Calcutta High Court | While deciding a matter related to appointment of the arbitrator, Shekhar B. Saraf, J., appointed the sole arbitrator and held that a matter is not rendered arbitrable, just because one party disagree about the legitimacy of the arbitration clause in the agreement and their signature on it.
In the matter, respondent 4, was entrusted through an agreement with the responsibility to manage and run the business of the proprietary company, Raj Drug Agency (respondent 1), including managing the bank accounts and all other license and permissions for running the pharmaceuticals business, by the respondent 2, who is the only proprietor of the proprietary company.
The petitioner and respondents entered into a credit facility repayable with interest agreement on 28-11-2020 and the petitioner had disbursed the loan amount of Rs. 25,45,000/- repayable in 36 monthly instalments of Rs. 93,934/- through electronic transfer fund to the bank account of the proprietary company. The petitioner issued a notice under S. 25 of the Payment and Settlement System Act, 2007 demanding the payment of the due amount, after ECS issued by the respondent was ECS issued which led to disagreement between the parties.
On further failure to repay, the petitioner preferred an application under S. 9 of the Arbitration and Conciliation Act, 1996 (Act of 1996). The Court, vide order dated 02-03-2022, allowed the application and directed an injunction on the property of the respondent to the extent of the due amount. The petitioner then preferred the present application under S. 11 of the Act for the appointment of the arbitrator.
The petitioner contended that the agreement has an arbitration clause, and the matter should be referred to arbitration, moreover, the respondents cannot treat the agreement as piecemeal for their convenience and later rescind from the obligation to repay all the credit facilities availed by it. On the other hand, the respondents contended that the agreement had been obtained by fraud and therefore, the arbitrator cannot be appointed.
The Court referred Rashid Raza v. Sadaf Akhtar, (2019) 8 SCC 710, where the Supreme Court laid down a two-fold test to determine the nature of the fraud for the purpose of S. 11 of the Act, 1996 i.e., a distinction between ‘serious allegations’ of forgery/fabrication in support of the plea of fraud as opposed to ‘simple allegations. The Supreme Court held that “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.”
The Court also referred to Avitel Post Studioz Ltd. v. HSBC PI Holdings (Mauritius) Ltd., (2021) 4 SCC 713, where the Supreme Court further elaborating on two-fold test, held that “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 also discussed Vidya Drolia v. Durga Trading Corpn., (2021) 2 SCC 1, where it was held that existence of certain kinds of fraud would make the subject matter non-arbitrable, but such non-arbitrability has to be considered in the light of Rashid Raza (Supra) and Avitel Post Studioz Ltd. (Supra).
The Court embarked that “…it is only in clear circumstances where the Court unerringly finds that the agreement or the arbitration clause does not exist, as in, the party against whom breach is alleged has not entered into the agreement, will the Court hold the matter to be non-arbitrable.”
In the light of facts and circumstances of the case, evidence provided, arguments advanced and authorities cited, the Court held that the matter should be referred to arbitration, because the mere possibility or existence of criminal proceedings, in respect dispute raised between the parties, would not make the dispute non-arbitrable.
The Court appointed the sole arbitrator to resolve the dispute subject to submission of declaration by the Arbitrator in terms of S. 12(1) in the form prescribed in the Sixth Schedule of the Act, 1996 before the Registrar of this Court within four weeks from the date of Judgment.
[Ugro Capital Ltd. v. Raj Drug Agency, 2023 SCC OnLine Cal 960, order dated 26-04-2023]
*Judgment by Justice Shekhar B. Saraf
Advocates who appeared in this case:
Mr. Rohit Banerjee and Ms. Shrayashee Das, Counsel for the Petitioner;
Mr. Tanish Geriwala, Mr. Ishaan Saha and Ms. Sananda Ganguli, Counsel for the Respondent/State.