Citation Codes

Equivalent Citations

citation codes

Case Number

Arbitration Case No. 1 Of 2009

Attorney(S)

For Petitioner : Mr. Vijayesh Atre, learned Counsel, for the Appellant; Mr. V.K. Jain, learned senior Counsel with Shri Abhishay Jain, learned Counsel, for the Respondent

Judges

Shri Prakash Shrivastava

Acts

section11(6) of the Arbitration and Conciliation Act, 1996
"Sub-section (1) of section 8

See more information ...

Smart Summary

Judicial Opinion — Summary and Analysis

Factual and Procedural Background

This arbitration application (referred to as "AC" in the opinion) was filed under section 11(6) of the Arbitration and Conciliation Act, 1996, seeking appointment of an arbitrator to resolve a dispute between the applicants and respondent No. 1 (a Trust) and respondent No. 2 (a Cooperative Society).

The applicants allege that on 31.3.1997 the applicants, respondent No.1 Trust and respondent No.2 Cooperative Society entered into an agreement whereby respondent No.1 borrowed money and created security in favour of respondent No.2 and the applicants over the Trust's assets for loans related to construction of a basketball complex on land granted by the State Government at Palasiya, Indore. The Trust subsequently mortgaged the entire superstructure by a deed dated 8.4.1997. According to the applicants, the Trust's balance sheet as of 31.3.2005 showed amounts due of Rs. 6013.18 Lakhs, and no payment was made.

The applicants served a legal notice dated 6.9.2008 on the named arbitrator to initiate arbitration, but the named arbitrator communicated his inability to act on 13.9.2008 citing old age and ill health. Consequently, the present application under Section 11(6) for appointment of an arbitrator was filed.

Procedurally, respondent No.1 filed a reply objecting to the application and raising multiple pleas. The applicants filed a rejoinder reiterating their stand. The court heard the parties and, after analysis, rejected the arbitration application, granting liberty to the applicants to approach the civil court for adjudication.

Legal Issues Presented

Whether an independent arbitrator should be appointed under Section 11(6) of the Arbitration and Conciliation Act, 1996, given that an arbitration agreement exists and the named arbitrator has declined to act.
Whether disputes involving allegations of fraud, malpractices and complicated factual questions (including allegations that the agreement is void for fraud and that one respondent is a creature of the applicants) are appropriate for resolution by arbitration or are to be tried by a civil court with full evidence.
Whether procedural or jurisdictional objections raised by respondent No.1 — such as the need to join the Registrar of Public Trust or the Registrar of Cooperative Societies, alleged defects in stamping/registration of the mortgage/agreement, non-signature by all trustees, and whether a public trust can be proceeded against — affect the appropriateness of referring the dispute to arbitration.

Arguments of the Parties

Applicants' Arguments

There exists an arbitration agreement between the parties (agreement dated 31.3.1997) which contains an arbitration clause.
A notice invoking arbitration was served on the named arbitrator on 6.9.2008, and the named arbitrator declined to act on 13.9.2008; therefore, an independent arbitrator should be appointed under Section 11(6).
The applicants denied having committed any financial irregularity or illegality while managing respondent No.1 and respondent No.2, as asserted in their rejoinder.

Respondent No.1's Arguments

The applicants are firms/companies controlled by certain named individuals (Shri O.T. Gandhi and Shri Janak Gandhi and family members), who were also office-bearers and controllers of respondents No.1 and No.2; those persons allegedly engaged in illegal activities and financial irregularities and misused the Trust's properties for personal benefit.
Respondent No.2 is alleged to be a creature of the applicants; the application is asserted to be motivated to avoid criminal liabilities of Shri Janak Gandhi and others.
The agreement is alleged to be ineffective and void due to fraud; the applicants allegedly tried to grab public property given by the State.
The Registrar of Public Trust is contended to be a necessary party; since respondent No.2 is a Cooperative Society, the dispute is said to be to be referred to the Registrar of Cooperative Societies.
Procedural and formal objections: the original agreement was not filed, the agreement is allegedly not properly stamped and registered, and the mortgage deed (superstructure) is said not to be properly stamped. It is further contended that the agreement is not signed by all trustees and therefore not binding.
Other objections included that applicant No.5 is a guarantor and thus cannot file the arbitration case, and an assertion that the respondent No.1 Public Trust is not a legal person, so proceedings cannot be initiated against it.
Substantively, counsel argued that given the nature of the allegations (fraud/malpractice), arbitration is not a proper remedy and the applicant should pursue civil court proceedings where detailed evidence can be led.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
N. Radhakishnan v. Maestro Engineers and others, 2010 (1) SCC 72	Complicated matters involving various questions and issues that need detailed investigation and elaborate evidence should be tried by a court rather than referred to an arbitrator.	The court relied on this decision to support the proposition that where serious allegations of fraud and complicated factual issues exist, the matter should be adjudicated by a civil court and not by an arbitrator; the case facts were seen as falling within this principle.
Hindustan Petroleum Corpn. Ltd. v. Pinkcity Midway Petroleums, 2003 (6) SCC 503	If an agreement contains an arbitration clause, the civil court is generally obliged to refer the dispute to arbitration under section 8 (mandatory language of section 8).	The court recorded that counsel for the appellant relied on this precedent but indicated that the principle is not decisive where allegations of fraud and complexity render arbitration inappropriate; the opinion considered this precedent but applied other authorities to distinguish the present situation.
Abdul Kadir Shamsuddin Bubere v. Madhav Prabhakar Oak and Another, AIR 1962 SC 406	Where serious allegations of fraud are made against a party and that party desires trial in open court, that is sufficient cause for the court not to order reference to arbitration.	The court relied on this precedent to support the view that serious fraud allegations justify refusing to refer the dispute to arbitration; the opinion explicitly invoked this principle to conclude that the present case should be tried in court.
Haryana Telecom Ltd. v. Sterlite Industries (India) Ltd., AIR 1999 SC 2354	Section 8 requires referral to arbitration only for disputes which the arbitrator is competent or empowered to decide; matters outside arbitrator's competence or involving complexities may not be referable.	The court cited this authority for the proposition that only disputes within the arbitrator's competence should be referred; it used the principle to justify keeping matters involving serious questions and complex evidence before the civil court.
Oomor Sait HG v. Asiam Sait, 2001 (3) CTC 269 (Madras High Court)	The civil court retains the power to refuse to stay a suit despite an arbitration clause when disputes involve serious questions of law or complicated facts requiring detailed oral and documentary evidence.	The court cited this High Court decision to reaffirm that civil courts can refuse to refer disputes to arbitration when complex factual issues or fraud allegations require detailed evidence and adjudication in court.

Court's Reasoning and Analysis

The court began by recording undisputed preliminary facts: the execution of the agreement dated 31.3.1997 was not in dispute; the agreement contains an arbitration clause; notice to the named arbitrator was sent on 6.9.2008; and the named arbitrator declined to act on 13.9.2008. The court explicitly noted, however, that those facts alone do not compel appointment of an arbitrator.

The court then considered the substantive nature of the disputes recorded in the pleadings. The record disclosed serious allegations of fraud and malpractices by the respondents against the applicants and factual disputes that would necessitate the leading of detailed evidence. Respondent No.1 had alleged that the agreement was ineffective and void because of fraud and had made allegations that respondent No.2 was a creature of the applicants. The court observed that such assertions raise complicated factual questions and allegations that cannot be properly resolved without elaborate evidence and detailed adjudication.

On the legal front, the court relied on binding and persuasive authorities (including N. Radhakishnan, Abdul Kadir Shamsuddin Bubere, Haryana Telecom, and the Madras High Court decision in Oomor Sait) for the established principle that where disputes involve serious allegations of fraud or complicated questions of fact or law requiring detailed oral and documentary evidence, the proper forum is the civil court rather than arbitration. The court acknowledged the rule in Hindustan Petroleum regarding the mandatory nature of section 8 where an arbitration clause exists, but placed emphasis on the exception recognized by the cited authorities: that certain disputes are unsuitable for arbitration.

Applying these legal principles to the facts before it, the court concluded that the present dispute — characterized by serious fraud allegations, contentions about misuse of public trust property, contested factual matrices and procedural objections — was not fit to be referred to arbitration. The court reasoned that an arbitrator would not be an appropriate forum to ventilate and resolve such complex and contested issues which require detailed evidence and open-court adjudication.

The court therefore exercised its discretion under Section 11 (and in light of the cited jurisprudence) to refuse to appoint an arbitrator and to keep the dispute for adjudication by a civil court.

Holding and Implications

Holding: The arbitration application under Section 11 was rejected. The AC is rejected with liberty to the applicant to approach the civil court for adjudication of the dispute.

Implications:

Direct effect on the parties: The court refused to appoint an arbitrator and denied referral to arbitration. The applicants retain liberty to initiate proceedings in a civil court to adjudicate the contested claims and to lead detailed evidence on the allegations of fraud and related issues.
Scope as precedent: The opinion applies and follows existing Supreme Court and High Court authorities establishing that disputes involving serious allegations of fraud or complicated factual and legal questions may be kept out of arbitration and decided by courts. The opinion does not announce a novel principle but applies established jurisprudence to the facts at hand.

Show full summary ...

M/S. Otg Global Finance Ltd. v. Corporation (Area) Basketball Trust

Prakash Shrivastava, J.- This arbitration case has been filed under section11(6) of the Arbitration and Conciliation Act, 1996 for appointment of arbitrator for resolving the dispute between the parties.

2. The case of the applicant is that the applicant and the respondent No. 1. Trust and respondent No. 2 Cooperative Society had entered into the agreement dated 31.3.1997, whereby the respondent No. 1 had borrowed money from the applicants and the respondent No. 2 and created security in favour of respondent No. 2. Society and the applicant over the assets of the respondent No. 1 Trust for the loan already taken or to be taken by the Trust from the applicant and respondent No. 2 for construction of the basketball complex on the land granted by the State Government to the Trust at Palasiya, Indore. Further case of the applicants is that the respondent No. 1-Trust had obtained loan from the applicant and respondent No. 2 from time to time and for securing the amount it had mortgaged the entire superstructure vide deed dated 8.4.1997. Pursuant to the agreement as well as the security provided by the Trust, the applicant and respondent No. 2 had extended loans to the respondent No. 1 from time to time and as per the balance sheet of the respondent No. 1 Trust, as on 31.3.2005 a sum of Rs. 6013.18 Lakhs was due for recovery from the respondent No. 1 but no payment was made by the respondent No. 1, hence the applicants had given the legal notice dated 6.9.2008 to the named arbitrator for resolving the dispute between the parties but vide communication dated 13.9.2008 the named arbitrator had expressed his inability to take up the matter in arbitration on account of old age and ill health, hence the present AC has been filed.

3. The respondent No. 1 has filed the reply objecting to the application and raising the plea that all the applicants are firms and companies of Shri O.T. Gandhi and Shri Janak Gandhi and their family members and that these two persons were the office bearers and controlling persons of respondents No. 1 and 2 and on account of their illegal activities and financial irregularities, the properties of the respondent No. 1-Trust have been misused and that these two persons have acted for their own benefit and contrary to the interest of the respondents No. 1 and 2. It has further been alleged that the respondent No. 2 is nothing but a creature of the applicants and the applicant No. 5 was the whole-sole controller of the respondent No. 2 and that the present application has been filed to avoid the criminal liabilities of Shri Janak Gandhi and others. It is also alleged that the agreement is ineffective and void because of fraud and that Shri Janak Gandhi and his family members with an intention to defraud the public had tried to grab the valuable public property which was given by the State in public interest. An objection is also raised that the Registrar of Public Trust is a necessary party and since the respondent No. 2 is a Cooperative Society, therefore, dispute is to be referred to the Registrar-Cooperative Society. An objection has also been raised that the original agreement is not filed and the agreement is not properly stamped and registered.

4. The applicants by filing the rejoinder have reiterated their stand and denied that they had ever committed any financial irregularity or illegality while managing the respondent No. 1 and 2 in the past. The dispute on merit raised by the respondent No. 1 was also replied by way of rejoinder.

5. Learned counsel for the applicants submits that since arbitration agreement exists between the parties and the dispute has arisen and named arbitrator has refused to take up the arbitration, therefore, an independent arbitrator be appointed for resolving the dispute.

6. Opposing the prayer, learned counsel for the respondent No. 1 submits that looking to the nature of allegations arbitration is not a proper remedy and applicant should approach the civil court. He has also submitted that since by the agreement the superstructure has been mortgaged, therefore, it is a mortgage deed which is not properly stamped, therefore, it is required to be impounded. He further submits that the agreement is not signed by all the trustees of the respondent No. 1, therefore, it is not binding and the respondent No. 1 is a registered public trust and no mortgage of the properties of registered public trust can be created without the permission of the Registrar of Public Trust and the applicant No. 5 himself is the guarantor, therefore, he cannot file the Arbitration Case and the State Government and the Registrar, Public Trust are the necessary parties and that the respondent No. 1 Public Trust is not a legal person, therefore, no proceedings can be initiated against it.

7. Having heard the learned counsel for the parties and on perusal of the record, it is noticed that though the execution of the agreement dated 31.3.1997 is not in dispute and it is also not in dispute that the said agreement contains the arbitration clause and notice dated 6.9.2008 was sent by the applicant to the named arbitrator and the named arbitrator vide communication dated 13.9.2008 had expressed inability to take up the matter in arbitration, but that alone is not enough for allowing this AC.

8. The record reflects that the present case involves the serious allegations of fraud and malpractices by the respondents as against the applicant as also factual disputes, for which the leading of the detailed evidence by the parties is required. The respondent No. 1 has made an allegation that the agreement is ineffective and void because of fraud and that the applicants have misused the properties of respondent No. 1- Trust through the two named persons in their reply before this Court. It has also been alleged that respondent No. 2 is the creature of the applicants. For such a nature of dispute the proper remedy is to approach the civil court and establish the respective right by leading detailed evidence.

9. The Supreme Court in the matter ofN. Radhakishnan v. Maestro Engineers and others reported in 2010(1) SCC 72in this regard has held that the complicated matters involving various questions and issues and needing detailed investigation and production of elaborate evidence, should be tried by the court instead of referring to the arbitrator. The Supreme Court in this regard in the above case where the subject matter of dispute was found to be within the jurisdiction of the arbitrator, has held as under:-

"21. In our opinion, the contention of the respondents relating to the jurisdiction of the Arbitrator to decide a dispute pertaining to a matter of this proportion should be upheld, in view of the facts and circumstances of the case. The High Court in its impugned judgment has rightly held that since the case relates to allegations of fraud and serious malpractices on the part of the respondents, such a situation can only be settled in court through furtherance of detailed evidence by either parties and such a situation can not be properly gone into by the Arbitrator.

22. Reliance was placed by the learned counsel for the appellant on a decision of this Court in the case ofHindustan Hindustan Petroleum Corpn. Ltd. v. Pinkcity Midway Petroleums . [2003 (6) SCC 503], wherein this Court in Para 14 observed:

"If in an agreement between the parties before the civil court, there is a clause for arbitration, it is mandatory for the civil court to refer the dispute to an arbitrator. In the instant case the existence of an arbitral clause in the Agreement is accepted by both the parties as also by the courts below. Therefore, in view of the mandatory language of section 8 of the Act, the courts below ought to have referred the dispute to arbitration."

The learned counsel for the appellant relying on the above mentioned observations of this Court in the aforesaid judgment submitted that the High Court was wrong in ignoring the ratio of the case and should have accordingly allowed the petition of the appellant for setting aside the order of the trial court.

23. The learned counsel appearing on behalf of the respondents on the other hand contended that the appellant had made serious allegations against the respondent alleging that they had manipulated the accounts and defrauded the appellant by cheating the appellant of his dues, thereby warning the respondents with serious criminal action against them for the alleged commission of criminal offences. In this connection, reliance was placed in a decision of this Court in the case ofAbdul Kadir Shamsuddin Bubere v. Madhav Prabhakar Oak and Another,[ AIR 1962 SC 406]in which this court under para 17 held as under:

"17. There is no doubt that where serious allegations of fraud are made against a party and the party who is charged with fraud desires that the matter should be tried in open court, that would be a sufficient cause for the court not to order an arbitration agreement to be filed and not to make the reference."

In our view and relying on the aforesaid observations of this Court in the aforesaid decision and going by the ratio of the above mentioned case, the facts of the present case does not warrant the matter to be tried and decided by the Arbitrator, rather for the furtherance of justice, it should be tried in a court of law which would be more competent and have the means to decide such a complicated matter involving various questions and issues raised in the present dispute.

24. This view has been further enunciated and affirmed by this Court in the decision ofHaryana Haryana Telecom Ltd. v. Sterlite Industries (India) Ltd. .[ AIR 1999 SC 2354], wherein this court under para 4 observed :

"Sub-section (1) of section 8 provides that where the judicial authority before whom an action is brought in a matter, will refer the parties to arbitration the said matter in accordance with the arbitration agreement. This, however, postulates, in our opinion, that what can be referred to the Arbitrator is only that dispute or matter which the Arbitrator is competent or empowered to decide."

25. The learned counsel for the respondent further elaborated his contention citing the decision of the High Court of Judicature at Madras in the case ofOomor Sait HG v. Asiam Sait, 2001 (3) CTC 269, wherein it was held:

"Power of civil court to refuse to stay of suit in view of arbitration clause on existence of certain grounds available under 1940 Act continues to be available under 1996 Act as well and the civil court is not prevented from proceeding with the suit despite an arbitration clause if dispute involves serious questions of law or complicated questions of fact adjudication of which would depend upon detailed oral and documentary evidence."

The Civil Court can refuse to refer matter to arbitration if complicated question of fact or law is involved or where allegation of fraud is made.

Allegations regarding clandestine operation of business under some other name, issue of bogus bills, manipulation of accounts, carrying on similar business without consent of other partner are serious allegations of fraud, misrepresentations etc., and therefore application for reference to Arbitrator is liable to be rejected."

We are in consonance with the above-referred decision made by the High Court in the concerned matter.

26. In the present dispute faced by us, the appellant had made serious allegations against the respondents alleging him to commit malpractices in the account books and manipulate the finances of the partnership firm, which, in our opinion, cannot be properly dealt with by the Arbitrator. As such, the High Court was justified in dismissing the petition of the appellant to refer the matter to an Arbitrator........"

10. Having regard to the aforesaid factual and legal position, I am of the opinion that it is not a fit case for appointing the arbitrator under Section 11 of the Act and referring the dispute to the arbitrator. Hence, the AC is rejected with liberty to the applicant to approach the civil court for adjudication of the dispute.

M/S. Otg Global Finance Ltd. v. Corporation (Area) Basketball Trust

Judicial Opinion — Summary and Analysis

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Applicants' Arguments

Respondent No.1's Arguments

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

M/S. Otg Global Finance Ltd. v. Corporation (Area) Basketball Trust

Comments