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Judgment
This arbitration case has been filed under Section 11(6) of the Arbitration and Conciliation Act, 1996 for appointment of arbitrator for resolving
the dispute between the parties.
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.
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.
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.
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.
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.
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.
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.
The Supreme Court in the matter of N. Radhakishnan Vs. Maestro Engineers and others reported in 2010(1) SCC 72 in 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:-
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.
Reliance was placed by the learned counsel for the appellant on a decision of this Court in the case of Hindustan Petroleum Corpn. Ltd. vs.
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 abovementioned 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.
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 of Abdul Kadir Shamsuddin Bubere vs. Madhav Prabhakar Oak and Another,[ AIR 1962 SC 406]
in which this court under para 17 held as under:
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.
This view has been further enunciated and affirmed by this Court in the decision of Haryana Telecom Ltd. vs.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.
The learned counsel for the respondent further elaborated his contention citing the decision of the High Court of Judicature at Madras in the
case of Oomor Sait HG Vs. 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.
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........
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.