SUPREME COURT HOLDS THAT ALLEGATIONS OF FRAUD NOT HAVING IMPLICATIONS IN PUBLIC DOMAIN ARE ARBITRABLE

A two Judge Bench of the Supreme Court comprising of Justice Aniruddha Bose and Justice Sudhanshu Dhulia passed a Judgment dated 15-12-2023 in the matter of Sushma Shivkumar Daga & Anr. Vs Madhurkumar Ramkrishnaji Bajaj & Ors. Civil Appeal No.1854 of 2023 and made observations regarding whether allegations of fraud made by the Appellants-Plaintiffs are arbitrable.

Facts

i) In the present case, M/s Emerald Acres Private Limited (Respondent- 2) was incorporated on 18-04-2006 by Late Mr. Shivkumar Daga and his wife, Mrs. Sushma Shivkumar Daga (Appellant- 1) for carrying on business of real-estate development.

ii) Thereafter, two Tripartite Agreements dated 31-03-2007 and 25-07-2008 were executed between Late Mr. Shivkumar Daga, Madhurkumar Ramakrishnaji Bajaj (Respondent- 1) and the Respondent No. 2-Company for the purpose of developing, trading and dealing with the real-estate properties and also to acquire such further properties as may be mutually agreed between the Parties.

iii) By way of the said Tripartite Agreements, the Parties further agreed that:

a) “In the event of any disputes or differences between the Parties hereto in relation to this Agreement or in relation to any matter touching or arising from this Agreement, the parties shall refer such disputes and differences to the arbitration under the provisions of the Arbitration & Conciliation Act, 1996 or any statutory modification thereof”.

b) Further, “the venue of such arbitration shall be at Mumbai and the court at Mumbai alone shall have jurisdiction.”

iv) Meanwhile, Late Mr. Shivkumar Daga passed away on 08-05-2011, with a Will dated 10-02-2011, whereunder, he bequeathed his assets to his wife. Sushma Shivkumar Daga, the Appellant No. 1 and his son, Mr. Chandrashekhar Shivkumar Daga, the Appellant No. 2. In respect of the same, a Probate Petition was pending before the Hon’ble Bombay High Court in WILL / 542 / 2021.

v) In view of the Tripartite Agreements, Late Mr. Shivkumar Daga had during his lifetime acquired rights in several properties by way of development rights, agreement for purchase with the funds provided by the Respondent No. 1, etc. One such agreement included a Deed of Conveyance dated 17-12-2019 that was executed by Late Mr. Shivkumar Daga through his Registered Power of Attorney Holder i.e. the Respondent No. 2- Company, which also comprised of the Development Agreements dated 17-09-2007, 20-11-2007, 30-11-2007, 03-12-2007 and 27-02-2008 in respect of six properties. The said Deed of Conveyance also contained an Arbitration Clause.

vi) It is this Registered Deed of Conveyance dated 17-12-2019 that the Appellants claimed that it was illegally, unauthorisedly and fraudulently executed by the Respondent No. 2-Company in favor of the Respondent No. 1. Hence, the Appellants claimed that the same is not binding on them. Thus, the Appellants filed a Suit bearing C. Suit No.1512 of 2021 before the Ld. Court of Civil Judge, Senior Division at Vadgaon, Pune (District Court) seeking (a) declaration that the Deed of Conveyance dated 17-12-2019 is null and void, as it is against the interest of the Appellants-Plaintiffs and (b) cancellation and termination of the Development Agreements dated 17-09-2007, 20-11-2007, 30-11-2007, 03-12-2007 and 27-02-2008.

vii) In the aforementioned Suit, the Respondents moved an Application under Section 8 of the Arbitration and Conciliation Act, 1996 (Arbitration Act) (Power to refer parties to arbitration where there is an arbitration agreement), for referring the disputes to arbitration, as per the Arbitration Clause contained in the aforesaid Agreements.

viii) The Appellants-Plaintiffs pleaded that the relationship with Respondents-Defendants under the aforesaid Agreements ceased to exist upon the demise of Late Mr. Shivkumar Daga. Further, the dispute itself pertained to adjudication of powers of Respondents-Defendants to execute the Conveyance Deed, hence, there is no arbitration agreement, which would govern the relationship between the Parties.

ix) The Ld. District Court, vide Order dated 13-10-2021, allowed the Section 8 Application filed by the Respondents-Defendants and thereby, referred the dispute to arbitration, on the ground that the Parties had consented to go for arbitration in case of disputes, under the aforementioned Tripartite Agreements.

x) Aggrieved by the District Court Order dated 13-10-2021, the Appellants-Plaintiffs filed Writ Petition No.8836 of 2021 before the Bombay High Court. The High Court, vide Order dated 10-12-2021 dismissed the Writ Petition filed by the Appellants-Plaintiffs on the ground that “the dispute must go to the arbitrator and merely because the SD is no more available for its enforcement, can be no ground to resist the reference to the arbitrator since the clause itself contemplated that any dispute or differences between the parties in relation to the “agreement” or in relation to “any matter touching or arising from the agreement” shall be referred to the arbitration under the Arbitration & Conciliation Act, 1996 along with any statutory modification thereof.”

Supreme Court Observations

Aggrieved by the High Court Order dated 10-12-2021, the Appellants-Plaintiffs filed Civil Appeal No.1854 of 2023 before the Supreme Court. The Apex Court, vide Order dated 15-12-2023, made the following observations:

1) That the Supreme Court has in an earlier case of Vidya Drolia v. Durga Trading Corpn., (2021) 2 SCC 1, laid down a test to determine when the subject-matter of a dispute in an arbitration agreement is not arbitrable:

(a) When cause of action and subject matter of the dispute relates to actions in rem, that do not pertain to subordinate rights in personam that arise from rights in rem.

(b) When cause of action and subject matter of the dispute affects third-party rights; hence, mutual adjudication would not be appropriate and enforceable.

(c) When cause of action and subject matter of the dispute relates to inalienable sovereign and public interest functions of the State; hence mutual adjudication would not be enforceable.

(d) When the subject-matter of the dispute is expressly or by necessary implication non-arbitrable as per mandatory statute(s).

2) Further, the Court will decline reference to arbitration under Section 8 or under Section 11 of the Arbitration Act only in rare cases, where the Court is certain that either the arbitration agreement does not exist, or the dispute is itself “manifestly non-arbitrable”.

3) In case of jurisdictional issues including the existence and validity of an arbitration clause, the same can be dealt by the Arbitral Tribunal itself under Section 16 of the Arbitration Act (Competence of arbitral tribunal to rule on its jurisdiction). The purpose behind giving these powers to the Arbitral Tribunal is to minimise judicial interference in arbitration matters.

4) In the present case, (i) both the Tripartite Agreements contained Arbitration Clauses, which formed the basis of all subsequent Agreements / Deeds that the Appellants sought to be declared as void. (ii) Further, the allegation of fraud made by the Appellants deals with the internal affairs of the Parties i.e. an action in personam, and “if an allegation of fraud exists strictly between the parties concerned, the same will not be termed to be as a serious nature of fraud and hence would not be barred for arbitration.” Hence, as the said allegations would not have any implication in the public domain, the jurisdiction of arbitrator is not ousted.

Conclusion

Thus, based on the aforesaid grounds, the Apex Court held that the disputes / allegations raised by the Appellants-Plaintiffs were arbitrable, hence, the District Court rightly referred the matter to arbitration and the High Court rightly upheld the District Court Order. As a result, the Appeal filed by the Appellants-Plaintiffs was dismissed by the Supreme Court and the High Court Order dated 10-12-2021 that upheld the District Court Order dated 13-10-2021 was sustained.

Harini Daliparthy

Senior Associate

The Indian Lawyer