For several years, fraud was seen as a blanket exception to the arbitrability of a dispute. However, this position has changed in recent times, and disputes involving allegations of fraud are being held to be arbitrable. The Supreme Court has recently rendered a judgment in Deccan Paper Mills Co. Ltd. v. Regency Mahavir Properties & Ors.1 that delves deep into the question of arbitrability of disputes involving allegations of fraud orchestrated in the execution of an agreement, and also the question of whether proceedings under Section 31 of the Specific Relief Act, 1963 ("Specific Relief Act") would be treated as proceedings in personam, or proceedings in rem.
By an agreement dated 22.07.2004 between Deccan Paper Mills Co. Ltd. ("Deccan") and Ashray Premises Pvt. Ltd. ("Ashray") entered into an agreement to develop a portion of land owned by Deccan ("Agreement"). At Clause 7(m) of this Agreement, the parties agreed that Deccan would have no objection if Ashray assigns or delegates the rights, or the Power of Attorney/writings executed in furtherance to the Agreement to any other person, firm or party without violating or disturbing any of the terms and conditions of the Agreement, at any stage during the continuance of the Agreement.
Pursuant to clause 7(m), Ashray entered into an agreement with Regency Mahavir Properties ("Regency"), a partnership firm, by which Ashray assigned the execution of the Agreement to Regency ("Regency Agreement"). Although the Agreement itself did not contain an arbitration clause, the Regency Agreement contained an arbitration clause. Thereafter, on 13 July 2006, a deed of confirmation had followed to confirm the terms of the Regency Agreement, which was signed by one Mr. Atul Chordia as an authorised partner of Regency ("Deed").
The Directors of Deccan had agreed to this assignment on the basis of assurances given by Mr. Atul Chordia, who had as later discovered by Deccan, orchestrated this whole transaction fraudulently. Shortly after the assignment of development work by Ashray to Regency, Mr. Atul Chordia had opted to retire with effect from 30 May 2006, i.e., before he fraudulently signed the Deed as an authorised partner of Regency. Upon discovering the alleged fraud orchestrated by Regency in collusion with Ashray and Mr. Atul Chordia, Deccan informed Ashray that the Regency Agreement and Deed are not binding upon it and filed a suit for declaration prayer inter alia for a declaration that the Regency Agreement and Deed are illegal, null, void and not binding upon Deccan and for cancellation of the Agreement, Regency Agreement as well as the Deed.
Immediately thereafter, Regency filed an application under Section 8 of the Arbitration and Conciliation Act, 1996 ("Arbitration Act"), setting out the arbitration clause in the Regency Agreement and seeking reference of the dispute to arbitration, which was allowed. Deccan challenged this reference by way of a writ petition before the High Court of Bombay, which was dismissed. In view of the above, Deccan preferred this appeal before the Supreme Court.
Arguments of Deccan
Deccan disputed this reference on the ground that the dispute involved serious allegations of fraud, which are not arbitrable and the arbitrator's jurisdiction gets ousted. Deccan had also argued that only a court could, enforce specific performance of an agreement under the Specific Relief Act, and not an arbitral tribunal. Moreover, the suit prayed for cancellation of the Agreement as well, which did not contain any arbitration clause and could therefore not be referred to arbitration. Doing so would make resolution of this dispute a piece-meal affair. Lastly, Deccan contended that the present dispute would be a proceeding in rem under Section 31 of the Specific Relief Act since it was for cancellation of written instruments. This being so, the present dispute would fall under one of the exceptions set out in Booz Allen & Hamilton Inc. v. SBI Home Finance Ltd.2
Findings of the Supreme Court
The "fraud exception"
The Supreme Court reiterated its holding in Avitel Post Studioz Limited & Ors. v. HSBC PI Holding (Mauritius) Ltd. ("Avitel"),3 wherein it laid down the law on invocation of the "fraud exception". The Avitel judgment clarified that if the subject matter of an agreement between parties falls within Section 17 of the Indian Contract Act, 1872 ("Contract Act"), or involves fraud in the performance of the contract, which would amount to deceit, being a civil wrong, the subject matter of such agreement would certainly be arbitrable. Moreover, the Supreme Court in Avitel has also held that merely because a particular transaction may have criminal overtones as well, does not mean that its subject matter becomes non-arbitrable. The Supreme Court also observed that there was no averment in the present matter, that the Regency Agreement and the Deed were not entered into at all, as a result of which the arbitration clause would be non-existent, and also that the suit is one that is inter parties with no "public overtones", as a result of which the "fraud exception" would not apply to the facts of this case.
Proceedings "in personam", or "in rem"?
As regards Deccan's argument that the suit would be a proceeding in rem, the Supreme Court opined that a reading of Section 31(1) of the Specific Relief Act makes it apparent that when a written instrument is adjudged void or voidable, a court may order it to be delivered up to the plaintiff and cancelled - in exactly the same way as a suit for rescission of a contract under Section 29 of the Specific Relief Act. Therefore, the Supreme Court concluded that the action under Section 31(1) is strictly an action inter-parties or by persons who obtained derivative title from the parties, and is thus in personam. The Supreme Court also clarified that an action that is started under Section 31(1) of the Specific Relief Act cannot be said to be in personam when an unregistered instrument is cancelled and in rem when a registered instrument is cancelled, and that the factum of registration of what is otherwise a private document inter-parties does not clothe the document with any higher legal status by virtue of its registration. The Supreme Court also analysed a plethora of judgments to conclude that a judgment rendered under Section 31 of the Specific Relief Act binds only the parties to the suit, and not all persons claiming an interest in the property.
While dealing with this argument, the Supreme Court reiterated the reasoning in Olympus Superstructures v. Meena Vijay Khetan,4 stating that "the dispute or difference which parties to an arbitration agreement agree to refer must consist of justiciable issues triable civilly". Since specific performance is a justiciable issue triable civilly, the expression "court" occurring throughout the Specific Relief Act will have to be substituted by "arbitrator" or "arbitral tribunal", when the context necessitates the same.5 An arbitrator or arbitral tribunal may also, therefore, enforce specific performance of an agreement where it is necessary.
The threshold for a dispute to qualify under the "fraud exception" for non-arbitrability has been set quite high by the Supreme Court, and the mere existence of criminal overtones in an otherwise commercial transaction would not automatically make a dispute incapable of being subject to arbitration. The Supreme Court has also conclusively addressed the confusion created by several High Court judgments that have adopted varying approaches to the question of whether a suit under Section 31 of the Specific Relief Act would be treated as proceedings in personam, or proceedings in rem. Further, after discussing the numerous anomalies that would present themselves if proceedings under Section 31 of the Specific Relief Act were treated as proceedings in rem, the Supreme Court has concluded once and for all that such proceedings would most definitely be proceedings in personam and binding only upon the parties to the suit.
1. Deccan Paper Mills Co. Ltd. v. Regency Mahavir Properties & Ors. Civil Appeal No. 5147 of 2016.
2. Booz Allen & Hamilton Inc. v. SBI Home Finance Ltd., (2011) 3 SCC 532.
3. Avitel Post Studioz Limited & Ors. v. HSBC PI Holding (Mauritius) Ltd. 2020 SCC OnLineSC 656.
4. Olympus Superstructures v. Meena Vijay Khetan, (1999) 5 SCC 651.
5. The judgment of Aliens Developers Pvt. Ltd. v. M. Janardhan Reddy, (2016) 1 ALT 194 (DB) has been set aside by the Supreme Court, to the extent that it contradicts this position set out in Olympus Superstructures (supra).
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