vbc 1 arbap123.08-7.1 IN THE HIGH COURT OF JUDICATURE AT BOMBAY O. O.C. J. ARBITRATION APPLICATION NO.123 OF 2008 Ivory Properties & Hotels Pvt. Ltd. ...Applicant. Versus Nusli Neville Wadia. ...Respondent. ....... Mr.I.M.Chagla, Sr.Advocate with Mr.Tushad Cooper, Ms.Hemlata Jain, Mr.Amey Nabar, Ms.Sukhada Wagle i/b.M/s.Hariani & Co. for the Applicant. Mr.Navroz Seevai, Sr.Advocate with Mr.Venkatesh Dhond, Mr.Rohan Kelkar, Mr.Shrikant Doijode, Mr.Parag Kabadi and Ms.Falguni Thakkar i/b.Doijode Associates for the Respondent. ...... CORAM : DR. D.Y. CHANDRACHUD, J. January 7, 2011. ORAL JUDGMENT : This is an application under Section 11(6) of the Arbitration and Conciliation Act, 1996. 2. An agreement was entered into between the Applicant and the Respondent on 2 January 1995. Under the agreement, the Applicant undertook to develop certain immovable property and to vbc 2 arbap123.08-7.1 sell the constructed area, for which the Respondent was to receive 12% in the amount realised from the sale. Under the agreement, a certain amount was guaranteed as a minimum guarantee payment for a term of ten years. The agreement contemplates that the Applicant would be entitled to sell or transfer units in the constructed area to third parties. The Respondent was to be entitled to receive all the gross realizations from the disposal or transfer of the constructed area so that 12% of the realization would be receivable directly from the purchasers. In this manner, 12% of the realization would belong to the Respondent while the balance representing 88% would belong to the Applicant. 3. Disputes and differences arose between the parties which led to the institution by the Respondent, of a suit on the Original Side of this Court on 4 February 2008. A criminal complaint had been instituted by the Respondent, in addition. The reliefs that are sought in the suit include: (i) A declaration that the agreement dated 2 January 1995 stands vitiated by fraud and/or stands duly determined vbc 3 arbap123.08-7.1 with effect from 1 February 2008; (ii) A declaration that the Powers of Attorney executed by the Respondent stand validly revoked; (iii) An injunction restraining the Defendants from carrying out any further construction on the suit lands; (iv) A declaration that the Memorandum of Understanding/Agreements entered into by the Applicant herein with several other parties stand rescinded; (v) A decree for the removal and demolition of the structures put up on the lands; and (vi) A decree for damages in the sum of Rs. 350.99 crores. Apart from the Applicant, who has been impleaded as the First Defendant to the suit, the array of parties includes thirteen Companies alleged to be controlled by the Applicant and several other entities. 4. The case of the Respondent in the suit is that the Applicant could develop segments of the land by constructing buildings thereon and that the constructed areas could be transferred only to genuine third parties against the payment of a 12% share to the Respondent. The allegation of the Respondent is that the Applicant constructed buildings on the land and paid over 12% of a notionally computed vbc 4 arbap123.08-7.1 consideration and that the transfers were effected not to genuine third parties, but by incorporating Companies such as Defendant Nos.5 to 17. Consequently, the payment of a 12% share to the Respondent is allegedly not of the gross realizations as contemplated by the agreement, but on the basis of a price pre-determined between related parties. The contention of the Respondent is that a fraud has been practiced by the Applicant in purported implementation of the agreement dated 2 January 1995. It is on the basis of the averments contained in the plaint, that the reliefs which have been sought include a declaration that the agreement dated 2 January 1995 stands vitiated by the fraud of Defendant Nos.1 to 4. 5. The Applicant has taken out a Notice of Motion in the suit under Section 8 of the Arbitration and Conciliation Act, 1996. The motion is pending before the Learned Trial Judge. 6. Clause 19 of the Agreement dated 2 January 1995 contains an arbitration agreement which is in the following terms: vbc 5 arbap123.08-7.1 “19. If at any time hereafter any dispute and/or difference shall arise between the Owner on the one hand and the Company on the other hand, in respect of and/or relating to this Agreement and/or the implementation thereof and/or the respective rights, obligations and/or responsibilities of the respective parties and/or regarding the construction or interpretation of any term or provision hereof and/or any other matter arising out of, concerning or touching this Agreement or such development project, the same shall be referred to the sole Arbitration of (a) Mr.Aziz H.Parpia (Solicitor) (of M/s.A.H.Parpia & Co.) or failing him(b) Mr.N.V.Iyer (Chartered-Accountant) (of M/s.C.C.Choksi & Co.). The decision and/or directions and/or Award of such Arbitrator, shall be final and binding on both the parties. It is clarified that such Arbitrator shall be entitled to give interim directions and/or interim Awards as may from time to time be considered by him to be necessary or proper and the same shall be carried out and complied with by the respective parties. Such Arbitrator shall have Summary Powers. The provisions of the Arbitration Act, 1940 and/or the statutory amendments and/or re-enactment thereof, for the time being in force, shall apply to such Arbitration. The parties record and confirm that Mr.Aziz H.Parpia has been and continues to be the Solicitor for the parties in this and other matters and he is aware of the facts and matters set out in this Agreement. Both parties have confidence in the impartiality of Mr.Aziz H.Parpia and have selected him as sole Arbitrator.” 7. Three defences have been set forth to the application under Section 11(6), during the course of the hearing: (i) In the suit which vbc 6 arbap123.08-7.1 has been instituted by the Respondent against the Applicant, serious allegations of fraud have been levelled against the Applicant. In view of the position of law settled by the Supreme Court, where serious triable issues relating to fraud arise between parties, these cannot be a subject of a reference to arbitration; (ii) The scope of the suit which is instituted by the Respondent is wider than the scope of the reference that is sought to arbitration. The suit inter alia includes several corporate entities controlled by the C.L. Raheja Group who are not parties to the arbitration agreement. The bifurcation of the cause of action which arises in the suit is impermissible, nor can there be a piece meal reference to arbitration; and (iii) Clause 19 of the contract which contains an arbitration agreement contemplates a reference to arbitration by either of two named Arbitrators. Both of them declined to act as such. The intention of the parties was that the arbitration should be conducted only by one of the two named Arbitrators and, if they were not to enter upon the reference, parties implicitly intended that there should be no arbitration at all. vbc 7 arbap123.08-7.1 8. On behalf of the Applicant it has been submitted that: (i) The scope of proceedings under Section 11(6) only extends to determine (a) Whether the application has been filed before a High Court having jurisdiction; (b) Whether there is a valid agreement to refer disputes to arbitration; and (c ) Whether there is a dispute arising within the purview of the arbitration agreement; (ii) The judgments of the Supreme Court indicate that it is only in a situation where a party against whom an allegation of fraud is made opts to proceed to a trial in a Civil Court that an objection to a reference to arbitration can be maintained at the behest of such a party. In other words, a party which levels an allegation of fraud cannot be heard to urge that those allegations should be considered only before the Civil Court and not in arbitration. Such a defence is only open to a party against whom an allegation of fraud is made; (iii) It is only in an application under Section 8 that it would be open to the Court to consider as to whether the allegations of fraud are of such nature and character that parties should not be directed to refer their disputes to arbitration. What is permissible for the Court to consider in an vbc 8 arbap123.08-7.1 application under Section 8, would not be permissible in an application under Section 11, considering the parameters of the jurisdiction under Section 11; (iv) If an agreement stands vitiated by fraud, then the entirety of the agreement has no existence in the eyes of law and it is only a defence of that nature which can be considered in an application under Section 11. In the present case, the allegation is that the agreement dated 2 January 1995 was vitiated as a result of a fraud practiced in the implementation of the contract. This is not a situation where the agreement at its inception was vitiated by fraud. An objection of this nature cannot be a ground to refuse a reference to arbitration on an application under Section 11. 9. The rival submissions now fall for determination. 10. The power which the Chief Justice or his designate exercises under Section 11 is judicial. This is settled in view of the decision of the Supreme Court in SBP & Co. vs. Patel Engineering Ltd.1 The judgment of the Supreme Court emphasizes the 1 (2005) 8 SCC 618 vbc 9 arbap123.08-7.1 complementary nature of the provisions of Sections 8 and 11. The Court observed that where there is an arbitration agreement between the parties, and while a party ignoring it files an action before a judicial authority and the other party raises an objection on the ground of the existence of an arbitration agreement, the judicial authority has to consider the objection. If it is found to be sustainable, the judicial authority is bound to refer parties to arbitration. The judicial authority is bound to decide the jurisdictional issue before making or declining to make a reference. Section 11 only covers another situation. The Supreme Court noted that it would be anomalous if it was to be held that while the jurisdictional issue would be decided under Section 8, that issue could not be determined by the Chief Justice or his designate while dealing with an application under Section 11. The nature of the objection is the same and the consequence of accepting the objection in one case and rejecting it in another would obviously be the same namely of sending parties to arbitration. The scope of the jurisdiction on an application under Section 11 was dealt with by the Supreme vbc 10 arbap123.08-7.1 Court. The Supreme Court held that the Chief Justice or his designate has to decide his own jurisdiction in the sense as to whether the party making the motion has approached the right High Court. The Chief Justice or his designate has to similarly decide whether there is an arbitration agreement as defined under the Act and whether the person who has decided to seek arbitration is a party to the agreement. The Chief Justice or his designate could also decide the question as to whether the claim was barred by time or whether the dispute has been resolved by recording satisfaction of the mutual rights and obligations between the parties. 11. The scope of an application under Section 11(6) and the judgment of seven Judges in Patel Engineering came to be revisited in a subsequent judgment of the Supreme Court in National Insurance Company Ltd. vs. Boghara Polyfab Private Limited.2 In the subsequent judgment, the Supreme Court has divided the issues into three categories: the first category consists of issues which must be decided in an application under Section 11; the second set consists 2 (2009) 1 SCC 267 vbc 11 arbap123.08-7.1 of issues which may be decided on an application under Section 11 and the third set consists of issues which the Chief Justice or his designate must, in the considered exercise of his discretion, leave it open to the arbitral tribunal. Issues in the first category are (i) whether a party making a motion moved the appropriate High Court; (ii) whether there is an arbitration agreement; and (iii) whether the party who has moved the arbitration application, is a party to the arbitration agreement. 12. The question as to whether allegations of fraud which raise serious triable issues can appropriately be referred to arbitration has been the subject matter of several decisions both under the Act of 1940 and under the Act of 1996. In a case which involved the provisions of Section 20(4) of the Act of 1940, the submission which had been made before the Supreme Court in Abdul Kadir Shamsuddin Bubere vs. Madhav Prabhakar Oak,3 was that serious allegations of fraud have been generally held by the Court to be a sufficient ground for not ordering an arbitration agreement to be filed 3 AIR 1962 SC 406 vbc 12 arbap123.08-7.1 and for not making a reference. Reliance in that regard was placed on a decision of the Chancery Division in Russell vs. Russell.4 That was a case where a notice for the dissolution of a partnership was issued by one of the partners upon which the other partner brought an action alleging various charges of fraud and seeking a declaration that the notice of dissolution was void. The partner who was charged with fraud sought a reference 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 if the party charged with the fraud desires a public enquiry. 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 was proved. In the context of the submission which was made before it, the Supreme Court observed as follows: “There is no doubt that where serious allegations of fraud are made against a party and the party who is charged with fraud desires that the matter should be tried in open 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. But it is not every allegation imputing some kind of dishonesty, particularly in matters of accounts, which 4 (1880) 14 Ch.D. 471 vbc 13 arbap123.08-7.1 would be enough to dispose a court to take the matter out of the forum which the parties themselves have chosen.” 13. The Supreme Court held that it is only where serious allegations of fraud are made which it is desirable, should be tried in open Court that the Court would be justified in refusing to make a reference. In the case before the Supreme Court, a civil trial was opted by the party against whom allegations of fraud were levelled. The Supreme Court has not however laid down that it is only at the behest of a party against whom allegations of fraud have been made that the Court would direct that a serious triable issue of fraud be resolved at a trial before a Court. 14. A similar issue came up for consideration before the Supreme Court in a subsequent decision in N.Radhakrishnan vs. Maestro Engineers.5 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 of 1996. The application was 5 (2010) 1 SCC 72 vbc 14 arbap123.08-7.1 dismissed by the trial Court which was affirmed in revision by the High Court. It was urged before the Supreme Court on behalf of the Appellant that where there is an express provision to that effect, the Civil Court was bound to refer disputes between the parties to an arbitrator. On the other hand, it was urged before the Supreme Court by the Respondent that where a case involved substantial questions relating to facts where detailed material evidence, both documentary and oral, was needed to be produced by either parties, and serious allegations of malpractice were raised, the matter must be tried in a Court and an arbitrator is not competent to deal with such matters which involved an elaborate production of evidence to establish the claims relating to fraud and criminal misappropriation. The Supreme Court observed that the High Court had rightly come to the conclusion that since the case related to allegations of fraud and serious malpractices on the part of the Respondent , 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. The Supreme Court cited with approval, the following vbc 15 arbap123.08-7.1 statement of law contained in the judgment of the Madras High Court in Oomor Sait v. O.Aslam Sait:6 “Power of civil court to refuse to stay of suit in view of arbitration clause on existence of certain grounds available under the 1940 Act continues to be available under the 1996 Act as well and the civil court is not prevented from proceeding with the suit despite an arbitration clause if dispute involves serious questions of law or complicated questions of fact adjudication of which would depend upon detailed oral and documentary evidence. The civil court can refuse to refer matter to arbitration if complicated question of fact or law is involved or where allegation of fraud is made. Allegations regarding clandestine operation of business under some other name, issue of bogus bills, manipulation of accounts, carrying on similar business without consent of other partner are serious allegations of fraud, misrepresentations etc. and therefore, application for reference to arbitrator is liable to be rejected.” The Supreme Court has, therefore, specifically affirmed the correctness of the statement of law contained in this judgment of the Madras High Court. The statement of law is that the Civil Court can refuse to refer a matter to arbitration if serious questions of law or 6 (2001)3 CTC 269 (Mad) vbc 16 arbap123.08-7.1 complicated questions of fact are involved adjudication of which would depend upon detailed oral or documentary evidence or where allegations of fraud are made. 15. In one such case in an arbitration application which arose under Section 11 of the Arbitration and Conciliation Act, 1996, a Learned Designated Judge of the Supreme Court in India Household and Healthcare Ltd. vs. LG Household and Healthcare Ltd.,7 declined to refer parties to arbitration. Before the Supreme Court, it was urged on behalf of the Petitioner that once an arbitration agreement was found to exist, having regard to the provisions of Section 5, no judicial authority could exercise any jurisdiction in the matter and the Court should uphold the arbitration agreement between the parties. On the other hand, it was urged on behalf of the Respondent that in view of the decision of the Constitution Bench in Patel Engineering, the Court was obligated to enquire into the question as to whether the entire agreement is vitiated by fraud as a result whereof no valid agreement came into being. Moreover, it was 7 (2007) 5 SCC 510 vbc 17 arbap123.08-7.1 urged that a fraud of grave magnitude having been committed, the entire agreement would stand vitiated. In this context, the Learned Designated Judge observed as follows: “It is also no doubt true that where existence of an arbitration agreement can be found, apart from the existence of the original agreement, the courts would construe the agreement in such a manner so as to uphold the arbitration agreement. However, when a question of fraud is raised, the same has to be considered differently. Fraud, as is well known, vitiates all solemn acts. A contract would mean a valid contract; an arbitration agreement would mean an agreement which is enforceable in law.” (emphasis supplied). A similar view was taken by a Division Bench of this Court in MSM Satellite (Singapore) Pte. Ltd. vs. World Sport Group (Mauritius) Ltd., (Appeal (Lodging) No.534 of 2010 in Notice of Motion No.1809 of 2010 in Suit No.1828 of 2010), decided on 17 September 2010. While adverting to the decisions which were cited before the Court on behalf of the Respondent, the Division Bench held as follows: “Even in the decisions that have been brought to our notice ... it has been held that in case of allegations of fraud and serious malpractices on the part of the parties, such a situation can only be settled in Court through furtherance of judicial evidence by either party and such a situation cannot be properly gone into by the Arbitrator. The reason for this appears to be obvious.” vbc 18 arbap123.08-7.1 The Division Bench in that case further held as follows: “These decisions clearly indicate that when vital issues of fraud and public policy are raised and when interests of third parties are involved and affected, then, the choice is not left to parties. It is for the Court to determine as to whether it will allow the matters to be gone into by a domestic tribunal in confidentiality or whether they are fit to be decided by a Court of law in an open trial. Once we reach the conclusion that when the issues arising out of fraud as raised in the present proceedings have a bearing on the position of BCCI in the game of cricket, the involvement of the general public in the game and the television rights which are conferred for viewing the games by them, so also presence of BCCI being necessary, then, the matter is fit for an open public trial by a Court of law. That cannot be left to be decided by a tribunal chosen by parties. The repercussions of allowing such matters to be decided by a domestic tribunal chosen by parties would be serious and in the longer run affect the judicial process itself. If such a course is permitted, that might run counter to the object and purpose of inserting Sections 23 and 28 in the Indian Contract Act, 1872. In other words, the impact of all this on Indian laws would be tremendous. We would be failing in our duty if we do not notice the same and take appropriate corrective steps.” 16. The submission which has been urged on behalf of the Applicant, however, is that it is only in the context of Section 8 of the Arbitration and Conciliation Act, 1996, that decided cases indicate vbc 19 arbap123.08-7.1 that parties have not been referred to arbitration in a situation where a serious allegation of fraud is made. The law which has been laid down by the Supreme Court in the decisions to which a reference has been made earlier, cannot be confined to proceedings only arising under Section 8. The observations which were made by the Supreme Court in the decision in Radhakrishnan's case arose out of proceeding in an application under Section 8. The principle of law which has been enunciated by the Supreme Court, cannot be confined to the scope of an enquiry on an application under Section 8 of the Act. The rationale for the principle extends to the provisions of Section 11 as well. Significantly, the Supreme Court has observed that where allegations of fraud or of serious malpractices are made, such a situation can only be settled in Court after leading evidence and cannot fall for determination by an arbitral tribunal. The Supreme Court has categorically affirmed the correctness of the statement of law contained in the judgment of the Madras High Court that a Court would refuse to refer a matter to arbitration if serious questions of law or complicated questions of fact are involved or vbc 20 arbap123.08-7.1 where an allegation of fraud is levelled. Now, it is necessary for the Court to emphasize that it is not every stray allegation of fraud which would lead to the consequence of a refusal on the part of the Court to