Calcutta High Court
Guiness Securities Limited vs Devang Dilip Vyas & Ors on 4 August, 2014
Author: Soumen Sen
Bench: Soumen Sen
GA No. 2407 of 2014
WITH
CS 277 of 2014
IN THE HIGH COURT AT CALCUTTA
ORIGINAL SIDE
GUINESS SECURITIES LIMITED
Versus
DEVANG DILIP VYAS & ORS.
BEFORE:
The Hon'ble JUSTICE SOUMEN SEN
Date : 4th August, 2014.
For the plaintiff :
Mr. Sourav Mukherjee,Advocate
Mr. Chandra Sekhar Jha,Advocate
Mr. Radhamohan Ray,Advocate
Mr. Agniswar Chowdhury,Advocate
For the defendant nos. 1 & 2 :
Mr. Jishnu Choudhury,Advocate
Mr. Arif Ali,Advocate
Mr. Amit Agarwalla,Advocate
Ms. Debangana Deb Roy,Advocate
The Court : - The plaintiff has filed this application for stay
of the arbitration proceeding pending before the learned Arbitrators of the
Bombay Stock Exchange of India Ltd.
The defendant no. 1 made a reference to the Bombay Stock Exchange of
India Ltd. under the relevant rules, bye-laws and regulations of the said
Exchange in order to resolve a dispute arising out of transactions that had taken
place between the defendant no. 1 as a client and the plaintiff as a broker.
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The present application for stay of the arbitration proceeding has been filed
after the Tribunal has entered reference in terms of the rules and regulations of
the Bombay Stock Exchange of India Ltd.
The defendant no. 1 has filed its statement of claim. The plaintiff, instead
of filing its counter or rejoinder to the statement of claim, filed an application
under Section 16 of the Arbitration and Conciliation Act, 1996 raising certain
disputes with regard to the jurisdiction of the Arbitral Tribunal.
During the pendency of the said proceeding on 22nd July,2014 the plaintiff
has filed a suit claiming, inter alia, for money decree and various other reliefs.
In the suit an interlocutory application has been filed for stay of the
arbitration proceedings.
Mr. Sourav Mukherjee, the learned Counsel appearing on behalf of the
plaintiff submits that in view of the allegations of fraud made in the statement of
claim by the claimant against the plaintiff, the proper forum to adjudicate and
decide such dispute is a Civil Court and not by an Arbitrator or by the Arbitral
Tribunal. It is submitted that had it been a money claim simplicitor, then
possibly the Arbitral Tribunal would have been the competent forum to decide
the matter. In the statement of claim the claimant alleged that the plaintiff had
acted fraudulently. By reason of such allegation being made in the statement of
claim it is submitted that the Arbitral Tribunal cannot proceed and investigate
into such allegations of fraud. According to the learned Counsel it is a settled
law that in such a situation it is the Civil Court alone who is competent decide
such issues relating to fraud. The learned Counsel has referred to the decisions
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of the Hon'ble Supreme Court in India Household and Healthcare Ltd. Vs. LG
Household and Healthcare Ltd. reported at (2007) 5 SCC 510, Abdul Kadir
Shamsuddin Bubere Vs. Madhav Prabhakar Oak & Anr. reported at AIR 1962 SC
406, N. Radhakrishnan Versus Maestro Engineers & Ors. Reported at 2009 (4)
Arbitration Law Reporter: 2010 (1) SCC 72 and the Single Bench decision of this
Court reported at (2011) 1 Calcutta Law Times 103 (High Court) in the matter of
R. Piyarelal Import & Export Ltd. Vs. Glencore Grain B.V. for the proposition
that in the event allegations of fraud are made in before the Arbitrator then the
Arbitrator would be denuded of its jurisdiction to decide the said reference. It is
submitted that the ratio of the decisions as could be culled out is that once it is
shown that an allegation of fraud is raised before the Arbitral Tribunal, the
Arbitral Tribunal shall recuse itself and refer the parties to decide their fate
before a Civil Court which is more competent and proper forum to investigate
and decide the issue with regard to fraud and malpractices, if any.
Per contra Mr. Jishnu Choudhury,learned Counsel appearing on behalf of
the defendant nos. 1 and 2 submits that this application has been filed with a
view to frustrate the proceeding already initiated before the Arbitral Tribunal
constituted under the relevant bye-laws and regulations of the Bombay Stock
Exchange of India Ltd. It is submitted that unless the plaintiff alleged that the
agreement containing the arbitration clause is a result of fraud, the Court
ordinarily should not interfere with the ongoing arbitration proceeding. The
learned Counsel has referred to the decisions in the matter of LMJ International
Limited Vs. Sleepwell Industries Co. Ltd. reported at 2012 (5) CHN (Cal) 95,
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Jamuna Transport Corporation Ltd. & Ors. Reported at 2010 (4) CHN (CAL) 488,
Ghyanshyamdas Baheti Vs. Jamuna Transport Corporation reported at AIR 2011
Calcutta 91 and Siddhi Vinayak Industries Pvt. Ltd. Vs. Virgoz Oils & Fats Pte
Ltd. reported at 2011 (2) CHN (CAL) 857 .
I have carefully considered the statement of claim filed before the Arbitral
Tribunal. It appears that the claim is arising out of certain unauthorized
transactions and/or trades alleged to have been carried out by the plaintiff. In
paragraph 16 of the statement of claimant, it is stated by the claimant that the
applicant company has carried out un-authorized transactions to the tune of
Rs.1,14,74,313/- in the trading account of the claimant although, the claimant
had requested the plaintiff company to close the said account. It was further
alleged that Mr. Kamal Kothari has a record of executing un-authorized trades in
other accounts and on similar allegations he was subjected to imprisonment for
all most 3 months in the year of 2012. The statements made in the statement of
claim do not per se appear to be of such nature which cannot be conveniently
decided at the Tribunal. The ratio of the decision cited by the plaintiff shows that
if the agreement contained the arbitration clause is vitiated by fraud, then the
Civil Court would have jurisdiction to decide the issue. This aspect of the matter
has been considered by a Single Judge, in the matter of Jamuna Transport
Corporation Ltd. (Supra). The learned Single Judge after considering both the
decisions of the Hon'ble Supreme Court in India Household (Supra) and N.
Radhakrishnan (Supra) in paragraph 31 stated :-
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"The plaintiff's endeavour to demonstrate that not only would the
setting up of an arbitration agreement not denude the Civil Court of its
authority to adjudicate upon the existence of such agreement, but also that
there are circumstances where a reference may be declined
notwithstanding the admitted execution of an arbitration agreement
covering the disputes. For such purpose, the plaintiffs rely on a judgment
reported at 2010 (1) SCC 72 (N. Radhakrishnan Vs. Maestro Engineers )
where the issue was slightly removed from what falls directly for
consideration in the present proceedings. The Court held in that case that
despite the existence of an arbitration agreement and the disputes in the
suit falling within the purview thereof, if the adjudication of the disputes
required detailed investigation and production of elaborate evidence, such
disputes had to be tried by Court. The N. Radhekrishnan judgment, though
not strictly applicable to this case, appears to enlarge the extent of the
primacy of the Civil Court over the agreed private forum. The arbitration
agreement was not in dispute in that case. Charges of misappropriation of
funds were levelled against the plaintiff in that case by a partner and the
suit was instituted for a declaration that the complaining person was not
even a partner of the defendant firm. The judgment noticed the dictum of a
three-Judge Bench in Abdul Kadir Shamsuddin Bubere Vs. Madhab
Prabhakar Oak, 1962(3) SCR 702, that where serious allegations of fraud
are made against a party and such party charged with fraud desires that
the matter should be tried in open Court, it would be sufficient cause for
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the Court not to order an arbitration agreement covering the disputes to be
filed. Though Abdul Kadir was a case under the 1940 Act and
notwithstanding the transformation of the law on arbitration in the country
upon the 1996 Act coming into force, N. Radhakrishnan found that an
element of discretion was still retained by the Court to refuse a prayer for
reference despite an admitted arbitration agreement. The plaintiffs rely on
an unreported Division Bench judgment of this Court in GA No. 1459 of
2009, APOT No. 190 of 2009, GA No. 640 of 2009, CS No. 61 of 2009
(Siddhi Vinayak Industries Pvt. Ltd. vs. Virgoz Oils & Fats PTE Ltd.)
delivered on September 7, 2009 where it was hield that section 16 of the
1996 Act is an enabling provision that permits the arbitral tribunal to rule
on its own jurisdiction; but that does not imply that the jurisdiction of the
Civil Court to consider such matter has been ousted. In another
unreported Division Bench judgment of this Court in GA No. 678 of 2009,
CS No. 69 of 2009(Nicco Corporation Ltd. vs. Prysmian Cavie Systemi
Energia s.r.1.) delivered on January 29,2010, it was held that if the factual
existence of an arbitration agreement was questioned the Civil Court would
have authority to entertain a suit; but if the question hinged on the legal
existence or validity of the arbitration agreement, it would be the arbitral
tribunal that would have exclusive jurisdiction. It must, of course, be
noticed that both the unreported judgments were rendered in the context
of section 45 of the 1996 Act relating to an arbitration agreement covered
by the New York Convention. The wording of section 45 of the 1006 Act is
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somewhat similar to sub-section (4) of section 9 of the English Act as the
judicial authority receiving a section 45 application has to assess whether
the arbitration agreement "is null and void, inoperative or incapable of
being performed."
The aforesaid decision has been upheld by the Division Bench in
Ghanashyam Das Baheti (Supra). The Division Bench noticed that the plaintiff in
that case alleged fraud in execution of arbitration agreement and held that in
order to get a temporary injunction although it is not necessary to prove concrete
full proof case of fraud, but the plaintiff would be required to make out a prima
facie case of fraud as to conduct of parties and the nature of agreement.
The judgment in N. Radhakrishnan was considered by the Hon'ble
Supreme Court subsequently in a decision in Swiss Timing Limited versus
Commonwealth Games, 2010 Organizing Committee reported at (2014) 6
Supreme Court Cases 677 and it was held that the said judgment is per
incurium as stated in paragraph twenty of the judgment. The relevant
paragraphs are paragraphs eighteen to twenty one, which are stated below:
18. "Having found that the subject-matter of the suit was within the
jurisdiction of the arbitration, it was held in N. Radhakrishnan case
that the disputes cannot be referred to arbitration. This Court
approved the finding of the High Court 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 8 cannot be properly gone into by the arbitrator. In my opinion, the aforesaid observations run counter to the ratio of the law laid down by this Court in Hindustan Petroleum Corpn. Ltd. v. Pinkcity Midway Petroleums, wherein this Court in para 14 observed as follows: (SCC p.504) "If in an agreement between the parties before the civil court, there is a clause for arbitration, it is mandatory for the civil court to refer the dispute to an arbitrator. In the instant case the existence of an arbitral clause in the agreement is accepted by both the parties as also by the courts below. Therefore, in view of the mandatory language of Section 8 of the Act, the courts below ought to have referred the dispute to arbitration."
19. In my opinion, the observations in Hindustan Petroleum Corpn. Ltd.
lay down the correct law. Although, reference has been made to the aforesaid observations in N. Radhakrishnan but the same have not been distinguished. A two-Judge Bench of this Court in P. Anand Gajapathi Raju v. P.V.G. Raju, had earlier considered the scope of the provisions contained in Section 8 and observed as follows: (SCC pp.542-43, para 8) "8. In the matter before us, the arbitration agreement covers all the disputes between the parties in the proceedings before us and even more than that. As already noted, the arbitration agreement satisfies the requirements of Section 7 of the new Act. The language of Section 8 is peremptory. It is, therefore, obligatory for the Court to refer the parties to 9 arbitration in terms of their arbitration agreement. Nothing remains to be decided in the original action or the appeal arising therefrom. There is no question of stay of the proceedings till the arbitration proceedings conclude and the award becomes final in terms of the provisions of the new Act. All the rights, obligations and remedies of the parties would now be governed by the new Act including the right to challenge the award. The court to which the party shall have recourse to challenge the award would be the court as defined in clause (e) of Section 2 of the new Act and not the court to which an application under Section 8 of the new Act is made. An application before a court under Section 8 merely brings to the court's notice that the subject-matter of the action before it is the subject-matter of an arbitration agreement. This would not be such an application as contemplated under Section 42 of the Act as the court trying the action may or may not have had jurisdiction to try the suit to start with or be the competent court within the meaning of Section 2(e) of the new Act.
20. This judgment in P. Anand Gajapathi case was not even brought to the notice of the Court in N. Radhakrishnan. In my opinion, the judgment in N. Radhakrishnan is per incuriam on two grounds: firstly, the judgment in Hindustan Petroleum Corpn. Ltd. though referred to has not been distinguished but at the same time is not followed also. The judgment in P. Anand Gajapathi Raju was not even brought to the notice of this Court. Therefore, the same has neither been followed nor considered. Secondly, the provisions contained in Section 16 of the Arbitration Act, 1996 were 10 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.
21. As noticed above, the attention of this Court was not drawn to the provision contained in Section 16 of the Arbitration Act, 1996 in N. Radhakrishnan. Section 16 provides that the Arbitral Tribunal would be competent to rule on its own jurisdiction including ruling on any objection with regard to existence or validity of the arbitration agreement. The Arbitration Act emphasises that an arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract. It further provides that a decision by the Arbitral Tribunal that the contract is null and void shall not entail ipso jure the invalidity of the arbitration clause." In the Household (Supra), it was found that the entire agrement containing the arbitration clause is vitiated in law. It was held that where existence of 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 up hold the arbitration agreement. However, when a question fraud is raised, the same has to be considered differently. Fraud as is well-known vitiates of solemn act. A contract would mean a valid contract; an arbitration agreement would mean an agreement, which is enforceable in law.
In the instant case, there is no challenge to the existence of the arbitration agreement, or the agreement containing the arbitration clause. 11
The arbitration is a mode of resolution of a dispute agreed by the parties. If the agreement is vitiated by fraud or by misrepresentation then it goes to the very root of the matter. Arbitration is consensual. A claim founded on the agreement containing an arbitration clause if is a product of fraud, the ratio of India House Hold and N. Radha Krishnan could apply.
However, the maintainability of a suit where the dispute are covered by the arbitration agreement can never be questioned. Once it is established that there has been an existence of an arbitration agreement the Court shall not ordinarily restrain the parties from proceeding with the arbitration proceedings. In the instant case, there is no dispute that the agreement between the parties contains arbitration clause and it is not alleged by the applicant that the said agreement was obtained by fraud. The intention of the parties to have their disputes resolved by arbitration also cannot be doubted. The parties have decided that all their disputes are to be resolved and decided by the arbitral tribunal constituted under the relevant by laws of the Bombay Stock Exchange.
In the instant case, the plaintiff never alleged that the agreement was entered into by fraud. Whether there has been any unauthorized act on the part of the plaintiff while carrying out the trades under the trade obligation and there is a breach of the broker - client agreement between the parties, it is required to be decided by the Tribunal constituted under the bye-laws and regulations of the Bombay Stock Exchange of India Ltd.
In view of the aforesaid, this Court finds no reason to stay the arbitration proceeding pending before the Arbitral Tribunal constituted under the Bombay 12 Stock Exchange of India Regulations. The application fails. However, there shall be no order as to costs.
(SOUMEN SEN, J.) S.Chandra