HARESH NAGJIBHAI RAMANI v. UDAY DINESHCHANDRA BHATT
2024-10-04
SUNITA AGARWAL
body2024
DigiLaw.ai
JUDGMENT : SUNITA AGARWAL, C.J. 1. The present petition has been filed under Section 11 (6) of the Arbitration and Conciliation Act 1996 (for short ‘the Act 1996’) seeking for appointment of arbitrator in a dispute between the two sets of partners of the partnership firm “Uday Developers.” 2. There is a strong opposition on the part of the respondents to refer the dispute to the arbitrator on the ground that there are criminal complaints against the petitioners and a First Information Report has been lodged after the order dated 10.07.2022 passed by the competent magistrate under Section 156 (3) of the Code of Criminal Procedure under Sections 406, 409 and 420 etc. of the Indian Penal Code. The contention is that criminal allegations against the petitioners would have a serious implication in the public domain as they permeate to the entire contract making the dispute non-arbitrable. 3. Noticing the context, in brief, this Court may take note of certain relevant facts. 4. The partnership firm namely Uday Developers had started its business in the year 2007 i.e. 27.04.2007 with the respondents as its partners. The firm was re-constituted on 01.09.2008 and the petitioners and few others were inducted as partners. Vide Partnership Deed dated 13.11.2014, the firm was again re-constituted on the retirement of some partners and the business of the partnership firm continued with the petitioners and the respondents as partners. 5. It seems that a legal notice dated 05.09.2019 issued by the respondents was served upon the petitioners and several other family members of the petitioners on the allegations of siphoning off partnership funds, mismanagement of the business of the firm, illegal investment of partnership funds in personal business etc. whereby the respondents have demanded the sum of Rs.32 crores from the petitioners on the ground that the petitioners have siphoned of the said amount. 6. In the reply dated 13.09.2019, the petitioners have made counter allegations asking the respondents to refund the amount of Rs.3,19,78,095/- to the firm on the premise that the respondents have withdrawn huge amount from the bank account of the partnership firm and thereby caused huge loss to the petitioners.
6. In the reply dated 13.09.2019, the petitioners have made counter allegations asking the respondents to refund the amount of Rs.3,19,78,095/- to the firm on the premise that the respondents have withdrawn huge amount from the bank account of the partnership firm and thereby caused huge loss to the petitioners. It was alleged that the respondents have taken advantage of the fact that the partnership account in the bank was being operated with the signatures of any two partners and the respondents have not shared the accounts of the firm, which is in their custody since the very inception of the business of the firm and that they have acted to the detriment of the interest of the firm. 7. It seems that the notice dated 13.09.2019 was a composite notice as per Arbitration Clause ‘16’ in the Deed of Partnership and the petitioners have invoked Arbitration Clause while taking course to Section 21 of the Act 1996. In reply thereto, the respondents have claimed that the petitioners have committed systematic fraud and the dispute between the parties is non-arbitrable in nature. 8. In Section 9 petition preferred by the petitioners namely Arbitration Civil Misc. Application No. 115 of 2019 on 27.09.2019, notice has been issued on 18.11.2019 and the same is awaiting adjudication. 9. It seems that the partnership was ‘partnership at will’ and the dispute between the partners is about dissolution of partnership and accounting. There are allegations and counter allegations by two sets of partners against each other and the questions concerning the conduct of partners and the accounts of partnership firm are to be adjudicated. The stand of the petitioners is that the respondents have dissolved the partnership being the ‘partnership at will’ and the accounts are to be settled. Both the parties are at variance with regard to the conduct of the partners and accounts of partnership firm. 10. The question before the Court is as to whether at the pre-reference stage, plea of non-arbitrability can be looked into. 11. Mr. Shalin Mehta, learned Senior Advocate appearing for the respondents has vehemently argued placing the decision of the Apex Court in the case of Rohit Tandon v. Directorate of Enforcement, (2018) 11 SCC 46 that there is an Enforcement Directorate (ED) Complaint against the petitioner Nos.
11. Mr. Shalin Mehta, learned Senior Advocate appearing for the respondents has vehemently argued placing the decision of the Apex Court in the case of Rohit Tandon v. Directorate of Enforcement, (2018) 11 SCC 46 that there is an Enforcement Directorate (ED) Complaint against the petitioner Nos. 1 and 2 before the Special Court constituted under the provisions of Prevention of Money Laundering Act 2002 (For short, ‘the PMLA Act 2002) for trying the said petitioners for the offences punishable under Sections 3 and 4 of the said Act. The Special Court has taken cognizance of the said complaint and ordered for its registration while issuing summons to the accused namely petitioner Nos. 1 and 2. Further, as per the information of the respondents, the Income Tax Department has also issued notices under Sections 148 and 148 A of the Income Tax Act 1961, for the assessment year 2017-18, to the petitioner No. 2. 12. The contention of the learned Senior Counsel for the respondents is that looking to the seriousness of the complaint filed against the petitioners, it may noted that the petitioner No. 2 in connivance with petitioner No. 1 hatched a criminal conspiracy and swindled the amount of Rs.1,508.05 lakh from the partnership firm M/s Uday Developers by practicing malpractices like keeping huge margins between the prices at which the sale deeds for the units developed by the partnership firm were executed and the prices at which there units were actually sold to the respective buyers. Cash amount have been received from the buyers by keeping margin from the amount received towards the stamp duty and registration charges for execution of the sale deed in favour of the respective buyers. The pricing pattern clearly established that cash has been taken and true prices have not been disclosed to the firm as also the Stamp and Registering authority. 13. The petitioners accused were found to be involved in the acquisition, possession and concealment of receipts of premium amounting to Rs.90 lakhs and therefore, they have committed the offence of Money laundering. Placing the report of the investigating agency, it was vehemently argued that on account of the ED complaint and the registration of case against the petitioners for the offences punishable under Sections 3 and 4 of the PMLA Act 2002, the dispute of accounting between the partners of the partnership firm has reached in the public domain.
Placing the report of the investigating agency, it was vehemently argued that on account of the ED complaint and the registration of case against the petitioners for the offences punishable under Sections 3 and 4 of the PMLA Act 2002, the dispute of accounting between the partners of the partnership firm has reached in the public domain. 14. Further, the petitioners have been declared proclaimed offender by the Judicial Magistrate in the Criminal Case No. 14986 of 2022, which arose out of the complaint under Sections 406, 409, 420, 467, 468, 477 and 120B of the Indian Penal Code, 1860. It was, thus, argued that the dispute between the partners is not merely a business dispute between the Bhatt Group (respondents) and Ramani Group (petitioners) alone, but is about the fraud committed by the petitioners of criminal nature inviting penal consequences and criminal sanctions and, thus, adjudication of the said dispute exclusively falls within the purview of the Public Court fora, the reason being that the petitioners have defrauded the public at large including the purchasers, public authority and the Government. 15. It was contended that the partnership firm entered into various development agreements dated 21.03.2009 in respect of various immovable properties with the intending purchasers and owners with a view to undertake development, construction and raise residential and/or commercial projects over such immovable properties. The Bhatt Group (respondents) were pre-occupied with their other ongoing business related activities and hence, agreed to exclusively appoint petitioner No. 2 namely Dharmesh Ramani as Power of Attorney of the partnership firm. All the partners including the Bhatt Group (respondents) had executed power of attorney dated 04.12.2012 in favour of the petitioner No. 2 (Ramani Group) on behalf of the firm, resultantly, the petitioner was authorized to independently and exclusively undertake the task of development and sale of the real estate projects subject to protecting the interest of the partnership firm, intending purchasers and the owners of such immovable properties. However, when the respondents sought accounts of the real estate projects from time to time, the petitioners kept on deffering and on an inquiry conducted by the respondents, they found out that out of 97 bungalows (units sold), the petitioners have kept huge margin between the legal, stamping and other expenditures relating to the execution and registration of the sale deeds before the Sub- Registrar that were collected from 3rd party purchasers. 16.
16. From the computer data retrieved by the respondents, the details pertaining to difference in 64 units were found to the tune of Rs.92.36 lakhs, however, details pertaining to remaining units could not be found. Under such circumstances, the respondents concluded that the true amount received from the purchasers have not been disclosed by the petitioners in the firm account and instead money has been taken away by them for their personal use. 17. With these averments, the learned Senior Counsel, referring to the judgment of the Apex Court in the case of Rohit Tandon (supra), would vehemently submit that the Apex Court has taken a consistent view that economic offences, have been the result of deep rooted conspiracy and involving huge loss of public funds, needed to be viewed seriously and considered as grave offences affecting the economy of the country as a whole and thereby posing serious threat to the fundamental health of the country. 18. It was argued that while referring to the PMLA Act 2002, the Apex Court has stated therein that when attempt is made to project the proceeds of crime as untainted money and the allegations having been made, though may not ultimately be established, but the burden of proof that the monies were not the proceeds of crime and were not, therefore, tainted, shifts on the accused persons under Section 24 of the 2002 Act. 19. With the aid of the judgment in Vijay Madanlal Choudhary v. Union of India, 2022 SCC Online SC 929, it was argued that the offence under Section 3 is not a standalone offence rather it would have been on the wrongful and illegal giving of the property as a result of criminal activities relating to a scheduled offence. It is concerning the process or activity connected with such property, which constitutes offence of Money laundering. The property must clarify the definition of “proceeds of crime” under Section 2(1)(u) of the PMLA Act 2002. Such properties which clarify the definition “proceeds of crime” under Section 2(1)(u) will necessarily be criminal properties. With the aid of observation in Paragraph ‘19’ of the said judgment, it was argued that Money laundering poses a serious threat not only to the financial systems of the countries but also their integrity and sovereignty. 20.
Such properties which clarify the definition “proceeds of crime” under Section 2(1)(u) will necessarily be criminal properties. With the aid of observation in Paragraph ‘19’ of the said judgment, it was argued that Money laundering poses a serious threat not only to the financial systems of the countries but also their integrity and sovereignty. 20. It was, thus, vehemently argued that since the offences of allegations of Money laundering against the petitioners are related to the business of the partnership firm, the dispute pertaining to accounts of partnership firm and the conduct of the parties becomes non-arbitrable. 21. The contention is that pending ED complaint, which is sequel to the complaint filed by the respondents, prima facie offence is made out against the petitioners. Money laundering has an element of public domain. The petitioner No. 2 has absconded and has been declared a proclaimed offender under Section 82 of the Code of Criminal Procedure and the proceedings under Section 83 of the Code of Criminal Procedure are going on. 22. In view of such a serious dispute, the arbitration, which means a personal judge is appointed to decide the dispute and as the person, who is an offender of scheduled offence cannot be permitted to judge his own case, asking the arbitrator to decide the question of settlement of partnership account on dissolution of the firm, would be contrary to law. 23. In rebuttal, learned counsel for the applicant would submit that the question as to whether criminal cases registered against the petitioners would have an implication in the public domain can be examined in light of the tests laid down by the Apex Court in the case of Rashid Raza v. Sadaf Akhtar, (2019) 8 SCC 710 . Wherein, the Apex Court had examined the legality of the order of rejection of arbitration petition under Section 11 of the Act 1996, seeking appointment of an arbitrator under the Arbitration Clause in the partnership deed between the parties. The High Court therein had rejected the application on the ground that the allegations of fraud were levelled against the applicant therein and in view of the nature of dispute involving serious allegations of fraud of complicated nature, it was not a fit case to be decided in an arbitration proceedings.
The High Court therein had rejected the application on the ground that the allegations of fraud were levelled against the applicant therein and in view of the nature of dispute involving serious allegations of fraud of complicated nature, it was not a fit case to be decided in an arbitration proceedings. Further, the dispute may require voluminous evidences on the part of both the parties to come to the findings, which can be undertaken by the Civil Court of competent jurisdiction. 24. Testing the correctness of the said decision, the Apex Court has noted the law laid down in Paragraph ‘25’ in A. Ayyasamy v. A. Paramasivam, (2016) 10 SCC 386 and stated that: “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. (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.” 25.
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.” 25. It was, thus, held in Rashid Raza (supra) that the observation made in Paragraph ‘25’ in A. Ayyasamy (supra), that when the case of fraud is set out by one of the parties and on that basis, that party wants to wriggle out of the arbitration agreement, a strong and meticulous inquiry into the allegation 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 the arbitration and then alone application under Section 8 before the Court should be rejected, is to be applied on the tests laid down therein. 26. In Avitel Post Studioz Ltd. v. HSBC PI Holdings (Mauritius) Ltd. (2021) 4 SCC 713 , the Apex Court, while referring to Paragraph ‘4’ in Rashid Raza (supra), has observed in Paragraph ‘35’ as under: “35. After these judgments, it is clear that “serious allegations of fraud” arise only if either of the two tests laid down are satisfied, and not otherwise. The first test is satisfied only when it can be said that the arbitration clause or agreement itself cannot be said to exist in a clear case in which the court finds that the party against whom breach is alleged cannot be said to have entered into the agreement relating to arbitration at all. The second test can be said to have been met in cases in which allegations are made against the State or its instrumentalities of arbitrary, fraudulent, or mala fide conduct, thus necessitating the hearing of the case by a writ court in which questions are raised which are not predominantly questions arising from the contract itself or breach thereof, but questions arising in the public law domain.” 27.
The contention of the learned Senior Counsel for the petitioner is that two tests, noted above, only if satisfied, the dispute would fall within the meaning of ‘serious allegations of fraud’ and would be covered by the principles laid down in A. Ayyasamy (supra), in Paragraph ‘25’ wherein it is observed that the principles 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, the courts in public fora are better suited than a private forum of arbitration. The nature of the inquiry by the Court, thus, would be as to whether the dispute is such that it cannot be referred to arbitration even if there is an arbitration agreement between the parties. 28. Taking note of the above, this Court may note that the principles laid down in A. Ayyasamy (supra), Rashid Raza (supra) and Avitel (supra) are to the effect that a distinction is to be made between serious allegations of forgery/fabrication in support of the plea of fraud as opposed to “simple allegations.” Two tests laid down by the Apex Court in the aforesaid decisions are: (i) does this plea permeate the entire contract and above all, the agreement of arbitration, rendering it void. (ii) whether the allegations of fraud touch upon the internal affairs of the parties inter se having no implication in the public domain. Only if either of the two tests are satisfied otherwise, it can be said that the dispute giving rise to “serious allegations of fraud” would require adjudication by the Court in Public fora. 29. It may further be noted that as per the law laid down in Avitel (supra), the first test is satisfied only when it can be said that the arbitration agreement or the agreement itself cannot be said to exist in a clear case in which, the Court finds that the party, against whom, breach is alleged cannot be said to have entered into the agreement relating to arbitration at all.
Further, the second test can be said to have been met in cases in which, allegations are made against the parties or its instrumentalities of arbitrary, fraudulent or mala fide conduct, thus, necessitating the hearing of the case by a Court wherein, the questions raised are not predominantly questions arising from the contract itself or breach thereof, but questions arising in the public law domain. 30. The Apex Court, in Avitel (supra), taking note of the statement of law in Afcons Infrastructure Ltd. v. Cherian Varkey Construction Co. (P) Ltd. (2010) 8 SCC 24 ; Booz Allen & Hamilton Inc. v. SBI Home Finance Ltd. (2011) 5 SCC 532 had observed that Afcons (supra), reference to Paragraph ‘27 (iv)’ i.e. “case involving serious and specific allegations of fraud, fabrication of documents, forgery, impersonation, coercion etc.” must be understood in a series of law laid down in A. Ayyasamy (supra) and Rashid Raza (supra). The statements in Paragraph ‘27 (iv)’ in Afcons (supra) and Paragraph ‘36 (i)’ in Booz Allen (supra), involving prosecution in criminal offences, is to be seen with another perspective that the same set of facts may have civil as well as criminal consequences. 31. Referring to the decision of the Constitution Bench of the Apex Court in the case of M.S. Sheriff v. State of Madras, (1954) 1 SCC 524, the proposition that it is well settled that in a given case, civil proceedings and criminal proceedings can proceed simultaneously and the question whether civil proceedings or criminal proceedings shall be stayed, depends upon the facts and circumstances of each case, laid down in P. Swaroopa Rani v. M. Hari Narayana, (2008) 5 SCC 765 , it was noted in Paragraph ‘39’ therein [Avitel (supra)]. “39. Likewise, in P. Swaroopa Rani v. M. Hari Narayana, this Court laid down the proposition: (SCC p. 769, Para-11) “11. It is, however, well settled that in a given case, civil proceedings and criminal proceedings can proceed simultaneously. Whether civil proceedings or criminal proceedings shall be stayed depends upon the facts and circumstances of each case. (See M.S. Sheriff v. State of Madras, Iqbal Singh Marwah v. Meenakshi Marwah and ICAI v. Assn. of Chartered Certified Accountants).” 32. It was further observed in Paragraphs ‘40’ or ‘41’ and ‘42’ as under: “40. In Syed Askari Hadi Ali Augustine Imam v. State (NCT of Delhi), it was held: (SCC pp.
(See M.S. Sheriff v. State of Madras, Iqbal Singh Marwah v. Meenakshi Marwah and ICAI v. Assn. of Chartered Certified Accountants).” 32. It was further observed in Paragraphs ‘40’ or ‘41’ and ‘42’ as under: “40. In Syed Askari Hadi Ali Augustine Imam v. State (NCT of Delhi), it was held: (SCC pp. 537-538, Paras 24 & 25) “24. If primacy is to be given to a criminal proceeding, indisputably, the civil suit must be determined on its own merit, keeping in view the evidence brought before it and not in terms of the evidence brought in the criminal proceeding. The question came up for consideration in K.G. Premshanker v. State...... 25. It is, however, significant to notice that the decision of this Court in Karam Chand Ganga Prasad v. Union of India, wherein it was categorically held that the decisions of the civil courts will be binding on the criminal courts but the converse is not true, was overruled......Axiomatically, if judgment of a civil court is not binding on a criminal court, a judgment of a criminal court will certainly not be binding on a civil court.” 41. In Kishan Singh v. Gurpal Singh, the Court referred to all the relevant judgments on the subject and ultimately held thus: (SCC pp. 780-781, Paras 13-18) “13. In V.M. Shah v. State of Maharashtra, this Court has held as under: (SCC p. 770, Para 11) “11. As seen that the civil court after full-dressed trial recorded the finding that the appellant had not come into possession through the Company but had independent tenancy rights from the principal landlord and, therefore, the decree for eviction was negatived. Until that finding is duly considered by the appellate court after weighing the evidence afresh and if it so warranted reversed, the findings bind the parties. The findings, recorded by the criminal court, stand superseded by the findings recorded by the civil court. Thereby, the findings of the civil court get precedence over the findings recorded by the trial court, in particular, in summary trial for offences like Section 630. The mere pendency of the appeal does not have the effect of suspending the operation of the decree of the trial court and neither the finding of the civil court gets disturbed nor the decree becomes inoperative.” 14.
The mere pendency of the appeal does not have the effect of suspending the operation of the decree of the trial court and neither the finding of the civil court gets disturbed nor the decree becomes inoperative.” 14. The correctness of the aforesaid judgment in V.M. Shah was doubted by this Court and the case was referred to a larger Bench in K.G. Premshanker v. State. In the said case, the judgment in V.M. Shah was not approved. While deciding the case, this Court placed reliance upon the judgment of the Privy Council in King Emperor v. Khwaja Nazir Ahmad wherein it has been held as under: (SCC Online PC: IA p. 212) “.........It is conceded that the findings in a civil proceeding are not binding in a subsequent prosecution founded [upon] the same or similar allegations. Moreover, the police investigation was stopped, and it cannot be said with certainty that no more information could be obtained. But even if it were not, it is the duty of a criminal court when a prosecution for a crime takes place before it to form its own view and not to reach its conclusion by reference to any previous decision which is not binding [upon] it.” 15. In P. Swaroopa Rani v. M. Hari Narayana this Court has held as under: (SCC pp. 769-771, Paras 11, 13 & 18) “11. It is, however, well settled that in a given case, civil proceedings and criminal proceedings can proceed simultaneously. Whether civil proceedings or criminal proceedings shall be stayed depends upon the facts and circumstances of each case. *** *** *** 13. Filing of an independent criminal proceeding, although initiated in terms of some observations made by the civil court, is not barred under any statute...... *** *** *** 18. It goes without saying that the respondent shall be at liberty to take recourse to such a remedy which is available to him in law. We have interfered with the impugned order only because in law simultaneous proceedings of a civil and a criminal case are permissible.” 16. In Iqbal Singh Marwah v. Meenakshi Marwah this Court held as under: (SCC pp. 389-390, Para 32) “32.
We have interfered with the impugned order only because in law simultaneous proceedings of a civil and a criminal case are permissible.” 16. In Iqbal Singh Marwah v. Meenakshi Marwah this Court held as under: (SCC pp. 389-390, Para 32) “32. Coming to the last contention that an effort should be made to avoid conflict of findings between the civil and criminal courts, it is necessary to point out that the standard of proof required in the two proceedings is entirely different. Civil cases are decided on the basis of preponderance of evidence while in a criminal case the entire burden lies on the prosecution and proof beyond reasonable doubt has to be given. There is neither any statutory provision nor any legal principle that the findings recorded in one proceeding may be treated as final or binding in the other, as both the cases have to be decided on the basis of the evidence adduced therein.” 17. In Syed Askari Hadi Ali Augustine Imam v. State (NCT of Delhi) this Court considered all the earlier judgments on the issue and held that while deciding the case in Karam Chand, this Court failed to take note of the Constitution Bench judgment in M.S. Sheriff and, therefore, it remains per incuriam and does not lay down the correct law. A similar view has been reiterated by this Court in Vishnu Dutt Sharma v. Daya Sapra, wherein it has been held by this Court that the decision in Karam Chand stood overruled in K.G. Premshanker. 18. Thus, in view of the above, the law on the issue stands crystallised to the effect that the findings of fact recorded by the civil court do not have any bearing so far as the criminal case is concerned and vice versa. Standard of proof is different in civil and criminal cases. In civil cases it is preponderance of probabilities while in criminal cases it is proof beyond reasonable doubt. There is neither any statutory nor any legal principle that findings recorded by the court either in civil or criminal proceedings shall be binding between the same parties while dealing with the same subject-matter and both the cases have to be decided on the basis of the evidence adduced therein.
There is neither any statutory nor any legal principle that findings recorded by the court either in civil or criminal proceedings shall be binding between the same parties while dealing with the same subject-matter and both the cases have to be decided on the basis of the evidence adduced therein. However, there may be cases where the provisions of Sections 41 to 43 of the Evidence Act, 1872, dealing with the relevance of previous judgments in subsequent cases may be taken into consideration.” 42. To complete the review of case law on the subject, we may finally refer to Guru Granth Saheb Sthan Meerghat Vanaras v. Ved Prakash, wherein this Court, after referring to the previous case law on the subject held as follows: (SCC pp. 628-629, Paras 17-18) “17. In K.G. Premshanker the effect of the above provisions (Sections 40 to 43 of the Evidence Act) has been broadly noted thus: (SCC p. 97, Para 30) “30........ (4) if the criminal case and civil proceedings are for the same cause, judgment of the civil court would be relevant if conditions of any of Sections 40 to 43 are satisfied, but it cannot be said that the same would be conclusive except as provided in Section 41. Section 41 provides which judgment would be conclusive proof of what is stated therein.” Moreover, the judgment, order or decree passed in previous civil proceedings, if relevant, as provided under Sections 40 and 42 or other provisions of the Evidence Act then in each case the court has to decide to what extent it is binding or conclusive with regard to the matters decided therein. In each and every case the first question which would require consideration is, whether the judgment, order or decree is relevant; if relevant, its effect. This would depend upon the facts of each case. 18. In light of the above legal position, it may be immediately observed that the High Court was not at all justified in staying the proceedings in the civil suit till the decision of criminal case. Firstly, because even if there is a possibility of conflicting decisions in the civil and criminal courts, such an eventuality cannot be taken as a relevant consideration.
Firstly, because even if there is a possibility of conflicting decisions in the civil and criminal courts, such an eventuality cannot be taken as a relevant consideration. Secondly, in the facts of the present case there is no likelihood of any embarrassment to the defendants (Respondents 1 to 4 herein) as they had already filed the written statement in the civil suit and based on the pleadings of the parties the issues have been framed. In this view of the matter, the outcome and/or findings that may be arrived at by the civil court will not at all prejudice the defences of Respondents 1 to 4 in the criminal proceedings.” 33. It was further held in Paragraph ‘43’ that: 43. In the light of the aforesaid judgments, Para 27(vi) of Afcons Para 36(i ) of Booz Allen, must now be read subject to the rider that the same set of facts may lead to civil and criminal proceedings and if it is clear that a civil dispute involves questions of fraud, misrepresentation, etc. which can be the subject-matter of such proceeding under Section 17 of the Contract Act, and/or the tort of deceit, the mere fact that criminal proceedings can or have been instituted in respect of the same subject matter would not lead to the conclusion that a dispute which is otherwise arbitrable, ceases to be so. 34. While taking note of Section 17, it was held in Paragraphs ‘46’ and ‘47’ in Avitel (supra) as under: “46. It has been held by the Bombay High Court in Fazal D. Allana v. Mangaldas M. Pakvasa, that Section 17 of the Contract Act only applies if the contract itself is obtained by fraud or cheating. However, a distinction is made between a contract being obtained by fraud and performance of a contract (which is perfectly valid) being vitiated by fraud or cheating. The latter would fall outside Section 17 of the Contract Act, in which the remedy for damages would be available, but not the remedy for treating the contract itself as being void (See pp. 311-312). This is for the reason that the words “with intent to deceive another party thereto or his agent” must be read with the words “or to induce him to enter into the contract”, both sets of expressions speaking in relation to the formation of the contract itself.
311-312). This is for the reason that the words “with intent to deceive another party thereto or his agent” must be read with the words “or to induce him to enter into the contract”, both sets of expressions speaking in relation to the formation of the contract itself. This is further made clear by Sections 10, 14 and 19, which have already been referred to hereinabove, all of which deal with “fraud” at the stage of entering into the contract. Even Section 17(5) which speaks of “any such act or omission as the law specially deals to be fraudulent” must mean such act or omission under such law at the stage of entering into the contract. Thus, fraud that is practised outside of Section 17 of the Contract Act i.e. in the performance of the contract, may be governed by the tort of deceit, which would lead to damages, but not rescission of the contract itself. 47. Both kinds of fraud are subsumed within the expression “fraud” when it comes to arbitrability of an agreement which contains an arbitration clause.” 35. From the statement of law made in the above decisions of the Apex Court, it can be culled out that even in a case where criminal proceedings are going on, civil proceedings can proceed simultaneously. Indisputably, the civil proceedings must be determined on its own merit keeping in view the evidence brought before it and not in terms of the evidence brought in the criminal proceedings. 36. It was, thus, held in Avitel (supra) that subject to the rigor that the same set of facts may lead to civil and criminal proceedings and if it is clear that the civil disputes involve question of fraud, misrepresentation etc. which can be subject matter of said proceedings under Section 17 of the Contract Act 1872 and/or the tort of deceit, the mere fact that a criminal proceedings have been instituted in respect of the same subject matter cannot be lead to the question that the dispute, which is otherwise arbitrable ceases to be so. 37. It was noted that Section 17 of the Contract Act only applied if the contract itself is obtained by fraud or cheating. Further, distinction is made between the contract being obtained by fraud and performance of contract (which is perfectly valid) being vitiated by fraud or cheating.
37. It was noted that Section 17 of the Contract Act only applied if the contract itself is obtained by fraud or cheating. Further, distinction is made between the contract being obtained by fraud and performance of contract (which is perfectly valid) being vitiated by fraud or cheating. The latter would fall outside Section 17 of the Contract Act 1872, in which, the remedy for damages would be available, but not the remedy for treating the contract itself as being void. 38. Thus, fraud that is practiced outside of Section 17 of the Contract Act, i.e. in the performance of the contract, may be governed by the tort of deceit, which would lead to damages, but not recession of the contract itself. Both kinds of fraud, however, are subsumed within the expression “fraud” when it comes to arbitrability of an agreement, which contains an arbitration clause. 39. In light of the above, further question before this Court is as to whether all these issues pertaining to arbitrability or non-arbitrability of the dispute between the parties can be decided at this stage, which is pre-reference stage under Section 11 of the Act 1996. 40. The question about arbitrability was referred and answered by the Bench of three Judges in Vidhya Drolia Vs. Durga Trading Corporation, (2021) 2 SCC 1 wherein it has been held that the scope of judicial review and the jurisdiction of the Court under Section 11 of the Act 1996 is extremely limited and restricted. On the principle of kompetenz - kompetenz, the arbitral tribunal is the preferred first authority to determine and decide all questions of non-arbitrability. The Court has been conferred power of “second look” on the aspect of non-arbitrability post the award in terms of Sub-Clause (i), (ii), or (iv) of Section 34 (2)(1)(a) or Sub-Clause (i) of Section 34 (2) (b) of the Act 1996. Rarely as a demurrer, the Court may interfere at Section 11 stage, when it is manifestly and ex facie certain that the arbitration agreement is non-existent, invalid or the disputes are non-arbitrable, though the nature of facet of non-arbitrability would, to some extent, determine the level and nature of judicial scrutiny. 41. The restricted and limited review is to check and protect parties from being forced to arbitrate when the matter is demonstrably “non-arbitrable” and to cut off the dead wood.
41. The restricted and limited review is to check and protect parties from being forced to arbitrate when the matter is demonstrably “non-arbitrable” and to cut off the dead wood. However, Section 11 is not the stage for the court to enter into the mini-trial or elaborate review so as to usurp the jurisdiction of the arbitral tribunal but to form and uphold integrity and efficacy of arbitration as an alternative dispute resolution mechanism. 42. The Constitution Bench in Re: Interplay Between Arbitration Agreements under A&C Act, 1996 & Stamp Act, 1899 [2023 SCC Online SC 1666] while dealing with the question whether arbitration agreements would be non-existent, unenforceable or invalid if the underlying contract is unstamped or inadequately stamped, has exhaustively dealt with the aspect of judicial interference in the Arbitration Act 1996. 43. It was noted in Paragraph ‘144’ therein that when parties enter into agreement, it is their mutual and unequivocal intention to submit their disputes to an arbitral tribunal. The arbitration law recognizes party autonomy to adopt procedural mechanism in the appointment of arbitrators. Article 11 (2) of the UNCITRAL Model of Law states that parties to an arbitration agreement are free to agree on a procedure for appointment of arbitrators and intervention of Court to seek appointment of arbitrator is often invoked as a last resort by the parties when their agreed procedure becomes unworkable. 44. The power of appointment of arbitrators is vested with the National Courts to resolve the deadlock in appointment of an arbitrator. Section 5 of the Act 1996 disallows the judicial authority from intervening unless expressly provided under Part-I. One of the major bottlenecks in the smooth functioning of the arbitral proceedings is the inability of the parties to ensure the constitution of the arbitral tribunal once the dispute has arisen. To ensure that such disagreement between the parties does not derail the arbitral proceedings, international covenants as well as national laws allow judicial authorities to assist the parties in appointing the arbitrators. 45. Section 11 of the Act 1996 deals with the appointment of arbitrator. It recognizes the autonomy of the parties to agree upon the procedure for appointment of an arbitrator or arbitrators. In the process, Section 11 is meant to give effect to the mutual intention of the parties to settle their disputes by arbitration in situation, when the parties fail to appoint an arbitrator or arbitrators.
It recognizes the autonomy of the parties to agree upon the procedure for appointment of an arbitrator or arbitrators. In the process, Section 11 is meant to give effect to the mutual intention of the parties to settle their disputes by arbitration in situation, when the parties fail to appoint an arbitrator or arbitrators. Section 11 (6) enlists three possible defects in the appointment procedure: (a) a party fails to act as required by the agreed procedure. (b) the parties, or the two appointed arbitrators, fail to reach to an agreement expected of them under that procedure. (c) a person, including an institution, fails to perform any function entrusted to him or it under the agreed procedure. 46. In the historical background of the decisions analyzing the scope of the powers and authority of the referral court under Section 11 (6), it has been noted in Interplay (supra) that the decisions in SBP & Co. v. Patel Engg. Ltd. (2005) 8 SCC 618 and National Insurance Co. Ltd. v. Boghara Polyfab (P) Ltd. (2009) 1 SCC 267 allowed for greater judicial interference at the pre-arbitral stage. [Reference may be taken to the decisions of the Apex Court in the cases of SBP & Co. v. Patel Engg. Ltd. (2005) 8 SCC 618 and National Insurance Co. Ltd. v. Boghara Polyfab (P) Ltd. (2009) 1 SCC 267 ]. In a fact, Referral Courts were encouraged to conduct mini-trials instead of summarily deal with the preliminary issues. The Law Commission recognizes that a judicial intervention in the arbitral proceedings is a pervasive problem in India leading to significant delays in the arbitration process. Section 11 applications were kept pending for years by the Courts. 47. To remedy the situation, the Law Commission proposes changes in the then existing scheme of power of appointment being vested in the “Chief Justice of the High Court” and the “Supreme Court.” It also clarifies that the power of appointment of arbitrators ought not to be recorded as a judicial act. It was observed significantly by the Law Commission that there was a need to reduce judicial intervention at the pre-arbitral stage, i.e. prior to the constitution of the arbitral tribunal. 48.
It was observed significantly by the Law Commission that there was a need to reduce judicial intervention at the pre-arbitral stage, i.e. prior to the constitution of the arbitral tribunal. 48. In light of the recommendations of the Law Commission, Parliament passed the Arbitration and Conciliation (Amendment) Act 2015 (Act 3 of 2016) to incorporate Section 11 (6A) with effect from 23.10.2015, which reads as under: “(6A) 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.” 49. With the coming into force of the 2015 Amendment Act with effect from 23.10.2015, the nature of preliminary explanation at the pre-referral stage under Section 11 was confined to the existence of an arbitration agreement. It also incorporates a non-obstante clause, which covers “any judgment, decree or order of any Court.” By virtue of the non-obstante clause, Section 11 (6A) takes away the basis of the position laid down by the previous decisions of the Apex Court in SBP & Co. (supra) and National Insurance Co. Ltd. (supra) 50. The effect and impact of the 2015 Amendment Act was subsequently clarified by the Apex Court in Duro Felguera, S.A. vs. Gangavaram Port Ltd. (2017) 9 SCC 729 , wherein it was noted that the intention of the legislature in incorporating Section 11 (6A) was to limit the scope of enquiry at the Prereferral stage under an arbitration agreement. Paragraph ‘15’ in Duro Felguera (supra), has been noted in Re.Interplay (supra), at Paragraph ‘156’ in the following manner: “156........This Court further held that Section 11(6-A) incorporates the principle of minimal judicial intervention: (SCC p. 765, Para 59) “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. and Boghara Polyfab. 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.” 51.
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.” 51. Further, it was noted that though the Arbitration and Conciliation (Amendment) Act 2019 (Act 33 of 2019) provides for omission of Section 11 (6A) but since it provided that the amended provisions shall come into force on such date as notified by the Central Government in the Official Gazette, and the amendment is yet to be notified, Section 11 (6A) will continue to operate. 52. Referring to Mayavati Trading (P) Ltd. v. Pradyuat Deb Burman, (2019) 8 SCC 714 , it was noted in Paragraph ‘158’ in Re: Interplay (supra) as under: “158. In Mayavati Trading (P) Ltd. v. Pradyuat Deb Burman, a three-Judge Bench of this Court affirmed the reasoning in Duro Felguera by observing that the examination under Section 11(6-A) is “confined to the examination of the existence of an arbitration agreement and is to be understood in the narrow sense.” Moreover, it held that the position of law prior to the 2015 Amendment Act, as set forth by the decisions of this Court in Patel Engg. and Boghara Polyfab, has been legislatively overruled. Thus, this Court gave effect to the intention of the legislature in minimising the role of the Courts at the pre-arbitral stage to the bare minimum.” 53. It was further noted that in Vidhya Drolia (supra), the Bench of three judges of the Apex Court had affirmed the ratio in Mayavati Trading (P) Ltd. (supra) and SBP & Co. (supra) has been legislatively overruled. In Vidhya Drolia (supra), while deciding the issue whether the Court, at the reference stage or the arbitral tribunal in the arbitration proceedings, would decide the question of non-arbitrability, the Apex Court interpreted the word “existence” as apparent in Section 11. It was held that “existence” and “validity” are inter-twined. It was observed in Vidhya Drolia (supra) that the arbitration agreement does not exist if it is illegal and does not satisfy mandatory legal requirements and is proceeded on the presumption that Subsection (6A) has been omitted by the Act 33 of 2019. 54.
It was held that “existence” and “validity” are inter-twined. It was observed in Vidhya Drolia (supra) that the arbitration agreement does not exist if it is illegal and does not satisfy mandatory legal requirements and is proceeded on the presumption that Subsection (6A) has been omitted by the Act 33 of 2019. 54. It was, thus, observed and held in Re.Interplay (supra) in Paragraph ‘162’ and ‘163’ as under: “162. Vidya Drolia proceeds on the presumption that Section 11(6-A) was effectively omitted from the statute books by the 2019 Amendment Act. This is also reflected in the conclusion arrived at by the Court, as is evident from the following extract : (SCC p. 121, Para 154) “154............. 154.1. Ratio of the decision in Patel Engg. on the scope of judicial review by the Court while deciding an application under Sections 8 or 11 of the Arbitration Act, post the amendments by Act 3 of 2016 (with retrospective effect from 23-10-2015) and even post the amendments vide Act 33 of 2019 (with effect from 9-8-2019), is no longer applicable.” 163. We are of the opinion that the above premise of the Court in Vidya Drolia v. Durga Trading Corporation, (2021) 2 SCC 1 : (2021) 1 SCC (Civ) 549 is erroneous because the omission of Section 11(6-A) has not been notified and, therefore, the said provision continues to remain in full force. Since Section 11(6-A) continues to remain in force, pending the notification of the Central Government, it is incumbent upon this Court to give true effect to the legislative intent.” 55. The Apex Court in Re: Interplay (supra) has noted the different parameters on the scope of judicial review under Sections 8 and 11 of the Act 1996 and observed that where Section 8 requires the referrel Court to look into the prima facie existence of valid arbitration agreement, Section 11 confines the Court’s jurisdiction to the explanation on the “existence of arbitration agreement.” Though the objects and purpose is to ensure that parties abide by their contractual understanding, but the scope of power of the Referral Courts under the said provisions is intended to be different. This is also evident from the fact that Section 37 of the Act 1996 allows an appeal from the order of an arbitral tribunal refusing to refer the parties to the arbitration under Section 8, but not under Section 11.
This is also evident from the fact that Section 37 of the Act 1996 allows an appeal from the order of an arbitral tribunal refusing to refer the parties to the arbitration under Section 8, but not under Section 11. About the scope of reference under Section 11 (6A), it was observed in Paragraphs ‘165’ and ‘166’ as under: “165. The legislature confined the scope of reference under Section 11(6-A) to the examination of the existence of an arbitration agreement. The use of the term “examination” in itself connotes that the scope of the power is limited to a prima facie determination. Since the Arbitration Act is a self-contained code, the requirement of “existence” of an arbitration agreement draws effect from Section 7 of the Arbitration Act. In Duro Felguera, this Court held that the Referral Courts only need to consider one aspect to determine the existence of an arbitration agreement - whether the underlying contract contains an arbitration agreement which provides for arbitration pertaining to the disputes which have arisen between the parties to the agreement. Therefore, the scope of examination under Section 11(6-A) should be confined to the existence of an arbitration agreement on the basis of Section 7. Similarly, the validity of an arbitration agreement, in view of Section 7, should be restricted to the requirement of formal validity such as the requirement that the agreement be in writing. This interpretation also gives true effect to the doctrine of competence-competence by leaving the issue of substantive existence and validity of an arbitration agreement to be decided by Arbitral Tribunal under Section 16. We accordingly clarify the position of law laid down in Vidya Drolia in the context of Section 8 and Section 11 of the Arbitration Act. 166. The burden of proving the existence of arbitration agreement generally lies on the party seeking to rely on such agreement. In jurisdictions such as India, which accept the doctrine of competence-competence, only prima facie proof of the existence of an arbitration agreement must be adduced before the Referral Court. The Referral Court is not the appropriate forum to conduct a mini-trial by allowing the parties to adduce the evidence in regard to the existence or validity of an arbitration agreement. The determination of the existence and validity of an arbitration agreement on the basis of evidence ought to be left to the Arbitral Tribunal.
The Referral Court is not the appropriate forum to conduct a mini-trial by allowing the parties to adduce the evidence in regard to the existence or validity of an arbitration agreement. The determination of the existence and validity of an arbitration agreement on the basis of evidence ought to be left to the Arbitral Tribunal. This position of law can also be gauged from the plain language of the statute.” 56. It was observed, thus, that: “167. Section 11(6-A) uses the expression “examination of the existence of an arbitration agreement.” The purport of using the word “examination” connotes that the legislature intends that the Referral Court has to inspect or scrutinise the dealings between the parties for the existence of an arbitration agreement. Moreover, the expression “examination” does not connote or imply a laborious or contested inquiry. On the other hand, Section 16 provides that the Arbitral Tribunal can “rule” on its jurisdiction, including the existence and validity of an arbitration agreement. A “ruling” connotes adjudication of disputes after admitting evidence from the parties. Therefore, it is evident that the Referral Court is only required to examine the existence of arbitration agreements, whereas the Arbitral Tribunal ought to rule on its jurisdiction, including the issues pertaining to the existence and validity of an arbitration agreement. A similar view was adopted by this Court in Shin-Etsu Chemical Co. Ltd. v. Aksh Optifibre Ltd.” 57. Reading and understanding the statement of law in Re: Interplay (supra) exhaustively, makes it clear that the word “examine” occurring in Section 11 (6A) intends that the Referral Court has to make a scrutiny for the existence of the arbitration agreement and the said expression does not employ the contested inquiry. The Referral Court is only required to examine the existence of arbitration agreement, whereas the arbitral tribunal shall have competence to look on its jurisdiction, including the issues pertaining to existence and validity of an arbitration agreement. If a prima facie view as to the existence of an agreement is taken by the Referral Court, it is still allowing arbitral tribunal to examine the issue in depth. Such a legal approach will help the Referral Court in weeding out prima facie nonexistent of the arbitration agreement. It will also protect the jurisdictional competence of the arbitral tribunals to decide all issues pertaining to the existence and validity of the arbitration agreement. 58.
Such a legal approach will help the Referral Court in weeding out prima facie nonexistent of the arbitration agreement. It will also protect the jurisdictional competence of the arbitral tribunals to decide all issues pertaining to the existence and validity of the arbitration agreement. 58. Consequently, the issues raised in the present petition about non-arbitrability of the dispute or whether the fraud alleged permeates the whole arbitration agreement making it impossible for the arbitral tribunal to adjudicate the dispute, in the considered opinion of the Court, are outside the limited scope of inquiry at the pre-referral stage under Section 11 (6) of the Act 1996. 59. In view of the above, all objections of the learned Senior Counsel for the respondent on the question of reference are liable to be rejected. The arbitration application is hereby allowed. 60. Hence, I pass the following: ORDER: (i) Petition is allowed. (ii) Hon’ble Mr. Justice Akil Kureshi, (Former Chief Justice, High Court of Rajasthan), having address at Akil Villa, Opposite B-9 Swastik Society, Navarangpura, Ahmedabad- 380009 and having contact numbers 9408481511 and 9825049099 Email ID: akil.kureshi@gmail.com is hereby appointed as the sole Arbitrator to resolve the disputes between the parties in accordance with the Arbitration Centre (Domestic and International), High Court of Gujarat Rules, 2021. Both Parties would also be governed by said Rules. (iii) Registry to communicate this order to the sole Arbitrator forthwith by Speed Post. (iv) Pending applications, if any, stands consigned to records.