Telangana High Court
Chitanuri Vijay Kumar vs M/S Sama Constructions on 22 April, 2024
Author: K. Lakshman
Bench: K. Lakshman
1
HONOURABLE SRI JUSTICE K. LAKSHMAN
ARBITRATION APPLICATON No.68 OF 2020
ORDER:
Heard Sri K. Prabhakar, learned counsel for the applicant, Sri Sushant Reddy, learned counsel appearing for respondent No. 2, Sri Peri Prabhakar, learned counsel appearing for respondent Nos. 6, 7, 8 and 10, Sri Vivek Jain, learned counsel appearing for respondent Nos. 4, 5 and 12 to 16, Sri S. Sharath Kumar, learned counsel appearing for respondent No. 9 and Sri D. Bharath Reddy, learned counsel appearing for respondent Nos. 11 and 17 to 19.
2. 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.
CONTENTIONS OF THE APPLICANT:-
3. A partnership deed dated 31.10.2003 was entered between Mr. Sama Narsimha Reddy/R.4 and his wife by name Smt. Sama Kalavathy Reddy, Mr. Sama Sunil Kumar Reddy/R.5, Mr. Kontam Janardhan 2 Reddy and Late Mahender Bai Patel with an object to carry on business in real estate, acquiring lands, converting into residential plots, purchase and sale of plots, construction of building houses and sale and all types of contracts and incidental thereto in the name and style of 'M/s Sama Constructions'. The specific terms are mentioned therein. Thereafter, since two partners were retired and they have added some more partners including applicant herein, another partnership deed dated 24.05.2004 was entered. As per the said partnership deed, the applicant's share in the property and loss is 5%. A deed of retirement - cum - re-constitution of partnership deed dated 31.03.2007 was entered because of retirement of some of the partners and induction of new partners. The terms and conditions are specifically mentioned therein. On 18.07.2015 another deed of retirement was entered in view of retirement of some of the partners and induction of new partners.
4. Respondents 4 and 8 are Managing Partners of 1st respondent firm. Acting on behalf of the firm, respondents 4 and 8 engaged in negotiations with land owners for acquisition of land admeasuring Ac.15.00guntas in Sy.No.9/1, adjacent to National Highway No.9 in 3 Saroornagar Village and Mandal, Ranga Reddy District, valued at Rs.1.5 Crore per acre. All the partners including the applicant, participated in those negotiations and contributed funds in accordance with their respective share percentages outlined in clause 7 of the partnership deed.
5. Subsequently, they entered into Memorandum of Understanding (MOU) dated 25.05.2004 with the with the land owners with specific terms and conditions governing the transaction. Each partner collectively invested Rs. 5,39,90,000/- towards the partial sale consideration as per the provisions of MOU. The said collective investment drawn from the contributions made by the partners under the partnership deed, encompassed both the applicant and respondents 4 to 11. Consequently, an agreement of sale was executed in the name of the 1st respondent firm to validate the transaction and secure the acquired land from the land owners, M/s South India Research Institute Private Limited, represented by Sri. G. Subba Raju (for short, 'SIRIS').
6. Respondent No.4 proposed the acquisition of 0.68cents of landed property in Sy.No.9/1 (new 9/4) shown in Schedule-B in the name 4 of 1st respondent firm. The said proposal was accepted by all the then partners of 1st respondent firm and contributed funds proportionate to their shares for purchase of the same under various registered sale deeds bearing Doc.Nos. 4943/2006, 4946/2006, 4944/2006, and 4945/2006 in the name of 1st respondent firm.
7. Following M/s SIRIS's refusal, the land owner, to execute the registered sale deed as per the terms outlined in Agreement/MOU dated 25.05.2004, the 1st respondent firm had filed a suit vide O.S No.476 of 2006 on the file of XI Additional District Judge, Ranga Reddy District, seeking specific performance. Respondent No. 4, clandestinely neglected to communicate the said suit proceedings to the partners, leading to an unsuccessful application for impleadment filed by some partners thereby resulting in its dismissal on technical grounds.
8. Subsequently, Respondent No. 4, while negotiating on behalf of the firm with M/s SIRIS, informed the partners of a compromise offer reducing the land claim from 15 acres to 5 acres. Believing the 4th respondent bona fides, all the partners agreed for the said compromise. 5
9. The applicant further contended that 4th respondent acting with ulterior motive, further reduced the offer to 2.00 acres, saying M/s SIRIS was unwilling to part with any land more than that. Based on the assurance of Respondent No. 4, all partners accepted the compromise. The said suit was referred to Lok Adalat which recorded compromise on 23.11.2013 relinquishing 3.00 acres of land from the firm's claim in exchange for the land owner retaining 12.00 acres. The compromise terms recorded in O.S No. 476 of 2006 are as follows:-.
Terms of Compromise "A. The Plaintiff under the terms of compromise requested the Defendants to demarcate 250 ft. road facing commencing from the north side and to bifurcate the 250 ft. road facing to two portions of 125 feet/523 feet i.e., two equal halfs. B. The Defendants have agreed on the request of the Plaintiff to execute Registered documents in favour of the Plaintiff or any other nominees. On request of the Plaintiff the 1st half proportion of 125 ft./523ft, would be registered in the name of (1) Vanam Yadaiah, the Respondent No.6, (2) A.Buchi Babu, the Respondent No.7, (3) Anand Kumar Yerra the Respondent No.8, (4) Smt.P.Shashirekha, the Respondent No.9, (5) R.Ramanatham, the Respondent No.10, and (6) Chitanuri Vijaya Kumar, the petitioner herein who are some of the partners of the Plaintiff Firm as shown in Schedule - A. The other half of 125 ft. X 523 ft. is agreed to be registered in the name of (1) Sama Narasimha Reddy, the Respondent No.4 (2) Sama Sunil Kumar Reddy, the Respondent No.5 (3) Mahender Bhai Patel and (4) M/s KMR Constructions, rep by its Managing Partner Sri K. Mohan Reddy, the Respondent No. 11 as shown in Schedule -B who are the other partners of the Plaintiff firm" 6
10. It is further contended by the applicant that Respondent No.4 deliberately prolonged the transfer of property to other partners as per the compromise recorded in Lok Adalat. He finally agreed to convey the property to all partners according to their respective shares in third week of June, 2015. However, Respondent No. 4 deceitfully presented an alleged retirement-cum- reconstitution of partnership deed, dated 31.03.2007 executed by the applicant, other partners as well as his own family members and agents, as incoming partners. He also produced a retirement deed dated 18-07-2015, depicting all 17 partners, including himself as retiring partners and his associates as continuing partners.
11. The applicant further contended that Respondent No. 4 coerced all partners into signing these documents under the guise of facilitating the transfer of 3.00 acres acquired through compromise, assuring them that the land would be distributed according to their respective shares. Subsequently, in October 2017, the applicant uncovered the fraudulent scheme designed by Respondent No. 4 in collusion with the owners of M/s SIRIS, to defraud all partners of the partnership firm. Respondent No. 4 through misrepresentation, managed to acquire an excess land measuring Ac.1.25 guntas, covertly transferring it to his associates, purportedly incoming partners. Thus, the Respondent No. 4 deceived the partners by making them to believe that the 7 compromise agreement only covered 3.00 acres of land, while clandestinely negotiating with third parties to transfer approximately 14,000 square yards of property through his proxies. This fraudulent scheme came to light during an interrogation by Income Tax officials, revealing various conveyance deeds executed in favour of partners, including those set up by Respondent No. 4 and his associates, who contributed no consideration for the transactions. Concerns were raised by the District Registrar regarding undervaluation of the property, leading to an investigation under Section 47-A of the Indian Stamp (Andhra Pradesh Amendment) Act 1899. Subsequently, all partners were summoned by the Deputy Director of Income Tax for interrogation. During questioning, Respondent No. 4 provided misleading information about two MOUs dated 12-08-2013, falsely claiming additional land allotment beyond the extent agreed upon in the Lok Adalat award of Ac.3.00.
12. Following an enquiry/investigation by Income Tax officials, the applicant upon further inquiries, uncovered several conveyances favoring newly joined partners and associates of Respondent No. 4, who contributed no consideration for the transactions. Subsequently, on 18-07-2017, the applicant filed a comprehensive complaint before learned II Metropolitan Magistrate, Cyberabad, at L.B Nagar, exposing the clandestine actions of Respondent No.4. The Applicant alleges that Respondent No. 4 orchestrated the creation of 8 forged documents, particularly the Reconstitution-cum-Retirement deed dated 18-07-2015, misrepresenting himself as a retiring partner along with others while inducting his agents as partners. Under false pretenses, Respondent No. 4 misled the Applicant into signing the deed, falsely representing that the compromise only covered 3.00 acres of land. Moreover, Respondent No. 4 fraudulently backdated the deed to 31-03-2007, a time when one of the original partners, Mr. Mahender Bhai Patel, was deceased, rendering the document non-binding and void. Thus, the concocted document holds no legal validity, and the involved parties cannot derive any benefit from it.
13. The Applicant further contends that the inclusion of Respondent No.4, its associates as incoming partners, facilitated by a forged document, was orchestrated with malicious intent to unlawfully transfer a portion of the acquired property. The firm contributed a significant portion of the sale consideration amounting to Rs. 5,39,90,000/- for the acquisition of Ac.15.00 of land in 2004. Conversely, the proposed partners mentioned in the reconstitution deed, specifically Respondents 2, 3, and 12 to 19, are identified as proxies, who have not contributed any funds towards the land purchase. This lack of financial investment undermines their entitlement to any share of the firm's property.9
14. The Applicant further contended that the conveyance of land to Sri G. Komaraiah underscores the absence of the purported Reconstitution-cum- Retirement deed dated 31-03-2007. The original partners, including the applicant, who contributed funds in December 2004, sought to sell the land in question to Sri G. Komaraiah. However, due to the failure of 1st respondent firm and its partners to meet their contractual obligations, Sri G. Komaraiah issued a legal notice dated 15-5-2012, demanding compliance.
15. The said fact would reveal the non-existence of the alleged reconstitution deed. The said retirement - cum - reconstitution deed, dated 31.03.2007 was not submitted to the Registrar and was intentionally disclosed only in 2015, indicating fraud played by Respondent No.4.
16. It is the specific contention of the applicant that on careful examination of the documents would reveal transfer of 22,248 square yards, approximately 4.25 Acres, to reconstituted partners who had not contributed capital, exceeding the extent of 3 acres under compromise. This resulted in the conveyance of around 1.25 surplus acres to individuals unrelated to the original partners. Such action contravenes Clause 5 of the partnership deed. These new partners are purported proxies of Respondent No.4, disguised under the concocted Reconstitution-cum-Retirement deed of 31.3.2007. Under the reconstituted deed, dated 25.5.2004, the applicant and partners acquired 0.68 10 cents in Sy.No.9/4 vide sale deeds bearing Doc.Nos.4943/2006, 4946/2006, 4944/2006, and 4945/2006. However, this land was not conveyed to partners according to their shares. Thus, it is imperative that the applicants share be rightfully transferred, along with the remaining 1.25 acres obtained through compromise, as Respondent No.4 deceitfully misrepresented only 3.00 acres of land. To settle the remaining land share issues they reserve the right to invoke clause 15 of the said deed.
17. Thus, according to the applicant, Respondent No.4 acting as the Managing Partner of 1st respondent firm at that time, perpetrated fraud and deception by securing signatures from the applicant and other partners on the concocted Deed of Retirement - cum - Reconstitution of Partnership deed dated 31.3.2007, thereby inducting his own agents and henchmen as partners. Despite being a party to this document, the applicant asserts that it is not binding on him due to its fraudulent nature.
18. Thus, according to the applicant, there are disputes between the applicant and respondents with regard to the affairs of 1st respondent firm and purchase of the aforesaid land. In the process of resolving the disputes, the applicant held discussions with 4th Respondent to settle the remaining land share issue by transferring the remaining share of land, in addition to the land acquired in Sy.No.9/4 comprising 0.68 cents but in vain. The applicant issued a 11 legal notice on 17-04-2020 urging respondents to seek an amicable settlement or consent for appointment of arbitrator by this Court.
19. Respondent Nos. 4 and 5 filed counter acknowledging the transaction between the 1st respondent firm and M/s SIRIS, but disputes the alleged pro-rata contributions. The subsequent acquisition of 0.68 cents from M/s SIRIS is distinct, involving a separate seller, and therefore not subject to distribution among the partners and the subject property is not in dispute.
20. The applicant, having raised serious concerns over the genuinity of the document, cannot seek to invoke the arbitration clause raising out of the same contract and by seeking appointment of an arbitrator to settle the disputes in the present matter in distribution of Ac.3.00 of land among the partners. The applicant is seeking to modify the award passed by Lok Adalat. To nullify the said Award, he has to file a civil suit but not to seek appointment of an arbitrator.
21. The present application is barred by limitation. Since the applicant though having knowledge of the compromise deed dated 22.07.2005, has issued notice dated 17.04.2020 invoking the arbitration clause and filed the present application on 08.10.2020. Therefore, present application is barred by limitation.12
22. Respondent No. 4 maintains that post the Lok Adalat award, there was a clear transfer of property to the applicant and respondents No. 7 to 10, evidenced by an undertaking/declaration dated 22-07-2015, relinquishing their rights over the partnership firm's property. This transfer aligns with the terms of the Lok Adalat award further supported by a sale deed executed on the same date.
23. The applicant cannot take contrary view to retirement - cum- reconstitution of partnership deed dated 31.03.2007 was obtained fraudulently and cannot invoke clause No.15 i.e. arbitration of the very same document. He cannot seek modification of Lok Adalat Award dated 23.11.2013 which is beyond the scope of the arbitrator. The firm was dissolved on 07.10.2016 itself. At the most, he has to file a suit for rendition of accounts.
24. The applicant gave undertaking/declaration stating that he is the partner of the 1st respondent firm with 10% share, he retired from the said partnership firm w.e.f. 18.07.2015 and at the time of retirement, based on the order of the Lok Adalat on the compromise dated 23.11.2013, he is entitled to the receive 806.6 sq.yards in Sy.No.9/4 situated at Saroornagar village and Mandal, Ranga Reddy District. He shall get the said extent of land registered in his name through a proper deed of sale from the original owner of the said land and also the continuing partners of 1st respondent firm in due course. He 13 declared and undertook that he shall pay all the taxes relating to the transaction of the sale 806.6 sq.yards in his favour, whenever the same arises. He further declared that neither the firm nor the continuing partners or the other retiring partners are no way responsible for his tax liability for transfer of the said land. He further declared that he is not entitled for any other money or land or any other share in assets of the above partnership firm.
25. Therefore, having given the said undertaking/declaration, the applicant cannot invoke arbitration clause and seek for appointment of an Arbitrator.
26. Respondents 6 to 10 filed separate counters stating that there are arbitral disputes between the Applicant and respondents to be adjudicated by a sole Arbitrator. .
27. In view of the aforesaid facts and submissions, it is relevant to discuss the relevant legal position which is as follows:-
a. In Union of India Vs. Master Construction Company 1 the Apex Court while examining a decision of the High Court under Section 11 (6) of the 1996 Act holding that all disputes between the parties to the contract had to be referred to arbitration; whereafter learned arbitrator was appointed, dealt with the issue regarding furnishing of no claim certificate. The question before 1 (2011) 12 SCC 349 14 the Hon'ble Supreme Court was after furnishing no claim certificate and after receipt of payment of final bill as submitted by the contractor whether any arbitrable dispute between the parties survived or the contract stood discharged. After referring to its various decisions, Hon'be Supreme Court held that there is no rule of the absolute kind. In a case where the claimant contends that discharge voucher or no claim certificate has been obtained by fraud, coercion, duress or undue influence, and the other side contests the correctness thereof, the Chief Justice or his designate must look into this aspect to find out at least, prima facie, whether or not the dispute is bona fide and genuine. Where the dispute raised by the claimant with regard to validity of the discharge voucher or no claim certificate or settlement agreement, prima facie, appears to be lacking in credibility, there may not be a necessity to refer the dispute for arbitration at all. Thereafter the Hon'ble Supreme Court observed as under:
"19. It cannot be overlooked that the cost of arbitration is quite huge--most of the time, it runs into six and seven figures. It may not be proper to burden a party, who contends that the dispute is not arbitrable on account of discharge of contract, with huge cost of arbitration merely because plea of fraud, coercion, duress or undue influence has been taken by the claimant. A bald plea of fraud, coercion, duress or undue influence is not enough and the party who sets up such a plea must prima facie establish the same by placing material before the Chief Justice/his designate. If the Chief Justice/his designate finds some merit in the allegation of fraud, 15 coercion, duress or undue influence, he may decide the same or leave it to be decided by the Arbitral Tribunal. On the other hand, if such plea is found to be an afterthought, make-believe or lacking in credibility, the matter must be set at rest then and there."
b. Vide order dated 08.06.2022 in A.A.No.22 of 2019, this court referring to the said principle in Master Construction Company (supra), held as follows:-
Prima facie, both the parties to the agreement do not stand on the same footing. Bargaining power of the employer i.e. first respondent is certainly much more because of its commanding and controlling position. But this is an aspect i.e. whether the no claim certificate would foreclose raising of further claim by the applicant leading to discharge of contract or whether the same can be construed to have been signed and submitted because of the compelling circumstances virtually putting the applicant under compulsion / duress, is an issue which can certainly be gone into by the learned arbitrator.
c. In Avantha Holdings Ltd. Vs CG Power and Industrial Solutions Ltd, 2 the Delhi High Court while determining the arbitrability of matters vitiated by fraud, held as under:-
"82. In the facts of the present case, there is no dispute that the respondent had entered into the agreement that includes the arbitration clause. The dispute, essentially, is whether the said agreement is invalid as being part of the fraudulent exercise by the promoters of the respondent to siphon 2 2021 SCC OnLine Del 5202 16 funds from the respondent Company. The dispute whether the consent is vitiated on account of fraud, as defined under Section 17 of the Contract Act, 1872, and the agreement is voidable under Section 19 of the said Act, is clearly a matter that can be referred to arbitration. The said issue is no longer res integra in view of the decision of the Supreme Court in N.N. Global Mercantile (P) Ltd. case 3
83. As noted above, an agreement, which is invalid on account of fraud, would undoubtedly have a bearing on the question of arbitrability of the disputes. If the arbitration agreement is invalid, it is obvious that recourse to arbitration would not be available for deciding any dispute. However, unless the court finally concludes that the arbitration agreement is invalid, it would not be apposite to deny the request to arbitration. As highlighted in the Law Commission's 246 Report, a reference by any judicial authority is required to be made to arbitration if prima facie an arbitration agreement exists. However, the conclusion that an arbitration agreement does not exist would be conclusive and not prima facie. The Supreme Court also clearly held that where the summary consideration in a summary proceeding would be insufficient and inconclusive, the parties are required to be referred to arbitration. Unless the court gives a conclusion that ex facie the arbitration agreement is non- existent, invalid or the disputes are not arbitrable, the parties would be referred to arbitration See : para 154.4 of the decision in Vidya Drolia case [Vidya Drolia v. Durga Trading Corpn., (2021) 2 SCC 1 : (2021) 1 SCC (Civ) 549] . 84. It is well settled that an Arbitral Tribunal is also competent to decide the question regarding arbitrability of disputes. See : Zostel Hospitality (P) Ltd. v. Oravel Stays (P) Ltd. [Zostel Hospitality (P) Ltd. v. Oravel Stays (P) Ltd., (2021) 9 SCC 765 : (2021) 4 SCC (Civ) 3 (2021) 4 SCC 379.17
625] and Arasmeta Captive Power Co. (P) Ltd. v. Lafarge India (P) Ltd. (2013) 15 SCC 414"
d. The Apex Court in A. Ayyasamy v. A. Paramasivam 4 drew a distinction between serious fraud and fraud simpliciter arising out of disputes with regards to arbitrability of matters vitiated with fraud, relevant paragraphs are extracted below:-
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 demands extensive evidence for which the 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 [N. Radhakrishnan v. Maestro Engineers, (2010) 1 SCC 72 : (2010) 1 SCC (Civ) 12] does not touch upon this aspect and the said decision is rendered after finding that allegations of fraud were of serious nature.
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 4 (2016) 10 SCC 386 18 effect of arbitration agreement 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 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 19 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. 45.1. First and foremost, it is necessary to emphasise that the judgment in N. Radhakrishnan [N. Radhakrishnan v. Maestro Engineers, (2010) 1 SCC 72 : (2010) 1 SCC (Civ) 12] does not subscribe to the broad proposition that a mere allegation of fraud is ground enough not to compel parties to abide by their agreement to refer disputes to arbitration. More often than not, a bogey of fraud is set forth if only to plead that the dispute cannot be arbitrated upon. To allow such a plea would be a plain misreading of the judgment in N. Radhakrishnan [N. Radhakrishnan v. Maestro Engineers, (2010) 1 SCC 72 : (2010) 1 SCC (Civ) 12] . As I have noted earlier, that was a case where the appellant who had filed an application under Section 8 faced with a suit on a dispute in partnership had raised serious issues of criminal wrongdoing, misappropriation of funds and malpractice on the part of the respondent. It was in this background that this Court accepted the submission of the respondent that the arbitrator would not be competent to deal with matters "which involved an elaborate production of evidence to establish the claims relating to fraud and criminal misappropriation". Hence, it is 20 necessary to emphasise that as a matter of first principle, this Court has not held that a mere allegation of fraud will exclude arbitrability. 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 arbitrable under the law for the time being in force. In each such case where an objection on the ground of fraud and criminal wrongdoing is raised, it is for the judicial authority to carefully sift through the materials for the purpose of determining whether the defence is merely a pretext to avoid arbitration. It is only where there is a serious issue of fraud involving criminal wrongdoing that the exception to arbitrability carved out in N. Radhakrishnan (supra) may come into existence.
e. The Apex Court in Avitel Post Studioz Ltd. v. HSBC PI Holdings (Mauritius) Ltd. 5 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 Apex Court referred to Rashid Raza v. Sadaf Akhtar, 6 Apex Court three judges bench laid down a two prong test affirming the decision taken by A. Ayyaswamy(supra) to determine whether the fraud alleged is serious fraud and must be satisfied before the Court can refuse to refer the matter to the Arbitrator. The Court also held that 5 (2021) 4 SCC 713 6 (2019) 8 SCC 710 21 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 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 22 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.
Therefore allegations must have some implication in public domain to oust the jurisdiction of an Arbitrator, if an allegation of fraud exists strictly between the parties concerned, the same will not be termed to be as a serious nature of fraud and hence would not be barred for arbitration.
28. In the light of the principles laid down in the aforesaid judgments, coming to the facts of the present case, according to the applicant, respondent No.4, Managing Partner of the 1st respondent firm, kept the other partners in dark and did not inform about the proceedings in O.S.No.476 of 2006 to them, and thus, 4th respondent played fraud. It is a simple fraud. It is not a serious fraud.
29. Judged by these two tests, it is clear that this is a case which falls on the side of "simple allegations" as there is no allegation of fraud which would vitiate the partnership deed as a whole or, in particular, the arbitration clause concerned in the said deed. Secondly, all the allegations made which have been relied upon by the learned counsel appearing on behalf of the respondent, pertain to the affairs of the distribution of the scheduled land and siphoning of additional land to the incoming partners who have not contributed to the 23 purchase transaction of the said land. These claims by any length do not seem to impinge on any matter in the public domain. This being the case, we are of the view that the disputes raised between the parties are arbitrable disputes and, hence, a Section 11 application under the Arbitration Act would be maintainable as per clause 15.
30. It is apt to note that in Duro Felguera, S.A. v. Gangavaram Port Ltd. 7 the Hon'ble Supreme Court, at paragraph No. 59, held as under:
"The scope of the power under Section 11(6) of the 1996 Act was considerably wide in view of the decisions in SBP and Co. [SBP and Co. v. Patel Engg. Ltd., (2005) 8 SCC 618] and BogharaPolyfab [National Insurance Co.Ltd. v. BogharaPolyfab (P) Ltd., (2009) 1 SCC 267 : (2009) 1 SCC (Civ) 117]. This position continued till the amendment brought about in 2015. After the amendment, all that the courts need to see is whether an arbitration agreement exists nothing more, nothing less. The legislative policy and purpose is essentially to minimise the Court's intervention at the stage of appointing the arbitrator and this intention as incorporated in Section 11(6-A) ought to be respected."
31. The Hon'ble Supreme Court in Vidya Drolia v. Durga Trading Ltd. 8 laid down the test to exercise power under Section 11 of the Act, 1996. In his separate opinion, the then Chief Justice of India, held as follows: 7
(2017) 9 SCC 729 8 (2021) 2 SCC 1 24
244. Before we part, the conclusions reached, with respect to Question 1, are:
244.1. Sections 8 and 11 of the Act have the same ambit with respect to judicial interference. 244.2. Usually, subject-matter arbitrability cannot be decided at the stage of Section 8 or 11 of the Act, unless it is a clear case of deadwood.
244.3. The court, under Sections 8 and 11, has to refer a matter to arbitration or to appoint an arbitrator, as the case may be, unless a party has established a prima facie (summary findings) case of nonexistence of valid arbitration agreement, by summarily portraying a strong case that he is entitled to such a finding.
244.4. The court should refer a matter if the validity of the arbitration agreement cannot be determined on a prima facie basis, as laid down above i.e. "when in doubt, do refer".
244.5. The scope of the court to examine the prima facie validity of an arbitration agreement includes only:
244.5.1. Whether the arbitration agreement was in writing? Or 244.5.2. Whether the arbitration agreement was contained in exchange of letters, telecommunication, etc.? 244.5.3. Whether the core contractual ingredients qua the arbitration agreement were fulfilled? 244.5.4. On rare occasions, whether the subject-matter of dispute is arbitrable?
32. With regard to the contention of the respondent No.4 that the present application is barred by limitation, it is the specific contention of the applicant that he came to know about the fraud played by 4th respondent during enquiry under Section 47-A of the Indian Stamp Act and investigation conducted by Deputy Director of Investigation (Investigations), Unit-4, who summoned all the partners including the applicant. They have appeared before 25 him on 18.07.2017 wherein he posed a question to the applicant and other partners with regard to two MOUs which said to have been submitted by 4th respondent wherein 4th respondent deposed that one acre of land allotment to the 1st respondent in addition to the promise extended as regards to Lok Adalat Award.
33. Thereafter, he made his own enquiries and came to know that there were several conveyances executed in favour of newly joined partners, henchmen of the 4th respondent. After obtaining certified copies, he has filed complaint under Section 200Cr.P.C. before the learned Magistrate. According to him, it is a continuous fraud and it is a continuous cause of action. Therefore, invoking arbitration clause 15, he has issued legal notice dated 17.04.2020. Despite receiving the same, some of the respondents did not sent any reply and some of the respondents unclaimed the said notices. However, he has issued rejoinder dated 25.06.2020 and filed the present application on 18.10.2020. Therefore, the said fraud alleged by the applicant is continuous and therefore, there is continuous cause of action. As held in Vidya Drolia (supra), if there is slightest suspicion, referral Court cannot reject application filed under Section 11(6) of the Act seeking appointment of arbitrator.
34. As discussed supra, in the light of the aforesaid facts in the present case, it cannot be said that the application is barred by limitation. Therefore, 26 the contention of the respondents 1 to 4 that the present application is barred by limitation cannot be accepted.
35. Clause Nos. 5 and 15 of retirement and re-constitution deed, dated 31.03.2007 are relevant and the same are extracted below:-
Clause 5:
The funds required for the purpose of the Partnership business shall be contributed or arranged by parties of the 1st to 17th partners in such manner as may be mutually agreed upon. Interest @ 12% P.A. simple rate or such lower/higher rate as may be prescribed. ...........
...........
At the time of retirement of partners 1st to 17th, they are entitled to the assets of the firm in equal ratio based on their investments. As stated above, the parties of the 18th and 19th are not having any shre in the assets of the firm at the time of retirement.
Clause 15:
In case of any dispute or disputes arising out of the interpretation of any clause or clauses in these presents the same shall be referred to an arbitrator or arbitrators chosen by the partners and the decision taken by him/her shall be final and binding upon the partners.
36. Therefore, there is no dispute that parties by incorporating the said Clause had agreed to resolve their disputes through arbitration. Thus, it is appropriate to refer the dispute to arbitration. The parties are at liberty take all the available defences before the learned arbitrator.27
37. Sri Vivek Jain, learned counsel for the respondents 4 and 5 placed reliance on the following Judgments:-
1. Cauvery Coffee Trades vs. Hornor Resources (International Co.Ltd. 9
2. Bhargavi Constructions vs. K.Muthyam Reddy 10
3. Raghunath Singh vs. Bricmor Infra Project Ltd 11
4. Zenith Drugs vs. Nicholas Piramal 12
5. Bharat Rasiklal Ashra vs. Gautam Rasiklal Ashra 13
6. Ivory Properties & Hotels Pvt.Ltd. vs Nusli Neville Wadia 14
38. In view of the law laid down by the 7 Judges Bench of the Apex Court in N.N.Global Mercantile (P) Ltd. vs. Indo Unique Flame Ltd. 15. wherein it was held that the aspect of fraud is to be considered by the arbitrator himself. Therefore, the principles held in the said judgments relied upon by Sri Vivek Jain, learned counsel are not applicable to the facts of the present case.
39. In light of the aforesaid discussion, this Court is of the considered opinion that there are disputes between the applicant and 9 (2011) 10 SCC 420 10 (2018) 12 SCC 480 11 (2022) SCC online TS 2199 12 (2020) 17 SCC 419 13 (2012) 2 SCC 144 14 (2011) SCC Online Bom.22 15 2023 INSC 1066 28 respondents which are arbitral disputes. The role of this Court is very limited to adjudicate the said disputes. As held by the Apex Court in Vidya Drolia (supra), this Court has to examine as to the existence of arbitration agreement and arbitration clause. This Court cannot consider the merits of the case or nature of disputes. In the present case, there is arbitration agreement and arbitration clause.
40. In the result, the Arbitration Application is allowed.
Accordingly, Dr Justice Shameem Akther, Former Judge of the High Court of Telangana at Hyderabad, is appointed as sole Arbitrator to adjudicate the disputes between the parties.
As a sequel thereto, the pending miscellaneous applications, if any, shall stand closed.
_________________________ JUSTICE K. LAKSHMAN Date:22.04.2024 VVR.