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IN THE HIGH COURT OF JUDICATURE AT BOMBAY
N.J.Jamadar, J.
Atul And Arkade Realty – Appellant
Versus
I.A. And I.C. Private Limited – Respondent
Arbitration Application No. 72 of 2013
Decided On : 06-05-2022
ARBITRATION - APPOINTMENT OF ARBITRATOR - APPLICATION UNDER SECTION 11 OF THE ARBITRATION AND CONCILIATION ACT, 1996 - SCOPE OF ENQUIRY - WHETHER THE ARBITRATION AGREEMENT IS NON-EXISTENT, INVALID OR THE DISPUTES ARE NON-ARBITRABLE - COURT TO ADOPT A 'WHEN IN DOUBT, DO REFER' APPROACH - ALLEGATIONS OF FRAUD AND FORGERY - DISTINCTION BETWEEN SERIOUS ALLEGATIONS OF FRAUD AND ALLEGATIONS SIMPLICITOR - BURDEN LIES ON THE PARTY RESISTING ARBITRATION TO ESTABLISH THAT THE DISPUTE IS NOT ARBITRABLE - TESTS TO BE APPLIED IN ASSESSING THE PLEA OF FRAUD - COURT TO CONSIDER WHETHER THE FRAUD ALLEGED AFFECTS THE UNDERLYING CONTRACT, RENDERING IT VOID, OR WHETHER THE FRAUD IS RESTRICTED TO THE AFFAIRS OF THE PARTIES, INTER SE, WITHOUT ANY IMPLICATION IN THE PUBLIC DOMAIN - CIVIL ASPECT OF FRAUD IS CONSIDERED TO BE ARBITRABLE, WHILE THE CRIMINAL ASPECT OF FRAUD, WHICH ENTAILS PENAL CONSEQUENCES, CAN BE ADJUDICATED ONLY BY A COURT OF LAW.
Fact of the Case:
The Applicant, a partnership firm engaged in real estate development in Mumbai, entered into a Joint Venture Agreement with the Respondents, a company and its subsidiaries, for the development of a property owned by the Respondents. Disputes arose between the parties, and the Applicant invoked arbitration. The Respondents resisted the application, contending that the Joint Venture Agreement was not adequately stamped and was a false, forged, and fabricated document. The Court had earlier directed a pre-arbitration trial to determine the existence and chargeability of the document.
Finding of the Court:
The Court held that, in light of the development in law, the scope of enquiry under Section 11 of the Arbitration and Conciliation Act, 1996, is restricted to the examination of the existence of the arbitration agreement. The Court further held that the allegations of fraud and forgery made by the Respondents were not of such a nature as to render the arbitration agreement non-existent or invalid. The Court distinguished between serious allegations of fraud and allegations simplicitor, and held that the burden lies on the party resisting arbitration to establish that the dispute is not arbitrable. The Court also applied the tests laid down by the Supreme Court in Avitel Post Studioz Ltd. v. HSBC PI Holdings (Mauritius) Ltd. and Vidya Drolia v. Durga Trading Corporation to assess the plea of fraud. The Court found that the fraud alleged by the Respondents did not affect the underlying contract or have any implication in the public domain, and was therefore arbitrable.
Issues: 1. Whether the scope of enquiry under Section 11 of the Arbitration and Conciliation Act, 1996, is restricted to the examination of the existence of the arbitration agreement. 2. Whether the allegations of fraud and forgery made by the Respondents were of such a nature as to render the arbitration agreement non-existent or invalid.
Ratio Decidendi: The Court held that the scope of enquiry under Section 11 of the Arbitration and Conciliation Act, 1996, is restricted to the examination of the existence of the arbitration agreement. The Court further held that the allegations of fraud and forgery made by the Respondents were not of such a nature as to render the arbitration agreement non-existent or invalid. The Court distinguished between serious allegations of fraud and allegations simplicitor, and held that the burden lies on the party resisting arbitration to establish that the dispute is not arbitrable. The Court also applied the tests laid down by the Supreme Court in Avitel Post Studioz Ltd. v. HSBC PI Holdings (Mauritius) Ltd. and Vidya Drolia v. Durga Trading Corporation to assess the plea of fraud. The Court found that the fraud alleged by the Respondents did not affect the underlying contract or have any implication in the public domain, and was therefore arbitrable.
Final Decision: The Court allowed the Application and appointed a Sole Arbitrator to decide all the disputes and differences between the Applicant and the Respondents arising out of the Joint Venture Agreement dated 28th March, 2007. The Court also directed the Arbitrator to first decide, as a preliminary issue, as to whether the Joint Venture Agreement is a legal and valid instrument and whether the arbitration agreement exists between the parties.
JUDGMENT
1. This Application under Sec. 11 of the Arbitratnd Conciliation Act, 1996 ('the Act') is filed to appoint a retired Supreme Court or High Court Judge or any other person as a sole arbitrator to arbitrate all the disputes which have arisen in relation to a Joint Venture Agreement dtd. 28/3/2007.
2. This Application has remained pending before this Court on account peculiar facts and is taken up for hearing and disposal in view of the Order passed by the Supreme Court in Special Leave Petition (Civil) Diary No.24275 of 2021 dtd. 25/10/2021.
3. The background facts necessary for the determination of this Application are as under : The Applicant is a Partnership firm. It is engaged in the business of real estate development in Mumbai. The Respondent No.3 is a company registered under the Companies Act, 1956. Respondent Nos.1 and 2 are the subsidiary companies of Respondent No.3. Respondent Nos.1 and 2 collectively owned the lands admeasuring 22358.48 sq. meters with super structures thereon at Village Balkum, Dist. Thane ('the subject property'). The Respondent Nos.1 and 2 had leased the subject property to Respondent No.3 for a period upto 4 th April, 2007. Respondent No.3 had expressed its unwillingness to renew the lease.
4. In the year 2007, the Respondent No.3 was declared a sick company by the Board for Industrial Finance and Reconstruction (BIFR). The Respondent No.3 owed a sum of Rs.69.85 Crores to the banks and financial institutions. The creditors agreed to accept a sum of Rs.23.00 Crores under the One Time Settlement scheme in full and final settlement of their dues and claims, if the said amount was paid by 31 st March, 2007. Negotiations were held between Shri Rajendra Parikh, the then Managing Director of Respondent No.3, and the Applicant. Pursuant to the negotiations, the Applicant agreed to bring in the said sum of Rs.23.00 Crores with the understanding that the Applicant and Respondents would enter into a joint venture agreement for the development of the subject property. Accordingly, a joint venture agreement dtd. 28/3/2007 came to be executed between the Applicant as a developer, Respondent Nos.1 and 2 as the owners and the Respondent No.3 as a confirming party / lessee, whereunder Respondent Nos.1 and 2 granted rights to the Applicant to develop the subject property.
5. The material terms of the joint venture agreement, according to the Applicant, were : (i) Respondent Nos.1 and 2 agreed to discharge the liabilities of Respondent No.3 to the banks / financial institutions to the extent of Rs.23.00 Crores so as to clear the encumbrances on the subject property. (ii) The Applicant agreed to provide the Respondent Nos.1 and 2 with the funds of Rs.23.00 Crores as and by way of interest free security deposit for its onward remittance to the creditors of Respondent No.3 in full and final discharge of their claims and dues. (iii) The Applicant was to develop the subject property at its costs/expenses. (iv) The said amount of Rs.23.00 Crores was to be repaid to the Applicant by the Respondents from the profits of the joint venture. (v) The net sale proceeds, after deducting all expenses including costs of constructions etc., were to be shared by the Applicant and Respondents in the ratio of 61:39. (vi) The Respondent No.3 would remove its plant, machinery and employees from the subject property and obtain all necessary regulatory permissions.
6. The joint venture agreement also contained a mechanism for resolution of the disputes through arbitration in accordance with the Act of 1996.
7. The Applicant claimed that pursuant to the joint venture agreement, the Applicant paid a sum of Rs.19,27,06,000.00 on 28 th March, 2007 to the Stressed Assets Stabilization Fund (SASF). Further payment of Rs.31,74,000.00 was made to SASF on 3/5/2007. On 29/3/2007 the Applicant claimed to have paid a sum of Rs.41,20,000.00 to the Canara Bank and Rs.31,74,000.00 to the State Bank of Bikaner. A further sum of Rs.3.00 Crores wad
The scope of enquiry under Section 11 of the Arbitration and Conciliation Act, 1996, is restricted to the examination of the existence of the arbitration agreement. The burden lies on the party resis....
Appointment of Arbitrator – When existence of arbitration agreement itself is in serious dispute and requires adjudication, appointment of Arbitrator would be premature and legally impermissible.
The arbitration agreement binds all parties, including non-signatories, and disputes must be referred to arbitration despite objections on limitation and jurisdiction.
Point of Law : If an allegation of fraud can be adjudicated upon in course of a trial before an ordinary civil court, there is no reason or justification to exclude such disputes from ambit and purvi....
Allegations of fraud and forgery do not inherently preclude the jurisdiction of an arbitral tribunal unless they directly impinge upon the arbitration agreement itself.
The grounds of fraud and forgery alleged in the plaint do not make out any case which would prevent the matter from being decided by an Arbitral Tribunal. The Trial Court and the Appellate Court acte....
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