TMI Blog2016 (10) TMI 1147X X X X Extracts X X X X X X X X Extracts X X X X ..... the C.B.I. raid at the house of Dhanapalraj from where cash in the sum of ₹ 45 lakhs was seized. Interestingly, though the Appellant has taken the position that this cash belongs to 'Hotel Arunagiri', they are the Respondents who have themselves alleged that the money belonged to Dhanapalraj and not to 'Hotel Arunagiri'. In view of the aforesaid stand taken by the Respondents/plaintiffs themselves, this issue does not fall for consideration and, therefore, is not to be gone by the Arbitral Tribunal. We, therefore, are of the opinion that the allegations of purported fraud were not so serious which cannot be taken care of by the arbitrator. The Courts below, therefore, fell in error in rejecting the application of the Appellant Under Section 8 of the Act. Reversing these judgments, we allow this appeal and as a consequence, application filed by the Appellant Under Section 8 in the suit is allowed thereby relegating the parties to the arbitration. Also consent by the other judge a mere allegation of fraud in the present case was not sufficient to detract from the obligation of the parties to submit their disputes to arbitration. A fresh line must be drawn to ensure the fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Radhakrishnan v. Maestro Engineers and Ors. (2010) 1 SCC 72 . This plea of the Respondents was sought to be controverted by the Appellant by arguing that aforesaid judgment was found to be per incuriam by this Court in Swiss Timing Ltd. v. Commonwealth Games 2010 Organising Committee (2014) 6 SCC 677 , wherein the application Under Section 11 of the Act was allowed holding that such a plea of fraud can be adequately taken care of even by the arbitrator. It was, thus, argued that the parties were bound by the arbitration agreement and there was no reason to file the civil suit. The trial court, however, dismissed the application of the Appellant herein by its order dated 25.04.2014, relying upon the judgment in N. Radhakrishnan. 3. Feeling aggrieved by this order, the Appellant preferred revision petition before the High Court repeating his contention that judgment in N. Radhakrishnan was held to be per incuriam and, therefore, trial court had committed jurisdictional error in rejecting the application of the Appellant Under Section 8 of the Act. Brushing aside this plea, the High Court has also chosen to go by the dicta laid down in N. Radhakrishnan with the observation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r ₹ 10,00,050/- dated 17.06.2010 from the bank account in the name of 'Hotel Arunagiri' in favour of his son without the knowledge and consent of the other partners and in this manner, the money was siphoned off and misappropriated from the common fund. It is further alleged that the Appellant kept the hotel account books with him and did not show it to the Respondents for their examination. The Respondents sent legal notices but it did not deter the Appellant to continue to act in the same manner by not depositing the day to day collections in the account. It is also alleged that Appellant's wife's younger brother one Dhanapalraj was a member of Bar Council of Tamil Nadu and was also a Vice-Chairman of All India Bar Council, New Delhi. In Chennai, the Central Bureau of Investigation (C.B.I.) raided the houses of the said Dhanapalraj and his co-brother Chandrasekaran and seized ₹ 45,00,000/- cash from them. As Dhanapalraj was aware of the disputes between the Appellant and the Respondents in respect of the 'Hotel Arunagiri', a false statement has been given by him before C.B.I. to the effect that the seized money of ₹ 45 lakhs belonged to & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f pronouncements have been rendered laying down the scope of judicial intervention, in cases where there is an arbitration clause, with clear and unambiguous message that in such an event judicial intervention would be very limited and minimal. However, the Act contains provisions for challenging the arbitral awards. These provisions are Section 34 and Section 48 of the Act. Section 34(2)(b) and Section 48(2) of the Act, inter alia, provide that an arbitral award may be set aside if the Court finds that the 'subject matter of the dispute is not capable of settlement by arbitration under the law for the time being in force.' Even when such a provision is interpreted, what is to be shown is that there is a law which makes subject matter of a dispute incapable of settlement by arbitration. The aforesaid position in law has been culled out from the combined readings of Sections 5, 16 and 34 of the Act. When arbitration proceedings are triggered by one of the parties because of the existence of an arbitration agreement between them, Section 5 of the Act, by a non-obstante clause, provides a clear message that there should not be any judicial intervention at that stage scuttling ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ral proceedings may raise the question of jurisdiction of the arbitrator as well as the objection on the ground of non-existence of any arbitration agreement in the so-called dispute in question, and on such an objection being raised, the arbitrator would do well in disposing of the same as a preliminary issue so that it may not be necessary to go into the entire gamut of arbitration proceedings. Aforesaid is the position when Arbitral Tribunal is constituted at the instance of one of the parties and other party takes up the position that such proceedings are not valid in law. 8. What would be the position in case a suit is filed by the Plaintiff and in the said suit the Defendant files an application Under Section 8 of the Act questioning the maintainability of the suit on the ground that parties had agreed to settle the disputes through the means of arbitration having regard to the existence of an arbitration agreement between them? Obviously, in such a case, the Court is to pronounce upon arbitrability or non-arbitrability of the disputes. 9. In the instant case, there is no dispute about the arbitration agreement inasmuch as there is a specific arbitration Clause in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ged with fraud sought reference of the disputes to arbitration. The Court held that in a case where fraud is charged, the Court will in general refuse to send the dispute to arbitration. But where the objection to arbitration is by a party charging the fraud, the Court will not necessarily accede to it and would never do so unless a prima facie case of fraud is proved. 12. The aforesaid judgment was followed by this Court in N. Radhakrishnan while considering the matter under the present Act. In that case, the Respondent had instituted a suit against the Appellant, upon which the Appellant filed an application Under Section 8 of the Act. The applicant made serious allegations against the Respondents of having committed malpractices in the account books, and manipulation of the finances of the partnership firm. This Court held that such a case cannot be properly dealt with by the arbitrator, and ought to be settled by the Court, through detailed evidence led by both parties. 13. When the case involves serious allegations of fraud, the dicta contained in the aforesaid judgments would be understandable. However, at the same time, mere allegation of fraud in the pleadings by on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1) 5 SCC 532 . In this case, one of the questions that had arisen for determination was, in the context of Section 8 of the Act, as to whether the subject matter of the suit was 'arbitrable' i.e. capable of being adjudicated by a private forum (Arbitral Tribunal). In this context, the Court carried out detailed discussion on the term 'arbitrability' by pointing out three facets thereof, viz.: 1) whether the disputes are capable of adjudication and settlement by arbitration? 2) whether the disputes are covered by the arbitration agreement? 3) whether the parties have referred the disputes to arbitration? 16. As we are concerned with the first facet of the arbitrability of dispute, on this aspect the Court pointed out that in those cases where the subject matter falls exclusively within the domain of public fora, viz. the Courts, such disputes would be non-arbitrable and cannot be decided by the Arbitral Tribunal but by the Courts alone. The justification and rationale given for adjudicating such disputes through the process of Courts, i.e. public fora, and not by Arbitral Tribunals, which is a private forum, is given by the court in the following manner: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty. Correspondingly, a judgment in personam refers to a judgment against a person as distinguished from a judgment against a thing, right or status and a judgment in rem refers to a judgment that determines the status or condition of property which operates directly on the property itself. (Vide Black's Law Dictionary.) 38. Generally and traditionally all disputes relating to rights in personam are considered to be amenable to arbitration; and all disputes relating to rights in rem are required to be adjudicated by courts and public tribunals, being unsuited for private arbitration. This is not however a rigid or inflexible rule. Disputes relating to subordinate rights in personam arising from rights in rem have always been considered to be arbitrable. 17. The Law Commission has taken note of the fact that there is divergence of views between the different High Courts where two views have been expressed, one is in favour of the civil court having jurisdiction in cases of serious fraud and the other view encompasses that even in cases of serious fraud, the Arbitral Tribunal will Rule on its own jurisdiction. It may be pertinent here to reproduce the observations of the Law ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a distinction in cases where there are allegations of serious fraud and fraud simplicitor. It, thus, follows that those cases where there are serious allegations of fraud, they are to be treated as non-arbitrable and it is only the civil court which should decide such matters. However, where there are allegations of fraud simplicitor and such allegations are merely alleged, we are of the opinion it may not be necessary to nullify the effect of the arbitration agreement between the parties as such issues can be determined by the Arbitral Tribunal. 19. Before we apply the aforesaid test to the facts of the present case, a word on the observations in Swiss Timing Ltd.' s case to the effect that judgment of N. Radhakrishnan was per incuriam, is warranted. In fact, we do not have to labour on this aspect as this task is already undertaken by this Court in State of West Bengal and Ors. v. Associated Contractors (2015) 1 SCC 32 . It has been clarified in the aforesaid case that Swiss Timings Ltd . was a judgment rendered while dealing with Section 11(6) of the Act and Section 11 essentially confers power on the Chief Judge of India or the Chief Justice of the High Court as a d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f cases as non-arbitrable. Such categories of non-arbitrable subjects are carved out by the Courts, keeping in mind the principle of common law that certain disputes which are of public nature, etc. are not capable of adjudication and settlement by arbitration and for resolution of such disputes, Courts, i.e. public fora, are better suited than a private forum of arbitration. Therefore, the inquiry of the Court, while dealing with an application Under Section 8 of the Act, should be on the aforesaid aspect, viz. whether the nature of dispute is such that it cannot be referred to arbitration, even if there is an arbitration agreement between the parties. When the case of fraud is set up by one of the parties and on that basis that party wants to wriggle out of that arbitration agreement, a strict and meticulous inquiry into the allegations of fraud is needed and only when the Court is satisfied that the allegations are of serious and complicated nature that it would be more appropriate for the Court to deal with the subject matter rather than relegating the parties to arbitration, then alone such an application Under Section 8 should be rejected. 21. When we apply the aforesaid p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith the reasons contained in His Lordship's judgment while adding some of my own. 25. The issue which arises in these proceedings has generated a considerable degree of uncertainty in the law of arbitration in India. This is an area of law where the intervention of this Court is needed to ensure that a cloud on the efficacy of arbitral proceedings to resolve issues of fraud is resolved conclusively. The litigative uncertainty which the discourse has produced is best set at rest for nothing is as destructive of legitimate commercial expectations than a state of unsettled legal precept. 26. The Arbitration and Conciliation Act, 1996 does not in specific terms exclude any category of disputes-civil or commercial-from arbitrability. Intrinsic legislative material is in fact to the contrary. Section 8 contains a mandate that where an action is brought before a judicial authority in a matter which is the subject of an arbitration agreement, parties shall be referred by it to arbitration, if a party to or a person claiming through a party to the arbitration agreement applies not later than the date of submitting the first statement on the substance of the dispute. The only excep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing in force . Clearly, therefore, the Act contemplates and acknowledges that before it can be held that a particular subject matter is not capable of settlement by arbitration, such a consequence must arise under the law for the time being in force. 29. Ordinarily every civil or commercial dispute whether based on contract or otherwise which is capable of being decided by a civil court is in principle capable of being adjudicated upon and resolved by arbitration subject to the dispute being governed by the arbitration agreement unless the jurisdiction of the Arbitral Tribunal is excluded either expressly or by necessary implication. In Booz-Allen and Hamilton Inc. v. SBI Home Finance Ltd. (2011) 5 SCC 532, this Court held that adjudication of certain categories of proceedings is reserved by the legislature exclusively for public fora as a matter of public policy. Certain other categories of cases, though not exclusively reserved for adjudication by courts and tribunals may by necessary implication stand excluded from the purview of private fora. This Court set down certain examples of non-arbitrable disputes such as: (i) Disputes relating to rights and liabilities which gi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Act, 1986, this Court held in Skypak Courier Ltd. v. Tata Chemical Ltd. (2000) 5 SCC 294, that the existence of an arbitration Clause will not be a bar to the entertainment of a complaint by a forum under the Consumer Protection Act, 1986 since the remedy provided under the law is in addition to the provisions of any other law for the time being in force. This was reiterated in National Seeds Corporation Ltd. v. M. Madhusudhan Reddy (2012) 2 SCC 506, and Rosedale Developers Pvt. Ltd. v. Aghore Bhattacharya (2015)1 WBLR (SC) 385. It was observed that the remedy is merely optional and is in addition to and not in derogation of the provisions of any other law for the time being in force. 32. Hence, in addition to various classes of disputes which are generally considered by the courts as appropriate for decision by public fora, there are classes of disputes which fall within the exclusive domain of special fora under legislation which confers exclusive jurisdiction to the exclusion of an ordinary civil court. That such disputes are not arbitrable dovetails with the general principle that a dispute which is capable of adjudication by an ordinary civil court is also capable of bein ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... court, that would be a sufficient cause for the court not to order an arbitration agreement to be filed and not to make the reference.... In our view and relying on the aforesaid observations of this Court in the aforesaid decision and going by the ratio of the above mentioned case, the facts of the present case does not warrant the matter to be tried and decided by the Arbitrator, rather for the furtherance of justice, it should be tried in a court of law which would be more competent and have the means to decide such a complicated matter involving various questions and issues raised in the present dispute. The above extract from the judgment in N. Radhakrishnan relies extensively on the view propounded in Abdul Kadir (supra). The decision in Abdul Kadir arose under the Arbitration Act, 1940 and was in the context of the provisions of Section 20. In Abdul Kadir, this Court emphasized that Sub-section (4) of Section 20 of the Arbitration Act, 1940 left a wide discretion in the court. In contrast, the scheme of the Act of 1996 has made a radical departure from the position under the erstwhile enactment. A marked distinction is made in Section 8 where no option has been left ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y be conducted by such offices and in a manner so specified in the said Act, and it is not open to the Appellant to arrogate to itself such statutory power of search and seizure by relying on some contractual terms in the Dealership Agreement. It is further argued that such disputes involving penal consequences can only be tried by a court of competent jurisdiction and cannot be decided by an arbitrator..... 20. Having considered the above arguments addressed on behalf of the Respondent as also the findings of the courts below, we are of the opinion that the same cannot be accepted because the Appellant is neither exercising the power of search and seizure conferred on a competent authority under the 1985 Act nor does the Dealership Agreement contemplate the arbitrator to exercise the power of a criminal court while arbitrating on a dispute which has arisen between the contracting parties. This is clear from the terms of the Dealership Agreement. (Id. at p. 19-20) In the view of this Court, the dispute between the parties was clearly referable to the terms of the contract and did not entrench upon the legislative provisions contained in the Standards of Weights and Measures ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f two judges of this Court in Sundaram Finance Ltd. v. T. Thankam AIR 2015 1303, the same position in regard to the mandate of Section 8 has been reiterated. The earlier decisions in Anand Gajapathi Raju, Pink City and in Branch Manager, Magma Leasing and Finance Ltd. v. Potluri Madhvilata (2009) 10 SCC 103, emphasizing the mandate of Section 8, have been reaffirmed. This Court has held: Once an application in due compliance of Section 8 of the Arbitration Act is filed, the approach of the civil court should be not to see whether the court has jurisdiction. It should be to see whether its jurisdiction has been ousted. There is a lot of difference between the two approaches. Once it is brought to the notice of the court that its jurisdiction has been taken away in terms of the procedure prescribed under a special statute, the civil court should first see whether there is ouster of jurisdiction in terms or compliance of the procedure under the special statute. The general law should yield to the special law-generalia specialibus non derogant. In such a situation, the approach shall not be to see whether there is still jurisdiction in the civil court under the general law. Such app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd of fraud and criminal wrongdoing is raised, it is for the judicial authority to carefully sift through the materials for the purpose of determining whether the defence is merely a pretext to avoid arbitration. It is only where there is a serious issue of fraud involving criminal wrongdoing that the exception to arbitrability carved out in N. Radhakrishnan may come into existence. Allegations of fraud are not alien to ordinary civil courts. Generations of judges have dealt with such allegations in the context of civil and commercial disputes. If an allegation of fraud can be adjudicated upon in the course of a trial before an ordinary civil court, there is no reason or justification to exclude such disputes from the ambit and purview of a claim in arbitration. Parties who enter into commercial dealings and agree to a resolution of disputes by an arbitral forum exercise an option and express a choice of a preferred mode for the resolution of their disputes. Parties in choosing arbitration place priority upon the speed, flexibility and expertise inherent in arbitral adjudication. Once parties have agreed to refer disputes to arbitration, the court must plainly discourage and disc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed (as the case might be) and then, if the contract is held to be valid, required the arbitrator to resolve the issues that have arisen. This is indeed a powerful reason for a liberal construction. Arbitration must provide a one-stop forum for resolution of disputes. The Court of Appeal held that if arbitrators can decide whether a contract is void for initial illegality, there is no reason why they should not decide whether a contract is procured by bribery, just as much as they can decide whether a contract has been vitiated by misrepresentation or non-disclosure. The judgment of the Court of Appeal was affirmed by the House of Lords in Premium Nafta Products Ltd. (20th Defendant) v. Fily Shipping Co. Ltd. [2007] UKHL 40. The House of Lords held that claims of fraudulent inducement of the underlying contract (i.e. alleged bribery of one party's officer to accept uncommercial terms) did not impeach the arbitration Clause contained within that contract. The Law Lords reasoned that if (as in this case) the allegation is that the agent exceeded his authority by entering into a main agreement in terms which were not authorized or for improper reasons, that is not necessarily a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ether the parties, as rational businessmen, were likely to have intended that only some of the questions arising out of their relationship were to be submitted to arbitration and others were to be decided by national courts. Could they have intended that the question of whether the contract was repudiated should be decided by arbitration but the question of whether it was induced by misrepresentation should be decided by a court? If, as appears to be generally accepted, there is no rational basis upon which businessmen would be likely to wish to have questions of the validity or enforceability of the contract decided by one tribunal and questions about its performance decided by another, one would need to find very clear language before deciding that they must have had such an intention. While affirming the judgment of the Court of Appeal, the House of Lords held: 13. In my opinion the construction of an arbitration Clause should start from the assumption that the parties, as rational businessmen, are likely to have intended any dispute arising out of the relationship into which they have entered or purported to enter to be decided by the same tribunal. The Clause should be c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 43. The Arbitration and Conciliation Act, 1996, should in my view be interpreted so as to bring in line the principles underlying its interpretation in a manner that is consistent with prevailing approaches in the common law world. Jurisprudence in India must evolve towards strengthening the institutional efficacy of arbitration. Deference to a forum chosen by parties as a complete remedy for resolving all their claims is but part of that evolution. Minimising the intervention of courts is again a recognition of the same principle. 44. Academic literature on the law of arbitration points in the same direction. In Russell on Arbitration3, the doctrine of separability has been summarized in the following extract: The doctrine of separability. An arbitration agreement specifies the means whereby some or all disputes under the contract in which it is contained are to be resolved. It is however separate from the underlying contract: An arbitration Clause in a commercial contract ... is an agreement inside an agreement. The parties make their commercial bargain ... but in addition agree on a private tribunal to resolve any issues that may arise between them. This is known as the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... distinguished from the parties' arbitration clause) was fraudulently induced have generally been held not to compromise the substantive validity of an arbitration Clause included in the contract. The fact that one party may have fraudulently misrepresented the quality of its goods, services, or balance sheet generally does nothing to impeach the parties' agreed dispute resolution mechanism. As a consequence, only fraud or fraudulent inducement directed at the agreement to arbitrate will, as a substantive matter, impeach that agreement. These circumstances seldom arise: as a practical matter, it is relatively unusual that a party will seek to procure an agreement to arbitrate by fraud, even in those cases where it may have committed fraud in connection with the underlying commercial contract. (See also in this context, International Arbitration Law and Practice by Mauro Rubino-Sammartano)6 47. For the above reasons, I agree with the eloquent judgment of my learned brother in coming to the conclusion that a mere allegation of fraud in the present case was not sufficient to detract from the obligation of the parties to submit their disputes to arbitration. I also agree ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
