Telangana High Court

Sbpl Infrastructure Ltd., Hyd vs G. Ramakrishna Reddy, Hyd 2 Others on 1 July, 2022

Bench: Ujjal Bhuyan

       THE HON'BLE THE CHIEF JUSTICE UJJAL BHUYAN

            ARBITRATION APPLICATION No.139 OF 2016

ORDER:

Heard Mr. Vivek Jain, learned counsel for the applicant;

Mr. M.Jayaram Reddy, learned counsel for respondent No.1;

and Mr. Bhaskar Mohan P. learned Senior Counsel for

respondent No.2.

2 This application has been filed under Section 11(6) of

the Arbitration and Conciliation Act, 1996 (briefly, 'the 1996

Act', hereinafter) for appointment of arbitrator.

3 Case of the applicant is that third respondent is the

owner of the subject land which he had purchased from the

previous vendor. Second respondent entered into an

agreement with the third respondent on 22.01.1982 for

purchase of the subject land for which advance payment was

made.

4 It is stated that first and second respondents entered

into a Memorandum of Understanding (MoU) dated

12.12.2008 with the applicant for developing the subject

property. Applicant agreed to develop the subject property for

which applicant was required to pay Rs.3.00 crores and

Rs.1.5 crores each to respondent Nos.1 and 2 respectively.

Accordingly payments were made. Applicant was also

required to obtain clearance and necessary permission from

the statutory authorities for the purpose of development of the

subject property.

5 It was agreed that from out of the land of Ac.3.00,

Ac.1.00 of land would be allotted to the first respondent and

on the remaining portion of the land admeasuring Ac.2.00

applicant would construct 2,00,000 sq.ft residential/

commercial area at its own cost and on completion deliver the

same to respondent Nos.1 and 2 as per the terms and

conditions of the MoU dated 12.12.2008.

6     As per the MoU, in the event of any delay in

construction, penalty would be imposed on the applicant.           It

is stated that parties had agreed that over and above the

aforesaid land, Ac.7.00 of land would be the sole entitlement

of the applicant over which applicant would have unfettered

alienable rights.

7 Parties had agreed under Clause 6 of the MoU that in

the event the subject property was not regularised by the

Government, respondent Nos.1 and 2 would refund the

amount of Rs.3.00 crores to the applicant; whereafter the

rights created in favour of the applicant would stand

extinguished.

8 Though the applicant was requesting respondent Nos.1

and 2 for execution of General Power of Attorney (GPA), the

same was not done by respondent Nos.1 and 2.

9 From the supporting affidavit it is seen that the subject

property was subjected to a series of layered litigation. The

litigation arose because of stand taken by the Government

that the subject property was Government land and was

grabbed by respondent No.3. Ultimately, the stand of the

Government was negated through the judicial process.

10 It is stated that the subject property is situated at a

prime locality of Hyderabad city and applicant made

significant investments in maintaining the property including

possession over the same.

11 Applicant came to know that second respondent

removed the security guards deployed by the applicant for

protection of the subject property. Applicant further came to

know that first and second respondents had entered into

negotiations with some third party regarding development

rights over the subject property. This was objected to by the

applicant since such actions of respondent Nos.1 and 2 were

in contravention of the MoU dated 12.12.2008.

12 Clause No.24 of the MoU provides for dispute resolution

mechanism. As per the said provision, in the event of dispute

between the parties, the same may be referred to arbitration.

Applicant moved an application under section 9 of the 1996

Act before the learned III Additional Chief Judge, City Civil

Court, Hyderabad, to restrain the respondents from alienating

or encumbering or otherwise from dealing with the subject

property, which was registered as O.P.No.1378 of 2016

wherein injunction order was passed on 15.07.2016

restraining the respondents from alienating / encumbering

the subject property.

13 Subsequently, applicant issued notice dated 14.09.2016

invoking Clause No.24 of the MoU dated 12.12.2008

nominating Sri Justice NRL Nageswara Rao, a retired Judge

of this Court, as its arbitrator and calling upon the

respondents to nominate their arbitrator. Respondents

submitted reply dated 18.10.2016 denying the very execution

of the MoU insofar respondent No.2 is concerned. It is in such

circumstances the present application came to be filed.

14 Respondent No.2 filed counter affidavit denying all the

contentions raised by the applicant. It is stated that second

respondent which is a registered cooperative society called

Godavari Cooperative Housing Society Limited had never

entered into any MoU or development agreement with the

applicant. MoU dated 12.12.2008 is a forged and fabricated

document brought into existence by the applicant in collusion

with the first respondent. Therefore, the arbitration clause i.e.,

Clause No.24 of the MoU is not binding at all on the second

respondent. All contentions raised by the applicant regarding

development of the subject property and entrustment of the

applicant by the respondents with the task of obtaining

permissions have been denied. Insofar the legal notice dated

14.09.2016 is concerned, it is stated that second respondent

submitted reply thereto on 18.10.2016. In the circumstances,

respondent No.2 seeks dismissal of the arbitration application.

15 In his counter affidavit, respondent No.1 stated that it

was he who had got the second respondent society registered

as a cooperative society in the year 1981. Respondent No.1

has asserted that he is one of the founder members of

respondent No.2 society who also held the office of President

of the said society for several years till he demitted office in

the year 2015 due to health reasons. He has agreed with the

contention of the applicant that the then office bearers of

respondent No.2 society had entered into negotiations for

purchase of the subject land and development thereof. He

also admits regarding execution of MoU dated 12.12.2008 and

further admits receipt of Rs.3.00 crores from the applicant.

He has stated that he became President of respondent No.2

society in the year 2012 for a term of five years. It was only in

the year 2015 that he resigned from respondent No.2 society

due to health reasons.

16 Both learned counsel for the applicant and respondent

No.1 assert about the genuineness and validity of the MoU

dated 12.12.2008 and submit that there is a dispute between

applicant and respondent No.2 which was raised by the

applicant on 14.09.2016 invoking Clause No.24 of the MoU

for reference to arbitration. On the other hand, learned

counsel for respondent No.2 submits that the MoU dated

12.12.2008 is a fake one and on the basis of such fake MoU,

the so called dispute between the parties should not be

referred to arbitration. He submits that members of

respondent No.2 are all senior citizens and they should not be

saddled with the heavy burden of arbitration on the strength

of a non-existing document.

17 Submissions made by learned counsel for the parties

have received the due consideration of the Court. Also

considered the rival pleadings.

18 From the rival pleadings and submissions, there is no

doubt that there is a dispute between applicant and

respondent No.2. Clause No.24 of the MoU dated 12.12.2008

provides for dispute resolution in the following manner:

24. That in the event of any dispute arising between the parties to this MoU, the same shall be referred to Arbitral Tribunal consisting of one Arbitrator each to be appointed by the parties hereto and Presiding Arbitrator to be appointed by the Arbitrators so appointed and the Award passed by such Arbitral Tribunal shall be final and binding on the parties hereto.

19 Thus, according to Clause No.24, in the event of any

dispute arising between the parties to the MoU, the same shall

be referred to an arbitral tribunal consisting of one arbitrator

each to be appointed by the parties and the presiding

arbitrator is to be appointed by the two arbitrators so

appointed.

20 It is true that second respondent has questioned the

very legitimacy of the MoU and consequently the very

existence of Clause No.24 inasmuch as according to

respondent No.2 the MoU dated 12.12.2008 is fraudulent.

21 Insofar the allegation of fraud is concerned, Supreme

Court in A.Ayyaamy Vs. A.Paramasivam1 has held that mere

allegation of fraud in the pleadings by one party against the

other cannot be a ground to hold that the matter is incapable

of settlement by arbitration and should be decided by the civil

court. The allegation of fraud should be such that not only

these allegations are serious but in normal course these may

even constitute criminal offence. Further, it should also be

that the allegations are complex in nature in which event a

decision would demand extensive adducing of evidence for

which the civil court would appear to be the more appropriate

forum than the Arbitral Tribunal. Otherwise, it may become a

convenient mode of avoiding the process of arbitration by

simply using the device of making allegations of fraud and

(2016) 10 SCC 386

pleading that the issue of fraud needs to be decided by the

civil court. In the above context, Supreme Court held as

follows:

25. In view of our aforesaid discussions, we are of the opinion that mere allegation of fraud simpliciter may not be a ground to nullify the effect of arbitration agreement between the parties. It is only in those cases where the court, while dealing with Section 8 of the Act, finds that there are very serious allegations of fraud which make a virtual case of criminal offence or where allegations of fraud are so complicated that it becomes absolutely essential that such complex issues can be decided only by the civil court on the appreciation of the voluminous evidence that needs to be produced, the court can sidetrack the agreement by dismissing the application under Section 8 and proceed with the suit on merits. It can be so done also in those cases where there are serious allegations of forgery/fabrication of documents in support of the plea of fraud or where fraud is alleged against the arbitration provision itself or is of such a nature that permeates the entire contract, including the agreement to arbitrate, meaning thereby in those cases where fraud goes to the validity of the contract itself of the entire contract which contains the arbitration clause or the validity of the arbitration clause itself. Reverse position thereof would be that where there are simple allegations of fraud touching upon the internal affairs of the party inter se and it has no implication in the public domain, the arbitration clause need not be avoided and the parties can be relegated to arbitration. While dealing with such an issue in an application under Section 8 of the Act, the focus of the court has to be on the question as to whether jurisdiction of the court has been ousted instead of focusing on the issue as to whether the court has jurisdiction or not. It has to be kept in mind that insofar as the statutory scheme of the Act is concerned, it does not specifically exclude any category of cases as non-arbitrable. Such categories of non-arbitrable subjects are carved out by the courts, keeping in mind the principle of common law that certain disputes which are of public nature, etc. are not capable of adjudication and settlement by arbitration and for resolution of such disputes, courts i.e. public fora, are better suited than a private forum of arbitration. Therefore, the inquiry of the Court, while dealing with an application under Section 8 of the Act, should be on the aforesaid aspect viz. whether the nature of dispute is such that it cannot be referred to arbitration, even if there is an arbitration agreement between the parties. When the case of fraud is set up by one of the parties and on that basis that party wants to

wriggle out of that arbitration agreement, a strict and meticulous inquiry into the allegations of fraud is needed and only when the Court is satisfied that the allegations are of serious and complicated nature that it would be more appropriate for the Court to deal with the subject-matter rather than relegating the parties to arbitration, then alone such an application under Section 8 should be rejected.

22 Again in Rashid Raza Vs. Sadaf Akhtar2 Supreme

Court held as follows:

4. The principles of law laid down in this appeal make a distinction between serious allegations of forgery/ fabrication in support of the plea of fraud as opposed to "simple allegations". Two working tests laid down in para 25 are: (1) does this plea permeate the entire contract and above all, the agreement of arbitration, rendering it void, or (2) whether the allegations of fraud touch upon the internal affairs of the parties inter se having no implication in the public domain.

5. Judged by these two tests, it is clear that this is a case which falls on the side of "simple allegations" as there is no allegation of fraud which would vitiate the partnership deed as a whole or, in particular, the arbitration clause concerned in the said deed. Secondly, all the allegations made which have been relied upon by the learned counsel appearing on behalf of the respondent, pertain to the affairs of the partnership and siphoning off of funds therefrom and not to any matter in the public domain.

6. This being the case, we are of the view that the disputes raised between the parties are arbitrable and, hence, a Section 11 application under the Arbitration Act would be maintainable.

23 In Bharat Sanchar Nigam Limited Vs. M/s. Nortel

Networks India Pvt. Limited3, Supreme Court referred to its

earlier decision in Union of India Vs. Master Construction

Company4 where it was held that a bald plea of fraud,

(2019) 8 SCC 710

Civil Appeal Nos.843-844 of 2021

(2011) 12 SCC 349

coercion, duress or undue influence was not sufficient unless

the party who sets up such a plea was able to prima facie

establish it by placing materials on record. In that context it

was held that if the dispute prima facie appears to be lacking

in credibility, the matter would not be referred to arbitration.

Thereafter, Supreme Court considered the effect and impact of

the Arbitration and Conciliation (Amendment) Act, 2015,

which came into force with effect from 23.10.2015. As per

Sub-section (6A) of Section 11 inserted by way of the aforesaid

amendment, the Supreme Court or the High Court, as the

case may be, while considering any application under Sub-

section (4) or Sub-section (5) or Sub-section (6) shall

notwithstanding any judgment, decree or order of any Court

confine to the examination of the existence of an arbitration

agreement. Thus the effect of the amendment is that if the

existence of the arbitration agreement is not in dispute, all

other issues should be left for the arbitral tribunal to decide.

It has been held as follows:

"The effect of the amendment was that if the existence of the arbitration agreement was not in dispute, all other issues would be left for the arbitral tribunal to decide. This was in reinforcement of the doctrine of kompetenz-kompetenz, which empowers the tribunal to rule on its jurisdiction, including any objections with respect to the validity of the arbitration agreement; and thereby minimize judicial intervention at the pre-reference stage."

24 Supreme Court referred to and extracted its earlier

decisions and held that post the 2015 amendment, all that the

Courts are required to examine is whether an arbitration

agreement is in existence or not - nothing more, nothing less.

It has been held as follows:

31. Sub-section (6-A) came up for consideration in Duro Felguera, S.A. v. Gangavaram Port Ltd. (2017) 9 SCC 729, wherein this Court held that the legislative policy was to minimise judicial intervention at the appointment stage. In an application under Section 11, the Court should only look into the existence of the arbitration agreement, before making the reference. Post the 2015 Amendment, all that the courts are required to examine is whether an arbitration agreement is in existence - nothing more, nothing less.

"48. Section 11(6-A) added by the 2015 Amendment, reads as follows:

'11 (6-A) The Supreme Court or, as the case may be, the High Court, while considering any application under sub-section (4) or sub-section (5) or sub-section (6), shall, notwithstanding any judgment, decree or order of any court, confine to the examination of the existence of an arbitration agreement.' (emphasis supplied)

From a reading of Section 11(6-A), the intention of the legislature is crystal clear i.e. the court should and need only look into one aspect - the existence of an arbitration agreement. What are the factors for deciding as to whether there is an arbitration agreement is the next question. The resolution to that is simple - it needs to be seen if the agreement contains a clause which provides for arbitration pertaining to the disputes which have arisen between the parties to the agreement.

59. The scope of the power under Section 11(6) of the 1996 Act was considerably wide in view of the decisions in SBP & Co. [SBP & Co. v. Patel Engg. Ltd., (2005) 8 SCC 618] and Boghara Polyfab [National Insurance Co. Ltd. v. Boghara Polyfab (P) Ltd., (2009) 1 SCC 267 : (2009) 1 SCC (Civ) 117]. This position continued till the amendment brought about in 2015. After the amendment, all that the courts need to see is whether an arbitration agreement exists -

nothing more, nothing less. The legislative policy and purpose is essentially to minimise the Court's intervention at the stage of appointing the arbitrator and this intention as incorporated in Section 11(6-A) ought to be respected."

25 Finally, Supreme Court concluded as under:

34. In view of the legislative mandate contained in the amended Section 11(6-A), the Court is now required only to examine the existence of the arbitration agreement. All other preliminary or threshold issues are left to be decided by the arbitrator under Section 16, which enshrines the kompetenz-kompetenz principle. The doctrine of kompetenz-kompetenz implies that the Arbitral Tribunal is empowered, and has the competence to rule on its own jurisdiction, including determination of all jurisdictional issues. This was intended to minimize judicial intervention at the pre-reference stage, so that the arbitral process is not thwarted at the threshold when a preliminary objection is raised by the parties.