Delhi High Court
Vinay Malani vs Delhi Prantiya Marwari Yuva Manch ... on 30 May, 2014
Author: Najmi Waziri
* IN THE HIGH COURT OF DELHI AT NEW DELHI
Date of Decision: 30.05.2014
+ CM(M) 1067/2011, CM APPLs. 17144/2011 and 18242/2013
PAWAN KUMAR GUPTA & ANR ..... Petitioner
Through: Mr. Manish Kaushik, Advocate
versus
VINAY MALANI ..... Respondent
Through: Mr. Kirti Uppal, Senior
Advocate with Mr. Anshumaan
Sahni, Ms Aastha Dhawan, Mr.
Shanker Chhabra and
Ms.Aakriti Jain, Advs.
+ CM(M) 606/2013, CM APPL. 9118/2013
VINAY MALANI ..... Petitioner
Through: Mr. Kirti Uppal, Senior
Advocate with Mr. Anshumaan
Sahni, Ms Aastha Dhawan, Mr.
Shanker Chhabra and
Ms.Aakriti Jain, Advs.
versus
DELHI PRANTIYA MARWARI YUVA MANCH & ORS
..... Respondent
Through: Mr. Manish Kaushik, Advocate
for Pawan Gupta.
CORAM:
HON'BLE MR. JUSTICE NAJMI WAZIRI
% MR. JUSTICE NAJMI WAZIRI
1. Two petitions of two parties are being heard and decided by this
common judgement. Although the petitions were filed two years
apart and in respect of two different impugned orders, the petitions
were heard together for two reasons: (a) the decision of CM(M)
1067/2011 ("first petition") is likely to have an impact CM(M)
CM(M) 1067 of 2011 and 606 of 2013 Page 1 of 30
606/2013 ("second petition"), and (b) the disputes all arise from the
same dispute between substantially the same parties.
Parties to the dispute
2. Given the multiplicity of parties and the diverse titles attributable to
them, for ease of reference the parties are hereinafter referred to as
follows: Mr. P is the first petitioner in the first petition; his election
has been impugned in the suit that gave rise to both petitions; he is
also the third respondent in the second petition. Mr. S is his co-
petitioner, who is also the fourth respondent in the second petition;
he was the Returning Officer for the elections. Mr. V is the sole
respondent in the first petition and the petitioner in the second
petition; he initiated the suit that gave rise to both petitions. The
Society is the first respondent in the second petition; Mr. P was
elected as President to the Society. The Organisation is the second
respondent in the second petition; the Society is regional component
of the Organisation, which functions at three levels (national, prantiya
(i.e., regional), and branch). Mr. K is the fifth respondent in the
second petition; he is the President of the Faridabad Branch of the
Organisation.
Proceedings
3. Although the various proceedings are not as many as the parties
involved, they deserve to be recounted once. A suit, being Civil Suit
no. 68 of 2011 ("Suit"), was filed by Mr. V in the Court of Senior
Civil Judge-cum-Rent Controller (Central), Tis Hazari Courts, Delhi
("Trial Court") challenging Mr. P's election to the post of the
CM(M) 1067 of 2011 and 606 of 2013 Page 2 of 30
President of the Society. It was filed on 22nd July, 2011 and an interim
order was passed on 23rd July, 2011 ("first interim order") granting
certain interim relief to Mr. V. The Society, Mr. P and Mr. S filed an
application ("Arbitration Application") under section 8 of the
Arbitration and Conciliation Act, 1996 ("Act") seeking that the
matter be referred to arbitration in view of clause 31G (o) in the
Constitution of the Organisation ("arbitral clause"). This was
rejected by the Trial Court by its order dated 8th August, 2011 ("first
impugned order"), which was challenged in the first petition by Mr.
P and Mr. S.
4. The proceedings in the Trial Court was initially stayed by this Court
in the first petition, which was later modified and only the first
impugned order was stayed. Mr. P then preferred an application
under Order XXXIX rule 4 of the First Schedule to the Code of Civil
Procedure, 1908 ("Code") for vacation of the first interim order
("Mr. P's application"). In the meanwhile, contending that Mr. P
has acted in violation of the first interim order, Mr. V filed an
application under Order XXXIX rule 2A of the First Schedule to the
Code ("Mr. V's application"). By an order of 3rd March, 2012, Mr.
P's application was allowed by the Trial court and Mr. V's application
was rejected and a Court Observer was appointed ("second interim
order"). Mr. V challenged the second interim order in RCA no.
14/12 ("first appeal") in the Court of the Additional District Judge -
06 (Central), Delhi ("Appellate Court") and Mr. P challenged the
same in RCA no. 19/12 ("second appeal") before the Appellate
Court. By its order dated 19th November, 2012 ("second impugned
CM(M) 1067 of 2011 and 606 of 2013 Page 3 of 30
order"), the Appellate Court rejected the first appeal and allowed the
second appeal and set aside the appointment of the Court Observer.
The second impugned order is the subject matter of challenge by Mr.
V in the second petition.
Facts
5. The facts, apart from what is set out hereinabove, are that Mr. P was
elected president to the Society by the elections held on 17th July,
2011 ("impugned elections"). Mr. V filed the Suit challenging the
same. Apart from alleging various irregularities, his primary
contentions have been that:
5.1. Mr. P was over the prescribed age limit (40 years) as per the
bye-laws and other rules made by the Organisation and could
not have been nominated for or have run for, or have become
the President of the Society, and
5.2. Mr. K was over the prescribed age limit (45 years) as per the
bye-laws and other rules made by the Organisation and could
not have been a member of the Faridabad Branch of the
Organisation, nor could he have nominated Mr. P for the
position of President of the Society
6. Mr. V's case is that both Mr. P and Mr. K have committed a fraud by
actively concealing their respective ages. He has further contended
that Mr. S, who was made the Returning Officer for the impugned
elections, has failed to appropriately scrutinise Mr. P's nomination,
and is likely complicit in the fraud. On these as well as other grounds
CM(M) 1067 of 2011 and 606 of 2013 Page 4 of 30
of irregularities, Mr. V sought that the impugned elections and their
results ought to be declared as null and void and that Mr. P be not
allowed to become the President of the Society or take charge over
from the erstwhile President.
7. By the first interim order, the handing over/taking over of the charge
was stayed but Mr. P was allowed to remain as the President of the
Society. As earlier recounted, the first impugned order rejected the
Arbitration Application, the grounds wherefor would be discussed in
further detail at a more appropriate part of the judgement. As earlier
outlined, this Court, in the first petition, stayed operation of the first
impugned order. It, however, allowed liberty to Mr. P to seek
modification of the first interim order. It was in these circumstances
that Mr. P's application seeking vacation of the first interim order
came to be filed.
8. In the meanwhile, Mr. P, on 16th October, 2011, called for a meeting
of the Executive Committee of the Society. Contending this
behaviour to be wilful contempt of the first impugned order, Mr. V's
applications came to be filed. It was sought to be contended that by
Mr. P calling for the meeting, he has de facto taken charge of/acted in
charge of the Society, in violation of the first interim order. By the
second interim order, the Trial Court rejected Mr. V's application. It
observed that the first interim order expressly allowed for Mr. P to
remain as the President of the Society and the call for the meeting is
in exercise of Mr. P's prerogative as the President of the Society. It
further allowed Mr. P's application, albeit partially. It observed that
CM(M) 1067 of 2011 and 606 of 2013 Page 5 of 30
Mr. P would be unable to function as the President if he is not
allowed to oversee the daily functioning of the Society. It further
observed that if the Suit is eventually decreed in Mr. V's favour, the
passage of this order ought to not adversely affect his or the Society's
rights. In the circumstances, it modified the first interim order to the
extent of allowing Mr. P to function as a President in toto. However, it
appointed a Court Observer regarding the affairs of the Society.
9. In these circumstances, Mr. V as well as Mr. P filed their respective
appeals challenging the second interim order. Mr. V contended that
(a) the spirit of the first interim order was that Mr. P ought to have
remained a President only in title and not discharged any functions of
the President, (b) that Mr. V has violated the first interim order in
letter as well as in spirit and has thus committed contempt thereof.
Mr. P as well as Mr. V challenged the appointment of the Court
Observer, contending that where there was neither any prayer for,
nor any grounds for appointment of a Receiver, appointment of one
in the name of a Court Observer is wholly inappropriate and ought to
be set aside. By the second impugned order, which will be discussed
in further detail shortly, the first appeal (by Mr. V) was rejected and
the second appeal (by Mr. P) was allowed.
The impugned orders
First impugned order
10. The first impugned order, as earlier stated, rejected the Arbitration
Application filed by Mr. P, Mr. S and the Society. Before the Trial
Court, the first objection raised by Mr. V against reference to
CM(M) 1067 of 2011 and 606 of 2013 Page 6 of 30
arbitration under section 8 of the Act was that the arbitral clause
required the Organisation to appoint an arbitral tribunal for the
purpose of deciding the disputes and differences. This contention was
rejected by the Trial Court, which held that the arbitral tribunal was
indeed appointed by the Organisation, as evidenced from the minutes
of its meeting held on 3rd May, 2009. This finding, having not been
challenged in either petition, has become final now.
11. The other contention raised by Mr. V was that since there are
allegations of fraud - being the active concealment of their respective
ages by Mr. P and Mr. K - the matter cannot be referred to
arbitration. It was contended that an arbitral tribunal would not be
competent to consider issues of fraud and hence the matter ought to
not be referred to arbitration. Accepting Mr. V's contention, the Trial
Court rejected the Arbitration Application reasoning that:
11.1. The judgement relied in support of the contention of the
applicant-defendants that an election dispute may be referred
to arbitration is distinguishable because the matter is squarely
covered by the judgements in General Enterprises & Ors. v
Jardine Handerson Ltd.,1 and SW Palanitkar & Ors. v State of
Bihar & Ors., which were cited by Mr. V.2
11.2. The allegations of fraud strike at the very root of the
impugned elections.
1 AIR 1978 Cal 407.
2 (2002) 1 SCC 241.
CM(M) 1067 of 2011 and 606 of 2013 Page 7 of 30
11.3. The subject matter of the dispute is not a dispute at a national,
regional or branch level - which is arbitrable - but is of fraud
committed by a person/persons - which is not arbitrable.
11.4. The judgements in NC Padmanabhan & Ors. v S Srinivasan,3
and Kashmiri Lal v Union of India,4 mandate that whenever
disputes involving fraud and misappropriation are alleged and
they are too serious to be tried by the arbitrator, stay of suit
ought to be refused.
12. Reasoning thus, the first impugned order refused to refer the dispute
to arbitration, which has been challenged by Mr. P and Mr. S in the
first petition herein.
Second impugned order
13. As earlier stated the second impugned order was considering the
appeals filed by Mr. V and Mr. P against the second impugned order
and had rejected the first appeal but allowed the second appeal. It had
reasoned that:
13.1. The Trial Court's specifically stated in the first interim order
that Mr. P may remain as the President of the Society.
13.2. The Trial Court's has clarified to the same effect in its further
orders, although it has not made it clear as to whether calling
for and holding a meeting of the Executive Committee would
fall within the prerogative of the President or whether it
3 AIR 1967 Mad 201.
4 AIR 1966 J&K 134.
CM(M) 1067 of 2011 and 606 of 2013 Page 8 of 30
would amount to taking charge/papers over - which latter
activity is prohibited.
13.3. The Trial Court, by the second interim order, has considered
the calling of the meeting as not amounting to a violation of
the first interim order.
13.4. The interpretation of the first interim order by the Trial Court
is a reasonable and plausible interpretation and is not
capricious, arbitrary or perverse.
13.5. Given the above, there is no basis for interference with the
interim order - especially when the application under Order
XXXIX rules 1 and 2 of the Code is still pending before the
Trial Court.
13.6. The challenge to the second impugned order on this ground
by the first appeal ought to hence be rejected.
13.7. The appointment of the Court Observer is, in effect, an
appointment of a Receiver under Order XL rule 1 of the
Code.
13.8. A Receiver/Observer may be appointed only where there is a
requirement of preservation of property or subject matter of
the Suit.
13.9. No allegations of misappropriation or embezzlement of funds,
nor of apprehension thereof have been pleaded by the
plaintiff, nor is there any prayer for appointment of a
Receiver/Observer.
CM(M) 1067 of 2011 and 606 of 2013 Page 9 of 30
13.10. No valid reason has been given for the appointment of a
Court Observer when Mr. P has already been allowed to
function as a President in toto.
13.11. In the circumstances, the second appeal by Mr. P has to be
allowed in its entirety; the appointment of the Court Observer
is set aside.
14. This order is the subject matter of challenge in the second petition.
Contentions and Analysis
As to the second impugned order
15. The second petition - filed by Mr. V - may be taken up for
consideration first, although due to what this Court will be holding in
the first petition, it need not, ordinarily, consider the second petition.
16. By the second petition, the second impugned order is challenged by
Mr. V before this Court. Much of what has been contended before
the Trial Court and the Appellate Court have been reiterated here -
that (i) neither could Mr. P have been nominated for nor have run for
President of the Society; (b) Mr. K could not have been a member of
the Faridabad Branch and hence could not have nominated Mr. P for
the impugned elections; (c) that the impugned elections are vitiated by
the fraud perpetrated by Mr. P and Mr. K; (d) that there were further
and other irregularities in the impugned elections; (e) that Mr. P
ought to not have been allowed to function as the President of the
Society. Senior Advocate Mr. Kirti Uppal, appearing on behalf of Mr.
V, contended that the Trial Court had failed to appreciate the spirit of
CM(M) 1067 of 2011 and 606 of 2013 Page 10 of 30
the first interim order when it passed the second interim order setting
the former aside. He contended that when there is a prima facie doubt
as to the validity of the impugned elections, the Trial Court ought to
not have allowed Mr. P to continue as President. He contended that
in any case, the Appellate Court has failed to appreciate these errors,
which are apparent from the record of the Trial Court itself. He lastly
contends that the Appellate Court was incorrect in holding that the
appointment of the Court Observer was contrary to the provisions of
Order XL rule 1 and ought to not have set the same aside by the
second impugned order.
17. Although they traverse the contentions on behalf of Mr. V, it is
unnecessary to set out the contentions on behalf of Mr. P in this
regard; this Court finds no merit in the contentions on behalf of Mr.
V. The limitations of this Court when it exercises supervisory
jurisdiction - especially in respect of interim and/or discretionary
orders - are well established and hardly need reiteration.5 The
petition, too, would be considered on this touchstone of whether
there was an error of jurisdiction or an illegality patent, warranting
interference with under article 227 of the Constitution of India. The
answer, to the mind of this Court, ought to be in the negative. The
second impugned order, to the extent that it rejects Mr. V's appeal
from the second interim order, is not contrary to material available on
record. The Appellate Court has refrained from interfering with (a)
the interpretation placed upon its own earlier order by the Trial
5Useful reference may be made to para. 38 of Surya Devi Rai v Ram Chander Rai & Ors., (2003) 6 SCC
675 in this regard.
CM(M) 1067 of 2011 and 606 of 2013 Page 11 of 30
Court, and (b) an interim order as well as an order on an application
under Order XXXIX rule 2A of the Code when the main application
under Order XXXIX rule 1 and 2 of the Code is still to be decided
finally.
18. The Appellate Court has, in its discretion refused to interfere with a
reasonable interpretation by the Trial Court of its own order; this
exercise of discretion is not arbitrary, nor is it contrary to material
available on record. It is not Mr. V's case that the first interim order
cannot be interpreted in the manner that the Trial Court did interpret
it. It is not his case that the only manner it ought to be interpreted
was the one posited by him. This Court will be loath to interfere with
a reasonable and plausible interpretation its own judicial order by a
Court, especially when the Appellate Court - which had jurisdiction
to reappreciate evidence - found no contention by Mr. V compelling
enough to warrant such interference. Further, it is not the case that
this interim order of the Trial Court will be incapable of correction at
a later stage or that the refusal to interfere with at this stage would
result in unnecessary prolonging of the disputes; this Court finds no
reason to interfere with the second impugned order on this count.6
19. This brings us to the second count on which the second impugned
order has been challenged: that it ought to not have interfered with
the appointment of the Court Observer. Although all that this Court
has observed in the previous paragraph would apply on all fours to
the present contention, it is being considered for one further reason.
6 Ibid., at para. 38(8), p. 696.
CM(M) 1067 of 2011 and 606 of 2013 Page 12 of 30
The first appeal, a copy of the memorandum whereof has been filed
with the second petition, discloses that Mr. V has himself contended
lack of consent for appointment of the Court Observer; this has also
been recorded in the second impugned order. Mr. V, having already
objected to the appointment of the Court Observer in his appeal -
which gave rise to the second impugned order - cannot be heard to
contend that the second impugned order ought to not have set aside
the appointment of the Court Observer; quod approbo non reprobo.7
20. On merits, the Appellate Court found that there has been no case
made out that Mr. P is embezzling or misappropriating the funds of
the Society in his position as the President thereof, or that there is an
apprehension thereof. It observed that there was no prayer on Mr.
V's behalf for appointment of a Court Observer, either. On this basis,
the Appellate Court set aside the appointment of the Court Observer,
holding it to not be in consonance with the rigours of Order XL rule
1. Mr. V has not been able to demonstrate before this Court as to
how the pleadings in the Suit can be construed as making out a case
of embezzlement or of misappropriation or of apprehension thereof.
This Court finds no reason to interfere with the second impugned
order; consequently, the second petition, filed by Mr. V, is hereby
dismissed.
As to the first impugned order
21. Advocate Mr. Manish Kaushik, appearing for Mr. P and Mr. S, in
support of the first petition, contended that the mandatory provision
7 Latin: That which is approved cannot be condemned.
CM(M) 1067 of 2011 and 606 of 2013 Page 13 of 30
of arbitration - the arbitral clause - will cover the present dispute,
and it ought to be referred to arbitration. He contended that:
21.1. The impugned order was wrong in holding that in view of the
allegations of fraud, the matter cannot be referred to
arbitration.
21.2. The Trial Court, once it came to the conclusion that an
arbitration clause exists, and the dispute would - but for the
allegation of fraud - be arbitrable, ought to not have refused
there reference to arbitration merely because bald allegations
of fraud have been made.
21.3. The allegations of fraud were made without furnishing any
particulars thereto and cannot form the basis of a rejection of
the Arbitration Application.
21.4. The fraud alleged is not of such a serious nature as to be tried
only by a Civil Court; the arbitral tribunal would well be
competent to try the same.
21.5. In any case, where the party against whom the fraud is alleged
is willing to have the allegations of fraud tried in arbitration, in
respect of frauds of this nature - of simple active concealment
of age in elections - the arbitral clause must be given effect to.
22. In reply, Mr. Uppal contended that the first impugned order was
rightly passed and ought to not be interfered with. He contended
that:
CM(M) 1067 of 2011 and 606 of 2013 Page 14 of 30
22.1. The petition is not maintainable under article 227 of the
Constitution of India.
22.2. The Arbitration Application did not disclose the disputes
sought to be referred to arbitration and in the absence thereof,
the application will not be maintainable.
22.3. Relying on the judgements in Utkarsh v Delhi Bar Association,8
and Akshay Kapur v Rishav Kapur & Ors.,9 he contended that
the Suit merely sought for enforcement of a mandatory term
of an agreement and hence cannot be referred to arbitration.
22.4. Where a prima facie case of fraud is made out, the matter ought
to not be referred to arbitration and must be tried by the Civil
Courts.
23. After hearing the parties, the Court reserved the matter for
consideration. This Court, after consideration of the contentions, is
of the view that the first petition ought to be allowed in the
circumstances of the case; there is much merit in the submissions on
behalf of Mr. P and Mr. S.
24. The issue of arbitrability of disputes where fraud is alleged is not new,
and has been the subject of pronouncements in the past too. An early
case on an issue of whether parties may be referred to arbitration
although there are contentions of fraud is that of the Madras High
Court in Anglo-Persian Oil Company Ltd. v PS Panchapakesa Aiyar,10
where SCHWABE C.J. held:
8 Judgement dated 25th February, 2014 of this Court in CS(OS) no. 2625/2013.
9 105 (2003) DLT 467.
10 AIR 1924 Mad 336, at p. 337.
CM(M) 1067 of 2011 and 606 of 2013 Page 15 of 30
"As I understand the principle in England and here, the Court, where there is a
submission to arbitration, in order to refuse to stay the proceedings, must be
satisfied that there is no sufficient reason why the matter should not be referred to
arbitration in accordance with the submission, that is, really saying in other words
that the onus is on the party resisting the application for stay to show some
sufficient reason why in the particular case the parties should be relieved from the
obligation which they should have contracted namely that their case should go
before the arbitrators selected by them and not before the ordinary tribunals of the
land. There are certain well defined instances where a court almost invariably
refuses to stay, such as a case where there are serious allegations of fraud..."
(Emphasis supplied)
25. In the said case, the Court held that since no case of fraud is made
out or even pleaded, the matter ought to be referred to arbitration.
Shortly thereafter, the Calcutta High Court had a similar issue before
it. The dispute was in respect of certain fraudulent misappropriation
of funds by misuse of office of a Managing Agency of the Maharajah
of Kasisimbazar's collieries, with the Maharajah seeking an injunction
against the Managing Agency from functioning as such qua the
collieries or a decree of declaration of determination of the contract
of agency. It appears that the matter involved the officers of the
Managing Agencies covertly selling coal from the collieries and
appropriating the funds for themselves, without the knowledge of the
Maharajah. Rejecting the application under Section 19 of the Indian
Arbitration Act, 1899, the CC GHOSE J. held:
"... [U]nder S. 19 of the Indian Arbitration Act, the Court has a discretion in
the matter of staying actions which it is bound to exercise judicially and in
accordance with certain well settled rules. The prima facie leaning of the Court is
to stay the action and leave the plaintiff to the tribunal to which he has agreed but
the Court may in its discretion, after considering all the circumstances of the case,
refuse a stay on the ground that the matters in dispute between the parties involve
the investigation of grave charges of fraud and may hold that in such circumstances
arbitration is not the most suitable method of determining the questions raised
CM(M) 1067 of 2011 and 606 of 2013 Page 16 of 30
between the parties. Sir Benoud Mitter and Mr. SC Bose, who appeared for the
defendant company, have strongly pressed upon me the case of Russel v Russel,
and have argued that where fraud is charged the Court will, in general, refuse to
send the case to arbitration if the party charged with fraud desires a public enquiry
and that where it is the party who is making the charge desires that the matter
should be given publicity of a public trial, the Court is much less inclined to free
him from the undertaking to go to arbitration into which he has seen fit to enter. I
assent, if I may respectfully do so, to the proposition laid down in Russel v Russel,
but it is to be observed that this very case virtually decides that, provided a prima
facie case of fraud is made out, the action will be allowed to proceed, although it is
the party alleging the fraud who desires the public enquiry. On this motion for stay
of the action, I am not at liberty to offer any opinion whatsoever on the merits of
the plaintiff's claim, but it is permissible for me to state that I am convinced that
the plaintiff has a substantial and bona fide cause of action and that on the
affidavits a sufficient prima facie case of fraud has been made out. In my
judgement, a question like this should not be sent to the determination of
arbitrators, and on this ground alone, I would decline to stay the action."11
(Emphasis supplied)
26. While upholding the refusal of the Court of Small Causes to refer
parties to arbitration given the allegations of fraud, the Sind Court of
Judicial Commissioner had, as early as in 1934, warned against lightly
allowing such matters to be tried by Courts. Relying on the Calcutta
High Court's decision,12 O'SULLIVAN A.J.C. observed:
"With regard to the question of forgery, when there is charge of fraud or forgery,
against one of the parties to a submission clause a Court has discretion to refuse a
stay. Generally speaking where the party charged desires a public inquiry, the
Court will generally refuse to send the case to arbitration but where the party
making the charge desires that the matter should be dealt with in Court the Court
will be less inclined to stay the suit...However, with reference to this question we
desire to sound a note of warning. To ensure a proper discretion in refusing to stay
a suit on an allegation of fraud or forgery, the Court should ascertain that there is
some foundation for such a charge; otherwise there will be a tendency to allege fraud
in any case in which a party to a submission clause wishes to avoid arbitration."13
(Emphasis supplied)
11 Maharajah Sir Manindra Chandra Nandy v HV Low & Co. Ltd., AIR 1924 Cal 796, at p. 800.
12 Ibid.
13 FO Murlimal Santram v Messrs. Bansaridas & Sons & Anr., AIR 1935 Sind 62, at p. 67.
CM(M) 1067 of 2011 and 606 of 2013 Page 17 of 30
27. Relying on Russel v Russel,14 LEACH C.J. speaking for the Division
Bench of the Madras High Court, refused to refer parties to
arbitration in a matter involving forgery of documents observing:
"We have no hesitation in holding that the discretion [to not refer parties to
arbitration where fraud is alleged] which [the learned Single Judge] did exercise
was exercised wisely. The questions at issue between the appellants and the
respondent involve serious allegations of fraud, and the respondent has the right to
ask the Court that matters which affect his honesty and integrity should be decided
in open Court."15
28. The position did not appear to change much even after the enactment
of the Arbitration Act, 1940. Before the Allahabad High Court, a case
was brought in appeal from an order of a Civil Judge refusing stay of
a suit on grounds inter alia of serious issues of fraud having been
raised. Reversing this, the Division Bench of the Court referred with
approval to Russel v Russel16 and the Calcutta High Court's
judgement17 and observed:
"[4] ...[U]nless a prima facie case of fraud is made out, the proceedings should
when an arbitration agreement exists, be stayed. If the plaintiff objects to the case
being referred to a domestic tribunal in accordance with an arbitration agreement
between the parties he must make out a substantial and bona fide case of fraud.
In the present case, respondent 1 has no doubt, made serious allegations of fraud
against the appellant. But he did not come into the witness box and the statement
on oath of the appellant and the affidavit filed on his behalf stand unrebutted. On
the other hand, the appellant has filed two affidavits sworn by respondent 1 in
which he has denied the allegations of fraud. No doubt, it is said on behalf of
respondent 1 that these affidavits had been obtained from him by undue influence
and misrepresentation. But, as I have said before, respondent 1 has not appeared
in the witness-box to state these facts on oath and there is also no affidavit on his
behalf in support of these allegations."18
14 (1880) 14 Ch 471.
15 Laldas Lakshmi Das & Anr. v JD Italia, AIR 1938 Mad 918.
16 Supra, at n. 14.
17 Supra, at n. 11.
18 Budhu Lal v Jagan Nath, AIR 1949 All 70, at p. 72.
CM(M) 1067 of 2011 and 606 of 2013 Page 18 of 30
(Emphasis supplied)
29. In the same year, the East Punjab High Court was to consider a
matter where a plaintiff sued two defendants, but only the first
defendant was party to the arbitral clause. The contention of the
plaintiff was that the two defendants colluded with each other to
defraud him. Refusing to refer the matter to arbitration, the Court
held:
"[39] ...Although there is no legal bar to the Court proceeding with the trial of
the suit as against defendant 2 not party to the arbitration agreement while the
suit, in so far as it affects defendant 1, who is a party to arbitration agreement
remains stayed, consideration of practical convenience appear to make it eminently
desirable that the allegations of fraud and collusion against both the defendants be
tried in the same action and at the same time.19
(Emphasis supplied)
30. In a matter involving the Union of India alleging supply of
adulterated ghee to it by the plaintiff, the Civil Judge refused stay of
the suit inter alia in view of the plaintiff alleging fraud by former's
officers during testing of the ghee. Refusing to interfere with the same,
the Division Bench of the Allahabad High Court observed:
"[7] ...[A] party to the arbitration agreement is not entitled as of right to the
stay of proceedings. Whether or not the Court shall exercise the power given to it
by the section [section 34 of Arbitration Act, 1940] is entirely one of discretion.
This discretion, of course, must be judicially exercised. But where it has been
exercised it will not readily be interfered with, even though the tribunal which is
asked to review it may feel that, if the decision had rested with them, their own
conclusion may have been different...Where parties have agreed to refer a dispute
to arbitration, and one of them, notwithstanding that agreement, commences an
action to have to dispute determined by Court, prima facie the leaning of the
Court is to stay the action and leave the plaintiff to the tribunal to which he has
agreed. But where the dispute referred to arbitration involves a question of fraud or
where the dispute under consideration involves charges against the character of one
19 Banwari Lal Ram Deo v Board of Trustees, Hindu College, Delhi, AIR 1949 E. Punj 165, at p. 175.
CM(M) 1067 of 2011 and 606 of 2013 Page 19 of 30
of the parties, the Court will usually permit the party against whom such charges
are made, if he so desires, to have them investigated in open Court. It is not proper
that a party against whom such charges are made should be without a right of
appeal on questions of fact..."20
(Emphasis supplied)
31. In the oft-cited case of Abdul Kadir Shamsuddin Bubere v Madhav
Prabhakar Oak & Anr.,21 KN WANCHOO J. (as he then was), citing
Russel v Russel,22 and speaking for the Bench of three Judges:
"(17) There is no doubt that where serious allegations of fraud are made against a
party and the party who is charged with fraud desires that the matter should be
tried in open court, that would be a sufficient cause for the court not to order an
arbitration agreement to be filed and not to make the reference. But it is not every
allegation imputing some kind of dishonesty, particularly in matters of accounts,
would be enough to dispose a court to take the matter out of the forum which the
parties themselves have chosen.
...
We are clearly of the opinion that merely because some allegations have been made
that accounts are not correct or that certain items are exaggerated and so on that is
not enough to induce the court to refuse to make a reference to arbitration. It is
only in cases of allegation of fraud of a serious nature that the court will
refuse..."23
(Emphasis supplied)
32. In the case of General Enterprises & Ors. v Jardine Handerson Ltd.,24 after
discussing Russel v Russel,25 the Calcutta High Court, after referring to
the above judgement of the Supreme Court26 observed:
"The true ratio of that decision, in my opinion, is that where allegations of fraud
are made in an action in respect of which stay is being sought, those allegations are
factors which the Court takes into consideration in exercising the discretion [to
grant or refuse stay]. It was normally the practice if party charged with fraud
20 Union of India v Firm Vishydha Ghee Vyopar Mandal, AIR 1951 All 541, at p. 543.
21 AIR 1962 SC 406.
22 Supra, at n. 14.
23 Abdul Kadir Shamsuddin Bubere v Madhav Prabhakar Oak & Anr., supra, at n. 21, p. 411.
24 Supra, at n. 1 para. 16, p. 418.
25 Supra at n. 14
26 Abdul Kadir Shamsuddin Bubere v Madhav Prabhakar Oak & Anr., supra, at n. 21.
desired public and open trial in courts to refuse to grant stay even where the stay
was merited. This principle grew up at a time when people with dignity very often
sought vindication of honour in public. Jessel M.R. has noted that there is a
tendency of making false or reckless allegation and it is often a tendency of those
who make those allegation to want exposure at a public forum. At the same time
it has to be borne in mind that sense of dignity is at discount in the present times,
people are no longer keen for vindication of honour. People who are guilty of fraud
tend to avoid public trial. Therefore, keeping this trend in mind, in my opinion,
the effect of allegations of fraud in exercising the discretion of the Court should be
examined...In my opinion the fact that there are allegations of fraud is a factor
which the Court should take into consideration in considering the exercise of
discretion. The nature and type of the allegations are also relevant factors. If a
party charged with fraud wants public trial stay should, subject to the above
factors, be always refused. But even if the party charged with fraud does not want
public trial but the party charging the fraud so wants there in appropriate cases the
court should refuse to grant stay..."
(Emphasis supplied)
33. It must be borne in mind that in the above matter, the dispute
involved the Plaintiff's own assistant causing it to enter into the
contract with a firm which was comprised of his wife and child,
which the plaintiff cited as reason inter alia to refuse to honour the
contract. Speaking for the Division Bench of the Andhra Pradesh
High Court in a matter with similar facts, JAGANNADHA RAO J. (as he
then was), relied upon the said judgement to refuse reference to
arbitration at the insistence of the plaintiff.27 He also held that cases
involving professional/occupational negligence, impropriety and
dishonesty ought also to be treated in a similar manner, with the
person against whom it is contended being given an opportunity to
have the matter tried in Court.28 In a subsequent case, the Calcutta
High Court was faced with an appeal from a stay of suit in view of
serious allegations of fraud having been made. The plaintiff's suit was
27 Muthavarapu Venkateswara Rao v N Subbarao, AIR 1984 AP 200.
28 Ibid., at para. 29, p. 206.
that the defendant-contractor colluded with its officers and presented
a false picture as to the quantum of work completed by him and thus
obtained payment therefor. Reversing the order of stay, and holding
that the actual dispute was qua the quantum of work done and not the
collusion the Division Bench held:
"43. However, mere allegation of fraud unconnected with the real point at issue
will, in our view, not operate as a bar to the stay of the legal proceeding. According
to us, the most vital question for consideration in such matters would be whether in
deciding the real dispute between the parties it would be necessary for the arbitrator
to enter into the allegation of fraud involving the reputation of a professional man.
If it is necessary for the arbitrator to enter into such question for determining the
real point at issue between the parties, the Court will be reluctant to allow the
matter to go to arbitration."29
(Emphasis supplied)
34. Indirectly affirming the principle that consent can clothe an arbitrator
with power to consider issues of fraud, a learned Single Judge of this
Court, rejected challenge to an award based on an agreement
contended as being obtained by fraud in Amir Singh Jain v Bimla Devi
Jain.30 In negativing the petitioner's contention that the arbitrator
ought to have sent the matter back to the Courts for their
consideration once fraud has been raised as an issue in the arbitration,
the Court held:
"I have considered this aspect. In my opinion the contention of Mr. Mittal has no
force. The matter was referred by the Court for decision. No application could be
filed before the Arbitrator to return the reference on the ground that allegations of
fraud had been pleaded. The proper remedy was to apply to the court for revocation
of the authority of the arbitrator. It [sic: if] advised, the plaintiff could move the
29 West Bengal Comprehensive Area Development Corporation and Anr. v Sansanka Sekhar Banerjee, AIR 1985
Cal 290.
30 1993 (27) DRJ 74.
court for revocation of the authority of the Arbitrator on the ground that the
subject matter of the reference contained allegations of fraud..."31
35. RC LAHOTI J. (as he then was), when sitting singly in this Court, had
occasion to consider the issue in Subhash Chander Kathuria v Ashoka
Alloys Steels Pvt. Ltd. & Ors.,32 where the plaintiff sought to oppose
the application for stay of suit on the ground that the defendants had
committed fraud in inducing him to enter into the contract. After
examining the decisions of the Andhra Pradesh High Court,33
Allahabad High Court's,34 and that of the Sind Court of Judicial
Commissioner,35 the learned Judge held:
"18. I have carefully perused the several so-called false representations and
persuasions made by the defendants, according to the plaintiff. Firstly, there is a
distinction between a misrepresentation and a fraud. A case of misrepresentation is
not a case of fraud. If not all, most of the false representations set out in the plaint
and attributed to the defendants are such as to which the plaintiffs could have
made enquiries of their own and by exercise of sheer reasonable diligence, they
could have known the correct state of affairs of the defendants company, howsoever
held out and falsely projected by the defendants. It would not be a case of fraud...
19. The allegations of fraud are against the defendants. Primarily they have the
option to have the matter decided by the civil court. They wishes [sic: wish] to have
the matter adjudicated upon by the arbitrator. If the applicability of S.34 of the
Arbitration is attracted the plaintiffs cannot in the facts and circumstances of the
case force upon the defendants a trial by civil court to the exclusion of the
arbitration clause."36
(Emphasis supplied)
36. The position of law remains substantially unchanged subsequent to
the enactment of the Act, as well. Now it must be borne in mind that
the 1940 Act afforded a discretion to the Court before which an
31 Ibid., at p. 77.
32 1995 (35) DRJ 319.
33 Muthavarapu Venkateswara Rao v N Subbarao, supra, at n. 27.
34 Budhu Lal v Jagan Nath, supra at n. 18.
35 FO Murlimal Santram v Messrs. Bansaridas & Sons & Anr., supra, at n. 13.
36 Subhash Chander Kathuria v Ashoka Alloys Steels Pvt. Ltd. & Ors., supra at n. 32, p. 323.
application for stay of a suit governed by an arbitral clause is made,
whereas section 8 of the Act provides no such scope for discretion.
This proposition, which was pressed into operation by the petitioner,
is undeniable. The judgements of the Supreme Court in P Anand
Gajapathi Raju & Ors. v PVG Raju (dead) & Ors.37 and Hindustan
Petroleum Corpn. Ltd. v Pinkcity Midway Petroleums,38 squarely cover this
issue, and this Court is bound by the same. However, the position of
law under the 1899 Act as well as the 1940 Act that in a matter where
serious fraud is alleged, the arbitrability thereof may be at issue has
been extended in respect even of the 1996 Act.
37. In a cause célèbre where the award was being challenged before the
Bombay High Court, the parties had agreed to the reference to
arbitration even on the issue of fraud - which was accepted by the
Supreme Court. Setting aside the interim award the tribunal had
passed on preliminary issues, the learned Single Judge observed:
"Normally, it is difficult to the Arbitral Tribunal to decide the issue of fraud.
However, in the present facts and circumstances of the case, and pursuant to the
order of the Supreme Court, parties agreed to get the issue of fraud decided by the
Arbitrator. Having once accepted the position, unless the same issue is decided by
giving full opportunity to the parties and specially to the Appellants, who have
made the averments about the fraud and collusion, the interim award in
question...is unsustainable..."39
38. The most important judgement, however, on the Act, is N
Radhakrishnan v Maestro Engineers & Ors.40 A reading of this judgement
shows that the Supreme Court has distinguished its earlier
37 (2000) 4 SCC 539.
38 (2003) 6 SCC 503.
39 Oriental Bank of Commerce v Kikabhai Premchand Trust, 2008 (3) Bom LR 0886.
40 (2010) 1 SCC 72.
judgements41 and thereby continued the position of law as existed
prior to the Act, in respect of the issue of arbitrability of issues of
fraud. It observed therein:
"20. The learned counsel for the respondents on the other hand argued that when
a case involves substantial questions relating to facts where detailed material
evidence (both documentary and oral) is needed to be produced by either parties,
and serious allegations pertaining to fraud and malpractices were raised, then the
matter must be tried in a court and the arbitrator could not be competent to deal
with such matters which involved an elaborate production of evidence to establish
the claims relating to fraud and criminal misappropriation.
21. In our opinion, the contention of the respondents relating to the jurisdiction of
the arbitrator to decide a dispute pertaining to a matter of this proportion should
be upheld, in view of the facts and circumstances of the case. The High Court in
its impugned judgment has rightly held that since the case relates to allegations of
fraud and serious malpractices on the part of the respondents, such a situation can
only be settled in court through furtherance of detailed evidence by either parties
and such a situation can not be properly gone into by the arbitrator.
...
23. The learned counsel appearing on behalf of the respondents on the other hand
contended that the appellant had made serious allegations against the respondents
alleging that they had manipulated the accounts and defrauded the appellant by
cheating the appellant of his dues, thereby warning the respondents with serious
criminal action against them for the alleged commission of criminal offences. In this
connection, reliance was placed on a decision of this Court in Abdul Kadir
Shamsuddin Bubere v. Madhav Prabhakar Oak [AIR 1962 SC 406] in
which this Court under para 17 held as under: (AIR p. 411)
"17. There is no doubt that where serious allegations of fraud
are made against a party and the party who is charged with
fraud desires that the matter should be tried in open court, that
would be a sufficient cause for the court not to order an
arbitration agreement to be filed and not to make the reference."
In our view and relying on the aforesaid observations of this Court in the aforesaid
decision and going by the ratio of the abovementioned case, the facts of the present
case do not warrant the matter to be tried and decided by the arbitrator, rather for
the furtherance of justice, it should be tried in a court of law which would be more
competent and have the means to decide such a complicated matter involving
various questions and issues raised in the present dispute."42
41 P Anand Gajapathi Raju & Ors. v PVG Raju (dead) & Ors., (2000) 4 SCC 539; Hindustan Petroleum
Corpn. Ltd. v Pinkcity Midway Petroleums, (2003) 6 SCC 503.
42 N Radhakrishnan v Maestro Engineers & Ors., supra, at n. 40, pp. 76-77.
39. A review of the authorities cited, to the mind of this Court, makes the
following obvious:
39.1. Under section 8 of the Act, where an arbitration agreement is
shown to exist, the Court is bound to refer parties and
disputes to arbitration.
39.2. The mandate of section 8 of the Act extends only to matters
where the disputes are arbitrable in nature.
39.3. A matter involves fraud only when:
39.3.1. A clear and unambiguous case of fraud - either active
concealment or active misrepresentation with intent to
make wrongful gain or create wrongful loss - is made
out.
39.3.2. The case of fraud is supported by sufficient particulars
to arrive at a prima facie conclusion of existence of a
case of fraud.
39.3.3. The fraud either vitiates the arbitral agreement (and
not the agreement containing the arbitral agreement,
which is a separate agreement in itself), or goes to the
root of the dispute itself, as opposed to the subject matter
of the dispute.
39.3.4. The dispute cannot be tried without trying the issue of
fraud.
39.4. Matters involving fraud include matters where allegations of
professional/occupational negligence, impropriety and
dishonesty or such other allegations as amount to an
imputation adverse to their personal or professional character.
39.5. Matters involving fraud are per se arbitrable, subject to the
following.
39.6. The party against whom fraud is alleged has an option - but
not a right - to demand that the matter be tried in open court
and not in arbitration.
39.7. The party alleging fraud or such other allegations has an
option - but not a right - to demand that the matter be tried
in open court and not in arbitration.
39.8. The Court, when considering the an application under section
8 of the Act in a matter where fraud has been alleged:
39.8.1. If the party against whom it is so alleged has prayed
that it be heard in open court in a regular trial, ought
to ordinarily reject the application.
39.8.2. if the party by whom it is so alleged has prayed that it
be heard in open court in a regular trial, ought to
ordinarily allow the application, unless it deems it
necessary and in the interest of justice and expediency
that the matter be heard in Court.
39.8.3. If neither party makes a prayer that it be heard in open
court in a regular trial, ought to ordinarily allow the
application.
39.9. In extraordinary circumstances, the Court may exercise its
discretion in view of the special circumstances, to either allow
or reject the application contrary to what is set out in para.
38.6 hereinabove.
39.10. An allegation of fraud will be considered as an allegation of
serious fraud when it is of a grievous, aggravated or egregious
nature as would warrant (a) the Court trying the matter itself
to ensure a proper trial of the allegation, (b) the findings of
facts in respect thereof is likely to so adversely affect either or
both parties that they ought to have a right of appeal from the
findings, or (c) the allegations are of such a nature that, if
found on, it is likely to affect persons other than the parties to
the dispute.
39.11. Matters involving serious fraud are ordinarily not arbitrable.
39.12. The Court, when considering the application under section 8
of the Act in a matter where serious fraud has been alleged, has
to ordinarily reject the application.
39.13. Although this Court cannot envision any exceptional
circumstance that would warrant referring to arbitration a
matter involving allegations of serious fraud, the discretion of
the Court in such cases is not adversely affected.
40. Mr. V has, in this matter, contended that Mr. P and Mr. K have
committed fraud by actively concealing their respective ages and
thereby attempting to make wrongful gain for themselves. Given the
findings above, this Court is of the view that this allegation does not
affect the arbitrability of the dispute for the following reasons:
40.1. The real dispute is as to whether Mr. P was over the maximum
age limit when he was nominated for, and he ran for the
President of the Society.
40.2. The real dispute is as to whether Mr. K was over the
maximum age limit when he nominated Mr. P for contesting
the impugned elections.
40.3. The arbitral tribunal, should this matter be referred to
arbitration, may not need to consider the issue of fraud to
come to a conclusion as to the main dispute - whether Mr. P
may be/remain President of the Society.
40.4. Even if the issue of fraud is necessary for deciding the dispute,
the same is not a case of serious fraud, only of a simple case of
fraud.
40.5. Mr. P and Mr. S, against whom the fraud has been alleged,
have expressed their willingness to have the matter referred to
arbitration.
40.6. There is no reason for the matter being tried in Court, it is a
private dispute between members of a private Society in
respect of its elections, with no basis for believing that any
serious fraud has been or is being committed.
41. In the circumstances, the first petition has to succeed; the first
impugned order is hereby set aside. All disputes and differences
between the parties are referred to arbitration before the arbitral
tribunal of the Organisation, constituted under the arbitral clause. All
rights and contentions of the parties are left open. The arbitral
tribunal shall consider the reference without being affected by any
observations in this order or any of the orders of the Trial Court or
Appellate court. Mr. V shall take necessary steps to communicate this
order to the arbitral tribunal and initiate appropriate proceedings as
necessary in respect thereof, as he may be advised. A copy of this
order shall be sent to the Trial Court. The parties shall bear their own
costs.
NAJMI WAZIRI
(JUDGE)
MAY 30, 2014
