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Friday, August 26, 2011

“Where the arbitration agreement between the parties is denied by the respondent, whether the Chief Justice or his designate, in exercise of power under section 11 of the Act, can appoint an arbitrator without deciding the question whether there was an arbitration agreement between the parties, leaving it open to be decided by the arbitrator?”


                                                                  Reportable

                  IN THE SUPREME COURT OF INDIA


                   CIVIL APPELLATE JURISDICTION


                     CIVIL APPEAL NO.7334 OF 2011

                  [Arising out of SLP [C] No.15286/2011]




Bharat Rasiklal Ashra                                     ... Appellant


Vs.


Gautam Rasiklal Ashra & Anr.                              ... Respondents





                                J U D G M E N T




R.V.RAVEENDRAN, J.




       Leave granted. Heard.




2.     The appellant and first respondent are brothers. A deed of partnership


dated 12.6.1988 was entered among Mr. Kanji Pitamber Ashra and his two


grandsons (appellant and first respondent) to carry on the business under the


name and style of M/s. Kanji Pitamber & Co., their shares being 40%, 30%


and 30% respectively. Clause 10 provided that death of any partner shall not


dissolve the partnership firm as to the surviving partners. Clause 11 of the


                                               2




said agreement provided that all disputes between the partners regarding the


rights and liabilities of partners or in regard to the transactions or accounts of


the partnership shall be referred to arbitration.





3.        The   appellant   is   permanent   resident   of   United   States   of   America.


Kanji   Pitamber   Ashra   died   on   4.9.1991.   According   to   appellant,   the


appellant and first respondent continued the business of M/s. Kanji Pitamber


&   Co.,   (second   respondent   firm),   by   increasing   their   profit   and   loss   ratio


from 30% to 50% each. The appellant alleges that in or about 2008 he came


to know that the first respondent was claiming that fresh partnership deeds


were   executed   by   the   parties   on   6.9.1991   and   19.5.2000.   The   appellant


claims   that   he   did   not   execute   any   such   deeds.   He   claims   that   the   firm's


bankers   by   their   letter   dated   7.7.2008   have   confirmed   that   the   only


partnership deed of the firm held by them was the deed dated 12.6.1988. He


also claims that the first respondent, as partner of the second respondent firm


had   sent   a   letter   dated   1.7.2008   to   the   Foreign   Exchange   Brokers


Association   of   India   (of   which   the   second   respondent   is   a   member)


confirming that the appellant  and first respondent were the partners as per


the  deed   dated  12.6.1988  and  there   was  no  change  in  the  said   partnership


deed.


                                              3




4.      According to the first respondent, immediately after the death of their


grandfather,   a   fresh  partnership   deed   was  executed   on   6.9.1991   and   again


another   deed   was   executed   on   19.5.2000   by   the   appellant   and   first


respondent; that under deed dated 6.9.1991, the share of the appellant was


reduced from 50% to 25% and under the deed dated 19.5.2000, the share of


the appellant was reduced from 25% to 10% with a further condition that if


the appellant did not attend to the business on account of his commitments


elsewhere, the entire profit and loss of the business shall belong to or borne


by the first respondent. The first respondent by letter dated 19.8.2010 stated


that the shares of appellant and first respondent in the firm were 10% and


90% respectively; that the appellant had abandoned his interest in the firm


and showed no inclination to participate in its business; that several issues


relating  to  the firm  had  arisen;  and  that  it  was necessary  to sort  out those


disputes   by   arbitration.   The   first   respondent   therefore   appointed   his


arbitrator   and   called   upon   the   appellant   to   appoint   his   arbitrator.   The


appellant   sent   a   reply   dated   7.9.2010   stating   that   he   had   not   signed   the


partnership deeds dated 6.9.1991 or 19.5.2010 and the said documents were


forged documents and not binding and therefore the question of appointing


an arbitrator in terms of the said documents did not arise.


                                              4




5.     The   first   respondent   filed   an   application   under   section   11   of   the


Arbitration   and   Conciliation   Act,   1996   (`Act'   for   short)   alleging   that


disputes   had   arisen   between   appellant   and   first   respondent,   who   were   the


partners of the second respondent firm governed by partnership deed dated


19.5.2000; and that clause 12 thereof provided for settlement of disputes by


arbitration.   He   therefore   prayed   that   the   person   named  in   his   notice   dated


19.8.2010, as his arbitrator, be appointed as the sole arbitrator in terms of the


arbitration agreement contained in the partnership deed dated 19.5.2000. The


appellant resisted the said petition by filing detailed objections denying the


existence   of   the   partnership   deeds   dated   6.9.1991   and   19.5.2000.   The


appellant   asserted   that   they   were   governed   by   the   partnership   deed   dated


12.6.1988 and therefore question of appointment of arbitrator in terms of the


arbitration clause contained in the alleged partnership deed dated 19.5.2000


did not arise.





6.     The   learned   designate   of   the   Chief   Justice   made   an   order   dated


11.2.2011   for   appointing   a   Commissioner   for   recording   the   evidence   of


parties   as   it   was   necessary   to   decide   whether   said   two   partnership   deeds


dated 6.9.1991 and 19.5.2000 were valid or not, before a reference could be


made in terms of an arbitration clause contained in the deed dated 19.5.2000.


However,   when   the   application   subsequently   came   up   for   hearing   before


                                              5




another   designate   of   the   Chief   Justice,   the   earlier   order   for   recording


evidence was ignored and by order dated 31.3.2011, the application under


section   11   of   the   Act   was   allowed   and   Mr.   Ketan   Parekh,   Advocate,   was


appointed as arbitrator. The learned designate held that a dispute raised by


Vijayaben Kanji Ashra, grandmother of the parties, claiming a share in the


second respondent firm as the legal heir of Kanji Pitamber Ashra, was the


subject matter  of an application  under section 11 of the Act in Arbitration


Application No.161/2010 and in that petition, by consent of  all parties, Mr.


Ketan Parekh had already been appointed as arbitrator; and that therefore, it


will  be appropriate to appoint the said Mr. Ketan Parekh  as the Arbitrator


and leave open the question whether the two subsequent partnership deeds


had been executed by the appellant or not, for the decision of the arbitrator.





7.      The   said   order   is   challenged   in   this   appeal   by   special   leave.   The


appellant   submitted   that   this   Court   has   repeatedly   held   that   the   the   Chief


Justice or his designate will have to decide the issue relating to the existence


of an arbitration agreement before referring the dispute between the parties;


and   that   where   serious   questions   of   fraud,   forgery   and   fabrication   of


documents have been made out, the Chief Justice or his designate should not


appoint an arbitrator. Learned counsel for the appellant made it clear that if


the first respondent wanted appointment of an arbitrator as per the arbitration


                                                  6




clause   contained   in   the   partnership   deed   dated   12.6.1988   and   wanted   the


disputes to be resolved in terms of the said partnership deed, the appellant


would not have any objection for appointment of an arbitrator. He submitted


that appellant's objection was to appoint an arbitrator under clause 12 of a


forged   and   fabricated   deed   dated   19.5.2000   execution   of   which   had   been


denied by him. Therefore, the following question arises for consideration in


this appeal:




       "Where   the   arbitration   agreement   between   the   parties   is   denied   by   the

       respondent,   whether   the   Chief   Justice   or   his   designate,   in   exercise   of

       power   under   section   11   of   the   Act,   can   appoint   an   arbitrator   without

       deciding the question whether there was an arbitration agreement between

       the parties, leaving it open to be decided by the arbitrator?"





8.     The question is covered by the decisions of this Court in S.B.P. & Co.


vs. Patel Engineering Ltd. [2005 (8) SCC 618] and National Insurance Co.


Ltd. vs. Boghara Polyfab Pvt. Ltd. [2009 (1) SCC 267]. In  S.B.P.& Co.,  a


Constitution Bench of this court held that when an application under section


11 of the Act is filed, it is for the Chief Justice or his designate to decide


whether there is an arbitration agreement, as defined in the Act and whether


the   party   who   has   made   a   request   before   him,   is   a   party   to   such   an


agreement. The said decision also made it clear as to which issues could be


left to the decision of the arbitrator. Following the decision in S.B.P. & Co.,


this court in National Insurance Co. Ltd.  held as follows :


                                                     7




      "17.     Where the intervention of the court is sought for appointment of an

      Arbitral   Tribunal   under   section   11,   the   duty   of   the   Chief   Justice   or   his

      designate is defined in SBP & Co. This Court identified and segregated the

      preliminary issues that may arise for consideration in an application under

      section   11   of   the   Act   into   three   categories,   that   is   (i)   issues   which   the

      Chief Justice or his Designate is bound to decide; (ii) issues which he can

      also decide, that is issues which he may choose to decide; and (iii) issues

      which should be left to the Arbitral Tribunal to decide.


      17.1)    The  issues   (first  category)   which   Chief  Justice/his   designate   will

               have to decide are:


      (a)      Whether   the   party   making   the   application   has   approached   the

               appropriate High Court.


      (b)      Whether there is an arbitration agreement and whether the party

               who has applied under section 11 of the Act, is a party to such an

               agreement.




      17.2)    The issues (second category) which the Chief Justice/his designate

               may choose to decide (or leave them to the decision of the arbitral

               tribunal) are:


      (a)      Whether the claim is a dead (long barred) claim or a live claim.


      (b)      Whether   the   parties   have   concluded   the   contract/   transaction   by

               recording   satisfaction   of  their   mutual   rights   and   obligation   or  by

               receiving the final payment without objection.




      17.3)    The   issues   (third   category)   which   the   Chief   Justice/his   designate

               should leave exclusively  to the arbitral tribunal are :



      (i)      Whether   a   claim   made   falls   within   the   arbitration   clause   (as   for

               example,   a   matter   which   is   reserved   for   final   decision   of   a

               departmental authority and excepted or excluded from arbitration).


      (ii)     Merits or any claim involved in the arbitration."


                                                                              (emphasis supplied)




9.    It is clear from the said two decisions that the question whether there


is an arbitration agreement has to be decided only by the Chief Justice or his


                                               8




designate and should not be left to the decision of the arbitral tribunal. This


is   because   the   question   whether   there   is   arbitration   agreement   is   a


jurisdictional   issue   and   unless   there   is   a   valid   arbitration   agreement,   the


application   under   section   11   of   the   Act   will   not   be   maintainable   and   the


Chief   Justice   or   his   designate   will   have   no   jurisdiction   to   appoint   an


arbitrator   under   section   11   of  the  Act.     This   Court  also   made   it  clear   that


only in regard to the issues shown in the second category, the Chief Justice


or his designate has the choice of either deciding them or leaving them to the


decision of the arbitral tribunal. Even in regard to the issues falling under the


second category, this court made it clear that where allegations of forgery or


fabrication are made in regard to the documents, it would be appropriate for


the Chief Justice or his designate to decide the issue. In view of this settled


position of law, the issue whether there was an arbitration agreement ought


to have been decided by the designate of the Chief Justice and only if the


finding   was   in   the   affirmative   he   could   have   proceeded   to   appoint   the


Arbitrator.




10.     Learned counsel for the first respondent submitted  that the appellant


has already agreed for the appointment of Mr. Ketan Parekh as the arbitrator


in   the   application   filed   by   their   grandmother   under   section   11   of   the   Act,


with respect to her claim for a share in the firm; and the dispute between the


                                                9




two brothers also being in regard to the extent of the shares in the firm, it


would be proper to have it decided by the same arbitrator. Disagreeing with


the   said   submission,   learned   counsel   for   the   appellant   submitted   that   his


grandmother's   claim   was   with   reference   to   the   partnership   deed   dated


12.6.1988 and as the said deed contained an arbitration  agreement, he had


agreed for appointment of an arbitrator. He submitted that merely because he


had consented for appointment of an arbitrator in regard to the deed dated


12.6.1988, and had expressed confidence in the arbitrator, it does not mean


that  he  should   agree  for  arbitration  even   where   arbitration   was  claimed   in


pursuance   of   a   provision   contained   in   a   forged   and   fabricated   document,


which was materially different from the deed dated 12.6.1988.





11.     It is well settled that an arbitrator can be appointed only if there is an


arbitration   agreement   in   regard   to   the   contract   in   question.   If   there   is   an


arbitration agreement in regard to contract A and no arbitration agreement in


regard   to   contract   B,   obviously   a   dispute   relating   to   contract   B   cannot   be


referred   to   arbitration   on   the   ground   that   contract   A   has   an   arbitration


agreement.   Therefore,   where   there   is   an   arbitration   agreement   in   the


partnership   deed   dated   12.6.1988,   but   the   dispute   is   raised   and   an


appointment of arbitrator is sought not with reference to the said partnership


deed, but with reference to another partnership deed dated 19.5.2000, unless


                                               10




the party filing the application under section 11 of the Act is able to make


out that there is a valid arbitration clause as per the contract dated 19.5.2000,


there can be no appointment of an arbitrator.




12.     The learned counsel for the first respondent next submitted that if the


Chief   Justice   or   his   designate   is   required   to   examine   the   allegations   of


fabrication and forgery made by a party in regard to the contract containing


the arbitration agreement, before appointing an arbitrator under section 11 of


the Act, the proceedings under the said section will cease to be a summary


proceedings,   and   become   cumbersome   and   protracted,   necessitating


recording   of   evidence,   thereby   defeating   the   object   of   the   Act.   In   our


considered view this apprehension has no relevance or merit. Existence of a


valid and enforceable arbitration agreement is a condition precedent before


an   arbitrator   can   be   appointed   under   section   11   of   the   Act.   When   serious


allegations of fraud and fabrication are made, it is not possible for the Court


to   proceed   to   appoint   an   arbitrator   without   deciding   the   said   issue   which


relates to the very validity  of the arbitration  agreement.  Therefore the fact


that   the   allegations   of   fraud,   forgery   and   fabrication   are   likely   to   involve


recording of evidence or involve some delay in disposal, are not grounds for


refusing to consider the existence of a valid arbitration agreement.


                                                 11




13.     The   apprehension   that   such   contentions   are   likely   to   be   raised


frequently to protract the proceedings under section 11 of the Act or to delay


the   arbitration   process,   thereby   defeating   the   purpose   of   section   11   of  the


Act is also without  basis. Where agreements  have been performed in part,


such   a   contention   will   not   be   entertained.   It   is   only   in   a   very   few   cases,


where   an   agreement   which   had   not   seen   the   light   of   the   day   is   suddenly


propounded,  or  where  the  agreement had  never been  acted  upon  or  where


sufficient circumstances exist to doubt the genuineness of the agreement, the


Chief   Justice   of   his   designate   will   examine   this   issue.   This   course   has


repeatedly held that on the ground of termination, performance or frustration


of the contract, arbitration agreement cannot be avoided. The legislature has


entrusted  the  power  of appointment   of  an arbitrator   to the  holders  of high


judicial  offices like the Chief Justice  or Judge of the Supreme  Court/High


Court, with a view that they can identify and effectively deal with false or


vexatious claims made only to protract the proceedings or defeat arbitration.


If   a   party   is   found   to   have   falsely   contended   that   the   contract   was


forged/fabricated, the Chief Justice or his designate may subject such part to


heavy costs so that such false claims are discouraged. Be that as it may.





14.     We therefore allow this appeal, set aside the order of the High Court


appointing an arbitrator and remit the matter to the High Court for deciding


                                            12




the questions whether the deed dated 19.5.2000 was forged or fabricated and


whether there is a valid and enforceable arbitration agreement between the


parties.     Nothing   stated   herein   shall   be   construed   as   expression   of   any


opinion on the merits of the case.





                                                     ...................................J.

                                                     (R V Raveendran)





New Delhi;                                           .................................J.

August 25, 2011.                                     (A K Patnaik)