Delhi High Court
Rishabh Enterprises & Anr vs Ameet Lalchand Shah & Ors on 15 March, 2017
* IN THE HIGH COURT OF DELHI AT NEW DELHI
% Date of decision: 15th March, 2017.
+ CS(COMM) No.195/2016.
RISHABH ENTERPRISES & ANR ..... Plaintiffs
Through: Mr. C.S. Vaidyanathan & Mr. Amit
Sibal, Sr. Advs. with Dr. Saif
Mahmood, Mr. Anish Dayal, Mr.
Amit Bhandhari, Mr. Sumant De, Mr.
Vivek Agarwal & Mr. Ishwar
Mohanty, Adv., Advs.
Versus
AMEET LALCHAND SHAH & ORS ..... Defendants
Through: Mr. Yatindra Singh, Sr. Adv. with Mr.
S.K. Dubey, Mr. Udit Malik, Mr.
Aman Singh & Mr. Varun Mathur,
Advs.
CORAM:
HON'BLE MR. JUSTICE RAJIV SAHAI ENDLAW
IA No.4158/2016 (of defendants u/S 8 of Arbitration Act r/w O-VII R-11
CPC).
1. The application of the five defendants, under Section 8 of the
Arbitration and Conciliation Act, 1996 for reference of the parties to this suit
to arbitration, is for adjudication.
2. The two plaintiffs have instituted this suit inter alia pleading:
(i) that the defendants No.1,4&5 proposed that the plaintiffs should
invest in the defendants‟ business of solar energy plant and
represented that the plaintiffs would not only be able to earn hefty
lease rentals but also be entitled to get other lawful and statutory
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benefits like accelerated depreciation etc.;
(ii) that it was specifically represented that the defendant No.3
Company, which was under the control and direction of the defendants
No.1,4&5, had the necessary authorisations to develop, own, operate
and commercially exploit a 2 MWp thin film Photovoltaic Solar Plant,
transmission line from power plant to the Grid Substation, Bay
Extension Work at Grid Substation including all the infrastructure and
relevant installations required to connect the electricity-producing
equipment to the distribution / transmission grid at the Grid Substation
in Jhansi, Uttar Pradesh;
(iii) that it was also represented to the plaintiffs that the vendors,
from whom various equipment and products had to be procured, had
already been identified and the defendant No.2 Company, also owned
and controlled by the defendant No.1, would procure CIS Photovoltaic
Products from third party vendors in India and resell the same to the
plaintiffs for further being given on lease to the defendant No.3
Company;
(iv) that the defendants jointly and severally assured that the agreed
lease rentals would become payable without any demur and
contestation and shall be paid and also specifically guaranteed and
warranted that the same shall be paid by the defendant No.3 Company;
(v) that the plaintiffs were so induced to purchase highly expensive
equipment from the defendant No.2 Company owned and controlled
by the defendant No.1 and to give it on lease to defendant No.3
Company, also owned and controlled by the defendant No.1;
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(vi) that the plaintiffs were so deceived by the defendants No.1,4&5
into making investment to the tune of more than Rs.32 crores and to
purchase the equipment and lease it back to the defendant No.3
Company, thereby investing and owning the entire solar equipment
installed at the site;
(vii) that on the aforesaid assurances and representations, the
plaintiffs entered into:
(A) Equipment and Materials Supply Contact for a value of
Rs.8,89,80,730/- whereunder Juwi India Renewable Energies P.
Limited (hereinafter referred to as „Juwi India‟) was to supply to
the plaintiffs some of the equipment and material to be installed
at the power plant at Jhansi, Uttar Pradesh;
(B) Engineering, Installation & Commissioning Contract for
a value of Rs.2,20,19,270/- where Juwi India was to engineer,
install and commission, equipment and material so purchased
by the plaintiffs at the power plant at Jhansi, Uttar Pradesh, at
the cost of the plaintiffs;
(C) Sale and Purchase Agreement dated 5th March, 2012 with
the defendant No.2 Company for purchasing CIS Photovoltaic
Products to be leased to defendant No.3 Company and installed
at the said power plant at Jhansi, Uttar Pradesh; the said
products were valued at Rs.25,16,00,000/-;
(viii) that while the last of the aforesaid agreement was being
executed, the plaintiffs asked defendant No.1 who was acting on
behalf of the defendant No.2 to provide some guarantee to ensure that
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the equipment so purchased from one of the companies of the
defendant No.1 to be leased to another company of the defendant No.2
would actually yield the lease rentals; the defendant No.1 proposed
that the plaintiffs withhold some amount from the payment to be made
to the defendant No.2 Company and pay the same to the defendant
No.3 Company, subject to the defendant No.3 Company making
timely payment of lease rentals, with the said amount being not
payable, if the lease rentals were not so paid; the defendant No.2
Company, accordingly placed with the plaintiffs a sum of
Rs.3,75,50,001/- out of the sum to be paid by the plaintiffs to the
defendant No.2 Company, to be retained as forfeitable security by the
plaintiffs;
(ix) that the plaintiffs paid a total amount of Rs.32,22,80,288/- for
purchase and installation of equipment at the power plant aforesaid;
(x) that a Equipment Lease Agreement (ELA) dated 14th March,
2012 was entered into by the plaintiffs with the defendant No.3
Company, wherein it was confirmed that the plaintiffs are the sole and
absolute owners of equipment leased; under the ELA, defendant No.3
Company was to pay lease rentals of Rs.13,67,500/- for the month of
March, 2012 and with effect from April, 2012 to pay lease rentals of
Rs.28,26,000/- per month for a period of fifteen years;
(xi) that the defendants No.1,4&5 personally agreed to ensure that
the lease rentals shall be paid as and when they fell due;
(xii) that the defendants did not make payment of the lease rentals
and defaulted in payment of the month of March, 2012 itself;
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consequently the sum of Rs.3,75,50,001/- held by the plaintiffs as
forfeitable security was forfeited;
(xiii) that a sum of Rs.13,97,51,418/- had become due from the
defendants to the plaintiffs towards lease rentals and which the
defendants had failed to pay despite repeated requests and reminders
of the plaintiffs;
(xiv) that the equipment purchased by the plaintiffs and leased to the
defendant No.3 Company was specially made to order for the Jhansi
Plant and cannot be used for any other purpose; the plaintiffs would
never have purchased the said equipment from the defendant No.2
Company or from Juwi India or entered into the agreement for
installation with Juwi India but for the representations of the
defendants of payment of lease rentals;
(xv) that the plaintiffs thus are entitled to recover the monies due
jointly and severally from the defendants;
(xvi) that the defendants however instead of paying the dues of the
plaintiffs, vide letters dated 6th July, 2015 and 10th July, 2015 of the
defendant No.1 on behalf of the defendant No.2 demanded the amount
of Rs.3,75,50,001/- aforesaid which had been forfeited by the
plaintiffs;
(xvii) that the plaintiffs, inspite of spending more than Rs.32 crores on
purchase of equipment which remains with the defendants and is being
used by the defendants, are not getting any return;
(xviii) that the plaintiffs have been fraudulently made to sponsor the
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business of the defendants;
(xix) that the defendant No.1 made the sons of the plaintiff No.2
subscribe to some debentures in the Group Companies of the
defendant no.1 and to establish his credibility, paid back the said
debentures well ahead of their expiry period;
(xx) that the corporate veil ought to be lifted to unearth the serious
fraud and cheating committed jointly and severally by the defendants;
a criminal complaint has been registered and is pending before the
Economic Offences Wing, Delhi Police;
(xxi) that the defendant No.2 Company, on 17th December, 2015,
suddenly transferred an amount of Rs.17,53,000/- to the plaintiffs‟
account;
(xxii) that the defendants no.1,4&5 are jointly, severally, separately
and personally liable to make good the plaintiffs‟ claims because they
have individually defrauded and cheated the plaintiffs by inducing the
plaintiffs to purchase the equipment in question and then parting with
its possession to defendant No.3 Company on the assurance that the
same will yield the agreed lease rentals; each of them also is liable
under their personal assurances to the plaintiffs;
(xxiii) that though Clause 29 of the ELA dated 14 th March, 2012
between the plaintiffs and defendant No.3 Company contains an
arbitration agreement but the plaintiffs, instead of invoking the
arbitration clause, have invoked the remedy of suit because the
arbitration agreement is only between the plaintiffs and the defendant
No.3 Company, though the entitlement of the plaintiffs to the reliefs
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claimed in the suit is jointly against defendant No.1,2,4&5 as well
with whom there is no arbitration agreement and because the plaintiffs
are also seeking a declaration that the entire transaction between the
plaintiffs and the defendants being vitiated by serious fraud committed
jointly and severally by the defendants.
The plaintiffs, besides the relief of declaration as aforesaid,
have sought recovery of Rs.32,22,80,288/- and Rs.19,31,74,804/- with
interest and costs and in the alternative, a money decree for recovery
of Rs.13,97,51,418/- and a decree for mandatory injunction for
payment of future lease rentals.
3. The suit was entertained and vide ex-parte ad-interim order dated 15th
March, 2016, the defendant No.3 Company was restrained from creating any
third party rights with respect to 2 MW Solar Plant at Dongri, Raksa, Jhansi,
Uttar Pradesh and the defendants No.1&4 from creating any third party
rights with respect to the Solar Power Plants at District Patan, Gujarat and at
District Jodhpur, Rajasthan.
4. The defendants, in the application under Section 8 of the Arbitration
Act, have pleaded:
(a) that on the averments in the plaint, the transactions under the
four agreements between the plaintiffs and the three different legal
entities are interlinked;
(b) that Article 30 & 29 of the Agreement dated 5th March, 2012 are
as under:
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"Article 30 Jurisdiction:
i. The courts of Mumbai alone shall have exclusive
jurisdiction to try any arbitration and / or legal
proceedings in respect of any matter, claim or dispute
arising out of this agreement or in any way relating to
this agreement.
Article 29 Arbitrator:
ii. In the event of any dispute or difference arising by
any between the parties out of this Agreement or in the
interpretation, construction or meaning thereof or any of
the terms and conditions of this Agreement, the same
shall be referred to a Sole Arbitrator, to be mutually
agreed upon by the Parties hereto, and in the absence of
any agreement regarding Sole Arbitrator or the
arbitration shall be governed by the provisions of the
Arbitration and Conciliation Act 1996 in force or any
subsequent amendment and re-enactment thereof. All
arbitration procedures shall take place in Mumbai and
the courts in Mumbai shall alone have jurisdiction in
the matter. The award of the arbitrator shall be final,
conclusive and binding on all parties. The arbitrator
shall be competent to decide whether any matter of
dispute or difference referred shall be competent to
decide whether any matter of dispute or difference
referred to him falls within purview of arbitration as
provided for above and / or any matter relating to
arbitration.
iii. xxxx xxxx xxxx xxxx
iv. xxxx xxxx xxxx xxxx
v. xxxx xxxx xxxx xxxx
vi. xxxx xxxx xxxx xxxx
vii. The parties hereby agree that the arbitrator need
not give reasons in award and it is also agreed that the
Courts of Mumbai alone shall have jurisdiction to
entertain any application or other proceedings in respect
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of anything under this agreement and any award or
awards made by the sole arbitrator hereunder shall be
filed in the concerned Courts in the city of Mumbai
only."
(c) that the Agreement dated 1st February, 2012 also contains an
arbitration clause;
(d) that the plaintiffs have deliberately, consciously made false plea
of serious fraud for invoking the jurisdiction of this Court;
(e) denying the other claims in the suit on merits;
(f) that the defendant No.3 Company has already vide letter dated
13th February, 2016 nominated an Arbitrator.
5. The plaintiffs in reply to the application aforesaid have pleaded
(I) that the application is not accompanied with the original
arbitration agreement or a duly certified copy thereof and is liable to
be rejected on this ground alone;
(II) that the issue in this suit is the validity of the agreements in
question being vitiated by serious fraud committed jointly and
severally by the defendants;
(III) that serious fraud of the kind perpetrated by the defendants is
not arbitrable; issues of fraud can only be decided by a Civil Court;
(IV) that the Agreement dated 5th March, 2012 of Sale and Purchase,
whereunder out of the total amount of Rs.32.22 crores, Rs.25.16
crores was paid, admittedly has no arbitration clause;
(V) that the existence of an arbitration clause in an agreement which
is a part of the transaction cannot ipso facto and ipso jure drag the
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principal agreement into an arbitration or deem to incorporate an
arbitration clause in the principal agreement;
(VI) that the suit is not for a simple or mere recovery of money or of
rentals under the lease agreement;
(VII) that the cause of action cannot be split into various separate
proceedings;
(VIII) that the defendants also in their letter dated 13 th February, 2016
have admitted that the agreement dated 5th March, 2012 is a related
contract;
(IX) that the relief claimed in the suit is against the defendants
no.1,2,4&5 also, besides the defendant No.3 Company with whom the
contract containing the arbitration clause was executed;
(X) that in fact it is the plea of the plaintiffs that it is the defendant
No.1 who is the perpetrator of the fraud.
6. The senior counsels for the plaintiffs and the senior counsel for the
defendants/applicants were heard on 17th August, 24th August, 1st September,
11th November and 25th November, 2016.
7. The senior counsel for the defendants:
(A) drew attention to the Equipment and Material Supply Contract
dated 1st February, 2012 between the plaintiffs and Juwi India and to
the arbitration clause therein;
(B) drew attention to the Engineering Installation and
Commissioning Agreement dated 1st February, 2012 between the
plaintiffs and Juwi India, also containing an arbitration clause;
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(C) however stated that since Juwi India is not a party to the present
suit, the arbitration clauses in the agreements aforesaid are
meaningless;
(D) drew attention to ELA dated 14th March, 2012 between the
plaintiffs and the defendant No.3 Company and the arbitration clause
contained therein and as reproduced above;
(E) argued that the ELA dated 14th March, 2012 is the mother
agreement;
(F) drew attention to the Sale and Purchase Agreement dated 5th
March, 2012 between the plaintiffs and the defendant No.2 Company
and in which there is no arbitration clause;
(G) however according to the plaint also, all the four agreements are
intertwined;
(H) argued that the defendants No.2&3 Companies (of which
defendants No.1,4&5 are Directors) are sister-concerns;
(I) argued that the arbitration clause in a contract is independent of
the contract and survives, even if the agreement is fraudulent, unless
the signatures thereon are denied;
(J) drew attention to paras 69 & 107 of Chloro Controls India
Private Limited Vs. Severn Trent Water Purification Inc. (2013) 1
SCC 641 noticing the difference between the language of Section 8
and Section 45 of the Arbitration Act and contended that with effect
from the amendment of the Arbitration Act on 23rd October, 2015, the
said difference has disappeared and thus what has been held in the said
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judgment in relation to Section 45 of the Act applies to Section 8 of
the Act also;
(K) contended that all the five defendants are willing to make a
statement that they will be bound by the arbitration agreement
contained in ELA dated 14th March, 2021 between the plaintiffs and
the defendant No.3 Company.
8. Per contra, the senior counsels for the plaintiffs argued:
(i) that only Court can decide the question of fraud;
(ii) that with the coming into force of the Commercial Courts,
Commercial Division and Commercial Appellate Division of High
Courts Act, 2015, the suit will be tried by the Commercial Court and
no prejudice would be suffered by the defendants;
(iii) relied on N. Radhakrishnan Vs. Maestro Engineers (2010) 1
SCC 72, wherein the contention of the respondents, that when a case
involved substantial question relating to facts, where detailed material
evidence, both documentary and oral is needed to be produced and
serious allegations pertaining to fraud and malpractices were raised,
then the matter must be tried in Court and the Arbitrator could not be
competent to deal with such matters which involved an elaborate
production of evidence to establish the claim relating to fraud and
criminal misappropriation, was upheld and it was held that Civil Court
can refuse to refer matter to arbitration if complicated question of fact
or law is involved or where allegations of fraud are made;
(iv) relied on State of West Bengal Vs. Associated Contractors
(2015) 1 SCC 32 holding that an order / judgment under Section 11 of
the Arbitration Act is not a precedent; thus Swiss Timing Limited Vs.
Commonwealth Games 2010 Organising Committee (2014) 6 SCC
677 cannot be treated as a precedent;
(v) that in World Sport Group (Mauritius) Limited Vs. MSM
Satellite (Singapore) PTE. Limited (2014) 11 SCC 639, N.
Radhakrishnan supra was not applied in the case of international
arbitration;
(vi) reliance was placed on RRB Energy Limited Vs. Vestas Wind
Systems 219 (2015) DLT 516 where inter alia finding serious
questions of fraud, arbitration proceedings were injuncted;
(vii) that in Chloro Controls India Private Limited supra, there were
several agreements with different companies of the same group and it
was in that context held that the arbitration clause in the principal
agreement shall govern the other agreements also; it is not so here;
here the arbitration clause is contained only in the agreement between
the plaintiffs and the defendant No.3 Company and there is no
agreement containing arbitration clause between the plaintiffs and any
of the other defendants; defendant No.1 is not even a Director in
defendant No.3 Company;
(viii) that the present suit is not for recovery of lease rentals but for
declaration that the agreements are void and for restitution;
(ix) that Juwi India is not controlled by the defendant No.1;
(x) that the offer today of the senior counsel for the defendants, of a
statement of all the defendants to be bound by the arbitration clause, is
not relevant for the purposes of Section 8 of the Arbitration Act;
(xi) that in fact, there is no privity of contract even of the plaintiffs
with the defendant No.1 and the claim against the defendant No.1 is
on the basis of his representations, actions and assurances.
9. The senior counsel for the defendants in rejoinder argued:
(a) that N. Radhakrishnan supra does not apply to the facts of the
present case;
(b) that under the amended Arbitration Act, Arbitral Tribunal is the
preferred forum;
(c) attention was drawn to the amendments to Section 11 of the
Act;
(d) that N. Radhakrishnan supra relies on judgments under the old
Act;
(e) that N. Radhakrishnan supra also does not refer to P. Anand
Gajapathi Raju Vs. P.V.G. Raju (2000) 4 SCC 539;
(f) that similarly Hindustan Petroleum Corpn. Ltd. Vs. Pinkcity
Midway Petroleums (2003) 6 SCC 503 has also not been considered
in N. Radhakrishnan supra; N. Radhakrishnan also does not
consider Section 16 of the Act and is per incuriam;
(g) that Chloro Controls India Private Limited supra, in para 66
thereof, overrules N. Radhakrishnan supra;
(h) that the averments in the plaint are of the defendants No.1,4&5
not acting in their personal capacity but on behalf of the defendants
No.2&3 Companies;
(i) that the averments in the plaint do not constitute a plea of fraud;
(j) that the arbitration agreement cannot be defeated by cleverly
drafting the plaint;
(k) that the plaint does not disclose any fraud;
(l) that, rather, it is the plaintiffs who have committed a fraud.
(m) has handed over copies also of (i) Reliance Industries Limited
Vs. Union of India (2014) 7 SCC 603; (ii) Premium Nafta
Products Limited Vs. Fili Shipping Company Limited [2007]
UKHL 40; (iii) World Sport Group (Mauritius) Limited Vs.
MSM Satellite (Singapore) Pte. Limited (2014) 11 SCC 639;
and, (iv) Buckeye Check Cashing, Inc. Vs. Cardegna 546 U.S.
440 (B).
10. Both counsels contend that the recent judgment of the Supreme Court
in A. Ayyasamy Vs. A. Paramasivam (2016) 10 SCC 386 is in their favour.
11. I have considered the rival contentions and am, for the reasons
following, of the view that no case for referring the parties to arbitration
under Section 8 of the Arbitration Act is made out:
(A) The offer of the senior counsel for the defendants, of statement
on behalf of all the defendants to be bound by the arbitration clause
contained in the ELA dated 14th March, 2012 between the plaintiffs
and the defendant No.3 Company and the arbitral award in pursuance
thereto, needless to state is of no avail for the determination. The
same is an offer of entering into a fresh agreement today. What
Section 8 of the Arbitration Act on the contrary requires is, the action /
matter brought before the Court being subject matter of a prior
arbitration agreement between the parties.
(B) Though the counsels have laboured mostly on, whether in the
face of the averments in the plaint, of fraud, arbitration should be
ousted and which requires the Court (as held in A. Ayyasamy supra) to
inter alia enquire and decide, (a) whether "the allegations are of
serious and complicated nature that it would be more appropriate for
the Court to deal with the subject matter rather than relegating the
parties to arbitration"; (b) whether the allegations of fraud "are serious
that in normal course, these may even constitute criminal offence" and
"are also complex in nature and the decision on these issues demands
extensive evidence for which civil court should appear to be more
appropriate forum than the Arbitral Tribunal"; (c) whether the
allegations of fraud are merely to avoid the process of arbitration; (d)
whether the "disputes relating to rights and liabilities which give rise
to or arise out of criminal proceedings" and "which make a virtual
case of criminal offence"; (e) whether the allegations of fraud are inter
se the parties and have "no implication in the public domain", but in
my opinion before adverting to the said enquiry and decision, it needs
to be adjudicated, whether the action / matter brought before the Court
by way of suit is the subject matter of arbitration agreement.
(C) Though there is a clause for arbitration also in the two
agreements between the plaintiffs and Juwi India but we are here not
concerned therewith, as Juwi India is not a party to these proceedings.
The only thing to be seen is, whether the subject matter of the suit is
covered by the arbitration clause contained in the ELA dated 14th
March, 2012 between the plaintiffs and the defendant No.3 Company.
(D) ELA dated 14th March, 2012 between the plaintiffs and the
defendant No.3 Company in its recitals records (i) that the plaintiffs
are the owners of certain Photovoltaic Products, Panels, Inverters,
Transformers and similar solar power generating equipments etc.; (ii)
that the defendant No.3 Company has necessary authorisation to
develop, own, operate and commercially exploit a 2 MWp thin-film
photovoltaic solar plant, transmission line from power plant to the
Grid Substation, bay extension work at the Grid Substation, including
all the infrastructure and relevant installations required to connect the
electricity-producing equipment to the distribution / transmission grid
at the Grid Substation at Jhansi, Uttar Pradesh; (iii) that the defendant
No.3 Company for this purpose requires the equipment in the
ownership of the plaintiffs; (iv) that the defendant No.3 Company was
desirous of obtaining from the plaintiffs on lease the said equipment.
(E) By the operative part of the ELA dated 14th March, 2012, the
plaintiffs as owners of the equipment gave on lease and the defendant
No.3 Company took on lease the aforesaid equipment for a period of
fifteen years, subject to the payment of the lease rentals and
performance of other terms and conditions as contained therein.
(F) Under the ELA dated 14th March, 2012 (i) the defendant No.3
Company expressed satisfaction vis-a-vis the equipment taken on
lease and confirmed that the same had been purchased by the plaintiffs
from the defendant No.2 and Juwi India after inspection and approval
thereof by the defendant No.3 Company; (ii) the defendant No.3
Company agreed to pay the lease rentals at the rate as prescribed
therein; (iii) the parties agreed to the Lock-in period of 24 months and
to termination thereafter in case of breach of any terms and conditions
by the other party by giving thirty days notice; (iv) the defendant No.3
Company as lessee agreed that since the plaintiffs had sourced the
equipment being leased after inspection by the defendant No.3
Company, the defendant No.3 Company would not at any time raise a
claim of the equipment being not as per specifications; (v) the
defendant No.3 Company agreed to maintain and repair the equipment
at its own cost; (vi) the defendant No.3 Company agreed to give
inspection of the equipment to the plaintiffs or their representatives;
(vii) the defendant No.3 Company agreed to keep insured the
equipment taken on lease from the plaintiffs at its own cost and to bear
the risk of loss and damage thereto; (viii) the defendant No.3
Company agreed not to sell or encumber in any way the said
equipment taken on lease from the plaintiffs; (ix) the defendant No.3
Company agreed to keep the plaintiffs indemnified against any claim
with respect to the said equipment; (x) the defendant No.3 agreed to,
on termination of the lease, surrender the equipment to the plaintiffs;
(xi) the parties agreed to confidentiality.
(G) The clause in the ELA dated 14th March, 2012 between the
plaintiffs and the defendant No.3 Company whereunder the plaintiffs
and the defendant No.3 Company agreed that "any dispute or
difference arising by and between" them "out of this agreement or in
the interpretation, construction or meaning thereof or any of the terms
and conditions of the agreement shall be referred to a sole Arbitrator"
has to be seen in the context of the agreement as aforesaid. The
language of the arbitration clause confines the operation thereof to a
dispute or difference between the plaintiffs and the defendant No.3
Company and arising out of that agreement or with respect to the
interpretation, construction or meaning thereof or any of the terms and
conditions thereof.
(H) Before taking up the aspect of, whether the clause aforesaid of
arbitration of disputes between the plaintiffs and on the one hand and
the defendant No.3 on the other hand can include disputes between the
plaintiffs and the other defendants also, even if be related, in my view,
the dispute subject matter of the suit cannot be said to be arising out of
the ELA dated 14th March, 2012 or out of any of the terms and
conditions thereof.
(I) ELA dated 14th March, 2012 is not concerned with the price
paid by the plaintiffs to defendant No.2 Company and to Juwi India
for purchase of the equipment being leased thereunder by the plaintiffs
to the defendant No.3 Company. The reference in the ELA to the said
purchase is only in the context of the defendant No.3 Company
absolving the plaintiffs from claims of the equipments given on lease
being not as per the requirements and needs of the defendant No.3
Company. For this purpose, it has been recorded in the agreement that
the equipment has been purchased by the plaintiffs from the defendant
No.2 Company and Juwi India as per the specifications prescribed by
the defendant No.3 Company and after inspection and satisfaction
expressed by the defendant No.3 Company.
(J) The disputes arising out of or in the interpretation, construction,
meaning of any of the clauses of the ELA dated 14th March, 2012 can
be only with respect to the payment of lease rental or termination
thereof or of a claim under any other clause thereof (though, I am
unable to find any).
(K) However, when we look at the suit filed by the plaintiffs,
though one of causes of actions for the dispute raised therein
undoubtedly is non-payment of lease rentals by the defendant No.3 to
the plaintiffs but the plaintiffs in the suit are not claiming lease rentals
and have not sought return of the equipment but are averring having
been induced by the defendants to pay the price to Juwi India and are
seeking to recover the said amount from the defendants jointly and
severally. I fail to see, as to how the said claim of the plaintiffs can be
said to arise out of the ELA dated 14th March, 2012 or can be said to
be entailing interpretation of any terms and conditions thereof. The
ELA dated 14th March, 2012, save for the satisfaction expressed
therein as to the quality and specifications of the equipment, is not
concerned with the transaction of purchase of equipment by the
plaintiffs from Juwi India and defendant No.2 Company. The claim of
the plaintiffs for recovery of Rs.32,22,20,288/- is not at all arising out
of or relating to any term of the ELA dated 14 th March, 2012. It is a
different matter that if the plaintiffs are unable to substantiate such a
claim, they would not be entitled thereto.
(L) Though the plaintiffs undoubtedly in the alternative to the
aforesaid have also claimed payment of lease rentals and which claim
would be covered by the arbitration clause in the ELA dated 14 th
March, 2012 but merely because the claim made in the alternative is
covered by the arbitration clause, would not make the subject matter
of the suit, subject matter of the arbitration agreement between the
parties. For the parties to be referred to arbitration under Section 8 of
the Act, the entire subject matter of the suit has to be the subject
matter of arbitration.
(M) As far back as in Union of India Vs. Birla Cotton Spinning &
Weaving Mills Ltd. AIR 1967 SC 688 it was held that where a suit
had been instituted for recovery of price under a contract for sale of
goods which contained an arbitration clause, the refusal of the
defendant to pay the agreed price in order to appropriate the same to
its claim under a separate contract was not a dispute arising under or
in connection with the said contract for sale and as such the suit
instituted thereon could not be stayed under Section 34 of the
Arbitration Act, 1940.
(N) Under the 1996 Act also, Supreme Court in Sukanya Holdings
Pvt. Ltd. Vs. Jayesh H. Pandya (2003) 5 SCC 531 held (i) for Section
8 to apply, the suit should be in respect of "a matter" which the parties
have agreed to refer and which comes within the ambit of arbitration
agreement; (ii) where however a suit is commenced "as to a matter"
which lies outside the arbitration agreement and is also between some
of the parties who are not parties to the arbitration agreement, there is
no question of application of Section 8; the words "a matter" indicate
that the entire subject matter of the suit should be subject to arbitration
agreement; (iii) it would be difficult to give an interpretation
to Section 8 under which bifurcation of the cause of action that is to
say the subject matter of the suit or in some cases bifurcation of the
suit between parties who are parties to the arbitration agreement and
others is possible - this would be laying down a totally new procedure
not contemplated under the Act; and (iv) such bifurcation of a suit in
two parts, one to be decided by the Arbitral Tribunal and the other to
be decided by the Civil Court would inevitably delay the proceedings;
the whole purpose of speedy disposal of dispute and decreasing the
cost of litigation would be frustrated by such procedure; it would also
increase the cost of litigation and harassment of the parties and may
also occasion a possibility of conflicting judgments and orders by two
different forums.
(O) I am conscious that a party to an arbitration agreement may
want to wriggle out therefrom by making a claim in the suit in
addition to the claim covered by the arbitration agreement. The same
cannot be permitted. The test, in my opinion, to be applied in such
cases is, whether the plaint discloses a cause of action for the claim
outside the arbitration agreement and if so, whether the claim outside
the arbitration agreement can be segregated from the claim subject
matter of arbitration agreement.
(P) I have perused the plaint in the present case and am unable to
hold that the same does not disclose a cause of action for the claim
therein of recovery of Rs.32,22,80,288/- and Rs.19,31,74,804/-. Law
permits a person who has been induced by another to part with monies
to a third party, to recover such monies from the person who has so
induced and who is availing the benefits of the monies so parted with
by the first person. I am also of the view that the claim of the
plaintiffs for recovery of Rs.32,22,80,288/- and Rs.19,31,74,804/- is
intertwined with the claim of the plaintiffs in the alternative for
recovery of lease rentals. It is not possible to segregate the two and
the same may result in conflicting findings of fact.
(Q) That brings me to Chloro Controls India Private Limited supra
which permits joinder of non-signatories or third parties to arbitration
even without consent of such non-signatories or third parties and to
see whether the defendants no.1,2,4&5 from whom also the plaintiffs
seek to recover can also be joined in the arbitration to which reference
of the disputes in this suit is sought by this application under Section 8
of the Act. At the outset, the same was held to be permissible only in
exceptional cases. It was held that the Court will examine these
exceptions from the touchstone of direct relationship to the party
signatory to the arbitration agreement, direct commonality of the
subject matter and the agreement between the parties being a
composite transaction where performance of the principal or mother
agreement may not be feasible without aid, execution and performance
of the supplementary or ancillary agreements, for achieving the
common object and collectively having bearing on the dispute. I am
afraid, the claim of the plaintiffs in the suit of recovery of the entire
investment made by them cannot be relatable to the ELA and it cannot
be said that ELA is the mother agreement in the transaction. It cannot
be lost sight of that it is the undisputed fact that the investments and
lease rentals were entitled to get other lawful and statutory benefits
like accelerated depreciation etc. Though there admittedly is a link
between defendant no.2 and the defendant no.3 and also between the
defendants no.1,4&5 and the defendants no.2&3 but it cannot be said
that the performance of ELA is in dispute or for the purposes of which
performance agreement between the plaintiffs and the defendant no.2
and the plaintiffs and Juwi India are supplementary or ancillary
agreements. At least on a bare reading of the agreements they do not
appear to be so. Thus no case for directing the plaintiffs to arbitrate
also with the defendants no.1,2,4&5 without the consent of the
plaintiffs is made out.
(R) Thus, irrespective of the pleas of fraud, I am of the view, that
the subject matter of the suit is not the subject matter of the arbitration
agreement between the plaintiffs and the defendant No.3 Company
and that the plaintiffs, against their consent, cannot be compelled to
arbitrate with defendants no.1,2,4&5 for their claims.
(S) Interestingly not only do the plaintiffs accuse the defendants of
fraud but the defendants also as aforesaid accuse the plaintiffs of
fraud, concealment and suppression of material facts. It is the plea of
the defendants in IA No.4157/2016 under Order XXXIX Rule 4 of the
CPC that invocation of jurisdiction of this Court is a fraud upon the
defendants as the plaintiffs have invoked discretionary jurisdiction by
concealing vital documents having a bearing on the proceedings of
this Hon‟ble Court with unclean hands. It is further the plea of the
defendants therein that the plaintiffs have committed perjury. The
defendants in their pleadings have also referred to the raid by the
Income Tax Authorities at the office premises of the defendant no.2
and defendant no.3 in relation to the plaintiff no.2‟s Income Tax
Returns and to the questions asked by the Income Tax Authorities in
relation to the accounts of the defendant no.2 and a transfer of
Rs.10,00,00,000/- to the sons of the plaintiff no.2 from the subsidiary
of defendants no.2&3. It is further the case of the defendants that the
FIR filed by the plaintiffs is false. All the said averments do indeed
satisfy the tests laid down in A. Ayyasamy supra, of the disputes
relating to rights and liabilities giving rise to or arising out of criminal
proceedings and/or which make virtual case of criminal offence and
the allegations of fraud having implication in the public domain. I
highlight that the sector in which investment has been done is
admittedly entitled to statutory benefits like accelerated depreciation
etc. It will thus have to be seen whether the parties have entered into
the transaction to illegally deprive the State of the revenue. I am thus
of the opinion that the allegations of fraud are serious enough to merit
adjudication by the Court rather than by an arbitral tribunal.
12. The application of the defendants is accordingly dismissed.
RAJIV SAHAI ENDLAW, J.
MARCH 15, 2017
„bs‟/pp..
