Sita Holiday Resorts Limited vs Mohan Lal Harbans Lal Bhayana & Co. ...
1999 Latest Caselaw 343 Del

JUDGMENT

S.N. Kapoor, J.

1. In this case, the question is whether there is a valid Arbitration Agreement in between the parties for, Mr. P.N. Bhatia who had signed on behalf of the defendant firm as partner, was allegedly not a partner, and as such, the defendant could not prima facie enforce the Arbitration Agreement.

2. Before proceeding further, it is desirable to appreciate the factual matrix. According to the plaintiff's case, late Shri P.N. Bhatia represented himself as a partner of defendant M/s. Mohan Lal Harbans Lal Bhayana and Co. and signed the alleged Articles of Contract dated 12th February, 1993 for and on behalf of defendant No.1, was not the partner on that date. A fraud was played on the plaintiff by producing photostat copies of some alleged partnership deed dated 24th May, 1986 and a photostat copy of Office Order No. 208 (B & R) New Delhi dated September, 1986 from the Government of India, Directorate General, Central Public Works Department indicating that late Shri P.N. Bhatia was one of the partners of defendant No. 1. Believing that Mr. P.N. Bhatia was competent to sign contract dated 12th February,1993, plaintiff entered into contract. Some disputes arose in between the parties relating to the said contract and the disputes were referred to Arbitration in terms of Articles of Contract dated 12th February, 1993 and from discovery and production of documents, it transpired that late Shri P.N. Bhatia, the signatory of the Contract, was not the partner and he represented as partner of the defendant No.1. It also transpired that the defendant firm was not registered under Section 69 of the Partnership Act. Mr. Ashish Bhatia who signed and verified the claim petition represented himself to be one of the partners of defendant No.1, was also not a partner. Now, the defendants are claiming that Mr. P.N. Bhatia and Mr. Ashish Bhatia were Attornies of defendant No. 1 and have allegedly filed forged and fabricated documents. Consequently, the plaintiff raised objection on 24th October, 1997 that there was no valid executable and subsisting Article of Contract (including the Arbitration Agreement) and therefore no Arbitration could take place. The matter could be tried only u/s. 9 of the CPC and not under the Arbitration.

3. The Arbitrator has already framed an issue and since the new Arbitration Act applies, under Section 9 it is only for the Arbitrator to decide the issue first for this Court has no jurisdiction to enter into those questions. Under Section 22 of the Partnership Act, even an outsider could appoint the firm and firm could re-confirm the agreement, even oral authorisation was permissible.

4. The plaintiff has moved an application for ad interim injunction for staying the proceedings before defendant No. 2 the Arbitrator.

5. The suit as well as this application is being contested by the defendant. It is claimed that the defendant No.1 is a partnership concern of primarily two families-Bhayanas and Bhatias. For administrative convenience, Shri P.N. Bhatia moved out of the partnership and a separate partnership was formed by late Shri P.N. Bhatia in the year 1992. However, Shri P.N. Bhatia continued to be attorney of continuing partnership firm of defendant No.1. In these circumstances, he signed the Articles of Contract dated 12th February, 1993. Consequently, the legality and validity of the contract was not affected. Only mis-description of persons signing Articles of Contract could not affect the validity or the execution of the contract for, the contract already stood executed. Shri P.N. Bhatia was fully authorised to enter upon the contract by all the partners of defendant No.1 and Mr. Ashish Bhatia was also an authorised person on behalf of defendant No. 1. He was also partner of sister concern Mohanlal Harbanslal Bhayana & Company (III). It is denied that any Power of Attorney was forged.

6. It is claimed that the defendant No.1 had completed the task but the plaintiff failed to make the payment. It is also added that the parties had acquiesced in appointment of Arbitrator and voluntarily agreed to Arbitration. Consequently, the plaintiff could not be permitted to take an about turn and the appointment of the Arbitrator for adjudication of disputes through the Forum of Arbitrator.

7. I have heard the parties Counsel and gone through the record. It is an undisputed fact that in 1993 when the contract was entered into Shri P.N. Bhatia was not partner of the defendant firm. It is also not disputed that the contract was performed by defendant No.1 and after completion of the contract, the dispute arose relating to payment.

8. The learned Counsel for the defendant submits that Section 16 of the new Act provides for the procedure in a situation like the present one relating to challenge to the validity of the Arbitration Agreement. Section 16 of the new Act reads as under:

16. Competence of arbitral Tribunal to rule on its jurisdiction. (1) The Arbitral Tribunal may rule on its own jurisdiction, including ruling on any objections with respect to the existence or validity of the Arbitration agreement, and for that purpose,. -

(a) an Arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract; and

(b) a decision by the Arbitral Tribunal that the contract is null and void shall not entail ipso jure the invalidity of the Arbitration Clause.

(2) A plea that the arbitral Tribunal does not have jurisdiction shall be raised not later than the submission of the statement of defense; however, a party shall not be precluded from raising such a plea merely because that he has appointed, or participated in the appointment of an Arbitrator.

(3) A plea that the arbitral tribunal is exceeding the scope of its authority shall be raised as soon as the matter alleged to be beyond the scope of its authority is raised during the arbitral proceedings.

(4) The arbitral Tribunal may, in either of the cases referred to in Sub-section (2) or Sub-section (3), admit a later plea if it considers the delay justified.

(5) The arbitral Tribunal shall decide on a plea referred to Sub-section (2) or Sub-section (3) and, where the arbitral Tribu nal takes a decision rejecting the plea, continue with the arbitral proceedings and make an arbitral award.

(6) A party aggrieved by such an arbitral award may make an application for setting aside such an arbitral award in accordance with Section 34.

9. On the basis of Section 16, it is submitted by learned Counsel for the defendant that now the arbitral Tribunal could decide on its own jurisdiction including the ruling on any objection with respect of the existence or validity of the Arbitration Agreement. The arbitral Tribunal on such a plea being raised is supposed to take decision and on rejecting the plea, may continue with arbitral proceedings and make an award. The remedy provided to an aggrieved party by such an award is to make an application for setting aside such an arbitral award in accordance with Section 34. As such, the question of validity or invalidity is to be decided by the Arbitrator and this Court is not required to interfere at this stage.

10. On the other hand, the plea of the leaned Counsel for the plaintiff is that there is no provision in the new act to cover the fundamental question of the nature raised in the case. The Arbitrator could not clothe himself with the jurisdiction to decide the dispute raised by the plaintiff in the proceedings. Seeing the provisions of Section 16, even if it is accepted prima facie that Mr. P.N. Bhatia had no authority to enter into the Arbitration agreement, it is apparent that such a question could be raised before the arbitral Tribunal. And, in this case not only it has been raised but issue has also been framed on the point. It cannot be said that Section 16 does not cover all the possible objections with respect to the existence or validity of the Arbitration Agreement. Therefore, I find it difficult to accept the submission of learned Senior Counsel appearing on behalf of the plaintiff.

11. Learned Counsel for the plaintiff referred to the definition of Arbitration Agreement under Section 7(4) of the new Act. There cannot be any dispute about the proposition that there has to be an agreement between the parties and agreement to refer to those disputes in addition to a defined legal relationship contractual or otherwise. It appears from the scheme of the Act that after the reference has been made to the Arbitrator, only Section 16 of the Arbitration Act would come into play for Section 5 of the new Act Provides as under:

5. Extent of judicial intervention. - Notwithstanding anything contained in any other law for the time being in force, in matters governed by this Part.

Section 5 as well as Section 16 both are in Part I and, therefore, the question relating to jurisdiction and validity of the Arbitration Agreement could be decided only by the arbitral Tribunal and not by the Court in these proceedings.

12. While in terms of submissions made by Shri P.N. Lekhi, prima facie it appears that Mr. P.N. Bhatia was not a partner, for even now the defendant No. 1 has not accepted him to be the partner. Instead, it is pleaded that he was holder of a General Power of Attorney. The General Power of Attorney is also challenged by the learned Senior Counsel for the plaintiff on the ground that the paper which was purchased for agreement had been used for forging the General Power of Attorney. Fraud is specifically pleaded in para 7 of the plaint.

13. In response to the above argument, the learned Counsel for the defendant submits that apart from the original Arbitration Agreement, the notice was given on 23rd January, 1996 for reference to the Arbitration and in response to the notice, the plaintiff has passed a resolution for the appointment of Hon'ble Mr. Justice M.K. Chawla (Retd.) as the Sole Arbitrator to enter into, consider, adjudicate upon and make an award in respect of the disputes between the contractor and the company on the one hand and the contractor on the other. It is also submitted that, thus, there is a subsequent agreement also justifying the reference.

14. The submission of the learned Counsel for the defendant is two-fold. Firstly, the exception to Section 19 of the Contract Act applies for, if the consent was being caused by misrepresentation by Mr. P.N. Bhatia within the meaning of Section 17 of the Contract Act, the contract nevertheless was not voidable for, the plaintiff could discover the truth with ordinary diligence and as such could not avoid the contract. It is also contended that the consent was given to enter into contract with defendant No.1 and not by Mr. P.N. Bhatia in his personal capacity. Therefore the consent was not affected by the fraud or misrepresentation. Secondly, the explanation to Section 19 provides that a fraud or misrepresentation which did not cause the consent to contract of the party on whom such fraud was practised or to whom such mis-representation was made, does not render the contract voidable. In so far as the explanation part is concerned, I feel that it may be a very material fact in case of a partnership firm to decide the question as to whether a contract should be entered into with a partnership firm or not for, it depends on credit-worthiness of individual partners of the firm more or less like a sole proprietary concern. I feel that explanation may be of no help to the defendant.

15. As regards the exception to Section 19, I feel that this may also be of no help for in ordinary course, a person is supposed to act upon the antiquity and continuity of the things. "Antiquity of time forty fifth all titles and supposeth the base beginning the law can given them". It is a maxim of the Law of England to give effect to everything which appears to have been established for a considerable course of time, and too presume that what has been done was done of right, and not of wrong. (See Broom's Legal Maxim 10th Edn. Page 640). It may be mentioned that Section 109 of the Indian Evidence Act provides: "When the question is whether persons are partners, landlord and tenant or principal and agent, and it has been shown that they have been acting as such, the burden of proving that they do not stand, or have ceased to stand, to each other in those relationships respectively, is on the person who affirms it." In this connection, Section 106 of the Indian Evidence Act provides: "When any fact is specially within the knowledge of any person, the burden of proving that fact is upon him." Accordingly, person who knows and claims about the discontinuity of such a relationship is supposed to disclose about discontinuity. If such a case of discontinuity of relationship is not disclosed, it must amount fraudulent misrepresentation for it amounts to active concealment of fact by one having knowledge or belief of the fact. Since Mr. P.N. Bhatia was admittedly a partner earlier and it was in his special knowledge that he was no more a partner of the defendant firm at the time of executing the `Articles of Contract', and the question of entering into a contract depends on credit-worthiness of individual partners, non-disclosure of such a fact certainly amounted to fraud. Firstly, Mr. P.N. Bhatia knowing that he was not a partner of the defendant firm suggested that he was a partner and secondly, it amounted to active concealment of a material fact by one having knowledge or belief of the correct facts. Accordingly, I feel that exception and explanation to Section 19 of the Contract Act are of no help to the defendant.

16. As regards the applicability of Sections 64 and 65 of the Contract Act, they are reproduced below for ready reference: "64. Consequences of rescission of voidable contract. When a person at whose option a contract is voidable rescinds it, the other party thereto needs not perform any promise therein con tained in which he is promisor. The party rescinding a voidable contract shall, if he have received and benefit thereunder from another party to such contract, restore such benefit, so far as may be, to the person from whom it was received.

65. Obligation of person who has received advantage under void agreement, or contract that becomes void.When an agreement is discovered to be void, or when a contract becomes void, any person who has received any advantage under such agreement or contract is bound to restore it, or to make compensation for it, to the person from whom he received it.

17. The submission of the learned Counsel for the parties regarding revoking or rescission of voidable contact also does not appear to be of any assistance to either of the parties, for if the plaintiff could revoke or rescind the contract only when he came to know of the fraud played on him, the plaintiff for the defendant, whosoever rescinds such a contact, if he has received any benefit thereunder, is supposed to restore such benefit, so far as may be, to the person from whom it was received.

18. However, the learned Counsel for the defendant has some substance in his submission that since the contract has undisputedly been performed by defendant No. 1, even if it was void or voidable, the plaintiff who has received advantage under the said agreement or contract is bound to compensate for it to the defendant No.1. While there cannot be any doubt that no man could take advantage of his own wrong, but at the same time no person could keep the fruits of a voidable contract under Section 64 or void contract under Section 65 of the Contract Act.

19. Consequently, this contention of the learned Counsel for the defendant has to be upheld.

20. For the foregoing reasons, I find no force in IA 10518/97 and reject the same.

I.A. dismissed.