Allegations Of Fraud/Forgery Inter-Se The Parties Do Not Make The Dispute Non-Arbitrable: Calcutta High Court

The Calcutta High Court has held that mere allegations of fraud inter-se the respondents would not make a dispute non-arbitrable. The bench of Justice Shekhar B. Saraf held that merely because the respondents inter-se dispute the validity of the agreement containing arbitration clause and also their signature on it, it does not make the dispute non-arbitrable. It further held that mere possibility or existence of criminal proceedings arising out of the same facts would not put the dispute beyond the scope of arbitration. Facts The first respondent is proprietorship concern engaged in the business of pharmaceuticals and medical drugs. The second respondent is the sole proprietor of the firm. The fourth respondent was granted the power, by the second respondent, to run the proprietary firm including managing the bank accounts in the year 2000 and this agreement was renewed in the year 2015 for another 10 years. The petitioner is an NBFC engaged in the business of extending customized loan services to its customers. The parties entered into an agreement dated 28.11.2020 wherein the respondent no. 1 was given a loan of Rs. 25.45 lakhs returnable in 36 monthly instalments of Rs. 93,934. A dispute arose between the parties when the ECS issued by the respondent to discharge its monthly instalments was dishonoured by the bank. Accordingly, the petitioner issued a notice under Section 25 of the Payment and Settlement System Act, 2007 demanding the payment of the due amount. However, the respondent failed to repay in the stipulated time which led the petitioner to file an application under Section 9 of the A&C Act. The Court allowed the application and directed an injunction on the property of the respondent to the extent of the due amount. Thereafter, the petitioner preferred an application for the appointment of the arbitrator. Contention of the Parties The respondents objected to the maintainability of the petition on the following grounds: The entire agreement including the arbitration clause is invalid on account of the fraud committed by the fourth respondent on the other respondents. The agreement in question was entered into by the fourth respondents behind the back of the second and the third respondents and their signature on the said agreement are forged and fabricated. The fraud not just permeates the main agreement but also the arbitration agreement that is imbedded in the agreement. Moreover, an FIR has already been filed against the fourth respondent and all of this indicates towards the serious nature of the fraud which was held to be non-arbitrable by the Supreme Court in Vidya Drolia Case. Analysis by the Court The Court referred to the judgment of the Supreme Court in Rashid Raza v. Sadaf Akhtar, (2019) 8 SCC 710 wherein the Apex Court laid down a two-fold test to determine the nature of the fraud for the purpose of Section 11. The Apex Court held as under: “4. The principles of law laid down in this appeal make a distinction between serious allegations of forgery/fabrication in support of the plea of fraud as opposed to “simple allegations”. Two working tests laid down in para 25 are: (1) does this plea permeate the entire contract and above all, the agreement of arbitration, rendering it void, or (2) whether the allegations of fraud touch upon the internal affairs of the parties inter se having no implication in the public domain.” Then the Court referred to the judgment of the Supreme Court in Avitel Post Studioz v. HSBC PI Holdings (2021) 4 SCC 713 wherein the Apex Court elaborated on the above two-fold test. The Apex Court held as under: “35. After these judgments, it is clear that “serious allegations of fraud” arise only if either of the two tests laid down are satisfied, and not otherwise. The first test is satisfied only when it can be said that the arbitration clause or agreement itself cannot be said to exist in a clear case in which the court finds that the party against whom breach is alleged cannot be said to have entered into the agreement relating to arbitration at all. The second test can be said to have been met in cases in which allegations are made against the State or its instrumentalities of arbitrary, fraudulent, or mala fide conduct, thus necessitating the hearing of the case by a writ court in which questions are raised which are not predominantly questions arising from the contract itself or breach thereof, but questions arising in the public law domain.” The Court examined the facts of the case in view of the law laid down by the Supreme Court. It held that the money was credited to the bank account of the first respondent and the second respondent had empowered the fourth respondent to run the business, including the bank accounts, thus, a clear inference cannot be drawn that the Agreement was not entered into by the answering respondents It ...

Allegations Of Fraud/Forgery Inter-Se The Parties Do Not Make The Dispute Non-Arbitrable: Calcutta High Court

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