Telangana High Court
Smt. Komirishetty Shravani vs Dr. Indana Geetha on 11 July, 2022
Author: K. Lakshman
Bench: K. Lakshman
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HON'BLE SRI JUSTICE K. LAKSHMAN
ARBITRATION APPLICATION No.142 OF 2021
ORDER:
The present Arbitration Application is filed under Section 11 of the Arbitration and Conciliation Act, 1996 (hereinafter 'the Act, 1996') for appointment of a sole Arbitrator to resolve the disputes between the parties.
2. Heard Ms. Zainab Khan, learned counsel, representing Mr. S. Nagesh Reddy, learned counsel for the Applicant and Mr. N. Rishi Kumar learned counsel appearing for the Respondents.
3. Contentions of the Applicant:
i. The Applicant and Respondent No. 1 entered into an agreement of sale dated 07.02.2020 for a sale consideration of Rs. 3,00,00,000/- ii. The said agreement of sale relates to the property owned by Respondent No. 1, bearing Municipal No. 1-15/A consisting of stilt + 2 upper floors, having a plinth area of 3750 Sq. Ft. with RCC roof, together with land admeasuring 223 Sq. Yds. forming 2 part of Sy. No. 159, situated at Khajaguda village, Serlingampally Mandal, R.R. District (hereinafter 'subject property'). iii. In the said transaction, the son-in-law of Respondent No. 1 acted as a mediator.
iv. As per the terms of the Agreement and its recitals, the Applicant issued a cheque of Rs. 10,00,000/- as advance payment and also paid an amount of Rs. 55,00,000/- The said cheque of Rs. 10,00,000/- was presented by Respondent No. 1 and was duly honored on 06.03.2020.
v. On various dates, the Applicant paid cash to Respondent No. 1 through her son-in-law, the payments made to her son-in-law were duly acknowledged by her by issuing receipts. vi. As on 13.06.2020, Respondent No. 1 was in receipt of Rs.
1,70,00,000/- and her son-in-law assured that the registration of property would be affected the next day. However, the registration did not take place as the son-in-law of Respondent No. 1 demanded an extra amount of Rs. 50,00,000/-3
vii. While things stood thus, a suit bearing OS No. 319 of 2020 was filed by Respondent No. 2 (daughter of Respondent No. 1) seeking perpetual injunction against the Applicant and her family members. It was during this time that the Applicant came to know that the subject property is already transferred to Respondent No. 2 by Respondent No. 1 by executing a gift deed.
viii. Aggrieved by the action of Respondent Nos. 1 and 2, the Applicant filed an application under Section 9 of the Act, 1996 vide A.O.P. No. 5 of 2020 on the file of XV Additional District Judge, Ranga Reddy at Kukatpally. The said application was allowed vide order dated 24.07.2020 and an interim injunction was granted restraining the Respondents herein from alienating the property. ix. The Applicant invoked Clause 11 of the agreement dated 07.02.2020 and issued an arbitration notice to the Respondents on 02.11.2020. The said notice remained unserved on the 4 Respondents. Therefore, the present application is flied seeking appointment of an Arbitrator.
4. Contentions of the Respondents:
i. The Respondents denied all the allegations made by the Applicant.
The execution of agreement of sale deed dated 07.02.2020 was denied stating that the same was forged by the Applicant. The receipts showing acknowledgment of payments of various amounts were also denied stating that the same were fabricated. ii. Since, the agreement of sale deed dated 07.02.2020 itself is forged, no arbitration agreement exists. Further, where serious allegations of fraud and forgery exists, the disputes are not arbitrable. Findings of the Court:
5. As stated above, the Respondents contend that the agreement of sale dated 07.02.2020 was never executed. They contend that serious allegations of fraud and forgery exist against the Applicant and the existence of the arbitration agreement itself is in challenge and therefore, the dispute is non-arbitrable.
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6. Therefore, now the question that arise before this Court is whether serious allegations of fraud exist in the present case, so as to make the entire dispute non-arbitrable.
7. It is relevant to note that the question of arbitrability of fraud was considered by the Supreme Court in A. Ayyasamy v. A. Paramasivam.1 The Supreme Court therein held that serious allegations of fraud are not arbitrable, whereas simple allegations of fraud can be decided by the Arbitrator. Explaining what amounts to serious fraud, the Court held that where the allegations go to the validity of the arbitration agreement itself, such allegations of fraud are not arbitrable. At the same time, the Court also held that a party cannot wriggle its way out of an arbitration clause merely by alleging fraud. Only when allegations are so complex that only a civil court can decide, the courts can refuse to appoint an Arbitrator. The relevant paragraph of the said judgment is extracted below:
25. In view of our aforesaid discussions, we are of the opinion that mere allegation of fraud simpliciter may not be a ground to nullify the effect of arbitration agreement 1 (2016) 10 SCC 386.6
between the parties. It is only in those cases where the court, while dealing with Section 8 of the Act, finds that there are very serious allegations of fraud which make a virtual case of criminal offence or where allegations of fraud are so complicated that it becomes absolutely essential that such complex issues can be decided only by the civil court on the appreciation of the voluminous evidence that needs to be produced, the court can sidetrack the agreement by dismissing the application under Section 8 and proceed with the suit on merits. It can be so done also in those cases where there are serious allegations of forgery/fabrication of documents in support of the plea of fraud or where fraud is alleged against the arbitration provision itself or is of such a nature that permeates the entire contract, including the agreement to arbitrate, meaning thereby in those cases where fraud goes to the validity of the contract itself of the entire contract which contains the arbitration clause or the validity of the arbitration clause itself. Reverse position thereof would be that where there are simple allegations of fraud touching upon the internal affairs of the party inter se and it has no implication in the public domain, the arbitration clause need not be avoided and the parties can be relegated to arbitration. While dealing with such an issue in an application under Section 8 of the Act, the focus of the court has to be on the question as to whether jurisdiction of the court has been ousted instead of focusing on the issue as to whether the court has jurisdiction or not. It has to be kept in mind that insofar as the statutory scheme of the Act is concerned, it does not specifically exclude any category of cases as non-arbitrable. Such categories of non-arbitrable subjects are carved out by the courts, keeping in mind the principle of common law that certain disputes which are of 7 public nature, etc. are not capable of adjudication and settlement by arbitration and for resolution of such disputes, courts i.e. public fora, are better suited than a private forum of arbitration. Therefore, the inquiry of the Court, while dealing with an application under Section 8 of the Act, should be on the aforesaid aspect viz. whether the nature of dispute is such that it cannot be referred to arbitration, even if there is an arbitration agreement between the parties. When the case of fraud is set up by one of the parties and on that basis that party wants to wriggle out of that arbitration agreement, a strict and meticulous inquiry into the allegations of fraud is needed and only when the Court is satisfied that the allegations are of serious and complicated nature that it would be more appropriate for the Court to deal with the subject-matter rather than relegating the parties to arbitration, then alone such an application under Section 8 should be rejected.
The law on arbitrability of fraud was further clarified by the Supreme Court in Rashid Raza v. Sadaf Akhtar.2 The Court laid down a two- prong test to determine whether the fraud alleged is serious fraud. The Court held that where allegations of fraud relate to the existence of the arbitration agreement itself and where such allegations have implications on the public domain, such allegations or disputes arising out of such 2 (2019) 8 SCC 710.
8allegations are not arbitrable. The relevant paragraphs are extracted below:
4. The principles of law laid down in this appeal make a distinction between serious allegations of forgery/fabrication in support of the plea of fraud as opposed to "simple allegations". Two working tests laid down in para 25 are: (1) does this plea permeate the entire contract and above all, the agreement of arbitration, rendering it void, or (2) whether the allegations of fraud touch upon the internal affairs of the parties inter se having no implication in the public domain.
The Supreme Court in Avitel Post Studioz Ltd. v. HSBC PI Holdings (Mauritius) Ltd.3 held that the disputes relating to fraud are arbitrable as long as the allegations of fraud do not permeate the existence of the agreement itself. The Court distinguished between pre-agreement fraud, where the entering of the agreement itself in question and post-agreement fraud where the existence of the agreement is not disputed. The Court also held that mere initiation of criminal proceedings does not make the dispute non-arbitrable. The relevant paragraphs are extracted below:
34. In a recent judgment reported as Rashid Raza [Rashid Raza v. Sadaf Akhtar, (2019) 8 SCC 710 : (2019) 4 SCC (Civ) 503] , this Court referred to Sikri, J.'s judgment in Ayyasamy [A. Ayyasamy v. A. Paramasivam, (2016) 10 3 (2021) 4 SCC 713 9 SCC 386 : (2017) 1 SCC (Civ) 79] and then held : (Rashid Raza case [Rashid Raza v. Sadaf Akhtar, (2019) 8 SCC 710 : (2019) 4 SCC (Civ) 503] , SCC p. 712, para 4) "4. The principles of law laid down in this appeal make a distinction between serious allegations of forgery/fabrication in support of the plea of fraud as opposed to "simple allegations". Two working tests laid down in para 25 are :
(1) does this plea permeate the entire contract and above all, the agreement of arbitration, rendering it void, or (2) whether the allegations of fraud touch upon the internal affairs of the parties inter se having no implication in the public domain."
35. After these judgments, it is clear that "serious allegations of fraud" arise only if either of the two tests laid down are satisfied, and not otherwise. The first test is satisfied only when it can be said that the arbitration clause or agreement itself cannot be said to exist in a clear case in which the court finds that the party against whom breach is alleged cannot be said to have entered into the agreement relating to arbitration at all. The second test can be said to have been met in cases in which allegations are made against the State or its instrumentalities of arbitrary, fraudulent, or mala fide conduct, thus necessitating the hearing of the case by a writ court in which questions are raised which are not predominantly questions arising from the contract itself or breach thereof, but questions arising in the public law domain.
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8. Coming to the facts of the case, this Court cannot accept the contentions of the Respondent that serious allegations of fraud exist which make the dispute non-arbitrable. It is relevant to note that mere allegations of serious fraud cannot stop the court from appointing an Arbitrator. According to this Court, the party alleging serious fraud has to prima facie establish that facts constituting such fraud exist. No party can avoid arbitral proceedings by a merely alleging serious fraud, including serious.
9. The Courts while deciding whether the existence of the agreement is marred by serious fraud has to see the conduct of the party alleging such fraud. For instance, it may be relevant to see if the party acted in furtherance of the alleged contract or not. If the party alleging serious fraud acted in furtherance of the contract, it cannot allege serious fraud which threatens the existence of the agreement itself. Further, the courts may also look into the conduct of the party after discovery of the fraud. In other words, the subsequent steps taken by the party alleging fraud against the party playing the alleged fraud may be relevant. If the court finds that fraud was discovered but no action was taken against it, 11 the court may draw an inference against the existence of serious fraud. However, this Court makes it clear that there can be no straight-jacket formula to ascertain whether serious allegations of fraud exist or not. Every case is to be decided based on the relevant facts.
10. In the present case, the Respondents allege that the agreement of sale dated 07.02.2020 is forged and fabricated. Further, they dispute the signatures on the agreement of sale dated 07.02.2020 and also on the payment receipts acknowledging receipt of money from the Applicant. Apart from these allegations, the Respondents have placed nothing on record to indicate that the agreement was obtained by fraud. Further, during the course of hearing the learned counsel for the Respondents accepted that the cheque dated 12.02.2020 of Rs. 10,00,000/- has issued by the Applicant under the terms of the agreement of sale dated 07.02.2020 and the same was honored and payment was received by the Respondent No. 1 on 06.03.2020. Respondent No. 1 having received payment in terms of the agreement dated 07.02.2020 cannot allege that serious allegations of fraud exist which vitiate the entire agreement including the arbitration clause. Therefore, this Court 12 cannot accept the contention of the Respondents that serious allegations of fraud exist which are not arbitrable.
11. At this juncture, it is relevant to note that the scope of Section 11 of the Act, 1996 is extremely limited. In Vidya Drolia v. Durga Trading Corporation4, the Supreme Court has held that whenever there is a doubt regarding the existence of a dispute, the courts shall refer the matter to arbitration.
12. In light of the aforesaid discussion and the law laid down by the Supreme Court, the present Arbitration Application is allowed. Accordingly, Sri Justice Challa Kodanda Ram, Former Judge of the High Court of Telangana, is appointed as the sole Arbitrator to resolve the disputes between the parties. The parties are free to take all the available pleas and defences before the learned sole Arbitrator.
Consequently, miscellaneous Petitions, pending if any, shall stand closed.
__________________ K. LAKSHMAN, J Date: 11.07.2022 Note: L.R.copy to be marked.
b/o. vvr 4 (2021) 2 SCC 1.