Bahel and Company and Others vs Bokaro Steel Ltd. Bokaro and Others

B.P. Singh, J.—The Appellants herein are Defendant Nos. 10, 11 and 12 in the suit filed by Respondent No. 1 M/s. Bokaro Steel Ltd. being Money Suit No. 19/78 pending in the court of the Subordinate Judge, 2nd court at Dhanbad. The Appellants are aggrieved by the order passed by the learned Subordinate Judge on 8th of August, 1980 dismissing the application filed by the Appellants u/s 34 of the Arbitration Act praying therein that the aforesaid Money Suit No. 19/78 be stayed. The ground on which such stay was prayed for was that some, of the matter covered by the suit were pending adjudication before the Joint Arbitrators; whereas the remaining disputes were pending adjudication before a sole arbitrator there being an arbitration clause in the agreement executed by and between the parties. The learned subordinate Judge has rejected the application u/s 34 of the Act and has refused to stay the suit holding that in the suit the very formation of the con tract containing the arbitration clause has been challenged, since it is alleged that the alleged contract is vitiated by fraud. He has further held that in any view of the matter all the disputes which are subject matter of the suit cannot be decided in the arbitration proceedings: and consequently the Plaintiff will have to file another suit against those parties, who are not, parties to the arbitration agreement.

The aforesaid Money Suit was filed by Respondent No. 1 M/s. Bokaro Steel Ltd. claiming a decree for a sum of Rs. 23, 68, 459.76 or such higher amount as may be found due against all the Defendants, namely, Defendant Nos. 1 to 17 jointly and severally. Alternatively, different amounts have been claimed against different sets of Defendants and so far as Defendant nos. 10 to 12 are concerned, a sum of Rs. 9, 62, 865.21 or such higher amount as may be found due has been claimed from them jointly and severally with Defendants 1 to 3. There are 17 Defendants in suit. Defendant No. 1 was at the relevant time the Chief Superintendent of Raw Materials Department of Respondent No. 1 Defendant No. 2 was at the relevant time the Mines Manager of Respondent No. 1. While Defendant No. 3 was the Surveyer at the relevant time in the Raw Materials Department of Respondent No. 1. The remaining Defendants are the contractors and/or their partners with whom agreements were executed on behalf of the Respondent-company which according to Respondent No. 1 are vitiated by fraud. The Appellant herein are Defendant Nos. 10, 11 and 12 in the suit. In the suit Respondent No. 1 has claimed that it was a lessee in respect of lime stone mine and was authorised to carry out mining operation and other activities. Such activities were carried out on behalf or Respondent No. 1 by its Raw Materials Department. It was the Raw Materials Department of Respondent No. 1 which was in-charge of prospecting and mining operations and for the supply of minerals to Respondent No. 1. The Board of Directors of Respondent No. 1�company delegated certain powers to the then Chairman-cum-Managing Director of the company who was also authorised to sub-delegate those powers. Accordingly, Defendant No. 1 Sri S.K Bhattacharya as Chief Superintendent (Raw Materials) was delegated with certain powers both administrative and financial in respect of duties assigned to the Raw Materials Department. A copy of such powers as were delegated to him was contained in annexure-1 which was filed alongwith the plaint. He was required to exercise those powers subject to canons of financial propriety and in accordance with the rules in force and the general policy as may be laid down from time to time. According to the plantiff/Respondent No. I Defendants I to 3, its officers, entered into a conspiracy with the other Defendants and conceived a plan to rob the Plaintiff-company of large amount of money. Pursuant to the conspiracy, Defendant No. 1, the Chief Superintendent made an artificial break up of what should have been the subject matter of a single contract, into five different contracts which included three Zones and two Sections of comparatively smaller values. This was done with a view to make it appear as if the works were of different nature, but the sole purpose behind this design was to bring the subject matter of contract within the delegated limits of the authority of Defendant No. 1 and thereby to eliminate the application of some of the normal procedure and checks at higher livels. In pursuance of the common object, the Defendants willfully committed many acts of commission and omission which have been detailed in the planint and pursuant to such conspiracy they succeeded in fraudulently inducing Plaintiff/Respondent No. 1 company to part with large sums of money which was shared between the Defendants. They had succeeded in concealing their fraud but when the matter was taken up by the investigating authorities the fraud was partially disclosed though much remains to be discovered. Having regard to the fact that the delay may make the chance of recovery still remote, the Plaintiff company filed the suit for damages on the basis of the fraud so far discovered. While reserving its right for claiming farther relief on the basis of fresh discovery of facts either by amendment of plaint or by filing a separate plaint. The plaint filed by Respondent No. 1 company is a detailed document containing various details of the manner in which the agreements were got fraudulently executed and the manner in which execution of the works was done, It is alleged that though the works were located in the same area having identical geological and site conditions, different rates of execution for various items of works were accepted in different Zones in respect of different contractors. Defendant No. 1 deliberately did not consider these facts for awarding the work at the lowest rate on itemwise basis resulting in serious Joss to the Respondent No. 1 company. Not only that the contracts were awarded contrary to the established rules by perpetrating fraud so as to assume jurisdiction to award contracts, even in the execution of the works, Respondents 1 to 3 acted dishonestly and fraudulently. Extensions were granted recklessly and without proper exercise of the powers vested in Defendants 1 and 2 of which particulars were mentioned in the plaint. Similarly Defendants 2 and 3 made false, fraudulent and inflated entries in the measurement books in connivance with Defendant No. 1 who was the Engineer in-charge, particulars whereof where given in the plaint Not only these Defendants 2 and 3 in connivance with some of the other Defendants and with the full knowledge of Defendant No. 1 got false bills prepared and recommended huge excess bills in favour of Defendant Nos. 4, 10 and 13 they even released a part of the security deposit to Defendant Nos. 10 and 13�particulars of such transactions were also given in the plaint. No administrative approval or technical sanctions were obtained. It is not necessary for me to refer to all the allegations made in the plaint but it Would appear that the suit proceeded on the basis that the agreements were executed in a fraudulent manner pursuant to a conspiracy between the Defendants and indeed Defendant No. l but for the fraudulent method adopted by him he was not competent to execute such; agreements. In the execution of works, false measurement books, inflated bils, unjustified, extensions were granted resulting in a huge loss to Respondent No. 1 company. The Plaintiff-company, therefore, claimed that by such frau dulent means the Defendants had caused serious monetary loss to the Plaintiff-company which on the basis of facts discovered amounted to, Rs. 23 lakhs and odd and it was apprehended that further investigation would reveal further facts which may entitle the Plaintiff-company to further amounts.

The Appellants herein, Defendants 10 to 12 in the suit, filed an application u/s 34 of the Arbitration Act praying that all proceedings of the suit be stayed as provided u/s 34 of the Arbitration Act. Two other sets of defenders who are not Appellants before me in this appeal filed similar applications it was contended on behalf of the Appellants that Clause 18 of the General Conditions of the contract was binding upon the parties to the agreement. The matter in suit between the parties was fully covered by the said arbitration clause. According to the Appellants, all the matters arising in the suit were pending before the joint arbitrators and also before a sole arbitrator. In that view of the matter, there was no reason why the present suit should net be stayed.

The learned Subordinate Judge, 2nd court, Dhanbad, by order dt. 8.8.1980 refused to stay the suit in exercise of his discretion u/s 34 of the Arbitration Act. The learned Subordinate judge found that the suit had been brought on the basis that there was fraud and misrepresentation by the contractors and the officers of the Plaintiff-company in bringing about the alleged contracts in-question and that relief was claimed on the ground of non-existence of the alleged contract in the eye of law being vitiated by fraud. He observed that according to the Plaintiff, there was no contract in the eye of Uw and consequently there was no arbitration clause Which could be enforced. Relying upon a judgment of this Court reported in Pramada Prasad Mukharjee Vs. Sagarmal Agarwala and Others, and a judgment of the Calcutta High Court reported in The Chartered Bank Vs. The Commissioner for the Port of Calcutta, , he held that in a suit where there were allegations and counter allegations of fraud or misrepresentation in bringing about a contract containing an arbitration clause, such a suit was independent of the contract and the dispute must be decided by the court and not by domestic tribunal for the repudiation of the contract itself or any obligations arising out of the contract. If the dispute goes to the very root of the contract, the Arbitrator cannot decide the same and the disputes mast be decided by the Court. He, therefor, came to the conclusion that having regard to the facts and circumstances of the case, since the validity of the agreement itself was challened in the suit, this was not a proper case in which he could exercise his discretion u/s 34 or the Act and stay the suit. Another reason which weighed with the learned Subordinate Judge was that some of the parties in the suit were not parties to the agreement. Relying upon the case reported in AIR 1954 Nag 289, he held that if stay was granted the Plaintiff would not be able to seek its relief against such parties in the arbitration proceedings and in such a case the Plaintiff has necessarily to file another suit to be decided by a court. This was also a relevant consideration for refusing prayer for stay of the suit.

Sri P.S. Dayal appearing for the Appellants has assailed the order of the leagued Subordinate Judge contending hat the learned Subordinate Judge has not given, any good reason why the parties should not be directed to get their disputes adjudicated in an arbitration proceeding when they had entered into an agreement which contained an arbitration clause. It was alternatively submitted that even if the entire suit could not be stayed, the learned Subordinate Judge ought to have stayed the suit only in part to the extent relief was claimed against the Appellants. He of course, submitted that by refusing to stay the suit, the learned Subordinate Judge had not exercised his discretion u/s 34 in accordance with law.

On the other hand Sri G.M. Misra, appearing on behalf of Respondent No. 1 submitted that the claim in the suit did not arise out of the contract. Moreover, the claim was made not only against the contractors but also against employees of the Plaintiff company who had acted in collusion with the contractors pursuant to a conspiracy hatched by them to cheat the Plaintiff-company. He, therefore, submitted that the claim made in the suit were not such as could be adjudicated upon in an arbitration proceeding. Moreover, the very basis of the arbitration clause was challenged as it was contended by the Plaintiff-company that the agreement itself containing the arbiter, action clause did not exist in the eye of law as it was vitiated by fraud. He further submitted that for the purpose of Section 34, the case as pleaded and framed in the plaint has to be seen. He submitted that in any event there was no en or in the exercise of discretion by the learned Subordinate Judge and, therefore, even, if it was possible to take a different view, I should not interfere with the order passed by the learned Subordinate Judge.

It is well settled mat the power stay legal proceedings u/s 34 is discretionary, and so a party to an arbitration agreement against whom legal proceedings have been commenced cannot, by relying on the arbitration agreement, claim the stay of legal proceedings instituted in a court as a matter of right. However, the discretion vested in the court must be properly and judicially exercised. Ordinarily the court would direct the parties to go before the Tribunal of their choice and stay the legal proceedings instituted before it by one of them. It would be difficult, and it is indeed inexpedient, to lay down any inflexible rules which should govern the exercise of the said discretion. It is ordinarily not open to the appellate court to substitute its own exercise of discretion for that of the trial Judge: but if it appears to the appellate court that in exercising its discretion, the trial court has acted unreasonably or capriciously or has ignored relevant facts and has adopted an unjudicial approach, then it would certainly be open to the appellate court and in many cases it may be its duty, to interfere with the trial court in exercise of its discretion. In cases falling in this class, the exercise of discretion by the trial court is in law wrongful and improper and that would certainly justify and call for interference from the appellate court, (see The Printers (Mysore) Private Ltd. Vs. Pothan Joseph, ).

In Uttar Pradesh Co-operative Federation Ltd. Vs. Sunder Brothers of Delhi, the Supreme Court observed that the strict principle of sanctity of contract is subject to the discretion of the Court u/s 34 of the Indian Arbitration Act, for there must be read with every such agreement, an implied term or condition that it would be enforceable only if the court having due regard to the surrounding circumstances, thinks lit in its discretion to enforce it. It is obvious that a party may be released from the bargain if he can show that the selected arbitrator is likely to show bais or b y sufficient reason to suspect that he will act unfairly or that he has been guilty of continued unreasonable conduct. It was observed that where the discretion vested in the court u/s 34 has been exercised by the lower court, the appellate court would be slow to interfere with the exercise of the discretion. In dealing with the matter raised before it at the appellate stage, the appellate court would normally not be justified in interfering with the exercise of the discretion under appeal on the ground that if it had considered the matter at the trial stage, it may have come to a contrary collusion. If the discretion has been exercised by the trial court reasonably and in a judicial manner, the fact that the appellate court would have taken a different view may not justify such interference with the trial court''s exercise of discretion. If it appears to the appellate court that in exercising its discretion the trial court has acted unreasonably or capriciously of has ignored relevant facts, then it would be open to the appellate court to interfere with the trial court''s exercise of discretion.

Having regard to the settled position in law I have to examine whether the learned Subordinate Judge has exercised his discretion reasonably and in a judicial manner or whether he has acted unreasonably or capriciously or has ignored relevant facts justifying interference by the appellate court.

Before dealing with the reasons given by the trial court for refusing to stay the suit, I may observe that it was not contended before me that the suit is itself frivolous and vexatious, nor was it contended before me that there is any express stipulation in the agreement that questions involving fraud should be subjected to arbitration. It is not the case of the Appellants that under the arbitration clause, the arbitrators were empowered to decide a dispute going to the very root of the contract, such as a dispute relating to the validity of the contract challenged on the ground of fraud or misrepresentation or any other ground legal or equitable. It was submitted that the plaint itself disclosed that the Plaintiff admitted the execution of the contract and also admitted that the contract contained an arbitration clause. In that view of the matter, it was submitted that the parties must be held bound by the contract and there were no circumstances justifying adjudication of disputes by court in a civil suit.

I shall now consider the first reason given by the learned Subordinate Judge for refusing to stay the suit, namely, that since in the suit it was alleged that there was fraud or misrepresentation in bringing the contract containing an arbitration clause into existence, such a suit was independent of the contract and had necessarily to be decided by a court. I have already observed that the trial court has relied upon a Division Bench decision of this Court reported in AIR 1952 Patna 352. That judgment is also binding upon me. In that case, the dispute between the parties was as to the factum and validity of the agreement itself. One of the questions involved was whether the agreement was vitiated by fraud or misrepresentation or both. It was urged in that case that the words of Clause 25 of the agreement were of sufficient amplitude and conferred power on the arbitrators to decide the dispute raised in the suit. That contention was rejected as the court found nothing in the deed of agreement to show that the arbitrators were empowered to decide the question of legality or fraud going to the very root of the contract. It was, thereafter, observed the attack is on the contract as a whole and the dispute is whether there is a binding contract between the parties. If the Plaintiff''s allegations of fraud and misrepresentation is proved, or the document, on construction is held to be a lease, and as such void for want of registration, the arbitration clause which is only a part of the contract, must perish along with other clauses. It is well settled that if there be in a suit allegations and counter allegations of fraud or misrepresentation in bringing a contract into existence, such a suit is independent of the contract, and the dispute must be decided by the court and not by the domestic tribunal, for the repudiation is of the contract itself, and not of the obligations arising out of the contract. The points in dispute can not, therefore, go to the arbitrators under the submission clause and the suit cannot, in our view, be stayed u/s 34 of the Indian Arbitration Act Their Lordships approved of the observation of this Court in ILR Pat 920 wherein Das, J. observed:

If the very fact or existence of the contract creating the Tribunal is denied, it is obvious that the very basis of the jurisdiction of the domestic tribunal is challenged.

Apart from the fact that the aforesaid decisions of this Court are binding upon me, I have not found any decision which takes a contrary view nor was any such authority cited before me. I find that the consensus of judicial opinion in this country is also in favour of the proposition laid down in Pramada Prasad Mukharjee Vs. Sagarmal Agarwala and Others, and in this connection one may usefully refer to the cases reported in AIR 1967 Mad 201 : In Re: Doraiswamy Nadar, . In this view of the matter, I find that the first reason given by the learned Subordinate. Judge for refusing to stay the suit is supported by good authority and justifies no interference.

The second ground given by the learned Subordinate Judge for refusing to stay the suit is that the entire claim made in the auk cannot be adjudicated upon in the arbitration procecding and necessarily the Plaintiff will have to tile another suit for claiming the relief against some of the Defendants. In this connection, I may also notice the submission urged on behalf of the Appellant that the learned Subordinate Judge ought to have stayed the suit in part, that is, insofar as the relief claimed against the Appellants was concerned. From the facts to the case it appears that the suit proceeds on the basis that Defendants 1 to 3 who are the officers of the Plaintiff-company entered into the conspiracy with the remaining Defendants to cheat the company and make an illegal gains by adopting fraudulent method and it was by such fraudulent methods that agreements were got executed with the remaining Defendants. It is, therefore, essential for the Plaintiff-company to prove the existence of a conspiracy as also the perpetration of fraud. Even if such a suit was filed claiming relief against Defendants 1 to 3 only, the remaining Defendants will necessarily be made parties in that suit because in their absence criminal conspiracy and fraud cannot be established. Another circumstance which is relevant in this connection is that even if the suit is stayed and the arbitration is permitted to proceed, the Plaintiff-company will have to file another suit claiming reliefs against the Defendants 1 to 3 who are not parties to the agreement in their own rights. In such a situation as well, it has been consistently held that it would be a proper exercise of discretion by the trial court not to stay, the suit. In A.I.K. 1954 Nagpur 289 it was held that where in suit a part of the controversy as raised by the Plaintiff is not covered by the agreement to refer to arbitration and there is no averment in the application for stay that the Plaintiff''s case in com t was frivolous and vexatious, to stay the suit and permit arbitration would result in splitting up of the action. That may be a ground for refusing the May. But where only a small portion of relief claimed is net within the scope of the arbitration clause, it is not a sufficient reason for refusing to stay proceedings where the main portion of the action is within the arbitration clause. Where the granting of stay would result in allowing the case of the Plaintiff and some of the Defendants to be determined by the arbitration leaving the case of the rest of the Defendants to be decided by the court and the portion of the claim that cannot be dealt with in arbitration, is not by any means small or insignificant, there is sufficient ground for refusing stay. Earned Counsel for the Appellant relied upon a decision of the Andhra Pradesh High Court reported in . The decision in that case does not help the Appellants. In that case, the Srivenkateswara Constructions and Others Vs. The Union of India, court was concerned with a situation where in order to circumvent an arbitration clause, the Plaintiff added some unnecessary parties to the suit. In such a case it was held that the court can grant stay of proceeding. In that case, it was found that the addition of parties was merely an attempt to circumvent an arbitration clause and, therefore, stay, was granted. But their Lordships in paragraph 7 of the judgment referred to various decisions of the High Courts laying down the proposition that where the Plaintiff claimed two reliefs; one against one set of Defendants and another relief in the alternative for a decree against another set of Defendants, and were not parties to the arbitration agreement, there was justification for grant of stay as the entire subject matter was not covered by the arbitration agreement. Asiatic Shipping Co. (Private) Ltd. Vs. P.N. Djakarta Lloyd and Another, .

In the instant case, as I have observed earlier, the relief claimed in the suit is against till the Defendants jointly and severally, and even in the alternative prayer claiming a specific amount against Defendants 10 to 12 Appellants herein, the claim is against them and Defendants 1 to 3 jointly and severally. There was, therefore, justification for holding that the entire relief claimed in the suit could not be claimed in the arbitration proceeding and in any event another suit may have to be filed against Defendants 1, 2 and 3 in which necessarily the other Defendants have to be made parties. Earned Counsel for the Appellant also relied upon a judgment of this Court reported in Basant Lal Vs. Surendra Prasad and Others, . He relied on paragraph 35 thereof and submitted that if the validity of the arbitration agreement were to be challenged that could be done only in an application u/s 33 of the Arbitration Act. I am afraid the observations in that judgment do not help the Appellants. That was not a case where the court was concerned with an application u/s 34 of the Arbitration Act and that decision must be understood in the facts and circumstances of that case where the question of stay or refusal to stay the suit did not arise.

In view of the above discussion, I have no doubt that the learned Subordinate Judge has exercised his discretion judiciously and both the reasons given by him for refusing to stay the suit are good reasons and in accordance with the settled legal principles.

I, therefore, find no reason to interfere with the exercise of discretion by the learned Subordinate Judge. This appeal, therefore, fails and, accordingly dismissed. But there will be no order as to costs.