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Judgment
S.R. Singharavelu, J.—Application No. 4979 of 2004 is filed by the applicant/first defendant to pass an order referring the first
respondent/plaintiff to the arbitration pending before the second respondent pursuant to the Arbitration Agreement dated 19.08.2001 and dismiss
the said suit filed by the first respondent/plaintiff.
Application No. 939 of 2004 is filed by the applicant/plaintiff to grant temporary injunction restraining the defendants from proceeding with any
arbitration pursuant to the suit agreement dated 19.08.2001 pending disposal of the suit.
The plaintiff is a Public Limited Company, having more than 40,000 shareholders and the then Chairman Mr. G. Venkatesan expired on
03.05.2003. Subsequent to the sudden death of Chairman G. Venkatesan, the well wishers formulated a Scheme of Amalgamation u/s 391 of the
Companies Act and the same was ordered on 29.04.2004 in C.P. No. 89 and 90 of 2000.
The Company seems to have borrowed Rs. 60 lakhs from the first defendant, which was a part of the consideration, was received by way of
cheque dated 14.08.2001. A notice dated 05.06.2003 was sent by the first defendant, demanding the said amount. The claim was Rs. 1.50 crores
with interest of Rs. 20,95,026/- that had accumulated from 18.01.2003 to 31.05.2003. The first defendant filed an application u/s 9 of the
Arbitration and Conciliation Act, 1996 (hereinafter referred to as ""Arbitration Act""), seeking interim protection for the amount that she lent by way
of three promissory notes and one cheque for Rs. 60 lakhs making a total of Rs. 1.50 crores.
The plaintiff resisted the passing of any consideration exceed Rs. 60 lakhs by way of a cheque dated 14.08.2001. There was also an Agreement
dated 19.08.2001 relied upon by the first defendant. It is in that agreement, the following clause was found:
In case of any dispute (including non-performance) or difference, the sum may be. referred to an arbitration by Mr. K.M. Srirangan, Advocate,
No. 103, Law Chambers, High Court, Chennai-600 104, who shall be the Arbitrator.
It is by relying upon this clause, the first defendant has preferred the Application No. 4979 of 2004 to grant an order referring the plaintiff to the
arbitration and to dismiss the suit.
Per contra, the plaintiff submitted that, the Agreement dated 19.08.2001 itself is a forged and fabricated document; that there could not be any
reference to arbitration and therefore, sought for injunction restraining the defendants from proceeding with any arbitration pursuant to the suit
agreement dated 19.08.2001.
Mr. Ravi, learned Senior Counsel appearing for the plaintiff submitted that the Agreement dated 19.08.2001 is a fabricated one on the ground
that,
(i) it has not been signed by the first defendant;
and that
(ii) no arbitration was agreed thereupon.
In order to establish that there was no such agreement factually, the following points were submitted;
(i) Both the letters dated 16.08.2001 written by G. Venkatesan to the first defendant as well as letter vice-versa mentioned only an agreement
dated 16.08.2001 and that too, of an agreement of loan between the parties;
(ii) even in Form No. 8 and 32 filed with the Registrar of Companies, the agreement was stated to have been by way of letters dated 16.08.2001
and not the alleged agreement dated 19.08.2001. Similarly, in the legal notice of demand issued by the first defendant, no mention was made about
the agreement dated 19.08.2001;
(iii) even though the alleged agreement dated 19.08.2001 refers to three pronotes dated 18.08.2001, date of two promissory notes has suffered
correction;
(iv) signatures on the alleged agreement vary even to the naked eye;
(v) it is highly probable to believe that a Public Limited Company, like the plaintiff, would have received a huge sum of Rs. 90 lakhs by way of only
cash transaction and that the first defendant would have ventured to do so. In fact, Section 269 of the Income Tax Act expressly prohibits lending
any sum exceeding Rs. 20,000/- except by way of Account payee cheque or demand draft. Any contract to pay in violation of such statutory
provision is against the public policy and hit by Section 23 of the Contract Act; and
(vi) as a consequence, if any award is opposed to public policy, then it shall be hit u/s 34(2)(b) of the New Act.
In that way, there could not be any award on the basis of the fact that the alleged passing of consideration was against the provisions of Income
Tax Act and was opposed to public policy.
Apart from the factual existence of the agreement, Mr. Ravi, learned senior counsel for the plaintiff further submitted that in law, there is no
arbitration agreement. In this connection, it was pointed out that Sections 7(3) and 7(4) of the Arbitration Act provided that,
an arbitration agreement shall be in writing; and that,
an arbitration agreement is in writing, if it is
contained in a document signed by the parties.
Thus, it was argued that as both parties should sign to an arbitration agreement and since first defendant failed to sign the agreement, it is not an
arbitration agreement in the eye of law.
I will now go through the case laws cited in support of the plaintiff.
The learned senior counsel for the plaintiff Mr. Ravi pointing out that the agreement was not signed by the first defendant, Sushila Devi, submitted
that the very conditions, which are required to be satisfied under Sections 8(1) and 8(2) of the Arbitration Act, 1996, which are as follows, as
mentioned in P. Anand Gajapathi Raju and Others Vs. P.V.G. Raju (Died) and Others, .
(1) There is an arbitration agreement;
(2) a party to the agreement brings an action in the court against the other party;
(3) subject-matter of the action is the same as the subject-matter of the arbitration agreement;
(4) the other party moves the court for referring the parties to arbitration before it submits his first statement on the substance of the dispute.
Therefore, stress was made that as the first defendant had never signed in the agreement, there is no valid agreement in the eye of law. He also
pointed out that the concerned clause of the disputed agreement, which is as follows:
In case of any dispute (including non-performance) or difference, the sum may be referred to an arbitration by Mr. K.M. Srirangan Advocate, No.
103, Law Chambers, High Court, chennai-600 104, who shall be the Arbitrator.
In this connection, reliance was also placed in the case law Wellington Associates Ltd. Vs. Mr. Kirit Mehta, wherein it was held that Section 7
of the Arbitration Act postulates an agreement which makes the appointment of an Arbitrator mandatory. It was observed as follows:
The words in Sub-section (1) of Section 7, ""means an agreement by the parties to submit to arbitration"", in my opinion, postulate an agreement
which necessarily or rather mandatorily requires the appointment of an arbitrator/arbitrators. Section 7 does not cover a case where the parties
agree that they ""may"" go to a suit or that they ""may"" also go to arbitration. Thus, unless the document filed by the party before the Chief Justice of
India or his designate is an ""arbitration agreement"" as defined in Section 7 as explained above, requiring a reference in a mandatory sense, no
reference, in my view, can be made to the Arbitral Tribunal.
The above proposition of law laid down in WELLINGTON case was also given approval in a subsequent: case law Nimet Resources Inc. and
Another Vs. Essar Steels Ltd., . wherein it was observed as follows:
I am conscious of the fact that M. Jagannadha Rao, J. in Wellington Associates Ltd. Vs. Mr. Kirit Mehta, held that the jurisdiction of the nominee
of the Chief Justice of India to decide the question is not excluded by Section 16 of the Act and such a power can be exercised in a suitable case.
On this basis it is no doubt permissible u/s 11 of the Act to decide a question as to the existence or otherwise of the arbitration agreement but
when the correspondence or exchange or documents between the parties are not clear as to the existence or non-existence of an arbitration
agreement, in terms of Section 7 of the Act,the appropriate course would be that the arbitrator should decide such a question u/s 16 of the Act
rather the Chief Justice of India or his nominee u/s 11 of the Act.
That was a case, where correspondence and exchange of documents between parties were relied on to show the existence of an arbitration
agreement and it was found that those correspondence and documents were not clear as to the existence or non-existence of arbitration
agreement. It is based upon the prospective chance of existence of the arbitration agreement, it was held that the appropriate course would be that
the arbitrator shall decide such a question u/s 16 of the Arbitration Act rather than the Court to decide u/s 11 of the Arbitration Act. However,
even in that case, it was found that on the basis of the proposition laid down in Wellington case, when there is an agreement, it is no doubt
permissible u/s 11 of the Act to decide a question as to the existence or otherwise of the arbitration agreement. Therefore, when a particular
document is relied on containing an arbitration clause, then the very existence when questioned by the other side on the ground that there was no
mutuality of mind to form the basis of such agreement, the very fact that it was not signed by the other side may make the Court to decide the
existence of the agreement u/s 11 of the Arbitration Act.
Even in the decision Hindustan Petroleum Corpn. Ltd. Vs. Pinkcity Midway Petroleums, when only parties to suit not disputing the existence of
arbitration agreement, it was held that the rejection of reference to arbitration amounted to failure of justice.
In Renusagar Power Co. Ltd. Vs. General Electric Company and Another, . while canvassing Section 3 of the Foreign Awards (Recognition
and Enforcement) Act, 1961, as amended by Act 47 of 1973, which deals with the stay of legal proceedings with respect to matters to the
arbitration, it was held that the conditions required to be fulfilled for invoking Section 3 are:
(i) there must be an agreement to which Article II of the Convention set forth in the Schedule applies;
(ii) a party to that agreement must commence legal proceedings against another party thereto ...etc.
Even in NIIT Limited v. Ashish Deb and Anr. 2004-2-L.W. 244 relied on by Mr. T.K. Seshadri, learned senior counsel appearing for the first
defendant, it was observed that parties to the arbitration cannot by agreement exclude the arbitrator''s competence to decide on its own jurisdiction
including the existence or validity of the arbitration agreement emanated from a document of agreement signed by both parties.
Reliance was placed by first defendant on 2004(2) 2 L.W. 244 NIIT Ltd. v. Ashish Deb and Anr. Although it is true that Section 8 is intended
to make arbitration agreement effective and to prevent party from going to Court contrary to its own agreement and although Section 16 would
provide that the arbitral tribunal may rule on its own jurisdiction and for that purpose an arbitration clause which forms part of a contract shall be
treated as an agreement independent of the terms of the contract, it presupposes the availability of an agreement in accordance with. Section 7 of
the Act, in which the clause of arbitration may form a segment; that segment may be a source of power even to decide about the existence of the
remaining clauses, provided there shall be an agreement in accordance with Section 7. But here is a case, where one of the parties never signed the
document at all. Therefore, there is no agreement at all, and only if there was an agreement, the arbitral clause can form a segment, to be a source
of power to the arbitrator.
To say that the proposal when accepted by the plaintiff amounted to agreement may not be very much applicable to the present facts of the
case because the acceptance itself is dubious as pointed out for reasons mentioned in para 7 supra.
Again, arguments was advanced on the side of the plaintiff that fraud was shown to have played in arriving at the terms of the agreement
including the signature of predecessor of plaintiff as there was no mutuality of mind. In this connection, reliance was placed upon GDR Financial
Services Pvt. Ltd. v. Allsec Securities Ltd. 2001 (3) CTC 461 and Comor Sait. H.G. v. O. Aslam Sait 2001 (3) CTC 269.
Although it was observed in The Bombay Gas Co. Ltd. Vs. Parmeshwar Mittal and others, that it is a person against whom fraud is alleged
has an option to have the matter decided by the Civil Court and that merely because the respondents have made allegations of fabrication of
record against the petitioner, the dispute cannot be taken out of the arbitration, the following was observed in 2001 (3) CTC 461.
It is very difficult to accept the contention of the learned Counsel for the defendants 1 and 3 that the dispute raised by the plaintiff in the suit is one,
which could be brought within the purview of the arbitrator. It is the case of the plaintiff that the first defendant with the knowledge of the other
defendants has deceived the plaintiff and it is pointed out that several transactions were made at his instance, which are mentioned supra. To
substantiate their contention, it is brought to the notice of this Court that the affidavit of the defendants 2 and 3 were sworn only by the 1st
defendant in his capacity as the Managing Director of defendants 2 and 3. The submission of the plaintiff that the dispute raised by them is outside
the terms and condition of the Bye-laws of NSE is justifiable. The said charges are very serious, complicated, cannot be considered and
determined by the arbitrator. This Court has proceeded on the basis of allegations made in the plaint and the said allegations are not made
recklessly. The defendants 2 and 3 also in Para No. 9 of their affidavit alleged fraud against Plaintiff as such it is necessary for them also to resolve
their issues in the suit.Having regard to the above facts, this Court find out a prima facie case in relation to the allegation of fraud is made out
defendants 2 and 3 can put forth all their defences and what are all mentioned in the affidavits, which were filed in support of the applications, in the
suit.
Again in 2001 (3) CTC 269, it was held as follows:
Rulings have already been quoted signifying that in matters where serious allegations of fraud are projected and the decision would depend upon
consideration of minute details of evidence, it is always desirable to let the civil court to go into the issue rather than to leave it to the Arbitrator
before whom the nature of the proceedings are summary and rules of evidence are not applicable.
That was also the case, where the plaint contained certain basic details which would constitute a proper allegation of collusion, diversification of
funds, which of course, are subject to satisfactory evidence and proof.
By holding that the right of citizen to invoke courts protection is an inherent one and no man can exclude himself from the protection of the
Courts vide in AIR 1917 PC 116 (Rehmatunnissa Begum and Ors. v. Price and Ors.), it was found that even where Civil Courts jurisdiction is
expressly barred by Statute, the Supreme Court had evolved several exceptions and had stated that exclusion of jurisdiction is not to be readily
and unconstitutionally assumed, especially in a cases of allegation of fraud emanated from creation of the agreement
In a case law Majett Surrtah and Co. v. Tetley and Whitly reported in 1923 (18) L.W.777, the following was observed:
If the case is on a matter arising out of the contract, the most usual instance of that being a case of breach of contract like the present, there is no
doubt whatever that there is power in the Court to refer to arbitration. It is true that in certain cases the Court will not exercise that power. Those
are cases where, either by reason of the fact that there are charges of fraud, or by reason of the Court coming to the conclusion that in arbitration
complete justice cannot be obtained between the parties, or for some other proper cause that the matter should be kept in Court rather than be
referred to arbitration.
Here is a case, where the agreement was not signed by one of the parties and one party alone signed and that too, under suspicious
circumstances, as alleged by the Plaintiff, I am of the view that it may not be referred for arbitration.
For the reasons mentioned above, Application No. 4979 of 2004 is dismissed. Consequently, Application No. 939 of 2004 is closed.