe?

 U n d o ub tedly, in th e c o u rse of c o r r e s p o n d e n c e e x c h a n g e d by va rious

m em b ers o f G roups A a n d B with th e C h a ir m a n , IFCI, so m e of th e m e m b ers
h av e u sed th e w o rds "arbitration" in c o n n e c t io n with Cla use 9. That by
itself, h o w e v er, is n o t c o n c lusive .
 The intention of the parties was not to have any judicial determination on
the basis of evidence led before the Chairman, IFCI. Nor was the Chairman,
IFCI required to base his decision only on the material placed before him by
the parties and their submissions.
 He was free to make his own inquiries . He had to apply his own mind and
use his own expertise for the purpose. He was free to take the help of other
experts. He was required to decide the question of valuation and the
division of assets as an expert and not as an arbitrator . He had been
authorise to nominate another in his place.

But the contract indicates that he has to nominate an expert. The fact that
submissions were made before the Chairman, IFCI, would not turn the
decision-making process into an arbitration.
What did the court say?

 The finality of the decision is also indicative of it being an

expert's decision though of course, this would n o t b e
conclusive. But looking at the nature of the functions
expected to be performed by the Chairman, IFCI, in our
view, the decision is not an arbitration award.
 The le a r n e d Sin g l e Ju d g e w a s , th e refo re, rig h t in
c o m i n g to th e co nclu sio n that th e pro c e e d in g s befo re
th e C h a i r m a n , IFCI, w e re not arb itratio n pro ce e d in g s &
n o r w a s his d ecisio n a n a w a r d .
 Whether Suit No.
1394/1996 is an a b u s e of
the process of court?

Question 2
What did the learned Single
Judge say?

 In the present case, the learned Judge w as of the view that the
appellants had resorted to two parallel proceedings , one under
the Arbitration Act and the other by way of a suit.
 W h e n th e o r d e r of inte rim injunc tio n o b ta in e d by th e
a p p e lla n ts w a s va c a t e d in a r b itra tio n p r o c e e ding s, th e y
o b ta in e d a n inju n c tio n in th e suit.
 The learned Single Judge also felt that the issues in the two
proceedings were identical and the suit was substantially to set
aside the award.
 He, therefore, held that the proceeding by way of a suit was an
abuse of the process of court since it amounted to litigating the
same issue in a different forum through different proceedings.
What did learned senior counsel for
the appellants submit?

 Mr. Na rim a n , le a r n e d senior counsel for th e a p p ella nts, h o w e v er, h as dra w n

our a tte n tio n to p a r a g r a p h 55 of th e pla in t.
 He has submitted that in the event of it being held that Clause 9 of the
Memorandum of Understanding is not an arbitration clause and the
decision of the Chairman, IFCI, is not an award, it is open to the appellants
to file a suit to challenge the decision . This is the reason why along with the
arbitration petition, a suit has also been filed as an alternative method of
challenging the decision in the event of it being held that the decision of
the Chairman and Managing Director, IFCI, is not an award. He has
cont ended t hat fi ll ing a separate proceeding in th is con text cann ot be
consi dered as an abuse of he process of the court; and the learned S ingle
Judge was not right in striking out the plaint under Order 6 Rule 16 of the
CPC.

Under O rder 6 Rule 16, th e C o u rt m ay, at a n y sta te of th e p r o c e e din g ,
order to be struck out, inter a lia , a n y m a tter in a n y p le a d in g w h ich is
o th e rwise a n a b u s e of th e p r o c es s o f th e c o u rt.
Finally what did the court say?

 The appeal of the appellants from the judgment of the Learned Judge
striking out the plaint is, therefore, partly allowed and the suit, to the extent
that it challenges independently the decision of the Chairman and
M a n ag in g Dir e c tor, IFCI a s a d e c isio n a n d n o t a s a n a w a r d , is
m a intain a ble
 in the sense that it is not an abuse of the process of the court .
We make it clear that we are not examining the merits of the claim nor
whether the plaint in the suit discloses a cause of action in this regard. The
plaint leaves much to be desired and it is for the trial court to decide these
 and allied questions.
The plaint in so far as it challenges the decision as an award and on the
same groun ds as an award; or seeks to prev ent t he en forcemen t of t hat
award by the Chairman, Modipon Ltd. or in any other way has been rightly
considered as an abuse of the process of court since the same reliefs have
already been asked for in the arbitration petition. The Transfer Case No. 13
of 1997 is, therefore, partly allowed.
Thank You