Shri Roshan Lal Gupta vs Shri Parasram Holdings Pvt Ltd & ...
2009 Latest Caselaw 478 Del

        *IN THE HIGH COURT OF DELHI AT NEW DELHI

+                   OMP 205/1997 & RSA 131/2002



%11.02.2009                           Date of decision: 11.02.2009


SHRI ROSHAN LAL GUPTA                               .......       Petitioner

                              Through: Mr Girish Aggarwal with
                                       Ms Mugdha Pandey, Advocates

                                    Versus

SHRI PARASRAM HOLDINGS PVT LTD & ANR ...... Respondents

                              Through: Mr Gagan Gupta with Mr Raman
                              Kapoor, Advocates for Respondents 1& 2 in
                              RSA 131/2002 and for Respondent No.1 in
                              OMP 205/1997.

                              Mr Sanjay Bhatt with Mr Abhishek Kumar,
                              Advocates for the respondent No.3 in RSA
                              131/2002.


CORAM :-
HON'BLE MR. JUSTICE RAJIV SAHAI ENDLAW

1.    Whether reporters of Local papers may
      be allowed to see the judgment?   Yes

2.    To be referred to the reporter or not? Yes

3.    Whether the judgment should be reported
      in the Digest?                        Yes


RAJIV SAHAI ENDLAW, J.

1. The appellant/petitioner on 9th January, 1997 instituted in

the court of the Senior Civil Judge, Delhi a suit for declaration and

permanent injunction from which the Regular Second Appeal (RSA)

has arisen. It was the case of the petitioner/appellant in the plaint

that he is a retired officer from the IDBI; that the respondent No.1

Shri Parasram Holdings Pvt Ltd (hereinafter called the "Stock

Broker") is carrying on business as a stock broker and is a member

of the (respondent No.3 in the RSA) M/s National Stock Exchange of

India Ltd (hereinafter called the "stock exchange"); that the

petitioner/appellant had purchased and sold some shares through

the stock broker during the period from 3rd July, 1996 to 9th July,

1996 and in which transaction he had suffered losses and had

squared up his account vide his cheque dated 10th July, 1996 and had

thereafter stopped purchase/sale of shares through the stock broker

or anyone else; that the petitioner/appellant on 22nd December, 1996

received notice from the stock exchange of the statement of claim

received by the stock exchange from the stock broker and requiring

the petitioner/appellant to submit his defence thereto together with

fee of arbitration as well as his nominees from the panel of

arbitrators of the stock exchange; that the stock broker had filed a

totally false claim against the petitioner/appellant with the stock

exchange and on the basis of fabricated and forged documents; that

photocopy of the Member Constituent Agreement received by the

petitioner/appellant as part of the claim of the stock broker though

purported to be signed by the petitioner/appellant was, in fact, not

signed by him and never executed by him and had been forged and

fabricated to cause the stock exchange to entertain the claim of the

stock broker for arbitration; that the petitioner/appellant had never

authorized the transactions on the basis whereof the claim was made

and had not made any part payment, after adjusting which the

balance was being claimed by the stock broker.

2. The petitioner/appellant further claimed that he had, prior

to the institution of the suit, served a legal notice on the stock broker

and the stock exchange calling upon them to withdraw the claim and

the request for arbitration but no reply had been received thereto.

The petitioner / appellant apprehending that the stock broker and

the stock exchange will continue with the arbitration proceedings,

instituted the suit for the relief of declaration that the Member

Constituent Agreement relied upon by the stock broker and

providing for arbitration of the stock exchange was fabricated and

forged and thus void and for perpetual injunction restraining the

stock exchange from taking any arbitration proceedings in

pursuance to the notice aforesaid served on the petitioner/appellant.

3. Summons/notice of the suit/application for interim relief

were issued on 9th January, 1997 for 16th January, 1997. On 16th

January, 1997 the stock broker (and its director who was impleaded

as defendant No.2 and who is respondent No.2 in the RSA) filed their

written statement. In the preliminary objections in the written

statement it was, inter alia, stated that the suit was not maintainable

owing to the Arbitration and Conciliation Act, 1996 having come into

force on 25th January, 1996; reference was made to Section 5 thereof

and it was pleaded that there was no provision under the Act to

challenge the arbitration agreement before the court when the

arbitration proceedings had already commenced; the claim in suit for

permanent injunction was also pleaded to be barred by Section 41(h)

of the Specific Relief Act; it was further pleaded that in view of the

byelaws of the stock exchange providing for arbitration of disputes

between the stock broker and its clients/constituents, the court had

no jurisdiction to try the suit. Other pleas on merits were also taken

in the written statement.

4. The stock exchange on 16th January, 1997 took time for

filing the written statement and the matter was adjourned to 20 th

January, 1997. On that date, the petitioner/appellant filed

replication to the written statement of the stock broker and the stock

exchange filed an application under Section 8 of the Arbitration Act

for referring the matter to arbitration. The stock broker in the

written statement as well as the stock exchange in the said

application also disputed the territorial jurisdiction of the courts at

Delhi and relied upon the clause in the byelaws of the stock

exchange with respect to the exclusive jurisdiction of the courts at

Mumbai. The application was contested by the petitioner/appellant

by filing a reply.

5. The learned Civil Judge vide order dated 1st February,

1997, inter alia, held that under Section 5 of the Act the jurisdiction

of the civil court was barred; that there was no provision under the

Arbitration Act to challenge the arbitration before the civil court;

that the arbitration proceedings of the stock exchange had already

commenced prior to the institution of the suit; that the

petitioner/appellant has a right under Section 16 of the Arbitration

Act to raise objections as raised in the suit before the arbitrator and

even thereafter under Section 34 of the Act and thus allowed the

application and dismissed the suit.

6. The petitioner / appellant preferred an appeal to the District

Judge which was registered as RCA 631/2002 against the order

aforesaid of the Civil Judge and which came to be decided vide order

dated 18th May, 2002. The learned Additional District Judge deciding

the appeal concurred with the Civil Judge and also noticed that

during hearing it had transpired that the arbitrator appointed by the

stock exchange had passed the arbitral award and with respect

whereto the petitioner/appellant had already filed petition under

Section 34 of the Act being OMP 205/1997. I may notice that though

there does not appear on the record any decree sheet drawn up by

the Civil Judge but a decree sheet was drawn up by the Additional

District Judge of dismissal of the appeal. The petitioner/appellant

preferred the RSA under Section 100 of the CPC to this court against

the order of the Additional District Judge and on 1st March, 2003,

after this court had called for the record of OMP205/1997 and

presumably perused the same, notice to show cause as to why the

RSA be not admitted was issued to the respondent. The OMP and

the RSA were pending before separate courts thereafter and the RSA

was transferred to be heard by this court where the OMP was

pending vide order dated 12th February, 2007 in the OMP file.

Though the RSA had been pending for long but no substantial

questions of law as required to be framed were framed nor was there

any order formally admitting the RSA for hearing.

7. In these circumstances on 30th January, 2009 the following

substantial questions of law were framed:

1. Whether a suit for declaration that the agreement containing an arbitration clause is fabricated, forged and thus null and void and legally inoperative and claiming the consequential relief of permanent injunction of restraining the other party to the impugned agreement from invoking arbitration and the arbitrator from proceedings with the arbitration maintainable in law?

2. Whether suit of the nature aforesaid is barred by Section 5 of the Arbitration & Conciliation Act?

3. What is the effect, if any, of a non party to the arbitration agreement, impleaded as party to the suit, applying under Section 8 of the Arbitration Act?

4. Whether a suit of the nature aforesaid for the relief of declaration and injunction is barred by Section 34 r/w 41 of the Specific Relief Act and whether an application under Section 16 of the Arbitration Act is an alternative efficacious remedy to the same.

and the counsels made submissions in RSA as well as OMP.

8. At the outset, query was made from the counsels as to the

maintainability of the RSA, the order challenged therein being on an

application under Section 8 of the Arbitration Act. No judgment was

cited by counsel for either party on this aspect. The court, if allowing

the application under Section 8 of the Act is required to refer the

parties to arbitration. In the present case it was the admitted

position that the arbitration proceedings had already commenced

even prior to the institution of the suit. Since Section 8(3) provides

that the arbitration proceedings may be commenced, continued and

an arbitral award made notwithstanding the pendency of an

application under Section 8. The suit was filed after the

commencement of arbitration proceedings had been commenced by

the stock exchange. The suit claimed the relief of stay thereof. The

order made by the Civil Judge is thus not of referring the parties to

arbitration as the court is required to do under Section 8 but of

dismissal of the suit.

9. Section 100 of the CPC provides for an appeal to lie before this

court from every decree passed in appeal by any court subordinate

to this Court. As aforesaid, though I have not found on record any

decree sheet having been drawn up by the Civil Judge while

dismissing the suit, there is on record a decree drawn up by the

Additional District Judge while dismissing the appeal. Technically,

therefore, there is a decree passed in appeal by a court subordinate

to this court, to satisfy the first requirement of the maintainability of

the second appeal before this court.

10. An appeal could lie from the order aforesaid of the Civil Judge

before the Additional District Judge either under Section 96 or under

Order 43 of the CPC. No appeal from an order on an application

under Section 8 of the Act is provided under Order 43. Under

Section 96 of the CPC an appeal lies from every decree passed by

any court exercising original jurisdiction. So, the question is as to

whether the order allowing the application under Section 8

Arbitration Act constitutes a decree or not.

11. A decree is defined in Section 2(2) of the CPC as a formal

expression of an adjudication which, so far as regards the court

expressing it, conclusively determines the rights of the parties with

regard to all or any of the matters in controversy in the suit. It is

deemed to include the rejection of the plaint. Since an order

allowing an application under Section 8 of the Act conclusively

determines the right of the plaintiff to maintain a suit, it should fall

within the definition of a decree.

12. I however find that the Division Bench of this court in

Canbank Financial Services Ltd. v. Haryana Petrochemicals

Ltd. 2008 (2) Arbitration Law Reporter 365 held that, an order

allowing the application under Section 8 of the Arbitration Act is not

appealable under the Arbitration Act and otherwise under the CPC.

The plea that such an order is akin to rejection of plaint and thus a

decree and hence appealable also did not find favour. Once the

Division Bench has held that the first appeal does not lie against

such an order, the question of the maintainability of the second

appeal does not arise. Thus I find that the second appeal is not

maintainable for this reason alone.

13. There is, however, yet another aspect in the present

proceedings of relevance to the nature of the order of the Civil

Judge. The counsel for the petitioner/appellant has argued that the

application on which the suit was dismissed, in the present case, was

filed by the stock exchange and not by the stock broker. It is

contended that the agreement alleged of arbitration was between

the petitioner/appellant and the stock broker and not between the

petitioner/appellant and the stock exchange. It is thus contended

that the right, if any, to apply under Section 8 of the Arbitration Act

was of the stock broker only and not of the stock exchange. It is

averred that in Section 8(1) "..... if a party so applies ...." refers to a

party as defined in Section 2(h) and means a party to an arbitration

agreement.

14. Per contra, the counsel for the stock broker has argued that

the stock broker also in written statement filed by them had in the

preliminary submissions itself taken the plea of the suit being barred

owing to the existence of the arbitration agreement and thus it

cannot be said that it is only the stock exchange which applied under

Section 8 of the Act. It is also urged that even if it is considered that

the stock broker alone could have applied under Section 8 of the Act

and had not so applied, the suit has been dismissed under Order 7

Rule 11 of the CPC as being barred by law i.e., the law contained in

Section 5 of the Arbitration Act.

15. At the outset, I may state that the contention of the stock

broker that even if the stock broker had not applied under Section 8

of the Act, the stock broker could still apply for rejection of the plaint

under Section 5 of the Act is not sound. It is not as if the civil court

per se does not have jurisdiction to entertain a suit emanating from a

transaction subject matter of arbitration agreement. A civil court

cannot dismiss a suit instituted before it, even though found to be

subject matter of an arbitration agreement, at the threshold. It is

always open to the defendant to the suit to waive, give up and

abandon the plea of arbitration and if that were to happen then the

suit will continue before the civil court. The manner in which the

defendant in a suit which is the subject matter of an arbitration

agreement is to setup the plea of arbitration has been prescribed in

Section 8 of the Act. Such a plea has to be raised not later than

when submitting the first statement on the substance of the dispute.

If such a plea is not raised while submitting the first statement on

the substance of the dispute, the defendant is thereafter barred from

raising such a plea and if that be the position then it cannot be

argued that even though the plea is not raised in the manner

prescribed in Section 8 of the Act, it is open to the defendant

thereafter also to contend that the suit is barred by virtue of section

5 of the Act.

16. I also do not agree with the contention of the

petitioner/appellant that the word "party" in Section 8 refers to a

party to the agreement. In my view, the word "party" in Section 8

refers to a party to the suit. In the present case the stock exchange

had been impleaded as a party to the suit, not merely as a proforma

party but as a substantive party against whom reliefs of injunction

was also claimed of proceeding with the arbitration initiated at the

instance of the stock broker. In the circumstances, it cannot be said

that the stock exchange was merely a proforma party to the suit and

not competent to raise the plea. The stock exchange being the

institution to whose arbitration the petitioner/appellant were alleged

to have agreed and as per whose byelaws such matters are to be

referred to arbitration thus had a vital interest in the arbitration and

was competent to apply to the court under Section 8 of the Act. It

cannot be called a stranger to the arbitration.

17. Section 2, upon clause (h) whereas reliance is placed by the

plaintiff/petitioner is subject to the context otherwise requiring.

Context in which the word "party" is used in Section 8 is in relation

to a party to an action brought before the judicial authority and not

in the context of a party to the arbitration.

18. I also do not find any merit in the plea of the

petitioner/appellant that the stock broker had consented to the

jurisdiction of the civil court and / or had waived/abandoned the

right under Section 8. The preliminary objections in the written

statement of the stock broker have already been referred to above.

In the same the stock broker has unequivocally contested the

jurisdiction of the civil court to proceed with the suit for the reason

of the arbitration. Of course, the preliminary objections repeatedly

refer to Section 5 and not to Section 8 but mere failure to cite the

correct provision of law and/or referring to the wrong provision,

cannot defeat the rights of the parties. It is of significance that the

written statement was filed soon after the coming into force of the

1996 Act and till when there was not much clarity about the statute

and the recent past has shown as to how the courts themselves have

from time to time changed their interpretation of the various

provisions of the statute. Thus, once the stock broker has, while

submitting his first statement on the substance of the dispute, taken

the plea of the jurisdiction of the civil court being barred for the

reason of the existence of the arbitration agreement, it cannot be

said that merely because reliance is made while taking the said plea

to section 5 instead to Section 8 would tantamount to the stock

broker giving up the right to apply for arbitration. It is also

significant that the stock broker had prior thereto already

commenced the arbitration proceedings. Recently another Single

Judge of this court in Ministry of Sound International Ltd v.

Indus Renaissance Partners Entertainment Pvt Ltd 156 (2009)

DLT 406 held that where a suit was instituted after the plea under

Section 8 of the Arbitration Act had been taken in a suit filed by

other party would not tantamount to waiver / abandonment of the

right under the arbitration agreement. It was further held that the

case would be different where before taking a plea of arbitration, a

suit is instituted. Following the same reasoning I am not only of the

view that on a meaningful reading of the written statement, the stock

broker had also applied for reference of the parties to arbitration

within the meaning of Section 8 of the Act but also, even if he had

not so applied, having instituted the arbitration proceedings before

filing the written statement cannot be said to have, by filing the

written statement waived or abandoned arbitration.

19. Though the second appeal is found to not lie, however, since

substantial questions of law were framed, it is deemed expedient to,

for the sake of complete adjudication, deal with the same also. The

questions 1, 2 and 4 aforesaid, relate to the very maintainability of a

suit as filed by the petitioner/appellant, i.e., for declaration that the

arbitration agreement on the basis whereof the defendants to the

suit have initiated arbitration proceedings, is forged and fabricated

and thus void and of permanent injunction restraining arbitration.

20. Section 32 of the 1940 Act, barred a suit for decision upon the

existence, effect and validity of an arbitration agreement; however

Section 33 thereof permitted the court to determine the existence or

validity of the agreement. The 1996 Act, however, marks a change

in this regard. There is no equivalent to the Sections 32 and 33 of

the old Act. On the contrary, Section 16 has been introduced and

Section 34 providing for recourse against an arbitral award

expressly makes the invalidity of the arbitration agreement a ground

for setting aside the arbitral award. A peremptory Section 5

prohibiting the jurisdiction of courts save as expressly provided

under the Act has also been introduced. If in spite of the said

changes, this court is to hold that a suit is maintainable where the

contract containing the arbitration clause is challenged on ground of

forgery and the court in such suit is empowered to injunct

arbitration proceedings (as otherwise no purpose would be served by

such suit), in my view, it would tantamount to negating the effect of

the change in the statute. It may also be noticed that arbitration is

normally provided for in commercial agreements and whereunder

after the disputes have arisen, one of the parties is always interested

in delaying the disposal of the claims of the other. In fact, the parties

while providing for arbitration in commercial contracts do so for the

reasons of expediency. If notwithstanding the aforesaid material

changes between the old and the new Act, it is to be held that a suit

as a present one is maintainable, it would give a tool in the hands of

the party wanting to delay the disposal of the claims of the other; in

each case suits would be instituted and stay of arbitration

proceedings would be sought.

21. There is yet another reason for me to hold so and it is reflected

in the substantial questions of law framed on 29th January, 2009. The

relief of declaration is guided by Section 34 and the relief of

permanent injunction by Section 41 of the Specific Relief Act. Grant

or non-grant of declaration is in the discretion of the court. A

permanent injunction cannot be granted under clause (h) of Section

41 when equally efficacious relief can be obtained by any other usual

mode of proceeding except in case of breach of trust. The discretion

of the court ought not to be exercised in a manner so as to adversely

affect the arbitral proceedings or to negate the purport of the 1996

Act. Similarly, it is not as if, if injunction restraining the arbitration

is not given, the party challenging the validity of the arbitration

agreement would be rendered remediless. The said party has the

equally efficacious remedy of Sections 16 & 34 of the Arbitration Act.

The suit for declaration and permanent injunction is found to be

barred by provisions of Specific Relief Act also.

22. The petitioner/appellant has in the synopsis of submissions

with judgments on record relied upon various judgments laying down

that the courts while exercising powers under Section 8 and Section

11 of the Arbitration Act are to satisfy themselves of the validity of

arbitration agreement. On the basis thereof, it is urged that the

courts including the Seven Judges Bench of the Apex Court in SBP

and Company vs. Patel Engineering Ltd 2005 (8) SCC 618 have

held that party should not be permitted to be vexed by costly

arbitration if at the initial stage itself it can be determined whether

there is any arbitration agreement and/or arbitral dispute or not. It is

further urged that on the same parity of reasoning the suit as the

present one ought to be held to be maintainable.

23. In my view, the law with respect to the adjudication by the

courts while dealing with an application under Section 8 or Section

11 of the Act would not apply to the suit. Firstly, the proceedings

under Sections 8 and 11 are provided for by the Act itself while the

suit challenging the validity of the arbitration agreement has not

been provided for in the Act and is barred under Section 5 of the Act.

Thus merely because while interpreting Section 8 and Section 11 it

has been held that the court before referring the parties to

arbitration should satisfy itself of the existence of the arbitration

agreement would not justify the institution of a suit for the same

relief. Section 8 application is filed when a substantive suit is

already before court and the question to be determined is whether

that suit is to proceed or the parties are to be referred to arbitration.

Similarly, Section 11 is an application for appointment of the

arbitrator. Merely, because the court when faced with such

provisions as provided for under the Act is to satisfy itself of the

existence of the agreement cannot be understood to lay down that it

is open to a party to even where no suit for substantial relief and

application under Section 11 has been filed, an independent suit only

for the relief of challenging the validity of the arbitration agreement

can be instituted. I, therefore, do not feel the need to refer to the

judgments filed by the counsel for the petitioner/appellant alongwith

the synopsis on Section 8 and Section 11 of the Act.

24. Synopsis of the petitioner/appellant also refers to a Division

Bench judgment of the Calcutta High Court in Hindustan Cables

Ltd vs. Bombay Metal Company AIR 1991 Calcutta 350 where a

suit as the present one was held to be maintainable and the

judgment of a Single Judge of this court in Chemical Sales

Agencies vs. Naraini Newar 2005 (1) Arbitration Law Reporter

193 Delhi also dealing with Section 8 of the Act. While the former

was under the 1940 Act, in the latter it was held by this court that

since there was no definite finding as to the existence of the

arbitration agreement, the parties could not be referred to

arbitration.

25. I, however, have found the question to be no longer res

integra. A Bench of three Judge of the Apex Court in K V Aerner

Cementation India Ltd vs. Bajranglal Agarwal 2001(6) Supreme

265 (and which is unfortunately not reported in the law journals

having large circulation and frequently used in the courts) has held

as under:

"1. These special leave applications are directed against an order of a learned Single Judge of Bombay High Court refusing to interfere with an order of the Civil Court vacating an interim order of injunction granted by it earlier. The suit in question had been filed for a declaration that there does not exist any arbitration clause and as such the arbitral proceedings are without jurisdiction. The learned Single Judge of Bombay High Court came to hold that in view of Section 5 of the Arbitration and Conciliation Act, 1996 read with Section 16 thereof since the arbitral Tribunal has the power and jurisdiction to make rule on its own jurisdiction, the Civil Court would not pass any injunction against an arbitral proceeding.

2. Mr. Dave, the learned Senior Counsel appearing for the petitioner contends that the jurisdiction of the civil Court need not be inferentially held to be ousted unless any statute on the face of it excludes the same and judged from that angle when a party assails the existence of an arbitration agreement, which would confer jurisdiction on an arbitral Tribunal, the Court committeed error in not granting an order of injunction. There cannot be any dispute that in the absence of any arbitration clause in the agreement, no dispute could be referred for arbitration to an arbitral Tribunal. But, bearing in mind the very object with which the Arbitration and Conciliation Act, 1996 has been enacted and the provisions thereof contained in Section 16 conferring the power on the arbitral Tribunal to rule on its own jurisdiction including ruling on any objection with respect to existence or validity of the arbitration agreement, we have no doubt in our mind that the Civil Court cannot have jurisdiction to go into that question. A bare reading of Section 16 makes it explicitly clear that the arbitral Tribunal has the power to' rule on its own jurisdiction even when any objection with respect to existence or validity of the arbitration agreement is raised and a conjoint reading of Sub-section (2), (4) and (6) of Section 16 would make it clear that such a decision would be amenable to be assailed within the ambit of Section 34 of the Act. In this view of the matter, we see no infirmity with the impugned order so as to be interfered with by this Court. The petitioner who is a party to the arbitral proceedings may raise the question of jurisdiction of the Arbitrator as well as the objection on the ground of non-existence of any arbitration agreement in the so-called dispute in question and such an objection being raised, the Arbitrator would do well in disposing of the same as a preliminary issue so that it may not be necessary to go into the entire gamut of arbitration proceedings."

Thus the question of maintainability of suit need not detain me

any further.

26. The questions No. 1, 2 and 4 of law are thus answered to the

effect that a suit for declaration that an agreement containing an

arbitration clause is forged, fabricated and unenforceable and thus

null and void and for injunction restraining arbitration does not lie

and is barred by Section 5 of Arbitration Act and Sections 34 and

41(h) of the Specific Relief Act read with Section 16 of the

Arbitration Act.

27. As far as the Question No.3 is concerned, as aforesaid, in the

present case the stock exchange being the institution to whose

arbitration the petitioner/appellant and stock broker had agreed, is

held entitled to maintain an application under Section 8 of the

Arbitration Act. The question whether a total stranger to arbitration

but a party to suit can apply or not, is not found relevant for

adjudication of present and is as such left open.

28. Having held the RSA and in any event the suit to be not

maintainable, there is no impediment to now consider the OMP. The

counsel for the petitioner / appellant has confined his arguments to

challenge to the signatures on the Member Constituent Agreement

relied upon by the respondent. It may be stated that in the OMP the

stock broker is the respondent No.1 and the arbitrator who has

rendered the award is the respondent No.2; the stock exchange is

not a party thereto.

29. Having held that the suit to challenge the arbitration

agreement as forged was not maintainable, the jurisdiction to decide

the said plea vested with the arbitrator. The fact that the arbitrator

has such jurisdiction also need not detain any further. Recently this

court in M/s Hero Exports v M/s Tiffins Barytes Arbitration

Application 121/2008 decided on 2nd September, 2008 was faced

with a similar question. The contention of the respondent therein

also was to the effect that the MoU containing the arbitration

agreement had been procured under coercion and extortion and

therefore unenforceable. An FIR on the basis of the said averments

had also been lodged and cognizance thereof been taken. A suit had

also been filed seeking declaration that the MoU was not binding.

The respondent in that case thus set up a plea of nullity of the

document containing the arbitration clause. This court held that the

jurisdiction of the arbitrator to decide upon the arbitrability of the

disputes after considering evidence, in terms of Section 16 of the

Act, is no longer undeniable; that the court cannot refuse to exercise

the power under Section 11(6) of the Act on such pleas. The court

thus allowed the application and referred the parties to arbitration.

An SLP was preferred against the said order and which was

dismissed in limine.

30. The arbitrator in the present case has, in the award, gone into

the plea of the petitioner/appellant and after comparing the

signatures of the petitioner/appellant on certain admitted documents

including the letters written by the petitioner/appellant to the stock

exchange/arbitrator, with the signatures on the Member Constituent

Agreement, the arbitrator reached a conclusion that the agreement

was, in fact, signed by the petitioner/appellant.

31. The counsel for the stock broker in this regard relied upon

Gulzar Ali v State of H.P. (1998) 2 SCC 192 holding that the

requirement in Section 67 of the evidence Act that handwriting must

be proved to be that of the person concerned can be met either by

expert opinion or by opinion of person acquainted with the

handwriting or even by the circumstantial evidence or by comparison

of the handwriting by the court itself.

32. Once having found that the arbitrator was empowered to

determine the question of the genuineness or validity of the

agreement which was challenged by the petitioner/appellant, no

ground is made out for challenging the said finding of the arbitrator

under Section 34 of the Act.

33. I even otherwise do not find the findings of the arbitrator to

be unjustified. It is the admitted position that the

petitioner/appellant purchased/sold shares through the stock broker

between 3rd July, 1996 to 9th July, 1996. The claim of the stock

broker is with respect to the transactions of sale/purchase by the

petitioner/appellant between 10th July, 1996 to 16th July, 1996. The

counsel for the petitioner/appellant, on inquiry, as to what was the

relevance or necessity of the Member Constituent Agreement on

which the signatures are denied by the petitioner/appellant, though

could not find anything to that effect in the byelaws of the stock

exchange, in post lunch session referred to the regulations of the

stock exchange. There is no dispute that in terms of the regulations

and byelaws of the stock exchange anybody selling/purchasing

shares through the stock broker is a constituent. Regulation 4.3.1

(only regulations as on September, 1999 have been made available)

provides that every trading member i.e., stock broker shall enter into

an agreement with each of his constituents before accepting or

placing orders on the constituent's behalf. Such agreement is to be

as per annexure 3. The Member Constituent Agreement relied upon

by the stock broker is in terms of the said regulation. Regulation 5

provides for arbitration and in 5.9 dealing with procedure for

arbitration it is provided that every application for arbitration shall

be accompanied by, inter alia, copy of a Member Constituent

Agreement. In compliance with the said regulation, the stock broker

while applying for the arbitration to the stock exchange appears to

have annexed the Member Constituent Agreement.

34. Byelaws of the stock exchange of January 1996 in Chapter XI,

Byelaw 1-a provides that all differences and disputes between a

trading member and constituent arising out of or in relation to

dealings on the exchange shall be referred to and decided by

arbitration in terms of the byelaws, rules and regulations of the

exchange. Byelaw 2 provides that all dealings, transactions and

contracts which are subject to the byelaws shall be deemed in all

respects subject to the byelaws, rules and regulations. Chapter X,

Byelaw 1 further provides that all contracts relating to dealings

permitted on the exchange made by a trading member shall in all

cases be deemed to be made subject to the byelaws, rules and

regulations of the exchange and shall be a part of the terms and

conditions of all such contracts. Chapter IX, Byelaw 8 provides for

issuance of contract notes for deals effected with clients or on behalf

of the clients.

35. The position which emerges is that all transactions between

the stock broker and client/constituent are subject to byelaws and

subject to arbitration. In my view the signing of the Member

Constituent Agreement also containing the arbitration clause in this

regard does not affect the existence of the arbitration agreement.

Even in the absence of such a Member Constituent Agreement it

cannot be said that there was no arbitration agreement between the

parties. The contract notes issued by the stock broker of

sale/purchase also provide for arbitration on them. The Apex Court

in Madan Mohan Rajgarhia v. Mahendra R. Shah & Bros.

(2003) 7 SCC 138 has held that the para materia clause of Bombay

Exchange is comprehensive and covers disputes and claims between

the sellers and purchasers of shares and the stock broker. In this

regard, it may also be stated that an arbitration agreement neither

under the 1940 Act nor under the 1996 Act was required to be

signed. The only requirement was of it being signed. I have recently

in Lt. Col. (Retd.) P.R. Choudhary & Ors v Narendra Dev Relan

& Ors (IA.no.6941/2005 in CS(OS)574/2005 decided on 13th January,

2009) dealt in detail with this aspect and do not feel the need to

burden with the case law in that regard. Suffice it is to state that

irrespective of the genuineness or validity of the Member

Constituent Agreement, the claims of a stock broker against its

client/constituent would be arbitrable in accordance with byelaws of

the stock exchange.

36. In view of the admission of the petitioner/appellant of having

been a constituent /client of the stock broker and of at least some of

the transactions with the stock broker, in the normal course it would

be expected that a Member Constituent Agreement as required by

the regulations would be signed. I, during the hearing, inquired

from the counsel for the petitioner/appellant as to whether the

petitioner/appellant for the transactions admitted had signed a

Member Constituent Agreement or not and if so which was that

agreement, if not the agreement relied upon by the respondent. The

only answer of the counsel for the petitioner/appellant was that it

was for the respondent to explain. The agreement relied upon by the

respondent and challenged by the petitioner/appellant is dated 3rd

July, 1996 i.e., the date on which, according to the

petitioner/appellant also, the transactions commenced between the

parties and in the absence of the petitioner/appellant averring or

proving that any other Member Constituent Agreement was signed

or that the same was terminated when according to the

petitioner/appellant the petitioner decided to cease the relationship

with the respondent, I find it in the normal course of human behavior

and business, within the meaning of section 114 of the Indian

Evidence Act to presume and believe that the Member Constituent

Agreement as relied by the respondent was signed by the

petitioner/appellant and do not find any illegality in the finding of the

arbitrator of the validity of the same.

37. Though the counsel for the petitioner/appellant has, during the

hearing, not urged any other ground challenging the validity of the

award but I find that a number of other grounds have been taken in

the petition.

38. It is pleaded that the appointment of the arbitrator was not in

accordance with the procedure prescribed in the regulations of the

stock exchange. Reliance in this regard is placed on Regulation 5.2

Exhibit P-13 to the affidavit by way of evidence of the

petitioner/appellant. The same provides for each party to the

reference submitting to the exchange the names of the proposed

arbitrators from the panel of arbitrators of the exchange and for the

respondent to submit within 7 days his selection of arbitrator.

Regulation 5.3 provides that if parties fail to select a common

arbitrator the relevant authority shall select an arbitrator. The

challenge is that the stock exchange appointed the arbitrator within

ten days. The record of the arbitrator received in this court discloses

that the broker made an application dated 13th December, 1996 to

the exchange for arbitration, also proposing his arbitrators and

enclosing other requisite documents. Vide letter dated 18th

December, 1996 the stock broker proposed certain other names as

arbitrators in substitution of the names earlier proposed. The stock

exchange issued notice dated 20th December, 1996 to the

petitioner/appellant of the application of the petitioner/appellant

requiring the petitioner/appellant to, inter alia, also submit the list of

7 persons from the panel of arbitrator within 7 days. The

petitioner/appellant in response thereto sent a legal notice dated 2nd

January, 1996 challenging the arbitration proceedings and naturally

in the same did not propose any arbitrator. The stock exchange only

vide letter dated 5th March, 1997 informed the respondent of the

appointment of Shri S.A. Kirtikar as the arbitrator. The counsel for

the stock broker and the stock exchange have, during the hearing,

informed that Mr S.A. Kirtikar is a retired District Judge. Thus, it

will be seen that the plea of the arbitrator having not been appointed

in terms of the regulations and byelaws is not made out.

39. The next plea is that the arbitrator failed to decide first the

challenge to the arbitration proceedings. This contention is also not

tenable in law. Under Section 16 of the Act upon a challenge being

made to the jurisdiction of the arbitrator, the arbitral tribunal though

is required to adjudicate the same but there is nothing to show that

the arbitrator is to first adjudicate the same and can thereafter only

proceed to adjudicate on the merits of the claim. The arbitral

tribunal in its jurisdiction is entitled to decide the said challenge

either as a preliminary issue or together with the entire matter. It is

significant that even in the event of the arbitrator deciding against

the challenge, no remedy therefor is provided and the challenge to

such finding can be made only after the arbitral award in accordance

with Section 34 of the Act. Thus, it cannot be said that any illegality

has been committed by the arbitrator in not deciding the challenge

as a preliminary issue as sought for by the petitioner/appellant.

40. In this case the petitioner/appellant choose to pursue the civil

suit, first appeal and then second appeal instead of defending the

claim before the arbitrator. Though the petitioner/appellant sent

notices/applications etc to the arbitrator but the petitioner/appellant

failed to appear on any of the dates of hearing fixed by the

arbitrator. The petitioner/appellant was fully aware that under the

law (Section 8(3) of the Arbitration Act) notwithstanding the suit and

the application under Section 8 therein having been filed the

arbitrator could proceed with the arbitration and, in fact, was so

proceeding. Though the petitioner/appellant had also applied for

stay of arbitration proceedings but no stay has been granted at any

stage. The petitioner/appellant thus took a chance of proceeding

with the suit and not appearing before the arbitrator and after the

award has been made cannot be heard to make grievance of the

same. There has been no denial of hearing or breach of principles of

natural justice and the petitioner has been given sufficient

opportunity. Moreover, the arbitrator has in the award dealt with all

the pleas raised by the petitioner in the communications sent by the

petitioner to the stock exchange/arbitrator.

41. The petitioner has also pleaded that the arbitrator ought to

have given an opportunity to the petitioner to lead evidence.

However, the petitioner after sending the communication before the

hearing on 3rd May, 1997 did not even bother to find out as to what

happened on 3rd May, 1997 and thereafter inquired about the

arbitration proceedings in July, 1997 only i.e., shortly before the

arbitrator made the award.

42. The counsel for the petitioner, during the hearing, also

generally argued that the arbitrator has erred in accepting the plea

of the stock broker of the petitioner having made cash payments and

which is not permissible under the regulations/byelaws of the stock

exchange. Reliance in this regard is placed on Chapter VI of the

Capital Market Regulations of the stock exchange of September,

1999. However, the same relates to settlement of accounts between

stock brokers themselves. My attention has not been drawn to any

regulation or byelaw requiring payment by constituents to stock

brokers in cheque only and prohibiting such payments in cash. In

this regard, it may be recorded that the claim of the stock broker is

that for the transactions by the petitioner between 10th July, 1996 to

16th July, 1996 a total sum of Rs 10,57,857/- was due from the

petitioner to the stock broker, out of which the petitioner paid Rs

1,67,855/- on 30th July, 1996 and Rs 1,50,000/- on 27th September,

1996 both in cash and which after adjusting the margin money of Rs

90,000/- also paid by the petitioner in cash on 15th July, 1996 left an

outstanding of Rs 6,50,000/- from the petitioner to the respondent.

Even if there is to be a provision prohibiting payment by the

constituents to the stock broker in cash, in my view, same would not

invalidate the award, whatsoever consequences thereof, for breach

of byelaw/regulation, if any, may follow.

43. Though the parties were given opportunity to lead evidence in

the OMP on the following issue framed on 13th November, 2000 in

the OMP:

"1. Whether the award dated 29.7.97 is liable to be set aside on the grounds noted in para 60 of the petition?

2.Relief."

the petitioner on whom the onus of challenge to the award rested

has failed to bring anything on record entitling him to the relief in

the petition.

44. The arbitrator has, while allowing the claim of the stock broker

of the principal sum of Rs 6,50,000/- also awarded interest thereon

@ 18% per annum from 15th July 1996 till payment. I do not find any

reason to set aside the award insofar as for the sum of Rs 6,50,000/-,

but following the dicta in Krishna Bhagya Jala Nigam Ltd v. G

Harischandra Reddy AIR 2007 SC 817 and Flex Engineering Ltd

v. Antartica Construction Co. 2007 (2) ARB LR 387 (Delhi) the

rate of interest during the pendency of the petition in this court is

reduced from 18% per annum to 12% per annum, considering that

the transaction between the parties was a commercial transaction.

However, if the petitioner fails to pay the amount within 30 days of

this order, the stock broker shall thereafter again be entitled to

interest at 18% per annum.

45. The RSA as well as the OMP challenging the award, therefore

fail and are dismissed with costs of Rs 50,000/- to the counsel for the

stock broker and the stock exchange to be shared equally.

RAJIV SAHAI ENDLAW (JUDGE) February 11, 2009 M