Afcons Infrastructure vs. Cherian Verkey Pvt.

Company Ltd (2010) 8 SCC 24

The second respondent (Cochin Port Trust) entrusted the work of construction of certain
bridges and roads to the appellants under an agreement dated 20.4.2001. The appellants sub-
contracted a part of the said work to the first respondent under an agreement dated 1.8.2001.
It is not in dispute that the agreement between the appellants and the first respondent did not
contain any provision for reference of the disputes to arbitration.

The first respondent filed a suit against the appellants for recovery of Rs.210,70,881 from the
appellants and their assets and/or the amounts due to the appellants from the employer, with
interest at 18% per annum. In the said suit an order of attachment was made on 15.9.2004 in
regard to a sum of Rs.2.25 crores. Thereafter in March 2005, the first respondent filed an
application under section 89 of the Code before the trial court praying that the court may
formulate the terms of settlement and refer the matter to arbitration. The appellants filed a
counter dated 24.10.2005 to the application submitting that they were not agreeable for
referring the matter to arbitration or any of the other ADR processes under section 89 of the
Code. In the meanwhile, the High Court of Kerala by order dated 8.9.2005, allowed the
appeal filed by the appellants against the order of attachment and raised the attachment
granted by the trial court subject to certain conditions. While doing so, the High Court also
directed the trial court to consider and dispose of the application filed by the first respondent
under section 89 of the Code.

The trial court heard the said application under section 89. It recorded the fact that first
respondent (plaintiff) was agreeable for arbitration and appellants (defendants 1 and 2) were
not agreeable for arbitration. The trial court allowed the said application under section 89 by
a reasoned order dated 26.10.2005 and held that as the claim of the plaintiff in the suit related
to a work contract, it was appropriate that the dispute should be settled by arbitration. It
formulated sixteen issues and referred the matter to arbitration. The appellants filed a revision
against the order of the trial court. The High Court by the impugned order dated 11.10.2006
dismissed the revision petition holding that the apparent tenor of section 89 of the Code
permitted the court, in appropriate cases, to refer even unwilling parties to arbitration.

In Afcons Infrastructure Ltd. and Anr. V Cherian Varkey Construction Co. (P) Ltd. and
Others in its decision dated 26th July 2010, (2010) 8 SCC 24 held as follows:
"The following categories of cases are normally considered to be not suitable for Arbitration
or Conciliation [ADR process]:

Representative suits under Order 1 Rule 8 CPC which involves public interest or interest
of numerous persons who are not parties before the court. (In fact, even a compromise in
such a suit is a difficult process requiring notice to the persons interested in the suit,
before its acceptance).

Disputes relating to election to public offices (as contrasted from disputes between two
groups trying to get control over the management of societies, clubs, association etc.).

Cases involving grant of authority by the court after enquiry, as for example, suits for
grant of probate or letters of administration.

Cases involving serious and specific allegations of fraud, fabrication of documents,

forgery, impersonation, coercion etc.

Cases requiring protection of courts, as for example, claims against minors, deities and
mentally challenged and suits for declaration of title against government.

Cases involving prosecution for criminal offences.

"All other suits and cases of civil nature in particular the following categories of cases
(whether pending in civil courts or other special Tribunals/Forums) are normally suitable for
ADR process:

All cases relating to trade, commerce and contracts,

All cases arising from strained or soured relationships,

Matters relating to specific performance

Matters relating to construction work, insurance, society relations, employee/employer

disputes.

All cases where there is a need for continuation of the pre-existing relationship in spite of
the disputes;
 All cases relating to tortious liability; and

All consumer disputes."

Supreme Court further held that "the above enumeration of 'suitable' and 'unsuitable' category
of cases is not intended to be exhaustive or rigid. They are only illustrative."

In the Afcons Infrastructure case, the Supreme Court had held that "under Section 89 of CPC
it is ascertaining whether it is feasible to have recourse mandatory for a civil court to have a
hearing, after the completion of pleadings, for the purpose of to refer parties to Arbitration or
Conciliation [ADR Process]. However the Supreme Court clearly held that it is not
mandatory to refer the Parties to any ADR process in all cases. Where the case falls under an
excluded category there need not be reference to ADR Process. In all other cases reference to
ADR process is a must."

It was further held that "a civil court, exercising power under Section 89 of CPC, cannot refer
a suit to arbitration unless all the parties to the suit agree for such reference."

Booz Allen & Hamilton Inc v SBI Home Finance Limited & Ors (2011) 5 SCC 532

Capstone Investment Co. Pvt. Ltd. (second respondent herein, for short "Capstone") and Real
Value Appliances Pvt. Ltd. (respondent No.3 herein, for short "RV Appliances") are the
owners of flat No.9A and 9B respectively situated at "Brighton", Napien Sea Road, Mumbai.
Capstone and RV Appliances had borrowed loans from SBI Home Finance Ltd., (the first
respondent herein, for short "SBI") under two loan agreements dated 3.12.1994 by securing
the said two flats in favour of SBI.

3. Under two leave and licence agreements dated 5.4.1996, Capstone and RV Appliances
permitted the appellant to use their respective flats, for the term 1.9.1996 to 31.8.1999. Each
licence agreement was signed, in addition to the licensor and licensee, by the other flat owner
(that is RV Appliances in respect of agreement relating to 9A and Capstone in respect of
agreement relating to 9B) and SBI as confirming parties 1 and 2.

4. On the same day (5.4.1996) a tripartite deposit agreement was entered among RV
Appliances and Capstone as the first party, appellant(Booz Allen) as the second party and
SBI as the third party. Under the said agreement, the appellant paid a refundable security
deposit of Rs.6.5 crores to Capstone and RV Appliances (at the rate of Rs.3.25 crores for
each flat). Clause (E) of the said agreement confirmed that the appellant made the said
deposit and Capstone and RV Appliances received the said deposit on the basis of the terms
and conditions recorded in the two leave and licence agreements and the deposit agreement;
and that the three agreements together formed a single integral transaction, inseparable, co-
extensive and co-terminus in character. Out of the said deposit of Rs.6.5 crores, a sum of
Rs.5.5 crores was directly paid to SBI on the instructions of Capstone and RV Appliances
towards repayment of the loan taken by Capstone and Real Value and the
 balance of Rs.1 crore accounted in the manner indicated therein. As a consequence, the loan
due by Capstone to SBI in regard to flat No.9A was cleared, but the loan taken by RV
Appliances remained due and outstanding.

Capstone however became a guarantor for repayment of the amount due by RV Appliances
and flat No.9A was secured in favour of SBI and a charge was created in the shares relating
to flat No.9A belonging to Capstone in favour of SBI, as security for repayment of the loan
by R V Appliances.

The judgment in Booz Allen4 and the 246th Law Commission Report were referred to by
Justice Sikri on behalf of the Division Bench while discussing whether the present dispute
was capable of adjudication and settlement by arbitration. The order in Booz Allen held that
only where the subject matter of the dispute fell exclusively within the domain of courts,
could the dispute said to be non-arbitrable. In general, , a right in rem would not be arbitrable
but a right in personam would be capable of adjudication in private fora. The SC in Booz
Allen and more recently in Vimal Kishor Shah5 have outlined the following instances which
would be outside the purview of arbitration:

disputes relating to rights and liabilities which give rise to or arise out of criminal
offences;

matrimonial disputes;

guardianship matters;

insolvency and winding up;

testamentary matters;

eviction or tenancy matters; and

disputes interse between trust, trustees, and beneficiaries.

According to Justice Sikri, he has recognised and has drawn a distinction between serious
allegations of fraud and fraud simplicitor and therefore it followed that only serious
allegations of fraud are to be treated as non-arbitrable which should be decided by civil
courts.

Justice Dr D Y Chandrachud, while agreeing with the view taken by Justice A K Sikri,
discussed how the parties, while relying on the judgment passed in N. Radhakrishnan, have
sought to avoid arbitration by raising a frivolous allegation of fraud.

So in this case, it was not arbritrable since:-

There was a delay in filing (Time period)

Subject matter was forclosure of mortgaged property.

Rights of third parties was involved (right in rem) so therefore not suitable for arbitration.

Shri Vimal Kishor Shah v. Jayesh Dinesh Shah - CIVIL APPEAL NO.8164 OF 2016

The Apex Court in its recent decision in Shri Vimal Kishor Shah & Ors v Mr. Jayesh Dinesh
Shah & Ors 2 has now carved out a seventh category of non-arbitrable disputes namely cases
arising out of trust deeds and the Trust Act 1882 ['the Act']. The Court has ruled that the Act
being a complete code in itself impliedly bars the Application of the Arbitration and
Conciliation Act 1996 ['the Arbitration Act']. The reasoning applied by the Court in
reaching upon its decision may lead to the creation of additional categories of disputes which
could be considered non-arbitrable

Facts

A family trust deed was created in the favour of six minor beneficiaries.  Clause 20 of the
trust deed contained an arbitration clause which provided that resolution of every
difference/dispute between the beneficiaries shall be resolved in accordance with the
provisions of the Indian Arbitration Act 1940.

Differences arose between the six beneficiaries and arbitration was invoked. Parties however
could not agree on the name of the arbitrator and Jayesh Dinesh Shah, one of the
beneficiaries filed an application under §11 of the Arbitration Act in the Bombay High Court.
This was opposed by the other beneficiaries led by Vimal Kishore Shah on the grounds that
no arbitration agreement existed between the beneficiaries as they were not signatories to the
trust deed.

The Bombay High Court in its decision allowed the §11 Application on grounds that at the
time the trust deed was executed the six beneficiaries were minors and could not have signed
the trust deed. However, the beneficiaries throughout their minority had taken benefit of the
trust deed and on attaining majority must be treated as parties to the trust deed.

Contentions raised by parties

In appeal, Vimal Kishor Shah apart from raising the issue of the beneficiaries not being
signatories to the trust deed also contended that disputes under the trust deed were not
arbitrable as the Act was a complete code in itself and provided for adjudication of disputes
between parties by the Civil Court, therefore arbitration was excluded.

Jayesh Dinesh Shah on his part relied upon the decision of the Bombay High Court for
support. 

Decision

The Supreme Court in its decision overruled the judgment of the Bombay High Court.
Relying upon §2(b) & (h) as well as §(7) of the Arbitration Act which deal with the definition
of an arbitration agreement as well as parties to an arbitration agreement, it noted that since
these provisions barred the jurisdiction of Civil Courts they must be interpreted strictly. The
Court stated that for an arbitration clause to be valid and binding it must be in writing and
should be executed by parties.

The Court then ruled that a trust deed is executed by the testator and the beneficiaries to the
trust deed are not required to execute it, as such the beneficiaries are not parties to the trust
deed and the deed cannot be treated as an agreement between the beneficiaries. The Court
noted that the beneficiaries are only required to carry out the provisions of the trust deed and
infact there is no agreement between the beneficiaries.  Therefore no arbitration agreement
existed between the parties in this case.
The Court thereafter observed that its aforesaid finding was sufficient to decide the entire
dispute between parties, but nevertheless proceeded to rule on the issue of whether arbitration
was excluded by the provisions of the Act on grounds that it was a pure issue of law and
could be decided in Appeal.

Examining the scheme of the Act and the various provisions under it, the Court noted that the
Act was in a complete code in itself. Various provisions of the Act provided for the legal
remedies available to the author of the trust, trustees and the beneficiaries and jurisdiction
was specifically conferred upon a principal Civil Court of Original jurisdiction.

Further relying upon the Constitution Bench decision of Dhulabhai etc. v  State of Madhya
Pradesh3 which lays down principles for determining express or/and implied bar on the
jurisdiction of Civil Courts, it ruled that since the Act provided the specific remedy of
adjudication of disputes by a Civil Court, any remedy through arbitration was impliedly
barred. The Court concluded its decision by specifically stating that it was now adding a
seventh category of disputes namely cases arising out of trust deed and the Act in the list of
disputes considered non-arbitrable that was specifically laid down in its decision in Booz
Allen & Hamilton.

IPRS v. Entertainment Network (India) Limited- MANU/MH/1597/2016

The Division Bench in addressing the present application took note of a subsequent
pronouncement by the Apex Court in M/s. Entertainment Network (India) Ltd. Vs. M/s.
Super Cassette Industries Ltd. 2008 (9) SCALE 69, which dealt with the matter at hand. The
Supreme Court therein carried out a broad analysis of the provisions including the provisions
relating to a Copyright Society, succinctly setting out the rights and obligations of a
Copyright Society.

The Division bench noted that in the context of the Statement of Objects and Reasons
Chapter VII providing for Copyright Societies was incorporated vide the amendment of 1992
to meet the object of dealing more effectively with the infringement of Copyright and related
rights.
The Division Bench took note that Supreme Court in the M/s. Entertainment Network (India)
Ltd. case (supra) had unequivocally observed that for all intents and purports the Copyright
Society stepped into the shoes of the author.

that both the mechanism for administration of the Copyrights as also enforcement thereof The
Division Bench, taking into account another perspective stated that the Copyright Society
may not have exclusive rights, inasmuch as the owner continues to simultaneously have
rights to deal with his Copyright in the work. However, they opined that the Statement of
Objects and Reasons and the provisions if read in that context clearly show was the intent of
the legislature while incorporating the provisions. The Bench noted that the two aspects could
not be segregated and differed with the opinion of the Single Judge. They also opined that in
view of Section 17 of the said Act, the copyright owner could certainly appoint an agent to
institute legal proceedings. The appeals were accordingly allowed, impugned judgments set
aside with the direction to restore the suits to their original numbers to be proceeded with in
accordance with law.

Eros International v Telemax  (Bom HC)

The Bombay High Court in effect held that a copyright dispute was a dispute “in
personam” and not ‘in rem’, that copyrights are not rights “in rem” and hence
arbitrable. While the judgment itself has far reaching implications on the
arbitrability of IPR disputes, and has probably reached the right conclusion, it
is respectfully submitted that the judgment muddles important distinctions
between rights in rem and personam, without sufficient grounding in
jurisprudence and reference to important texts.

In the case, the Plaintiff, the owner of copyright

in several films, entered into a “Term Sheet” with the Defendant with respect
to distribution of its films. The Term Sheet contemplated an exclusive
licensing contract and an execution of a “Long Form Agreement” and had a
standard arbitration clause stating that any dispute arising out of or in
connection with the Term Sheet shall be settled by arbitration by a sole
arbitrator. The Long Form Agreement was never executed and disputes arose as
regards the copyrighted content provided to the Defendant under the Term Sheet.
Accordingly, the Plaintiff filed a suit in the Bombay High Court and the
Defendant thereafter filed an application under Section 8 of the Arbitration
Act, 1996. It is pertinent to mention that the Defendant was not using the
copyright material anymore and therefore, the only relief that could be
provided was a claim in damages and for relief in terms of a permanent
injunction for the future.

Justice Gautam Patel allowed the Notice of

Motion under Section 8 of the Arbitration Act, 1996 and held that the disputes
were arbitrable. His reasoning was as follows:

(i)        The resolution of copyright disputes by

an arbitral tribunal does not take away or exclude the remedies available to a
claimant (para 14).

(ii)       As between two claimants to a copyright

or a trademark in either infringement or passing off action, that action and
that remedy can only ever be an action “in personam”. It is never an action “in
rem”. Copyright actions are actions “in personam”. (para 17).

(iii)

Swiss Timing Ltd. vs. Organizing Committee, Commonwealth Games 2010 Delhi
(Arbitration Petition No. 34 of 2013)

Facts:

Swiss Timing Ltd. (P) entered into an agreement with the Organizing Committee for
providing Timing, Score, Result (TSR) systems and supporting services required to conduct
the commonwealth games in India. It was alleged by (P) that the (R) had defaulted in making
payments due under the Contract/agreement and therefore the arbitration clause, Clause 38.6
as provided under the contract, was invoked by the (P) and hence an Arbitrator was appointed
by them.
(R) Failed to nominate their arbitrator due to which the third arbitrator was also not
nominated and now (P) has made application to SC u/s 11(4) read with section 11 (6) of the
Act for the constitution of the Arbitral Tribunal.

Issue:

Whether the Arbitral tribunal has jurisdiction in the matters of fraud, Misrepresentation or in
the cases were the contract stands not valid/ void?

Organizing Committee Contended:

1. That the Contract was Void-ab-initio, as it was obtained by corrupt practices and hence the
Arbitration cannot be invoked.
2. Heavy Reliance was placed on N. Radhakrishnan case, where it was held that the
allegations of fraud and serious malpractices cannot be dealt with properly in arbitration.
3. That there were criminal Proceedings pending simultaneously in the trial court, and thus
the arbitration cannot be invoked as it will lead to unnecessary confusion.

Rationale:

1. The court held that the Judgement in N. Radhakrishnan case is per incuriam, that is bad in
law and it cannot be relied upon.
As it failed to consider the earlier judgments of the court in Hindustan Petroleum
Corporation and Anand Gajapathi Raju case , wherein it was seen as the obligation of the
Civil court to direct the parties to the Arbitration agreement where there exists an Arbitration
Agreement.
Also, Section 16 (2), which deals with the principle of separability, was not referred to
the court anywhere in N. Radhakrishnan case.
2. The Court Adopted the Pro arbitration policy, keeping up with the general principle u/s 5.
Court concluded on the Joint Reading of Section 5 and Section 16 that also on matters where
the contract is void/voidable, arbitration can be referred to.
By the proper presentation of facts and evidences to the tribunal itself.
3. Void and Voidable Contracts: Court drew the distinction in the cases where the contract is
void or voidable and said that the two are in many cases used interchangeably, whereas both
have its different meaning.
It held that the Court ought to decline reference to arbitration only where the Court can
reach the conclusion that the contract is void on a meaningful reading of the contract
document itself without the requirement of any further proof.
Whereas, in the cases of voidable contracts, the court cannot decline the reference to the
arbitration.
4. Possibility of Conflicting Decisions
So if the Award is made in favour of (P) by the tribunal, (R) will be at liberty to resist
enforcement on the ground of subsequent conviction if any at the criminal proceedings.
And if the Criminal proceedings result in an Acquittal, it would leave little ground for
challenging the validity of the underlying contract. Thus denial of reference at this stage
would unnecessarily delay the arbitration.

Holding:

The court while deciding in favour of the (P), appointed the other 2 arbitrators. Also,
favouring the principle of separability u/s 16 (2) decided on the jurisdiction of the tribunal
even in the matters of fraud and misrepresentation or in the cases of invalidity of the contract.

Rules:

N. Radhakrishnan Judgement is bad in law and not to be followed.

In the cases of fraud or misrepresentation or the invalidity of the contract, the
arbitration agreement will be valid.
Section 11 – deals with appointment procedure of arbitrators. 11(3) mentions that if
there are three arbitrators and the parties fail to come up with an agreement regarding their
appointment, then each party will appoint one arbitrator each and then the two arbitrator will
appoint the third one.
Section 16(2) [Principle of Separability] – the section essentially states that irrespective
of the validity or enforceability of the contract, the arbitration clause will be valid and seen
separately from the main contract.

A.Ayyaswamy Vs. A Paramasivam & Ors (2016) 10 SCC 386

Five brothers and their father

entered into a partnership deed for running a hotel in Tamil Nadu. The
partnership deed contained an arbitration clause. The business was being
managed and administered by the father and, after his death, the same was
entrusted to the eldest brother, i.e. Mr Ayyasamy. Disputes arose between the
parties, and Ayyasamy fraudulently signed a cheque to transfer money to his son
from the hotel account, without the knowledge and consent of the remaining
brothers, instead of depositing the same into the common bank account of the
partnership firm. He also refused to show the account books of the hotel to his
brothers.

The brothers were therefore forced

to file a declaratory suit seeking a declaration that they were entitled to
participate in the administration of the hotel, and for a permanent injunction
restraining Ayyasamy from interfering with the same. Ayyasamy meanwhile filed
an application under section 8 of the Arbitration and Conciliation Act, 1996
(“Arbitration Act“) to refer the dispute to arbitration. The
Trial Court, however, dismissed the aforesaid application, relying on the
Radhakrishnan Case wherein the Supreme Court laid down that serious offences
such as allegations of criminal acts, malpractices and serious allegation of
fraud are required to be determined by the Courts. Thereafter, the High Court
upheld the decision of the trial court and Ayyasamy, being aggrieved by the
said order, filed an appeal before the Supreme Court.

The Supreme Court has clearly stated

in this judgment that the Arbitration Act does not make a provision excluding
any category of disputes by treating them as non-arbitrable. When an agreement
has an arbitration clause, in such cases judicial intervention would be
minimal. Under the Arbitration Act, an Arbitral Tribunal has the power to rule on
its own jurisdiction. The Supreme Court has held where there are mere
allegations of fraud simpliciter, such issues can be determined by the Arbitral
Tribunal.

In the Ayyasamy Case, the Supreme Court also laid down well-recognised examples
of non-arbitrable disputes, which are:

–disputes relating to rights and

liabilities which give rise to or arise out of criminal offences;

– matrimonial disputes relating to

divorce, judicial separation, restitution of conjugal rights, child custody;

– guardianship matters;

– insolvency and winding-up matters;

– testamentary matters (grant of

probate, letters of administration and succession certificate); and

– eviction or tenancy matters governed

by special statutes where the tenant enjoys statutory protection against
eviction and only the specified courts are conferred jurisdiction to grant
eviction or decide the disputes.

Fraud is one such category spelled

out by the decisions of this Court where disputes would be considered as
non-arbitrable.

The Supreme Court has further held

that rights in personam (right exercisable against specific individuals) are
considered to be amenable to arbitration; and all disputes relating to rights
in rem (rights exercisable against the world) are required to be adjudicated by
courts and public tribunals.
The Supreme Court has held that (i) when there is a serious allegation of fraud
which makes it a criminal offence, or (ii) when the allegation of fraud becomes
so complicated that it becomes necessary to consider complex issues wherein
extensive evidence is required to be produced by the parties for the
determination of the offence by the court, or (iii) where fraud is alleged
against the arbitration provision itself or is of such a nature that permeates
the entire contract, including the agreement to arbitrate, meaning thereby in those
cases where fraud goes to the validity of the contract itself of the entire
contract which contains the arbitration clause or the validity of the
arbitration clause itself, then the Court can dismiss an application under section
8 of the Arbitration Act and proceed with the suits on merit.

Therefore, the Supreme Court has

made it clear that simple fraud is arbitrable, whereas instances of serious
fraud are to be determined by courts. However, the Supreme Court has not
provided any definition of `serious fraud` and interpretation of the same shall
be interpreted on a case-to-case basis. The Arbitral Tribunal may not be competent
to deal with such matters which involve an elaborate production of evidence to
establish the claims relating to fraud and criminal misappropriation. Also, Supreme
Court laid down in the Ayyasamy case that disputes which give rise to or arise
out of criminal offences are non-arbitrable; therefore, serious frauds need to
be determined by the Courts.