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Thursday, July 14, 2016

Lack of Proper Issues - case remanded to frame and decide the same = whether the agreement/MoU is a valid and genuine document and whether it is enforceable or not, it is the duty of the High Court to first decide such questions keeping in view the law laid down in SBP & Co. (supra), National Insurance Co. Ltd., (supra) and Bharat Rasiklal Ashra (supra) and if it is held to be a valid and genuine document then whether it is binding on the parties and depending upon the outcome of the findings on such question, appropriate orders as required under Sections 11(5) and (6) of the Act has to be passed. - In our opinion, this was sufficient for joining issue on the validity and genuineness of the MoU which was raised timely in appropriate proceedings by the appellant. = We find that the appellant in reply to the respondents’ petition filed under Section 9 of the Act has specifically denied having signed or/and executed such agreement/(MoU). He has also contended therein that it is a bogus and fabricated MoU. The appellant again in his reply to application filed by the respondents under Section 11 of the Act denied the very existence of MoU. In view of foregoing discussion, the appeal succeeds and is allowed. The impugned order is set aside. The case is remanded to the learned designate Judge to decide the question of legality, validity and genuineness of the agreement/(MoU) in question on its merits on the basis of pleadings and evidence of the parties keeping in view the law laid down by this Court in three decisions referred supra. Depending upon the findings on the question, appropriate orders including the order for appointment of arbitrator, if occasion arises, be passed for final disposal of the application filed under Section 11 of the Act.

                                                                  REPORTABLE
                            IN THE SUPREME COURT OF INDIA

                             CIVIL APPELLATE JURISDICTION

                             CIVIL APPEAL No. 6198 OF 2016
                      (ARISING OUT OF SLP (C) No. 25473/2015)


Velugubanti Hari Babu             …….Appellant(s)


                             VERSUS


Parvathini Narasimha Rao & Anr.   ……Respondent(s)



                               J U D G M E N T

Abhay Manohar Sapre, J.
1.    Leave granted.
2.    This appeal is filed by the appellant against the final  judgment  and
order dated 13.02.2015 passed by the High Court of Judicature  at  Hyderabad
for the State of Telangana and the State of Andhra  Pradesh  in  Arbitration
Application No. 79 of 2014 whereby the High Court  allowed  the  application
filed  by  the  respondents  herein  under  Section  11(5)  &  (6)  of   the
Arbitration and Conciliation Act, 1996  (hereinafter  referred  to  as  “the
Act”) and appointed the sole arbitrator to decide the  disputes  alleged  to
have arisen between the parties in relation  to  MoU  dated  27.05.2013  and
further directed the arbitrator to decide the legality and validity  of  the
MoU by taking evidence.
3.    Facts of the case  lie  in  a  narrow  compass.  They,  however,  need
mention in brief  to  appreciate  the  short  controversy  involved  in  the
appeal.
4.    The appellant (who was respondent before the High Court) is the  owner
of the plot of land measuring  15.53  acres  situated  in  Sy.  No.  416/2B2
having come into possession of it in the year 1990 by way  of  a  registered
gift deed.  He is since then enjoying peaceful possession of the said land.
5.    According to  the  respondents,  the  appellant  and  the  respondents
entered into Memorandum of Understanding (MoU) dated 27.05.2013.   The  MoU,
inter alia, provided that the  respondents  will  resolve  certain  disputes
that are pending between the appellant and certain  other  persons,  namely,
Mattaparthi Sivayya, Mattaparthi Satyanarayana and Mattaparthi  Srinu,  sons
of late Appa Rao and another dispsute with Kanchumarthi Venkata  Ramachandra
Rao s/o Seetarama Rao, with respect to the land in question and, in  return,
the appellant will sell 50% of the land to the respondents at  the  rate  of
Rs.1 crore per acre.  According to the respondents, as  per  the  MoU,  they
paid a sum of Rs.7,00,000/-  as token money to the appellant.
6.    In terms of the MoU, both parties agreed that if  any  dispute  arises
in connection with the enforcement of the terms of the MoU,  that  shall  be
resolved through an Arbitrator, who would be appointed by both  the  parties
with their mutual consent under the provisions of the Act.
7.    On 11.12.2013, the respondents sent a letter  to  the  appellant.   In
the letter, it was alleged that since disputes have arisen between  them  in
relation to execution of MoU and hence the respondents,  in  terms  of  MoU,
appoint one Sanyasi Rao – retired District Judge as an arbitrator to  decide
the disputes.
8.     As  the  respondents  did  not  get  any  response,  they  filed   an
application being Arbitration Application No. 79 of  2014  before  the  High
Court under Section 11(5) and  11(6)  of  the  Act  for  appointment  of  an
arbitrator out of which this appeal by special leave arises.
9.    During the pendency of the arbitration  application  before  the  High
Court, the respondents also filed a petition being A.A.O.P. No. 41  of  2013
before the Principal Sessions Judge, Rajahmundry under Section 9 of the  Act
for grant of injunction restraining the  appellant  herein  from  alienating
the property which was the subject matter of MoU.  The  appellant  contested
the application and denied the  very  execution  of  MoU  by  him.   It  was
alleged that the so called  MoU  relied  on  by  the  respondents  in  their
application is forged and fabricated document and that he has  never  signed
any such MoU.  It was, therefore, not binding on the  appellant.   By  order
dated 20.06.2014, the Principal Sessions Judge allowed the petition.
10.   The appellant also contested the petition filed under Section 11(5)  &
(6) and  filed a counter affidavit therein stating,  inter  alia,  that  the
MoU in question is forged and fabricated document and that he  never  signed
any such document with the respondents.
11.   By impugned  order  dated  13.02.2015,  the  High  Court  allowed  the
application by holding that the legality and validity of the  MoU  including
arbitration agreement can be examined by the Arbitrator on  taking  evidence
and accordingly appointed Mr. B. Prakash Rao, a retired High Court Judge  as
the sole arbitrator to adjudicate all the disputes  raised  by  the  parties
including to decide the question regarding legality and genuineness of MoU.
12.   Challenging the said order, the appellant has  filed  this  appeal  by
way of special leave before this Court.
13.   Heard Mr. V.V.S. Rao, learned senior counsel  for  the  appellant  and
Mr. Basant R., learned senior counsel for the respondents.
14.   Mr. V.V.S Rao, learned senior  counsel  appearing  for  the  appellant
while assailing the legality and correctness of the  impugned  order  argued
two points.
15.   In the first place, learned counsel urged that the  High  Court  erred
in allowing the application filed by the respondents under Section  11(5)  &
(6) of the Act and further erred in directing the arbitrator to  decide  the
legality and validity of the MoU along with  the  disputes  arising  out  of
MoU.
16.   In the second place, learned counsel urged that the directions  issued
to the arbitrator to decide the legality and  genuineness  of  the  MoU  are
contrary to the law laid down by this Court in SBP &  Co.  vs.  Patel  Engg.
Ltd., (2005) 8 SCC 618,  National Insurance Co.  Ltd.  Vs.  Boghara  Polyfab
(P) Ltd., (2009) 1 SCC 267 and Bharat Rasiklal  Ashra  vs.  Gautam  Rasiklal
Ashra & Anr., (2012) 2 SCC 144  and  hence such directions are  not  legally
sustainable and are  liable to be set aside.
17.   Learned counsel further submitted that in a case of this nature  where
the question arises before the High Court in Section 11  proceedings  as  to
whether the agreement/MoU is a valid and genuine document and whether it  is
enforceable or not, it is the duty of the High Court to  first  decide  such
questions keeping in view the law laid down in SBP & Co. (supra),   National
Insurance Co. Ltd., (supra) and Bharat Rasiklal Ashra (supra) and if  it  is
held to be a valid and genuine document then whether it is  binding  on  the
parties and depending upon the outcome of the  findings  on  such  question,
appropriate orders as required under Sections 11(5) and (6) of the  Act  has
to be passed.
18.   Learned counsel further urged that since in this case, the High  Court
instead of deciding these questions on their merits,  which  had  admittedly
arisen on the basis of pleadings,  straightaway  proceeded  to  appoint  the
arbitrator  and  directed  the  arbitrator  to  decide  the   validity   and
genuineness of the MoU, such exercise of power by the High Court was  wholly
without jurisdiction and renders the impugned order  legally  unsustainable.
In other words, submission of the learned counsel was that  the  High  Court
had the jurisdiction under Section 11 of the Act to decide the  question  of
validity and genuineness of MoU one way or other on merits as held  by  this
Court in abovementioned three decisions whereas it had  no  jurisdiction  to
ask the arbitrator to decide such question and, therefore, non-deciding  the
question amounts to failure to exercise jurisdiction vested  in  it  by  law
and renders the impugned order bad in law.
19.   In reply, Mr. Basant R., learned  senior  counsel  appearing  for  the
respondents while elaborating his submissions supported  the  reasoning  and
the conclusion arrived at by the learned Chief Justice  and  contended  that
no interference is called for in the impugned order.
20.   Having heard the learned counsel for the parties  and  on  perusal  of
the record of the case, we find force in  the  submissions  of  the  learned
counsel for the appellant, which deserve acceptance.
21.   This is how the learned Chief Justice dealt with the  matter  in  hand
and held as under :
“I am of the view that the  legality  and  validity  of  the  Memorandum  of
Understanding and also the Arbitration Agreement can  also  be  examined  by
the learned Arbitrator on taking  evidence  in  this  matter,  particularly,
under Section 16 of the said Act.   As  I  notice  and  taking  prima  facie
material,  such  question  cannot  be   adjudicated   conclusively   by   me
effectively and it would be proper for the learned Arbitrator to do so.   I,
therefore, appoint Mr. Justice B. Prakash  Rao,  a  retired  Judge  of  this
Court as sole Arbitrator to  adjudicate  all  the  disputes  raised  by  the
parties.  If the plea of existence and validity of the aforesaid  Memorandum
of Understanding is  taken  on  any  ground  and  so  also  the  Arbitration
Agreement, such pleas have to be adjudicated together with other pleas.”

22.   The short question which arises for consideration in  this  appeal  is
whether the High Court (Designate Judge) was justified in not  deciding  the
question as to whether MoU, which is  denied  by  the  appellant  herein  in
Section 11 proceedings, is valid and genuine document and whether  the  High
Court  was  justified  in  directing  the  arbitrator  to  decide  the  said
question.
23.   The question posed by us remains no more res integra  and  is  already
answered by the Constitution Bench of this Court in SBP &  Co.  (supra)  and
then in  National Insurance Co. Ltd. (supra) and lastly in  Bharat  Rasiklal
Ashra (supra). It is really  unfortunate  that  the  learned  Chief  Justice
while deciding the application did not take note of any of  these  decisions
and passed the impugned order which is apparently against the law laid  down
in these decisions.
24.   Justice Raveendran, speaking for the Bench in Bharat Rasiklal  Ashra’s
case (supra) which also involved the same question, took note  of  law  laid
down in earlier two decisions of SBP & Co. (Supra)  and  National  Insurance
Co. Ltd. (supra) and succinctly explaining  the  ratio  of  these  decisions
laid down the following proposition of law in paras 10 to 13 which  read  as
under:
“10. 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?”

11. The question is covered by the decisions of this Court 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  In  SBP  &  Co.(supra)  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.

12. Following the decision in  SBP  &  Co.(supra)  this  Court  in  National
Insurance Co. Ltd.(supra) held as  follows:  (National  Insurance  Co.  Ltd.
Case (supra), SCC p. 283, paras 22 & 22.1-22.3)

“22. 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.

22.1. The issues (first category)  which  the  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.

22.2. 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.

22.3. 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)

13. 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 designate and should not  be  left  to  the  decision  of  the  Arbitral
Tribunal. This is because the  question  whether  there  is  an  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.”
                                            (emphasis supplied)

25.   Keeping in view the law laid down in the  aforementioned  three  cases
quoted supra which does not need any more elaboration  by  us,  we  have  no
hesitation in setting aside the direction which directs  the  arbitrator  to
decide the question of legality and validity of the agreement/(MoU).
26.   In our considered opinion, such directions issued by  the  High  Court
are plainly against the law laid down  by  this  Court  in  three  decisions
quoted above.  Indeed, the High Court ought to have  decided  the  questions
itself and recoded a finding as to whether the MoU  dated  27.05.2013  is  a
valid and genuine document or it is a forged  and  fabricated  document  and
then depending upon the  findings,  appropriate  directions,  if  necessary,
should  have  been  passed  for  disposal  of   the   application   finally.
Unfortunately, it was not done.
27.   This takes us to the next argument of Mr. Basant  R.,  learned  senior
counsel for the respondents.  It was argued that since the appellant  failed
to give reply to the notice given by the respondents for appointment  of  an
arbitrator, the appellant should not be allowed to  raise  such  plea  at  a
belated  stage  in  Section  11  proceedings.  We  do  not  agree  with  the
submission.
28.   We find that the appellant  in  reply  to  the  respondents’  petition
filed under Section 9 of the  Act  has  specifically  denied  having  signed
or/and executed such agreement/(MoU).  He has also  contended  therein  that
it is a bogus and fabricated MoU.  The  appellant  again  in  his  reply  to
application filed by the respondents under Section 11 of the Act denied  the
very existence of MoU.
29.    In our  opinion,  this  was  sufficient  for  joining  issue  on  the
validity and genuineness of the MoU which was raised timely  in  appropriate
proceedings  by  the  appellant.   The  submission  of  Mr.  Basant  R.  is,
therefore, wholly devoid of merit and is accordingly rejected.
30.   In view of foregoing discussion, the appeal succeeds and  is  allowed.
The impugned order is set  aside.  The  case  is  remanded  to  the  learned
designate  Judge  to  decide  the  question  of   legality,   validity   and
genuineness of the agreement/(MoU) in question on its merits  on  the  basis
of pleadings and evidence of the parties keeping in view the law  laid  down
by this  Court  in  three  decisions  referred  supra.  Depending  upon  the
findings on  the  question,  appropriate  orders  including  the  order  for
appointment of arbitrator, if occasion arises, be passed for final  disposal
of the application filed under Section 11 of the Act.
31.   No costs.


                     ………...................................J.
                                [J. CHELAMESWAR]


                  …...……..................................J.
                               [ABHAY MANOHAR SAPRE]     New Delhi;
July 13, 2016














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