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Paper Mills Co. Ltd. v. Regency Mahavir Properties
CIVIL APPEAL NO. 5147 OF 2016 decided on 19.08.2020
Bench: RF
Nariman, Navin Sinha and Indira Banerjee, JJ
Facts
A, who is a Company owns
a large tract of land and, decided vide agreement to develop the land by B, the
Developer Company. The said agreement contains a clause that ‘the Owner shall
have no objection if at any stage during the continuance of this agreement the Developer
assigns developing right to third party’.
One of the former Director
of B Company, namely X, who has retired
representing to be acting director of B Company executed an agreement with C
for transfer of Developing Right. This agreement contains arbitration clause.
When this fraud was
discovered by C, he filed a civil suit for cancellation of agreement under S.
31 of Specific Relief Act but the matter was referred to arbitration by Court
as the said agreement contains arbitration clause.
Question of Law
Whether the
case in which fraud or misrepresentation is discovered is arbitrable?
Arguments
|
Appellant |
Defendant |
|
The
learned advocate appearing on behalf of the Appellant argued that when it
comes to serious allegations of fraud, an arbitrator’s jurisdiction gets
ousted and reading the pleadings in the Special Civil Suit, it is obvious
that serious allegations of fraud being raised in the present case, the dispute
is thus rendered non-arbitrable. |
The Advocate
appearing on behalf of Respondent stated the case law on the“fraud exception”
and stated that after the judgment in Rashid Raza v. Sadaf Akhtar, (2019) 8
SCC 710 (see paragraph 4), this exception would only apply if it can be
stated that the agreement itself was never executed, in which case the
arbitration clause itself would fall,
but not otherwise. Also, since there are no public ramifications in the
present proceeding, and in particular, no ramifications of a criminal nature,
neither of the condition precedent for the application of the “fraud
exception” being present in this case. |
Held
The Court said that if
the subject matter of an agreement between parties falls within section 17 of
the Indian Contract Act, 1872, 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. Furthermore, the Court said that merely because
a particular transaction may have criminal overtones as well, does not mean
that its subject matter becomes non-arbitrable.
Question of Law
Whether the said suit
which involve proceeding under S. 31 Specific Relief Act to declare agreement
void is arbitrable?
Held
The Court held that the proceeding under section 31 in personam and could
be referred to arbitration because such proceeding is related to specific
persons and not with reference to all who may be concerned with the property
underlying the instrument, or “the world at large”. Explaining the meaning of the expression “any person
against whom a written instrument is void or voidable…” under Section 31(1),
the Court said that the expression “any person” does not include a third party,
but is restricted to a party to the written instrument or any person who can
bind such party. Hence, 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.
It further explained that when it comes to cancellation of a deed by an
executant to the document, such person can approach the Court under section 31,
but when it comes to cancellation of a deed by a non-executant, the
non-executant must approach the Court under section 34 of the Specific Relief
Act, 1963. Cancellation of the very same deed, therefore, by a non-executant
would be an action in personam since a suit has to be filed under section 34.
However, cancellation of the same deed by an executant of the deed, being under
section 31, would somehow convert the suit into a suit being in rem.