OMP 205/1997 & RSA 131/2002 Page 1 of 25 *IN THE HIGH COURT OF DELHI AT NEW DELHI + OMP 205/1997 & RSA 131/2002 %11.02.2009 Date of decision: 11.02.2009 SHRI ROSHAN LAL GUPTA ….… Petitioner Through: Mr Girish Aggarwal with Ms Mugdha Pandey, Advocates Versus SHRI PARASRAM HOLDINGS PVT LTD & ANR ...... Respondents Through: Mr Gagan Gupta with Mr Raman Kapoor, Advocates for Respondents 1& 2 in RSA 131/2002 and for Respondent No.1 in OMP 205/1997. Mr Sanjay Bhatt with Mr Abhishek Kumar, Advocates for the respondent No.3 in RSA 131/2002. CORAM :- HON’BLE MR. JUSTICE RAJIV SAHAI ENDLAW 1. Whether reporters of Local papers may be allowed to see the judgment? Yes 2. To be referred to the reporter or not? Yes 3. Whether the judgment should be reported in the Digest? Yes RAJIV SAHAI ENDLAW, J. 1. The appellant/petitioner on 9th January, 1997 instituted in the court of the Senior Civil Judge, Delhi a suit for declaration and permanent injunction from which the Regular Second Appeal (RSA) has arisen. It was the case of the petitioner/appellant in the plaint that he is a retired officer from the IDBI; that the respondent No.1 Shri Parasram Holdings Pvt Ltd (hereinafter called the “Stock Broker”) is carrying on business as a stock broker and is a member of the (respondent No.3 in the RSA) M/s National Stock Exchange of India Ltd (hereinafter called the “stock exchange”); that the OMP 205/1997 & RSA 131/2002 Page 2 of 25 petitioner/appellant had purchased and sold some shares through the stock broker during the period from 3rd July, 1996 to 9th July, 1996 and in which transaction he had suffered losses and had squared up his account vide his cheque dated 10th July, 1996 and had thereafter stopped purchase/sale of shares through the stock broker or anyone else; that the petitioner/appellant on 22nd December, 1996 received notice from the stock exchange of the statement of claim received by the stock exchange from the stock broker and requiring the petitioner/appellant to submit his defence thereto together with fee of arbitration as well as his nominees from the panel of arbitrators of the stock exchange; that the stock broker had filed a totally false claim against the petitioner/appellant with the stock exchange and on the basis of fabricated and forged documents; that photocopy of the Member Constituent Agreement received by the petitioner/appellant as part of the claim of the stock broker though purported to be signed by the petitioner/appellant was, in fact, not signed by him and never executed by him and had been forged and fabricated to cause the stock exchange to entertain the claim of the stock broker for arbitration; that the petitioner/appellant had never authorized the transactions on the basis whereof the claim was made and had not made any part payment, after adjusting which the balance was being claimed by the stock broker. 2. The petitioner/appellant further claimed that he had, prior to the institution of the suit, served a legal notice on the stock broker and the stock exchange calling upon them to withdraw the claim and the request for arbitration but no reply had been received thereto. The petitioner / appellant apprehending that the stock broker and the stock exchange will continue with the arbitration proceedings, instituted the suit for the relief of declaration that the Member OMP 205/1997 & RSA 131/2002 Page 3 of 25 Constituent Agreement relied upon by the stock broker and providing for arbitration of the stock exchange was fabricated and forged and thus void and for perpetual injunction restraining the stock exchange from taking any arbitration proceedings in pursuance to the notice aforesaid served on the petitioner/appellant. 3. Summons/notice of the suit/application for interim relief were issued on 9th January, 1997 for 16th January, 1997. On 16th January, 1997 the stock broker (and its director who was impleaded as defendant No.2 and who is respondent No.2 in the RSA) filed their written statement. In the preliminary objections in the written statement it was, inter alia, stated that the suit was not maintainable owing to the Arbitration and Conciliation Act, 1996 having come into force on 25th January, 1996; reference was made to Section 5 thereof and it was pleaded that there was no provision under the Act to challenge the arbitration agreement before the court when the arbitration proceedings had already commenced; the claim in suit for permanent injunction was also pleaded to be barred by Section 41(h) of the Specific Relief Act; it was further pleaded that in view of the byelaws of the stock exchange providing for arbitration of disputes between the stock broker and its clients/constituents, the court had no jurisdiction to try the suit. Other pleas on merits were also taken in the written statement. 4. The stock exchange on 16th January, 1997 took time for filing the written statement and the matter was adjourned to 20th January, 1997. On that date, the petitioner/appellant filed replication to the written statement of the stock broker and the stock exchange filed an application under Section 8 of the Arbitration Act for referring the matter to arbitration. The stock broker in the written statement as well as the stock exchange in the said OMP 205/1997 & RSA 131/2002 Page 4 of 25 application also disputed the territorial jurisdiction of the courts at Delhi and relied upon the clause in the byelaws of the stock exchange with respect to the exclusive jurisdiction of the courts at Mumbai. The application was contested by the petitioner/appellant by filing a reply. 5. The learned Civil Judge vide order dated 1st February, 1997, inter alia, held that under Section 5 of the Act the jurisdiction of the civil court was barred; that there was no provision under the Arbitration Act to challenge the arbitration before the civil court; that the arbitration proceedings of the stock exchange had already commenced prior to the institution of the suit; that the petitioner/appellant has a right under Section 16 of the Arbitration Act to raise objections as raised in the suit before the arbitrator and even thereafter under Section 34 of the Act and thus allowed the application and dismissed the suit. 6. The petitioner / appellant preferred an appeal to the District Judge which was registered as RCA 631/2002 against the order aforesaid of the Civil Judge and which came to be decided vide order dated 18th May, 2002. The learned Additional District Judge deciding the appeal concurred with the Civil Judge and also noticed that during hearing it had transpired that the arbitrator appointed by the stock exchange had passed the arbitral award and with respect whereto the petitioner/appellant had already filed petition under Section 34 of the Act being OMP 205/1997. I may notice that though there does not appear on the record any decree sheet drawn up by the Civil Judge but a decree sheet was drawn up by the Additional District Judge of dismissal of the appeal. The petitioner/appellant preferred the RSA under Section 100 of the CPC to this court against the order of the Additional District Judge and on 1st March, 2003, OMP 205/1997 & RSA 131/2002 Page 5 of 25 after this court had called for the record of OMP205/1997 and presumably perused the same, notice to show cause as to why the RSA be not admitted was issued to the respondent. The OMP and the RSA were pending before separate courts thereafter and the RSA was transferred to be heard by this court where the OMP was pending vide order dated 12th February, 2007 in the OMP file. Though the RSA had been pending for long but no substantial questions of law as required to be framed were framed nor was there any order formally admitting the RSA for hearing. 7. In these circumstances on 30th January, 2009 the following substantial questions of law were framed: 1. Whether a suit for declaration that the agreement containing an arbitration clause is fabricated, forged and thus null and void and legally inoperative and claiming the consequential relief of permanent injunction of restraining the other party to the impugned agreement from invoking arbitration and the arbitrator from proceedings with the arbitration maintainable in law? 2. Whether suit of the nature aforesaid is barred by Section 5 of the Arbitration & Conciliation Act? 3. What is the effect, if any, of a non party to the arbitration agreement, impleaded as party to the suit, applying under Section 8 of the Arbitration Act? 4. Whether a suit of the nature aforesaid for the relief of declaration and injunction is barred by Section 34 r/w 41 of the Specific Relief Act and whether an application under Section 16 of the Arbitration Act is an alternative efficacious remedy to the same. and the counsels made submissions in RSA as well as OMP. 8. At the outset, query was made from the counsels as to the maintainability of the RSA, the order challenged therein being on an application under Section 8 of the Arbitration Act. No judgment was cited by counsel for either party on this aspect. The court, if allowing the application under Section 8 of the Act is required to refer the OMP 205/1997 & RSA 131/2002 Page 6 of 25 parties to arbitration. In the present case it was the admitted position that the arbitration proceedings had already commenced even prior to the institution of the suit. Since Section 8(3) provides that the arbitration proceedings may be commenced, continued and an arbitral award made notwithstanding the pendency of an application under Section 8. The suit was filed after the commencement of arbitration proceedings had been commenced by the stock exchange. The suit claimed the relief of stay thereof. The order made by the Civil Judge is thus not of referring the parties to arbitration as the court is required to do under Section 8 but of dismissal of the suit. 9. Section 100 of the CPC provides for an appeal to lie before this court from every decree passed in appeal by any court subordinate to this Court. As aforesaid, though I have not found on record any decree sheet having been drawn up by the Civil Judge while dismissing the suit, there is on record a decree drawn up by the Additional District Judge while dismissing the appeal. Technically, therefore, there is a decree passed in appeal by a court subordinate to this court, to satisfy the first requirement of the maintainability of the second appeal before this court. 10. An appeal could lie from the order aforesaid of the Civil Judge before the Additional District Judge either under Section 96 or under Order 43 of the CPC. No appeal from an order on an application under Section 8 of the Act is provided under Order 43. Under Section 96 of the CPC an appeal lies from every decree passed by any court exercising original jurisdiction. So, the question is as to whether the order allowing the application under Section 8 Arbitration Act constitutes a decree or not. OMP 205/1997 & RSA 131/2002 Page 7 of 25 11. A decree is defined in Section 2(2) of the CPC as a formal expression of an adjudication which, so far as regards the court expressing it, conclusively determines the rights of the parties with regard to all or any of the matters in controversy in the suit. It is deemed to include the rejection of the plaint. Since an order allowing an application under Section 8 of the Act conclusively determines the right of the plaintiff to maintain a suit, it should fall within the definition of a decree. 12. I however find that the Division Bench of this court in Canbank Financial Services Ltd. v. Haryana Petrochemicals Ltd. 2008 (2) Arbitration Law Reporter 365 held that, an order allowing the application under Section 8 of the Arbitration Act is not appealable under the Arbitration Act and otherwise under the CPC. The plea that such an order is akin to rejection of plaint and thus a decree and hence appealable also did not find favour. Once the Division Bench has held that the first appeal does not lie against such an order, the question of the maintainability of the second appeal does not arise. Thus I find that the second appeal is not maintainable for this reason alone. 13. There is, however, yet another aspect in the present proceedings of relevance to the nature of the order of the Civil Judge. The counsel for the petitioner/appellant has argued that the application on which the suit was dismissed, in the present case, was filed by the stock exchange and not by the stock broker. It is contended that the agreement alleged of arbitration was between the petitioner/appellant and the stock broker and not between the petitioner/appellant and the stock exchange. It is thus contended that the right, if any, to apply under Section 8 of the Arbitration Act was of the stock broker only and not of the stock exchange. It is OMP 205/1997 & RSA 131/2002 Page 8 of 25 averred that in Section 8(1) “….. if a party so applies ….” refers to a party as defined in Section 2(h) and means a party to an arbitration agreement. 14. Per contra, the counsel for the stock broker has argued that the stock broker also in written statement filed by them had in the preliminary submissions itself taken the plea of the suit being barred owing to the existence of the arbitration agreement and thus it cannot be said that it is only the stock exchange which applied under Section 8 of the Act. It is also urged that even if it is considered that the stock broker alone could have applied under Section 8 of the Act and had not so applied, the suit has been dismissed under Order 7 Rule 11 of the CPC as being barred by law i.e., the law contained in Section 5 of the Arbitration Act. 15. At the outset, I may state that the contention of the stock broker that even if the stock broker had not applied under Section 8 of the Act, the stock broker could still apply for rejection of the plaint under Section 5 of the Act is not sound. It is not as if the civil court per se does not have jurisdiction to entertain a suit emanating from a transaction subject matter of arbitration agreement. A civil court cannot dismiss a suit instituted before it, even though found to be subject matter of an arbitration agreement, at the threshold. It is always open to the defendant to the suit to waive, give up and abandon the plea of arbitration and if that were to happen then the suit will continue before the civil court. The manner in which the defendant in a suit which is the subject matter of an arbitration agreement is to setup the plea of arbitration has been prescribed in Section 8 of the Act. Such a plea has to be raised not later than when submitting the first statement on the substance of the dispute. If such a plea is not raised while submitting the first statement on OMP 205/1997 & RSA 131/2002 Page 9 of 25 the substance of the dispute, the defendant is thereafter barred from raising such a plea and if that be the position then it cannot be argued that even though the plea is not raised in the manner prescribed in Section 8 of the Act, it is open to the defendant thereafter also to contend that the suit is barred by virtue of section 5 of the Act. 16. I also do not agree with the contention of the petitioner/appellant that the word “party” in Section 8 refers to a party to the agreement. In my view, the word “party” in Section 8 refers to a party to the suit. In the present case the stock exchange had been impleaded as a party to the suit, not merely as a proforma party but as a substantive party against whom reliefs of injunction was also claimed of proceeding with the arbitration initiated at the instance of the stock broker. In the circumstances, it cannot be said that the stock exchange was merely a proforma party to the suit and not competent to raise the plea. The stock exchange being the institution to whose arbitration the petitioner/appellant were alleged to have agreed and as per whose byelaws such matters are to be referred to arbitration thus had a vital interest in the arbitration and was competent to apply to the court under Section 8 of the Act. It cannot be called a stranger to the arbitration. 17. Section 2, upon clause (h) whereas reliance is placed by the plaintiff/petitioner is subject to the context otherwise requiring. Context in which the word “party” is used in Section 8 is in relation to a party to an action brought before the judicial authority and not in the context of a party to the arbitration. 18. I also do not find any merit in the plea of the petitioner/appellant that the stock broker had consented to the jurisdiction of the civil court and / or had waived/abandoned the OMP 205/1997 & RSA 131/2002 Page 10 of 25 right under Section 8. The preliminary objections in the written statement of the stock broker have already been referred to above. In the same the stock broker has unequivocally contested the jurisdiction of the civil court to proceed with the suit for the reason of the arbitration. Of course, the preliminary objections repeatedly refer to Section 5 and not to Section 8 but mere failure to cite the correct provision of law and/or referring to the wrong provision, cannot defeat the rights of the parties. It is of significance that the written statement was filed soon after the coming into force of the 1996 Act and till when there was not much clarity about the statute and the recent past has shown as to how the courts themselves have from time to time changed their interpretation of the various provisions of the statute. Thus, once the stock broker has, while submitting his first statement on the substance of the dispute, taken the plea of the jurisdiction of the civil court being barred for the reason of the existence of the arbitration agreement, it cannot be said that merely because reliance is made while taking the said plea to section 5 instead to Section 8 would tantamount to the stock broker giving up the right to apply for arbitration. It is also significant that the stock broker had prior thereto already commenced the arbitration proceedings. Recently another Single Judge of this court in Ministry of Sound International Ltd v. Indus Renaissance Partners Entertainment Pvt Ltd 156 (2009) DLT 406 held that where a suit was instituted after the plea under Section 8 of the Arbitration Act had been taken in a suit filed by other party would not tantamount to waiver / abandonment of the right under the arbitration agreement. It was further held that the case would be different where before taking a plea of arbitration, a suit is instituted. Following the same reasoning I am not only of the view that on a meaningful reading of the written statement, the stock OMP 205/1997 & RSA 131/2002 Page 11 of 25 broker had also applied for reference of the parties to arbitration within the meaning of Section 8 of the Act but also, even if he had not so applied, having instituted the arbitration proceedings before filing the written statement cannot be said to have, by filing the written statement waived or abandoned arbitration. 19. Though the second appeal is found to not lie, however, since substantial questions of law were framed, it is deemed expedient to, for the sake of complete adjudication, deal with the same also. The questions 1, 2 and 4 aforesaid, relate to the very maintainability of a suit as filed by the petitioner/appellant, i.e., for declaration that the arbitration agreement on the basis whereof the defendants to the suit have initiated arbitration proceedings, is forged and fabricated and thus void and of permanent injunction restraining arbitration. 20. Section 32 of the 1940 Act, barred a suit for decision upon the existence, effect and validity of an arbitration agreement; however Section 33 thereof permitted the court to determine the existence or validity of the agreement. The 1996 Act, however, marks a change in this regard. There is no equivalent to the Sections 32 and 33 of the old Act. On the contrary, Section 16 has been introduced and Section 34 providing for recourse against an arbitral award expressly makes the invalidity of the arbitration agreement a ground for setting aside the arbitral award. A peremptory Section 5 prohibiting the jurisdiction of courts save as expressly provided under the Act has also been introduced. If in spite of the said changes, this court is to hold that a suit is maintainable where the contract containing the arbitration clause is challenged on ground of forgery and the court in such suit is empowered to injunct arbitration proceedings (as otherwise no purpose would be served by such suit), in my view, it would tantamount to negating the effect of OMP 205/1997 & RSA 131/2002 Page 12 of 25 the change in the statute. It may also be noticed that arbitration is normally provided for in commercial agreements and whereunder after the disputes have arisen, one of the parties is always interested in delaying the disposal of the claims of the other. In fact, the parties while providing for arbitration in commercial contracts do so for the reasons of expediency. If notwithstanding the aforesaid material changes between the old and the new Act, it is to be held that a suit as a present one is maintainable, it would give a tool in the hands of the party wanting to delay the disposal of the claims of the other; in each case suits would be instituted and stay of arbitration proceedings would be sought. 21. There is yet another reason for me to hold so and it is reflected in the substantial questions of law framed on 29th January, 2009. The relief of declaration is guided by Section 34 and the relief of permanent injunction by Section 41 of the Specific Relief Act. Grant or non-grant of declaration is in the discretion of the court. A permanent injunction cannot be granted under clause (h) of Section 41 when equally efficacious relief can be obtained by any other usual mode of proceeding except in case of breach of trust. The discretion of the court ought not to be exercised in a manner so as to adversely affect the arbitral proceedings or to negate the purport of the 1996 Act. Similarly, it is not as if, if injunction restraining the arbitration is not given, the party challenging the validity of the arbitration agreement would be rendered remediless. The said party has the equally efficacious remedy of Sections 16 & 34 of the Arbitration Act. The suit for declaration and permanent injunction is found to be barred by provisions of Specific Relief Act also. 22. The petitioner/appellant has in the synopsis of submissions with judgments on record relied upon various judgments laying down OMP 205/1997 & RSA 131/2002 Page 13 of 25 that the courts while exercising powers under Section 8 and Section 11 of the Arbitration Act are to satisfy themselves of the validity of arbitration agreement. On the basis thereof, it is urged that the courts including the Seven Judges Bench of the Apex Court in SBP and Company vs. Patel Engineering Ltd 2005 (8) SCC 618 have held that party should not be permitted to be vexed by costly arbitration if at the initial stage itself it can be determined whether there is any arbitration agreement and/or arbitral dispute or not. It is further urged