THE HIGH COURT OF SIKKIM: GANGTOK
(Civil Appellate Jurisdiction)
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DIVISION BENCH: . JUSTICE BISWANATH SOMADDER, CHIEF JUSTICE
THE HON’BLE MR
THE HON’BLE MR. JUSTICE BHASKAR RAJ PRADHAN, JUDGE
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Arb. A. No. 02 of 2016
1. State of Sikkim,
Through the Principal Secretary,
Finance Revenue & Expenditure Department,
Government of Sikkim.
2. Director,
Sikkim State Lotteries,
Government of Sikkim,
Gangtok. Appellants
…..
Versus
M/s Tashi Delek Gaming Solutions (P) Ltd.,
135-Continental Building,
Dr. A.B. Road, Worli,
Mumbai
–
18.
….. Respondent
Appeal under Section 37 of the Arbitration & Conciliation Act, 1996
[against the order dated 29.07.2016 passed by the ld. District Judge,
East District at Gangtok, in T.S. (Arbitration) Case No. 02 of 2013
in the matter of M/s Tashi Delek Gaming Solutions (P) Ltd. vs. State of Sikkim & Ors.]
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Appearance:
Mr. Zangpo Sherpa, Additional Advocate General and Mr. Shakil
Raj Karki, Government Advocate for the Appellant.
None for the Respondent.
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Date of hearing : 25.10.2024
Date of judgment : 12.11.2024
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J U D G M E N T
On 25th October, 2024, this Court passed the
following order:-
“In this matter, ever since September, 2023, the
respondent M/s Tashi Delek Gaming Solutions Pvt.
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Arb. A. No. 02 of 2016
State of Sikkim vs. M/s Tashi Delek Gaming Solutions (P) Ltd.
Ltd., is not being represented by any learned Advocate.
Having given several opportunities to the respondent to
be represented before us, we are now left with no option
but to conclude the hearing of the matter on the basis of
the pleadings on record and the submissions advanced
by the learned Additional Advocate General of Sikkim on
behalf of the appellants.
Hearing stands concluded. Judgment reserved.”
We, therefore, now proceed to pronounce our
judgment.
2. The learned District Judge has, vide the
impugned order dated 29.07.2016, set aside the arbitral
award dated 06.06.2011 under section 34(2)(a)(ii) of the
Arbitration and Conciliation Act, 1996 (Arbitration Act of
1996) on the ground that the tender process as well as the
agreement dated 24.08.2001 had been quashed by this
Court, as such, the arbitration clause of the agreement
dated 24.08.2001 also became non-existent. The learned
District Judge thus held that although the parties had
agreed to the arbitration the learned Sole Arbitrator had no
jurisdiction to arbitrate the dispute.
THE FACTS
3. An agreement dated 24.08.2001 was entered
between the State of Sikkim and the Director, Sikkim State
Lotteries (appellants) and M/s Tashi Delek Gaming
Solutions (P) Ltd. (respondent). The respondent was
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Arb. A. No. 02 of 2016
State of Sikkim vs. M/s Tashi Delek Gaming Solutions (P) Ltd.
appointed as the sole and exclusive marketing agent for the
respondents for initiating the business of Online
Computerized Lottery System for a period of seven years
with a provision for further extension of five years thereafter.
The minimum assured revenue for each of the seven years
was agreed upon. After the required infrastructure was set
up, the first online computerized lottery game was launched
on 05.03.2002. Subsequently, another lottery game was also
launched. In the first year, Rs.9,00,00,000/- was paid by
the respondent to the appellants by way of bank guarantee
which was equivalent to quarter of the minimum assured
revenue for the first year. Thereafter, the payment of
minimum assured revenue was not according to clause 10 of
the agreement dated 24.08.2001. In the meantime, the
legality of the tender notice dated 10.07.2001 and the
agreement dated 24.08.2001 were challenged before this
Court in two writ petitions. This Court quashed the entire
process awarding the contract to the respondent and
nullified the agreement dated 24.08.2001. Direction was
issued to the appellants to issue fresh tender and to
complete the entire exercise within three months from
24.06.2003. As a temporary measure, the appellants were
granted liberty to: (i) to appoint a competent selectee or
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State of Sikkim vs. M/s Tashi Delek Gaming Solutions (P) Ltd.
interim marketing agent until the new marketing agent is
appointed in pursuance of the fresh tender, or (ii) allow the
existing agent to continue for the stipulated period of three
months only till such new marketing agent is appointed
(whichever is earlier) and that too after clearing off any
outstanding dues, government share, if any, or (iii) to make
any alternative arrangement for the said period under the
wisdom of the State Government. Two days later, on
26.06.2003, the appellants issued a letter requesting the
respondent to continue as marketing agent for three more
months on the same terms and conditions stipulated in the
agreement dated 24.08.2001. Without any letter of
acceptance, the respondent continued with the business of
marketing online computerized lottery system for the
appellants. On 27.06.2003, the respondent requested for
reduction of the State’s share from 20% to 10%. Numerous
correspondences were exchanged between the respondent
and the appellants
for reduction in the State’s share and the
minimum assured revenue. On 08.09.2003, the appellants
were informed by the respondent that the three months time
granted by this Court would be expiring on 24.09.2003.
Since the appellants had not been able to float new tender,
the respondent expressed their desire to discontinue being
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State of Sikkim vs. M/s Tashi Delek Gaming Solutions (P) Ltd.
the marketing agent for the Sikkim online lottery. As the
appellants
were not in favour of reducing the State’s share
and the minimum assured revenue and further since the
dues payable by the respondent had accumulated to a
noticeable amount, the respondent by letter dated
11.09.2003 gave notice for arbitration under section 11 of
the Arbitration Act of 1996 and by letter dated 04.11.2003
expressed their desire for terminating the agreement dated
24.08.2001. By a letter dated 12.11.2003, the respondent
issued notice for termination of the agreement dated
24.08.2001. The letter of termination issued by the
respondent was not accepted by the appellants. Thereafter,
a supplementary agreement was entered between them on
09.12.2003. By a letter dated 21.12.2003, the appellants
and increased the
reduced the State’s share from 20% to 5%
prize pool upto 60%. The minimum assured revenue
remained unchanged. Since the dispute between the parties
remained unresolved, vide letter dated 05.10.2004, the
respondent gave a notice to the appellants for arbitration in
terms of the agreement dated 24.08.2001. By a letter dated
20.10.2004, appellants called upon the respondent to pay
their dues accumulated since July 2002. On 01.03.2005, a
joint meeting was convened between the respondent and the
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State of Sikkim vs. M/s Tashi Delek Gaming Solutions (P) Ltd.
appellants wherein it was decided to initiate arbitration
proceedings and the case was referred to the learned Sole
Arbitrator. During the pendency of the arbitration
proceedings, the parties entered into another agreement
dated 18.11.2005 as an interim agreement on introduction
of new games with revised terms. The learned Sole Arbitrator
passed the award dated 06.06.2011 holding the respondent
liable to pay a total sum of Rs.96,48,38,070.00 to the
appellants for the period of 2003-2006 along with interest at
the rate 12% per annum. The respondent challenged the
award under section 34 of the Arbitration Act of 1996 before
the learned District Judge in T.S (Arbitration) Case No.02 of
2013. The learned District Judge set aside the arbitration
award.
CONSIDERATION
4. The above facts, as narrated by the learned
District Judge in the impugned judgment, makes it clear
that the arbitration proceeding was initiated at the instance
of the respondent. Therefore, evidently there was a dispute
which was unresolved. The narration of facts in the
impugned judgment also makes it evident that in terms of
the subsequent agreements, the respondent had acted as
the appellants’ marketing agent and conducted
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Arb. A. No. 02 of 2016
State of Sikkim vs. M/s Tashi Delek Gaming Solutions (P) Ltd.
computerized online lottery. This Court, while quashing the
tender process and the agreement dated 24.08.2001, did
permit interim measures including allowing the existing
agent to continue for the stipulated period of three months
only till such new marketing agent was appointed and that
too after clearing off any outstanding dues, Government
share, if any. It is further clear that although the agreement
dated 24.08.2001 had been quashed by this Court,
payments were due from the respondent to the appellants. It
is therefore certain that there was a dispute between the
parties which needed a resolution.
5. The learned District Judge has set aside the
arbitral award primarily on the ground that after this Court
quashed the tender process and the agreement dated
24.08.2001, the arbitration clause also perished with it
relying upon ,
Union of India vs. Kishorilal Gupta and Bros.1
Waverly Jute Mills Co. Ltd. vs. Raymon & Co. (India) Pvt. Ltd.2
and
Jaikishan Dass Mull vs. Luchhiminarain Kanoria and Co.3
6. In (supra), it was held that an
Kishorilal Gupta
arbitration clause is a collateral term of a contract as
distinguished from its substantive terms; but nonetheless it
1
AIR 1959 SC 1362
2
AIR 1963 SC 90
3
AIR 1974 SC 1579
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State of Sikkim vs. M/s Tashi Delek Gaming Solutions (P) Ltd.
is an integral part of it; however comprehensive the terms of
an arbitration clause may be, the existence of a contract is a
necessary condition for its operation, it perishes with the
contract.
7. In (supra), it was held that an
Waverly Jute Mills
agreement for arbitration is the very foundation on which
the jurisdiction of the arbitrators to act rests, and where
that is not in existence, at the time when they enter on their
duties, the proceeding must be held to be fully without
jurisdiction. This defect is not cured by the appearance of
the parties in those proceedings, even if that is without
protest, because it is well settled that consent cannot confer
jurisdiction. But in such a case, there is nothing to prevent
the parties from entering into a fresh agreement to refer the
dispute to arbitration while it is pending adjudication before
the arbitrators, and in that event the proceedings thereafter
before them might be upheld as referable to that agreement,
and the award will not be open to attack as without
jurisdiction.
8. In (supra), it was held that
Jaikishan Dass Mull
survival of an arbitration clause was dependent on the
legality of the contract and if a contract is illegal and void,
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State of Sikkim vs. M/s Tashi Delek Gaming Solutions (P) Ltd.
an arbitration clause, which is one of the terms thereof must
also perish with it.
9.
These judgments were rendered by the Hon’ble
Supreme Court interpreting the Arbitration Act, 1940. The
Hon’ble Supreme Court in Sundaram Finance Ltd. vs. NEPC
4, had however cautioned:-
India Ltd.
9. The 1996 Act is very different from the Arbitration
“
Act, 1940. The provisions of this Act have, therefore, to
be interpreted and construed independently and in fact
reference to the 1940 Act may actually lead to
misconstruction. In other words, the provisions of the
1996 Act have to be interpreted being uninfluenced by
the principles underlying the 1940 Act. In order to get
help in construing these provisions, it is more relevant
to refer to the UNCITRAL Model Law rather than the
1940 Act.”
10. In
Interplay between Arbitration Agreements under
ble
A&C Act, 1996 & Stamp Act, 1899, In Re5, the Hon’
Supreme Court held as under:
115. The separability presumption has undergone a
“
significant evolution in India. Initially, the Indian courts
viewed an arbitration agreement as an integral part of the
underlying contract without any existence beyond such
contract. For instance, in Union of India v. Kishorilal Gupta
& Bros. [Union of India v. Kishorilal Gupta & Bros., 1959
SCC OnLine SC 6], the issue before this Court was
whether an arbitration clause in the original contract
survived after the enactment of a subsequent contract. K.
Subba Rao (as the learned Chief Justice then was)
considered Heyman [Heyman v. Darwins Ltd., 1942 AC
356 (HL)] but distinguished it on the ground that it only
dealt with repudiation, where rights and obligations of
parties survive the termination of contract. It was held
that in situations where the original contract is
superseded by a subsequent contract, the arbitration
clause in the original contract will also cease to exist. K.
4
(1999) 2 SCC 479
5
(2024) 6 SCC 1
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State of Sikkim vs. M/s Tashi Delek Gaming Solutions (P) Ltd.
Subba Rao, J., speaking for the majority, held that first,
an arbitration clause is a collateral term of a contract as
distinguished from its substantive terms, but nonetheless
it is an integral part of it; second, the existence of the
underlying contract is a necessary condition for the
operation of an arbitration clause; third, if the underlying
contract was non est in the sense that it never came
legally into existence or was void ab initio, the arbitration
clause also cannot operate; fourth, if the parties put an
end to a validly executed contract and substitute it with a
new contract, the arbitration clause of the original
contract also perishes with it; and fifth, in situations such
as repudiation, frustration, or breach of contract, only the
performance of the contract comes to an end, the
arbitration clause persists because the contract continues
to exist for the purposes of disputes arising under it.
116. In Damodar Valley Corpn. v. K.K. Kar [Damodar
Valley Corpn. v. K.K. Kar, (1974) 1 SCC 141] , a two-Judge
Bench of this Court held that the plea that a contract is
void, illegal or fraudulent affects the entire contract along
with the arbitration clause. However, the enactment of the
Arbitration Act in 1996 enabled the Indian Courts to give
effect to the separability presumption with greater
impetus. Section 16(1)(b), which provides that a decision
by the Arbitral Tribunal that the contract is null and void
shall not entail ipso jure the invalidity of the arbitration
clause, renders the decisions in Kishorilal Gupta [Union of
India v. Kishorilal Gupta & Bros., 1959 SCC OnLine SC 6]
and Damodar Valley Corpn. [Damodar Valley Corpn. v. K.K.
Kar, (1974) 1 SCC 141] redundant. Consequently, even if
the underlying contract is declared null and void, it will
not ipso jure result in the invalidity of the arbitration
agreement.
117. In Firm Ashok Traders v. Gurumukh Das Saluja [Firm
Ashok Traders v. Gurumukh Das Saluja, (2004) 3 SCC
155], the issue before this Court was whether an
application under Section 9 of the Arbitration Act moved
by a partner of a non-registered firm or by a person not
shown as a partner in the Register of Firms was
maintainable in view of Section 69(3) of the Partnership
Act, 1932. Section 69(3) creates a bar against the
institution of a suit to enforce a right arising from a
contract unless the firm is registered and the person suing
is or has been shown in the Register of Firms as partner.
This Court considered the overall scheme of the
Arbitration Act to hold that an “arbitration clause is
separable from the other clauses of the partnership deed”
and “constitutes an agreement by itself”.
118. In National Agricultural Coop. Mktg. Federation India
Ltd. v. Gains Trading Ltd. [National Agricultural Coop.
Mktg. Federation India Ltd. v. Gains Trading Ltd., (2007) 5
SCC 692] , the issue before this Court in an application
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State of Sikkim vs. M/s Tashi Delek Gaming Solutions (P) Ltd.
under Section 11 was whether an arbitration clause
comes to an end if the contract containing such clause is
repudiated. While answering this in the negative, this
Court observed that even if the underlying contract comes
to an end, the arbitration agreement contained in such
contract survives for the purpose of the resolution of
disputes between the parties. Similarly, in P. Manohar
Reddy & Bros. v. Maharashtra Krishna Valley Development
Corpn. [P. Manohar Reddy & Bros. v. Maharashtra Krishna
Valley Development Corpn., (2009) 2 SCC 494 : (2009) 1
SCC (Civ) 612] , this Court referred to Buckeye Check
Cashing Inc. [Buckeye Check Cashing Inc. v. Cardegna,
2006 SCC OnLine US SC 14 : 546 US 440, 444 (2006)] to
observe that an arbitration agreement contained in an
underlying contract is a collateral term which may survive
the termination of the contract.
119. In Magma Leasing & Finance Ltd. v. Potluri
Madhavilata [Magma Leasing & Finance Ltd. v. Potluri
Madhavilata, (2009) 10 SCC 103 : (2009) 4 SCC (Civ) 57] ,
this Court cited Heyman [Heyman v. Darwins Ltd., 1942
AC 356 (HL)] with approval to hold that the termination of
the underlying contract does not render an arbitration
agreement inoperative. It was further observed that the
arbitration agreement survives for the purpose of
resolution of disputes arising “in respect of”, “with regard
to”, or “under” the underlying contract. The emphasis on
the expressions “in respect of”, “with regard to” or “under”
in Magma Leasing & Finance [Magma Leasing & Finance
Ltd. v. Potluri Madhavilata, (2009) 10 SCC 103 : (2009) 4
SCC (Civ) 57] indicates that the purpose of an arbitration
agreement is to embody the mutual intention of the
parties to settle
any disputes that may arise “in respect of”
the substantive obligations under the underlying contract.
It is, therefore, a logical conclusion that the parties
mutually intend to make an arbitration agreement distinct
and separate from the underlying contract, so that even if
the underlying contract comes to an end, the arbitration
agreement survives to resolve any outstanding disputes
that may arise out the substantive obligations under the
contract.
120. In view of the above discussion, we formulate our
conclusions on this aspect. First, the separability
presumption contained in Section 16 is applicable not
only for the purpose of determining the jurisdiction of the
Arbitral Tribunal. It encapsulates the general rule on the
substantive independence of an arbitration agreement.
Second, parties to an arbitration agreement mutually
intend to confer jurisdiction on the Arbitral Tribunal to
determine questions as to jurisdiction as well as
substantive contractual disputes between them. The
separability presumption gives effect to this by ensuring
the validity of an arbitration agreement contained in an
underlying contract, notwithstanding the invalidity,
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State of Sikkim vs. M/s Tashi Delek Gaming Solutions (P) Ltd.
illegality, or termination of such contract. Third, when the
parties append their signatures to a contract containing
an arbitration agreement, they are regarded in effect as
independently appending their signatures to the
arbitration agreement. The reason is that the parties
intend to treat an arbitration agreement contained in an
underlying contract as distinct from the other terms of the
contract; and Fourth, the validity of an arbitration
agreement, in the face of the invalidity of the underlying
contract, allows the Arbitral Tribunal to assume
jurisdiction and decide on its own jurisdiction by
determining the existence and validity of the arbitration
agreement. In the process, the separability presumption
gives effect to the doctrine of competence-competence.
”
[emphasis supplied]
11. The learned District Judge did not realise that
with the enactment of the Arbitration Act of 1996, the view
that the arbitration clause was an integral part of the
contract and perished with it, had undergone a change.
Now, the separability presumption ensures the validity of an
arbitration agreement contained in an underlying contract,
notwithstanding the invalidity, illegality, or termination of
such contract.
12. Consequently, the impugned judgment and order
rendered by the learned District Judge cannot be sustained.
It is liable to be set aside and is accordingly set aside. The
appeal stands allowed.
( Bhaskar Raj Pradhan ) ( Biswanath Somadder )
Judge Chief Justice
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