Bombay High Court
Sap India Private Limited vs Cox And Kings Limited on 30 November, 2018
Equivalent citations: AIRONLINE 2018 BOM 1240
Author: G.S.Kulkarni
Bench: G.S. Kulkarni
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IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
IN ITS COMMERCIAL DIVISION
COMMERCIAL ARBITRATION APPLICATION NO.61 OF 2018
SAP India Private Limited .. Applicant
Vs.
Cox & Kings Limited ... Respondent
-----
Mr.Navroz Seervai, Senior Advocate with Ashish Kamat Farhad Sorabjee, Pratik
Pawar, Ms.Shanaya Vyrus Irani, Siddhesh Pradhan I/b. J.Sagar Associates, for
the Applicant.
Mr.Rampal Singh Kohli with Sonia Redkar I/b. C.K.Legal Advocates and
Consultants, for the Respondent.
-----
CORAM : G.S. KULKARNI, J.
RESERVED ON: 21st November, 2018.
PRONOUNCED ON : 30th November, 2018
---
Judgment:
1. By this application under Section 11(6) of the Arbitration and
Conciliation Act,1996 (for short 'the Act'), the applicant seeks
appointment of an arbitrator on behalf of the respondent to adjudicate the
disputes between the parties which are stated to have arisen under the
agreement dated 30 October 2015 termed as "Services General Terms and
Conditions Agreement" for implementation of the SAP Hybris E-Commerce
Solution Software (for short 'the agreement').
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2. The applicant's case as pleaded in the application is that the
applicant is a wholly owned subsidiary of SAP Se GmBH incorporated
under the Companies Act,1956 and is one of the world's largest and
leading provider of business software solutions, with functions spread
across sectors and industries-private and public sectors, municipalities,
utilities, infrastructure and transport. It is stated that the applicant
supports more than 9000 customers in the Indian sub-continent, and has
over 7500 employees spread across three development centres in India. It
is stated that six out of seven Maharatna companies and eleven out of
seventeen navratna companies are run on applicant's software. It is stated
that the applicant's customers outreach include running applications daily
to issue more than 80 lacs tickets, managing 125 airports and securing 28
lacs square nautical miles of airspace, handling 1.2 crore tons of cargo
annually, providing electricity to more than 4 crores citizens of India,
operating 18 out 20 main refineries in India. It is stated that the applicant
provides implementation services of such SAP proprietary software only.
3. The applicant's case is that the respondent was interested in
building a global travel solution for its different business entities had
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earlier approached three different vendors but had failed. The respondent
being a long standing and a satisfied customer of the applicant in the past,
entered into discussions with the applicant from mid of 2015, wherein the
applicant offered the "SAP Hybris" software based on the
understanding/requirements as provided by the respondent. It is stated
that the respondent conducted a proper and thorough diligence and after
being fully satisfied, requested the applicant to send a commercial
proposal.
4. Accordingly an agreement and the Order Form 1 was entered
between the applicant and the respondent interalia for services (as
described in Order Form 1) and for implementation of applicant's SAP
Hybris E-Commerce Solution Software ("Project") which was licensed to
the respondent by the applicant under the SAP Software End-User License
Agreement effective from 14 December 2010 (License Agreement) read
with Software License and Support Agreement Software Order Form 3
effective from 30 October 2015.
5. The applicant has averred that prior to entering into the
agreement and the Order Form 1 for the purposes of the Project, the
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applicant was provided with a bird's eye view (in form of a few
presentations) of the respondent's expectations from the project. The
business requirement documents were shared with the applicant only after
commencement of work on the project. It was understood between the
parties that the agreement and the Order Form 1 were executed on a
'Time and Material Basis' (instead of a fixed-fee), the respondent was
contractually obligated to pay the applicant on the basis of time spent by
the applicant's team on the project where the timelines and the cost for
the services was provided only on an estimate basis. The applicant also
proceeded to invest huge resources and time towards implementation of
the said project.
6. The applicant stated that in or about August,2016, the
respondent started alleging that timelines in respect of the project were
not being adhered by the applicant and alleged that the applicant and its
top management misrepresented to the respondent that the said software
was 90% compatible to the requirements of the respondent. The
respondent however failed to mention that the alleged delay in
operationalizing the software which in fact according to the applicant was
attributable to the respondent as set out in paragraph 9 of the application.
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7. The applicant state that the disputes had arisen between the
parties as the respondent started making allegations against the applicant
and its representatives. The representatives of the applicant had several
meetings and discussions with the respondent in an attempt to try and
resolve the disputes and differences between the parties in the amicable
manner. The applicant also provided six weeks solution re-design of the
operations area. This was ignored by the respondent and the respondent
made unreasonable demand for refund of all the monies paid by it to the
applicant and full refund and payment of all consequential losses and
started escalating the matter. It is stated that further in November,2016,
the respondent purportedly terminated the agreement which according to
the applicant is not as per the terms of the agreement, on the ground of
alleged delay on the part of the applicant in completion of the project. The
respondent also refused to make payment to the applicant towards
invoices amounting to Rs.17 crores for the work done by the applicant
during the period April,2016 to July 2016. Timesheets in respect of the
said claim as made by the applicant for the said period, were in fact
approved by the respondent.
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8. On the above backdrop of disputes having been arisen, the
applicant by its notice issued to the respondent dated 29 October 2017
invoked a reference of the disputes to arbitration as per clause 15.7 of the
agreement interalia in relation to the wrongful termination of the
agreement and recovery of principal claim amount of Rs.17,00,00,000/-
alongwith additional interests and costs under the agreement.
9. The respondent replied to the notice of the applicant by its
letter dated 29 November 2017 interalia alleging fraud and
misrepresentation which according to the applicant was with an intent to
avoid reference of the disputes with the applicant to arbitration. The
applicant thereafter by its Advocate's letter dated 14 December 2017
refuted the allegations made by the respondent and according to the
applicant recorded the true and correct facts of the matter. The applicant
also informed the respondent that the applicant had appointed Mr.Justice
V.C.Daga (Retd) on its behalf to act as an arbitrator and called upon the
respondent to appoint an arbitrator on their behalf. This letter of the
applicant's Advocate was replied by the respondent by its letter dated 12
January 2018 reiterating its contentions as raised in its letter dated 29
November 2017 whereby the respondent refused to comply with the
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requisitions of the applicant. The applicant contends that accordingly the
respondent failed to appoint an arbitrator on its behalf. It is on the above
backdrop the present application has been filed on 14 February 2018
seeking appointment of the respondent arbitrator.
10. A detailed affidavit in reply dated 23 March 2018 of
Mr.Himanshu Khare, authorized representative of the respondent is placed
on record. The case of the respondent as set out in the reply is interalia of
the agreement being void, ab-initio and procured by the applicant through
serious fraud and misrepresentation. It is the respondent's case that the
respondent was deceitfully induced to part with a huge sum of about
Rs.45 crores by the applicant. It is further its case that a criminal
complaint has been filed by the respondent against the applicant on 4
August,2017 for commission of offences of misappropriation, criminal
breach of trust, cheating and fabricating false evidence. At the same time
the respondent has not denied that the respondent earlier entered into
agreement dated 12 December 2010 with the applicant. In paragraph 8(k)
of the affidavit the respondent has stated that the applicant has willfully
and fraudulently induced the respondent to enter into a 'Software License
& Support Agreement' dated 30 October 2015. The case of fraud according
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to the respondent is spelt out in paragraph 8(o) of the reply affidavit. It is
further stated that a criminal complaint being filed by the respondent, the
police authorities have accordingly filed FIR on 19 October 2017. A
perusal of the affidavit in its entirety clearly indicates that the case of the
respondent to oppose this application is of a fraud as played by the
applicant against the respondent not only inducing to enter into the
agreement but even further actions taken in the execution of the contract.
11. There are two more affidavits filed on behalf of the
respondent, opposing this application which are on the same lines to urge
a case of a fraud as played by the applicant. There is a further affidavit
dated 22 March 2018 filed by Mr.Vinayak Raut, Chief Technology Officer
of the respondent which interalia supported the contentions in the
affidavit of Mr.Himanshu Khare. Mr.Vinayak Raut has stated that he
has participated in the meetings and negotiations held between the
applicant and the respondent from the beginning till the contract was
rescinded and it is on the basis of his personal knowledge he is deposing.
The sum and substance of the affidavit is that the case of the respondent is
that the applicant had admitted of the representation made by them that
the Hybris Solution is 90% in sync and caters to the software requirement
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of the respondent, was not correct. In paragraph 6 of the affidavit
Mr.Vinayak Raut has stated as under:-
6. I say that it becomes clear from the meeting held
on 14 November,2016, 15th November,2016 and 21st
th
March,2017 that the Applicant admitted the
representations made by them that the Hybris Solution is
90% in sync and caters to the software requirement of
the Respondent was not correct and it was found that
the fitment of the Hybris Solution vis-a-vis the Business
Requirement Developments of Respondents was at
significantly low level, then what was represented."
There is another affidavit filed on behalf of Mr.Himanshu
Khare dated 26 September 2018. The affidavit interalia contends that in
view of criminal complaint filed by the respondent, the case of fraud
makes the arbitration agreement invalid. It is submitted that technical and
complicated evidence ought not to have referred to the arbitration. A
reference is made to the various issues in the investigation to point out
non-arbitrability of the dispute.
12. Mr.Kohli, learned Counsel for the respondent though refused
to argue the matter on merits despite the said three affidavits of the
respondent on record has made some submissions that the conduct of the
applicant is fraudulent and submitted that criminal proceedings in that
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regard are already pending as also a forensic report is called for.
13. I have perused the application, the affidavits as filed on
behalf of the respondent. It appears from the record that the application
was listed before the Court from time to time.
14. It is not in dispute that the parties have entered into a
"Services General Terms and Conditions Agreement" dated 30 October
2015. Clause 15.7 of the said agreement is the arbitration clause which
reads thus:-
"15.7. Dispute Resolution. In the event of any dispute of difference
arising out of the subject matter of this Agreement, the Parties shall
undertake to resolve such disputes amicably. If disputes and
differences cannot be settled amicably then such disputes shall be
referred to bench of three arbitrators, where each party will
nominate one arbitrator and the two arbitrators shall appoints a
third arbitrator. Arbitration award shall be binding on both parties.
The arbitration shall be held in Mumbai and each party will bear
the expenses of their appointed arbitrator. The expense of the third
arbitrator shall be shared by the parties. The arbitration process
will be governed by the Arbitration & Conciliation Act,1996."
15. It is also not in dispute that the applicant by its letter dated
29 October 2017 invoked the arbitration clause and had nominated
Mr.Justice V.D.Daga (Retd) as an Arbitrator on behalf of the applicant and
had called upon the respondent to appoint its arbitrator in accordance
with the provisions of the Act.
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16. The applicant's letter dated 29 October 2017 was replied by
the respondent by its letter dated 29 November 2017. In the said letter the
respondent clearly stated as under:-
"It is true that there existed an agreement dated 30th October,2015
between the parties which contained the arbitration clause.
However, according to us, we were induced by the Directors,
Officers and Employees of SAP India Private Limited and SAP SE
GmBH with fraudulent intent by making false representation to
enter into that agreement and an amount of approximately Rs.46
crores was paid by us to SAP India Private Limited under the said
agreements which SAP India Pvt. Ltd. And SAP SE GmBH
deceitfully, by making false representation, induced us to execute."
(emphasis supplied)
In the said letter it was also recorded by the respondent that
on 4 August 2017 a criminal complaint was filed by the respondent
against the officers of the applicant at MRA Marg Police Station, Mumbai
and the investigation was transferred to the Economic Offences Wing.
The respondent also recorded that the entire dispute is therefore
complicated and arises from criminal conduct of the applicant and its
officers and that the agreement dated 30 October 2015 which contained
arbitration clause, is invalid and inoperative and as there are allegations of
fraud, the disputes are not arbitrable.
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17. The said letter of the respondent dated 29 November 2017
was replied by the Advocates of the applicant by a letter dated 14
December 2017 denying all the allegations. The applicant stated that the
allegations against the applicant interalia of fraud and misrepresentation
are baseless and unwarranted and no more than a pre-meditated and a
deliberate attempt to avoid delay in reference of dispute between the
applicant and the respondent to arbitration. The applicant sets out all the
facts which, according to the applicant, clearly demonstrate liability of the
respondent to pay the applicant. It was stated that the dispute was clearly
a contractual dispute and only to resile from the agreement, the
respondent had resorted to unwarranted action of resorting to untenable
criminal proceedings. In paragraphs 4 to 7 the applicant recorded as
under:-
"4. Our client states that the criminal proceedings referred to in
the letter are nothing but an opportunistic afterthought, and the
allegations of inter alia, fraud and misrepresentation are a poorly
disguised endeavour to provide an unsustainable and ill-advised
criminal colour to the present commercial matter. Admittedly, the
Criminal proceedings were initiated by you, after you "terminated"
the Agreement (although not in terms of the Agreement) and the
same is therefore entirely irrelevant and extraneous to the dispute.
Even assuming whilst denying that the same has any substance, the
criminal proceedings merely constitute a poorly-disguised abuse of
process to attempt to intimidate and browbeat our client, an
attempt that is condemned to failure. Despite being fully aware
that the present dispute is contractual in nature, you have sought
to make unsubstantiated allegations against our client only with an
intent to resile from your agreement to submit the disputes arising
out of the said Agreement to arbitration. The pendency of the
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criminal proceedings mentioned do not in any way embargo the
initiation of arbitral proceedings.
5. Your thinly-disguised attempt to adopt these proceedings
and give the purported dispute a colour that would allegedly fit
into the findings of the Hon'ble Supreme Court, is both misleading
and an attempt to abuse the law laid down by the Hon'ble Supreme
Court.
6. Your attempt to stymie the arbitration mechanism for
resolution of the disputes in relation tot he Agreement has caused,
and continues to cause, serious harm to our client. Our client
reserves its right to seek such reliefs as may be appropriate in this
regard.
7. Your attempt to adopt post facto and unrelated criminal
proceedings to avail of the Supreme Court judgments is
unfortunate. Your "termination" of the Agreement (although not in
terms of the Agreement) was several months prior to your adopting
criminal proceedings. Assuming whilst denying that there is any
merit in these criminal proceedings, the attempt to use the
Supreme Court judgments is a cynical abuse and misinterpretation
of those judgments."
18. The applicant's advocate's letter dated 14 December 2017 was
replied by the respondent's advocate's letter dated 12 January 2018,
interalia recording that on 4 August 2017 the respondent filed a criminal
complaint on the charges of fraud, misrepresentation, cheating and
criminal conspiracy. It is stated that the nature of the case with its
surrounding facts and circumstances rendered the matter non-arbitrable
and attracted criminal action and the agreement was rightly terminated by
the respondent. It was further stated that the respondent was deceitfully
induced to make payment of Rs.46 crores to SAP India Pvt.Ltd. And SAP
SE GmBH under the agreement.
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19. For the purpose of this application, the scope of inquiry
would be limited as per the provisions of sub-section (6A) of Section 11 of
the Act as inserted by the Amendment Act 3 of 2016 (with effect from 23
October 2015) which would be confined to the existence of an arbitration
agreement between the parties. As noted above in the letter dated 29
November 2017 of the respondent, the respondent has clearly admitted
that "there existed agreement dated 30th October 2017 between the parties
which contained arbitration clause." There is also a valid invocation of a
reference to arbitration in terms of the contract by the applicant by its
letter dated 29 October 2017 and 14 December 2017, whereby the
applicant has appointed its nominee to act as arbitrator, and called upon
the respondent to appoint its nominee. There is a clear failure on the part
of the respondent to appoint its nominee arbitrator.
20. A three Judge bench of the Supreme Court in "Wexford
Financial Inc.Panama Vs. Bharat Heavy Electricals Ltd."1 in paragraph 9
observed thus:-
".. ..... There is, in that view, no gainsaying that the present petition under
Sections 11(5) and 11(12) shall have to be allowed with appropriate directions,
particularly when this Court is concerned primarily with the question whether
1 (2016)8 SCC 267
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an arbitration agreement exists between the parties and if so whether the
disputes falling within the scope of the agreement have arisen for determination.
....... ....
21. In "TRF Limited vs. Energo Engineering Projects Limited"2,
three Judge bench of the Supreme Court while examining Section 11(6A)
held as under:-
42. We are referring to the same as learned counsel for the parties
have argued at length with regard to the disclosure made by the
arbitrator and that has also been referred to by the designated
Judge. In this context, we may profitably refer to sub-section (6A)
of Section 11 of the Act which reads as follows:
"11.(6A). The Supreme Court or, as the case may be, the
High Court, while considering any application under sub-
section (4) or sub-section (5) or sub-section (6), shall,
notwithstanding any judgment, decree or order of any
Court, confine to the examination of the existence of an
arbitration agreement."
43. The purpose of referring to the said provision is that the
amended law requires the Court to confine the examination of the
existence of an arbitration agreement notwithstanding any
judgment of the Supreme Court or the High Court while
considering an application under Section 11(6) of the Act. As the
impugned order would indicate, the learned Judge has opined that
there had been no failure of procedure, for there was a request for
appointment of an arbitrator and an arbitrator has been appointed.
It is apt to state here that the present factual score projects a
different picture altogether and we have to carefully analyse the
same."
22. In "Duro Felguera, S.A. Vs. Gangavaram Port Ltd."3 the
Supreme Court examining the provisions of Section 11(6-A) of the Act,
2 (2017)8 SCC 377
3 (2017)9 SCC 729
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has observed thus:-
"18. The language in Section 11(6) of the Act "the Chief Justice or
any person or institution designated by him" has been substituted
by "Supreme Court or as the case may be the High Court or any
person or institution designated by such Court". Now, as per sub-
section (6A) of Section 11, the power of the Court has now been
restricted only to see whether there exists an arbitration
agreement. The amended provision in sub-section (7) of Section 11
provides that the order passed under Section 11(6) shall not be
appealable and thus finality is attached to the order passed under
this Section. The amended Section 11 reads as under:- ... ... ...
.. ... ...
22. On behalf of GPL, it was repeatedly urged that the works are
intrinsically connected, inseparable, integrated, interlinked and
that they are one composite contract and that they were split up
only on the request and representations given by Duro Felguera
and FGI. As discussed earlier, as per amended provision Section 11
(6A), the power of the Supreme Court or the High Court is only to
examine the existence of an arbitration agreement. From the
record, all that we could see are five separate Letters of Award; five
separate Contracts; separate subject matters; separate and distinct
work; each containing separate arbitration clause signed by the
respective parties to the contract."
In the concurring judgment of Mr.Justice Kurian Joseph, His Lordship in
paragraphs 47 and 48 observed thus:-
"47. What is the effect of the change introduced by the Arbitration
and Conciliation (Amendment) Act, 2015 (hereinafter referred to
as "the 2015 Amendment") with particular reference to Section
11(6) and the newly added Section 11(6A) of the Arbitration and
Conciliation Act, 1996 (hereinafter referred to as "the 1996 Act") is
the crucial question arising for consideration in this case.
48. Section 11(6A) added by the 2015 Amendment, reads as
follows:
"11(6A) The Supreme Court or, as the case may be, the
High Court, while considering any application under sub-
section (4) or sub-section (5) or sub-section (6), shall,
notwithstanding any judgment, decree or order of any
Court, confine to the examination of the existence of an
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arbitration agreement." (Emphasis Supplied)
From a reading of Section 11(6A), the intention of the legislature is
crystal clear i.e. the Court should and need only look into one
aspect- the existence of an arbitration agreement. What are the
factors for deciding as to whether there is an arbitration agreement
is the next question. The resolution to that is simple - it needs to be
seen if the agreement contains a clause which provides for
arbitration pertaining to the disputes which have arisen between
the parties to the agreement.
23. Adverting the above position in law it is clear that in exercise
of its jurisdiction in adjudication of application under Section 11(6) of the
Act, the enquiry of the Court would now be confined primarily to the
question whether an arbitration agreement exists between the parties and
if it is so exists whether the disputes are falling within the scope of the
agreement have arisen for adjudication.
24. In so far as as the case of the Respondent that the dispute itself is
not arbitrable as according to the Respondent it is a clear case of fraud for
which criminal proceedings are initiated by the Respondent, in my
opinion, cannot be accepted. This has two fold reasons, firstly, I am of the
opinion that the record would indicate that it was too late in time after the
execution of the contract which took place on 30 October 2015, for the
respondent to contend that the applicant had played a fraud on the
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respondent to induce the respondent to enter into a contract. Further it
clearly appears that the contract between the parties was sufficiently put
into operation and executed. It is also not in dispute that substantial
amounts under contract were paid by the Respondent to the applicant and
there was a further claim of Rs.17 crores as made by the applicant from
the respondent.
25. If it was really to be a case of fraud right from the inception
as alleged by the respondent, it is difficult to accept as to how payments
could be made by the Respondent to the applicant. From the perusal of
the reply Affidavits and more particularly affidavit of Mr. Vinayak Raut,
Chief Technological Officer and as to what he says in paragraph 6 as
noted above in reality it prima facie appears to be a pure contractual
dispute, although the defence/case of the Respondent is that it has
initiated criminal proceedings against the applicant. This albeit the fact
that there were long standing contractual relations between the parties.
26. Be that as it may, in a situation as in the present case when a
party in a contract has alleged fraud, whether the Court would be
prevented in the facts of the case from referring the dispute to arbitration
and what would be the principles to be followed is now well settled.
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27. In A. Ayyasamy vs. A. Paramasivam and others 4 which is a
decision of two Judge Bench of the Supreme Court, Dr. Justice A. K. Sikri,
speaking for the Court in paragraph 18 observed thus:-
18, When the case involves serious allegations of fraud, the
dicta contained in the aforesaid judgments would be
understandable. However, at the same time, mere allegation of
fraud in the pleadings by one party against the other cannot be a
ground to hold that the matter is incapable of settlement by
arbitration and should be decided by the civil court. The allegations
of fraud should be such that not only these allegations are serious
that in normal course these may even constitute criminal offence,
they are also complex in nature and the decision on these issues
demand extensive evidence for which civil court should appear to
be more appropriate forum than the Arbitral Tribunal. Otherwise, it
may become a convenient mode of avoiding the process of
arbitration by simply using the device of making allegations of
fraud and pleading that issue of fraud needs to be decided by the
civil court. The judgment in N. Radhakrishnan does not touch upon
this aspect and said decision is rendered after finding that
allegations of fraud were of serious nature." (emphasis supplied)
In the supplementary judgment of Dr.Justice
D.Y.Chandrachud, His Lordship has observed that allegations of criminal
wrongdoing or of statutory violation would not detract from the
jurisdiction of the Arbitral Tribunal to resolve a dispute arising out of a
civil or contractual relationship on the basis of the jurisdiction conferred
by the arbitration agreement. It was emphasized that as a matter of first
principle in N. Radhakrishanan vs. Maestro Engineers 5 case, the
4 2016 (10) SCC 386.
5 (2010)1 SCC 72.
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Supreme Court had not held that mere allegation of fraud will exclude
arbitrability. It is observed that the burden must lie heavily on a party
which avoids compliance with the obligation assumed by it to submit
disputes to arbitration to establish the dispute is not arbitratble under the
law for the time being in force. His Lordship in taking review of the law
on the issue, in paragraphs 32, 43, 45.2 and 51 has observed thus:
"32. The Arbitration and Conciliation Act, 1996 does not in specific
terms exclude any category of disputes - civil or commercial - from
arbitrability. Intrinsic legislative material is in fact to the contrary.
Section 8 contains a mandate that where an action is brought before a
judicial authority in a matter which is the subject of an arbitration
agreement, parties shall be referred by it to arbitration, if a party to or a
person claiming through a party to the arbitration agreement applies not
later than the date of submitting the first statement on the substance of
the dispute. The only exception is where the authority finds prima facie
that there is no valid arbitration agreement. Section 8 contains a positive
mandate and obligates the judicial authority to refer parties to
arbitration in terms of the arbitration agreement. While dispensing with
the element of judicial discretion, the statute imposes an affirmative
obligation on every judicial authority to hold down parties to the terms
of the agreement entered into between them to refer disputes to
arbitration. Article 8 of the UNCITRAL Model Law enabled a court to
decline to refer parties to arbitration if it is found that the arbitration
agreement is null and void, inoperative or incapable of being performed.
Section 8 of the Act of 1996 has made a departure which is indicative of
the wide reach and ambit of the statutory mandate. Section 8 uses the
expansive expression "judicial authority" rather than "court" and the
words "unless it finds that the agreement is null and void, inoperative
and incapable of being performed" do not find place in Section 8.
.........
43. Hence, allegations of criminal wrongdoing or of statutory
violation would not detract from the jurisdiction of the arbitral tribunal
to resolve a dispute arising out of a civil or contractual relationship on
the basis of the jurisdiction conferred by the arbitration agreement.
... ... ..
45.2. Allegations of fraud are not alien to ordinary civil courts.
Generations of judges have dealt with such allegations in the context of
civil and commercial disputes. If an allegation of fraud can be
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adjudicated upon in the course of a trial before an ordinary civil court,
there is no reason or justification to exclude such disputes from the
ambit and purview of a claim in arbitration. Parties who enter into
commercial dealings and agree to a resolution of disputes by an arbitral
forum exercise an option and express a choice of a preferred mode for
the resolution of their disputes. Parties in choosing arbitration place
priority upon the speed, flexibility and expertise inherent in arbitral
adjudication. Once parties have agreed to refer disputes to arbitration,
the court must plainly discourage and discountenance litigative strategies
designed to avoid recourse to arbitration. Any other approach would
seriously place in uncertainty the institutional efficacy of arbitration.
Such a consequence must be eschewed.
... ... ..
While affirming the judgment of the Court of Appeal, the House of Lords
held:
"13 In my opinion the construction of an arbitration clause
should start from the assumption that the parties, as rational
businessmen, are likely to have intended any dispute arising out
of the relationship into which they have entered or purported to
enter to be decided by the same tribunal. The clause should be
construed in accordance with this presumption unless the
language makes it clear that certain questions were intended to
be excluded from arbitrator's jurisdiction. As Longmore LJ
remarked, at para 17:
"if any businessmen did want to exclude disputes about
the validity of a contract, it would be comparatively easy
to say so"
....
15. If one adopts this approach, the language of clause 41 of
Shelltime 4 contains nothing to exclude disputes about the
validity of the contract, whether on the grounds that it as
procured by fraud, bribery, misrepresentation or anything else. In
my opinion it therefore applies to the present dispute".
This principle should guide the approach when a defence of fraud is
raised before a judicial authority to oppose a reference to arbitration.
The arbitration agreement between the parties stands distinct from the
contract in which it is contained, as a matter of law and consequence.
Even the invalidity 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.
56. The legal position has been succinctly summarized in
International Commercial Arbitration by Gary B Born (2 nd Edn. Vol. I.
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p.846) thus:
".....under most national arbitration regimes, claims that the parties'
underlying contract (as distinguished from the parties' arbitration clause)
was fraudulently induced have generally been held not to compromise
the substantive validity of an arbitration clause included in the contract.
The fact that one party may have fraudulently misrepresented the quality
of its goods, services, or balance sheet generally does nothing to impeach
the parties' agreed dispute resolution mechanism. As a consequence, only
fraud or fraudulent inducement directed at the agreement to arbitrate
will, as a substantive matter, impeach that agreement. These
circumstances seldom arise: as a practical matter, it is relatively unusual
that a party will seek to procure an agreement to arbitrate by fraud, even
in those cases where it may have committed fraud in connection with the
underlying commercial contract". (emphasis supplied)
28. In a recent decision in Ameet Lalchand Shah and others vs.
Rishabh Enterprises6, Smt.Justice R. Bhanumti speaking for the bench
and referring to the decision in A. Ayyasamy (supra) in para 36 to 38
observed thus:
"36. While concurring with Justice Sikri, Justice D. Y. Chandrachud
pointed out that the duty of the Court is to impart "sense of business
efficacy" to the commercial transactions pointed out that mere allegations
of fraud were not sufficient to decline to refer the parties to arbitration. In
para (48) of Ayyasamy case, Justice D. Y. Chandrachud held as under :-
48. The basic principle which must guide judicial decision-
making is that arbitration is essentially a voluntary assumption
of an obligation by contracting parties to resolve their disputes
through a private tribunal. The intent of the parties is
expressed in the terms of their agreement. Where commercial
entities and persons of business enter into such dealings, they
do so with a knowledge of the efficacy of the arbitral process.
The commercial understanding is reflected in the terms of the
agreement between the parties. The duty of the court is to
impart to that commercial understanding a sense of business
efficacy."
(Underlining added)
37. When we apply the aforesaid principles to the facts of the present
6 2018 SCC Online SC 487
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case, as discussed earlier, both parties have consciously proceeded with
the commercial transactions to commission the Photovoltaic Solar Plant at
Dongri, Raksa, District Jhansi, U.P. The first respondent has proceeded to
procure the materials, entered into agreement with Juwi India for
engineering, installation and commissioning and the sale and purchase
agreement with Astonfield, were all the conscious steps taken in the
commercial understanding to commission the Solar Plant at Dongri,
Raksa, District Jhansi, U.P. Even though Juwi India and Astonfield are not
parties to the main agreement - Equipment Lease Agreement
(14.03.2012), all the agreements/contracts contain clauses referring to
the main agreement. It is the duty of the Court to impart the commercial
understanding with a "sense of business efficacy" and not by the mere
averments made in the plaint. The High Court was not right in refusing to
refer the parties on the ground of the allegations of fraud levelled in the
plaint.
38. It is only where serious questions of fraud are involved, the
arbitration can be refused. In this case, as contended by the appellants
there were no serious allegations of fraud; the allegations levelled against
Astonfield is that appellant no.1 - Ameet Lalchand Shah misrepresented
by inducing the respondents to pay high er price for the purchase of the
equipments. There is, of course, a criminal case registered against the
appellants in FIR No.30 of 2015 dated 05.03.2015 before the Economic
Offences Wing, Delhi. The appellant no.1 - Ameet Lalchand Shah has
filed Criminal Writ Petition No.619 of 2016 before the High Court of
Delhi for quashing the said FIR. The said writ petition is stated to be
pending and therefore, we do not propose to express any views in this
regard, lest, it would prejudice the parties. Suffice to say that the
allegations cannot be said to be so serious to refuse to refer the parties to
arbitration. In any event, the Arbitrator appointed can very well examine
the allegations regarding fraud."
29. Applying the above well settled principles of law to the facts of the
present case and to the plea of fraud and misrepresentation and pendency
of the criminal proceedings as urged on behalf of the Respondent, I am
not convinced that the respondent's case falls in such a category of
exception that at the threshold a reference of the disputes between the
parties to an arbitral tribunal should be denied by not accepting the
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applicant's plea to appoint an arbitral tribunal. In any case it always open
to the arbitral tribunal to form an opinion on the merits of the issues,
including arbitrality of the disputes.
30. Both the parties are stated to be entities of repute in their respective
fields of business. The commercial understanding of the parties is clearly
evident in the agreement dated 30 th October, 2015. As observed by the
Supreme Court the duty of the Court is to impart commercial
understanding with a sense of business efficacy. This, more particularly
when in the present case, it is quite clear from the record that agreement
was acted upon, part consideration was paid by the Respondent to the
applicant which is also a substantial amount of Rs.48 crores and when a
balance claim of Rs.17 crores was made by the applicant, disputes have
arisen, as also the contract came to be terminated and criminal complaints
were initiated by the respondent. Thus the allegations of the respondent
of a fraud or criminal act would not detract the jurisdiction of the arbitral
tribunal to resolve disputes between the parties, which arise from a
contractual relationship for which the parties have entered into the
arbitration agreement. The arbitration agreements cannot be rendered
nugatory, it needs to work and is required to be given its full effect, which
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is the very intention of the parties to have such agreement.
31. In the above circumstances, I am of the clear opinion that the
arbitration application is required to be allowed. The applicant has already
nominated Mr.Justice V.C.Daga (retired) as its nominee arbitrator. The
respondent having not appointed an arbitrator, the Court would be
required to appoint an arbitrator. Accordingly the following order:-
ORDER
(I) Mr.Justice V.C.Daga (retired) former Judge of this Court is proposed to be appointed as an arbitrator on behalf of the applicant. (II) The Court appoints Mr. Justice D. B. Bhosale (Retd), former Chief Justice of Allahabad High Court, having address at 6, Bhagyoday, Nagindas Master Road, Behind Kandil Restaurant, Near Stock Exchange, Mumbai-400001, as a nominee arbitrator on behalf of the respondent. (III) The prospective arbitrators appointed by the Court shall appoint the Presiding Arbitrator in accordance with the provisions of the Act. (IV) The prospective arbitrators before entering a reference, shall make a statement of disclosure as per the requirement of Section 11(8) read with Section 12(1) of the Arbitration and Conciliation Act,1996, and forward the same to the Prothonotary and Senior Master of this Court to be placed ::: Uploaded on - 30/11/2018 ::: Downloaded on - 30/12/2018 11:37:18 ::: pvr 26 carap61-18.doc on record of this application, with a copy to be forwarded to both the parties.
(V) The Arbitration Application is disposed of in the above terms. No costs.
32. The above observations are prima-facie and are made only in the context of adjudication of the present application under Section 11(6) of the Act. All contentions of the parties on merits of the dispute on all issues are expressly kept open.
(G.S.Kulkarni, J.) ::: Uploaded on - 30/11/2018 ::: Downloaded on - 30/12/2018 11:37:18 :::