TaxTMI 
TaxTMI 
2016 (10) TMI 1147
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....rai (Tamil Nadu) seeking a declaration that as partners they are entitled to participate in the administration of the said hotel. Relief of permanent injunction restraining the Defendant (Appellant herein) from interfering with their right to participate in the administration of the hotel has also been sought. This suit was filed in the year 2012. The Appellant, after receiving the summons in the said suit, moved the application Under Section 8 of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as the 'Act') raising an objection to the maintainability of the suit in view of arbitration agreement between the parties as contained in Clause (8) of the Partnership Deed dated 01.04.1994 and submitted that as per the provisions of Section 8 of the Act, it is mandatory for the Court to refer the dispute to the arbitrator. This application was resisted by the Respondents with the submission that since acts of fraud were attributed to the Appellant by the Plaintiffs/Respondents, such serious allegations of fraud could not be adjudicated upon by the Arbitral Tribunal and the appropriate remedy was to approach the civil court by filing a suit, and that was exactly ....
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....ation of the Respondents, as contained in the plaint, that the subject matter of the suit 'Hotel Arunagiri' was managed and administered by their father in a disciplined manner till his death. After his death, the Appellant being the eldest brother wanted to take the administration of 'Hotel Arunagiri' with the assurance that he will be following the foot prints of his father. The Respondents had no other alternative except to accept the said proposal in good faith. It was, at that time resolved by all the brothers, that the daily collection of money from 'Hotel Arunagiri' should be deposited on the very next day into the hotel Current Account No. 23 maintained with the Indian Overseas Bank, Tirunelveli Junction. It was agreed that about rupees ten to fifteen thousand may be kept as cash for urgent expenses. The Respondents reposed confidence with the Appellant and believed that his administration would never be detrimental to the smooth running of the business. On the aforesaid understanding, administration of the hotel was taken over by the Appellant. But he did not adhere to the said understanding and failed to deposit day to day collection into the bank ....
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.... in the circumstances of this case. 5. As already mentioned above, the Appellant filed the application Under Section 8 of the Act for rejection of the plaint and reference of the dispute to an arbitrator in which attempt the Appellant has not succeeded for the reasons stated hereinabove. 6. The two courts below have preferred to adopt the dicta laid down in N. Radhakrishnan while dismissing the application of the Appellant Under Section 8 of the Act holding that as there are serious allegations as to fraud and malpractices committed by the Appellant in respect of the finances of the partnership firm and the case does not warrant to be tried and decided by the arbitrator and a civil court would be more competent which has the requisite means to decide such complicated matter. In this backdrop, it would be appropriate to revisit the law on this aspect before adverting to the question as to whether the approach of the High Court was correct in following the judgment in N. Radhakrishnan in the instant case. 7. In this behalf, we have to begin our discussion with the pertinent observation that insofar as the Arbitration and Conciliation Act, 1996 is concerned, it does not make ....
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....ussion by this Court in Kvaerner Cementation India Ltd. v. Bajranglal Agarwal and Anr. (2012) 5 SCC 214: 3. There cannot be any dispute that in the absence of any arbitration Clause in the agreement, no dispute could be referred for arbitration to an Arbitral Tribunal. But, bearing in mind the very object with which the Arbitration and Conciliation Act, 1996 has been enacted and the provisions thereof contained in Section 16 conferring the power on the Arbitral Tribunal to Rule on its own jurisdiction, including ruling on any objection with respect to existence or validity of the arbitration agreement, we have no doubt in our mind that the civil court cannot have jurisdiction to go into that question. 4. A bare reading of Section 16 makes it explicitly clear that the Arbitral Tribunal has the power to Rule on its own jurisdiction even when any objection with respect to existence or validity of the arbitration agreement is raised, and a conjoint reading of Sub-sections (2), (4) and (6) of Section 16 would make it clear that such a decision would be amenable to be assailed within the ambit of Section 34 of the Act. 5. In this view of the matter, we see no i....
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....9; is a knowing misrepresentation of the truth or concealment of a material fact to induce another to act to his detriment. Fraud can be of different forms and hues. Its ingredients are an intention to deceive, use of unfair means, deliberate concealment of material facts, or abuse of position of confidence. The Black's Law Dictionary defines 'fraud' as a concealment or false representation through a statement or conduct that injures another who relies on it2. However, the moot question here which has to be addressed would be as to whether mere allegation of fraud by one party against the other would be sufficient to exclude the subject matter of dispute from arbitration and decision thereof necessary by the civil court. 11. In Abdul Kadir Shamsuddin Bubere v. Madhav Prabhakar Oak AIR 1962 SC 406, serious allegations of fraud were held by the Court to be a sufficient ground for not making a reference to arbitration. Reliance in that regard was placed by the Court on a decision of the Chancery Division in Russell v. Russell (1880) 14 Ch D 471. That was a case where a notice for the dissolution of a partnership was issued by one of the partners, upon which the other pa....
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....nan as per incuriam by referring to the other judgments in the case of P. Anand Gajapathi Raju v. P.V.G. Raju (2000) 4 SCC 539 and Hindustan Petroleum Corporation. Ltd. v. Pinkcity Midway Petroleums (2003) 6 SCC 503. Two reasons were given in support which can be found in para 21 of the judgment which makes the following reading: 21. This judgment was not even brought to the note of the Court in N. Radhakrishnan's case. In my opinion, judgment in N. Radhakrishnan's case is per incuriam on two grounds; Firstly, the judgment in Hindustan Petroleum Corpn. Ltd., though referred has not been distinguished but at the same time is not followed also. The judgment in P. Anand Gajapathi Raju and Ors. Was not even brought to the notice of this Court. Therefore, the same has neither been followed nor considered. Secondly, the provision contained in Section 16 of the Arbitration Act, 1996 were also not brought to the notice by this Court. Therefore, in my opinion, the judgment in N. Radhakrishnan does not lay down the correct law and cannot be relied upon. 15. We shall revert to the question of per incuriam at a later stage. At this juncture, we may point out that the issue ....
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....have agreed upon arbitration as the forum for settlement of such disputes. 36. The well-recognised examples of non-arbitrable disputes are: (i) disputes relating to rights and liabilities which give rise to or arise out of criminal offences; (ii) matrimonial disputes relating to divorce, judicial separation, restitution of conjugal rights, child custody; (iii) guardianship matters; (iv) insolvency and winding-up matters; (v) testamentary matters (grant of probate, letters of administration and succession certificate); and (vi) eviction or tenancy matters governed by special statutes where the tenant enjoys statutory protection against eviction and only the specified courts are conferred jurisdiction to grant eviction or decide the disputes. 37. It may be noticed that the cases referred to above relate to actions in rem. A right in rem is a right exercisable against the world at large, as contrasted from a right in personam which is an interest protected solely against specific individuals. Actions in personam refer to actions determining the rights and interests of the parties themselves in the subject-matter of the case, whereas actions in rem refer to actions de....
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....h decision (which was based on the finding in Russel v. Russel [1880 14 Ch.D. 471]) is only an authority for the proposition that a party against whom an allegation of fraud is made in a public forum, has a right to defend himself in that public forum. Yet, following Radhakrishnan, it appears that issues of fraud are not arbitrable. 51. A distinction has also been made by certain High Courts between a serious issue of fraud and a mere allegation of fraud and the former has been held to be not arbitrable (See Ivory Properties and Hotels Private Ltd. v. Nusli Neville Wadia 2011 (2) Arb LR 479 (Bom); C.S. Ravishankar v. C.K. Ravishankar 2011 (6) Kar LJ 417). The Supreme Court in Meguin GMBH v. Nandan Petrochem Ltd. 2007 (5) R.A.J. 239 (SC), in the context of an application filed Under Section 11 has gone ahead and appointed an arbitrator even though issues of fraud were involved. Recently, the Supreme Court in its judgment in Swiss Timing Ltd. v. Organising Committee, Arb. Pet. No. 34/2013 dated 28.05.2014, in a similar case of exercising jurisdiction Under Section 11, held that the judgment in Radhakrishnan is per incuriam and, therefore, not good law. 18. A perusal of th....
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....e appreciation of the voluminous evidence that needs to be produced, the Court can sidetrack the agreement by dismissing application Under Section 8 and proceed with the suit on merits. It can be so done also in those cases where there are serious allegations of forgery/fabrication of documents in support of the plea of fraud or where fraud is alleged against the arbitration provision itself or is of such a nature that permeates the entire contract, including the agreement to arbitrate, meaning thereby in those cases where fraud goes to the validity of the contract itself of the entire contract which contains the arbitration Clause or the validity of the arbitration Clause itself. Reverse position thereof would be that where there are simple allegations of fraud touching upon the internal affairs of the party inter se and it has no implication in the public domain, the arbitration Clause need not be avoided and the parties can be relegated to arbitration. While dealing with such an issue in an application Under Section 8 of the Act, the focus of the Court has to be on the question as to whether jurisdiction of the Court has been ousted instead of focusing on the issue as to whether....
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....ere cash in the sum of Rs. 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. 22. 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. 23. At the same time, in order to save the time and having regard to the nature of the dispute, this Court appoints Hon'ble Ms. Justice Prabha Sridevan, a retired Judge of the Madras High Court, as the arbitrator. The arbitrator shall fix her own fee. No c....
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....27. Section 16 empowers the arbitral tribunal to Rule upon its own jurisdiction, including ruling on any objection with respect to the existence or validity of an arbitration agreement. Section 16(1)(b) stipulates that a decision by the arbitral tribunal that a contract is null and void shall not entail ipso jure the invalidity of the arbitration clause. Hence, the invalidity of the contract between the parties does not render the arbitration agreement invalid as a consequence of law. This recognises as inhering in the arbitrator the jurisdiction to consider whether the main contract (other than the arbitration clause) is null and void. The arbitration agreement survives for determining whether the contract in which the arbitration Clause is embodied is null and void, which would include voidability on the ground of fraud. The severability of the arbitration agreement is a doctrinal development of crucial significance. For, it leaves the adjudicatory power of the arbitral tribunal unaffected, over any objection that the main contract between the parties is affected by fraud or undue influence. 28. Section 34(2)(b) and Section 48(2) provide as one of the grounds for challenge to ....
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.... to be a right in rem for which proceedings in arbitration would not be maintainable. In Vimal Kishore Shah v. Jayesh Dinesh Shah, this Court added a seventh category of cases to the six non-arbitrable categories set out in Booz Allen, namely, disputes relating to trusts, trustees and beneficiaries arising out of a trust deed and the Trust Act. 30. In Natraj Studios (P) Ltd. v. Navrang Studios (1981) 2 SCR 466, a Bench of three judges of this Court dealt with the issue as to whether a dispute between a landlord and a tenant falling within the exclusive domain of the Court of Small Causes at Mumbai, to the exclusion of the civil court, is arbitrable. This Court held that the Bombay Rent Act is a welfare legislation aimed at a definite social objective of protecting tenants as a matter of public policy. The conferment of exclusive jurisdiction on certain courts was in pursuance of a specific social objective which the legislation seeks to achieve. Public policy, this Court held, requires that parties cannot be allowed to contract out of the legislative mandate which requires certain kinds of disputes to be resolved by special courts constituted under rent control legislation. Henc....
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....Bench of two judges of this Court held as follows: The High Court in its impugned judgment has rightly held that since the case relates to allegations of fraud and serious malpractices on the part of the Respondents, such a situation can only be settled in court through furtherance of detailed evidence by either parties and such a situation cannot be properly gone into by the Arbitrator. (I.d. at p. 7) The judgment accepted the submission of the Respondent that the Appellant having raised serious matters alleging criminal wrongdoing, such disputes ought to be adjudicated upon by the civil court: The learned Counsel appearing on behalf of the Respondents on the other hand contended that the Appellant had made serious allegations against the Respondents alleging that they had manipulated the accounts and defrauded the Appellant by cheating the Appellant of his dues, thereby warning the Respondents with serious criminal action against them for the alleged commission of criminal offences. In this connection, reliance was placed in a decision of this Court in the case of Abdul Kadir Shamsuddin Bubere v. Madhav Prabhakar Oak and Anr. [AIR 1962 SC 406] in which this C....
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....eement contained an arbitration agreement. In the course of an inspection the Appellant found a breach of the dealership agreement and sales of petroleum products were suspended. The Respondent instituted a suit before the ordinary civil court seeking declaratory reliefs in which the Appellant filed an application Under Section 8 of the Arbitration and Conciliation Act, 1996. The civil court rejected the application and the High Court in revision affirmed the view. The submission which weighed with the High Court was that the allegation of tampering of weights and of measurement seals could only be adjudicated upon under the Standards of Weights and Measures (Enforcement) Act, 1985 and hence such a dispute was not arbitrable. This Court held that once the arbitration agreement was admitted, in view of the mandatory language of Section 8, the dispute ought to have been referred to arbitration. The judgment of this Court dealt with the submission that since the allegations in the case related to an element of criminal wrongdoing, the dispute was not arbitrable. Rejecting this submission, this Court held as follows: 19. It was argued before the courts below as also before us ....
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....roducts to an erring dealer. The power exercised by the Appellant in such a situation is a contractual power under the agreement and not a statutory one under the 1985 Act. The existence of dual procedure; one under the criminal law and the other under the contractual law is a well-accepted legal phenomenon in the Indian jurisprudence....... Therefore, in our opinion, the courts below have erred in coming to the conclusion that the Appellant did not have the legal authority to investigate and proceed against the Respondent for its alleged misconduct under the terms of the Dealership Agreement. We are also of the opinion that if the Appellant is satisfied that the Respondent is indulging in short-supply or tampering with the seals, it will be entitled to initiate such action as is contemplated under the agreement like suspending or stopping the supply of petroleum products to such erring dealer. If in that process any dispute arises between the Appellant and such dealer, the same will have to be referred to arbitration as contemplated under Clause 40 of the Dealership Agreement. (Id. at p. 23-24) 35. Hence, allegations of criminal wrongdoing or of statutory violation wou....
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....raud. First and foremost, it is necessary to emphasise that the judgment in N. Radhakrishnan does not subscribe to the broad proposition that a mere allegation of fraud is ground enough not to compel parties to abide by their agreement to refer disputes to arbitration. More often than not, a bogey of fraud is set forth if only to plead that the dispute cannot be arbitrated upon. To allow such a plea would be a plain misreading of the judgment in N. Radhakrishnan. As I have noted earlier, that was a case where the Appellant who had filed an application Under Section 8 faced with a suit on a dispute in partnership had raised serious issues of criminal wrongdoing, misappropriation of funds and malpractice on the part of the Respondent. It was in this background that this Court accepted the submission of the Respondent that the arbitrator would not be competent to deal with matters "which involved an elaborate production of evidence to establish the claims relating to fraud and criminal misappropriation". Hence, it is necessary to emphasise that as a matter of first principle, this Court has not held that a mere allegation of fraud will exclude arbitrability. The burden must lie heavil....
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.... in imparting business efficacy to arbitral agreements. The Court of Appeal held that: For our part we consider that the time has now come for a line of some sort to be drawn and a fresh start made at any rate for cases arising in an international commercial context. Ordinary business men would be surprised at the nice distinctions drawn in the cases and the time taken up by argument in debating whether a particular case falls within one set of words or another very similar set of words. If business men go to the trouble of agreeing that their disputes be heard in the courts of a particular country or by a tribunal of their choice they do not expect (at any rate when they are making the contract in the first place) that time and expense will be taken in lengthy argument about the nature of particular causes of action and whether any particular cause of action comes within the meaning of the particular phrase they have chosen in their arbitration clause. If any business man did want to exclude disputes about the validity of a contract, it would be comparatively simple to say so... One of the reasons given in the cases for a liberal construction of an arbitration Clause is t....
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.... the court is to impart to that commercial understanding a sense of business efficacy. 40. Lord Hoffmann, speaking for the House of Lords in Premium Nafta Products, placed the matter eloquently in the following observations: In approaching the question of construction, it is therefore necessary to inquire into the purpose of the arbitration clause. As to this, I think there can be no doubt. The parties have entered into a relationship, an agreement or what is alleged to be an agreement or what appears on its face to be an agreement, which may give rise to disputes. They want those disputes decided by a tribunal which they have chosen, commonly on the grounds of such matters as its neutrality, expertise and privacy, the availability of legal services at the seat of the arbitration and the unobtrusive efficiency of its supervisory law. Particularly in the case of international contracts, they want a quick and efficient adjudication and do not want to take the risks of delay and, in too many cases, partiality, in proceedings before a national jurisdiction. 41. Lord Hoffmann held that if this is the purpose underlying an agreement to arbitrate, it would be inconceivable ....
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.... of the main agreement does not ipso jure result in the invalidity of the arbitration agreement. Parties having agreed to refer disputes to arbitration, the plain meaning and effect of Section 8 must ensue. 42. In the United States, the Supreme Court in Buckeye Check Cashing, Inc. v. Cardegna 546 U.S. 440 (U.S.S. Ct. 2006), followed its earlier decisions in Prima Paint Corporation v. Flood and Conklin Manufacturing Co. 388 US 395 (U.S.S. Ct. 1967), and in Southland Corporation v. Keating 465 U.S. 1 (1984). Justice Scalia, who delivered the judgment of the Supreme Court, summarized the position thus: Prima Paint and Southland answer the question presented here by establishing three propositions. First, as a matter of substantive federal arbitration law, an arbitration provision is severable from the remainder of the contract. Second, unless the challenge is to the arbitration Clause itself, the issue of the contract's validity is considered by the arbitrator in the first instance. Third, this arbitration law applies in state as well as federal courts. The parties have not requested, and we do not undertake, reconsideration of those holdings. Applying them to this cas....
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....f arbitration, as Section 107(2) of the Arbitration Act makes clear. The Act expressly recognises that an arbitral tribunal may decide an issue of fraud, and the courts have acknowledged that an arbitrator has jurisdiction to decide allegations of bribery against a party to an arbitration agreement. Even in this context, however, an arbitral tribunal does not have jurisdiction to impose criminal sanctions on a party, even if bribery of a public officer is established; its power is limited to the civil consequences of that conduct. Under Section 24(2) of the Arbitration Act, 1950, the court could revoke the authority of a tribunal to deal with claims involving issues of fraud and determine those claims itself. This provision has been repealed in Section 107(2) of the Arbitration Act, 1996. 45. Similarly, Redfern and Hunter on International Arbitration4 contains the following statement of legal position in relation to arbitrability of matters involving fraud: (vi) Fraud Where allegations of fraud in the procurement or performance of a contract are alleged, there appears to be no reason for the arbitral tribunal to decline jurisdiction. Indeed, in the heat of b....