In DECCAN PAPER MILLS CO. LTD. vs REGENCY MAHAVIR PROPERTIES & ORS., the Appellants before the Supreme Court had entered into an agreement with a firm for the development of a property and there was no arbitration clause in the agreement. The said firm with the approval of the Appellants entered into an agreement with the Respondent for the development. The Appellants allegation was that they had entered into all these agreements only with the understanding that one particular individual who was then a partner of the first firm would remain involved in the development process. However, when there was delay in development, the Appellants on enquiring found that the same person had long since left the firm and was not involved in the development process at all. It should be noted that none of the agreements mentioned the need for this person to be present in the development process. The Appellants claimed fraud has been done against them as the non-participation of this person as violation of the agreement and the said person had signed on the agreements even after having left the firm and took the matter to court demanding cancellation under Section 31 of the Specific Relief Act,, 1963, (SPA) of all the agreements executed for the development of the property. The Respondent's attempt to refer the issue to Arbitration was objected to by the Appellants who claimed that as the agreement which allows arbitration has been conceived with fraud and therefore void, the arbitration clause was also nullified.
The Trial court as well as the Bombay High Court referred the matter to arbitration. Therefore the Appellants approached the Supreme Court.
In its appeal before the SC, Deccan contended against the arbitrability of the dispute primarily on two grounds, firstly, disputes arising from the agreement allegedly executed on the basis of fraud are not arbitrable, secondly, the original agreement between the Appellant and Ashray did not contain an arbitration clause, and since the suit was to set aside that agreement as well, the dispute could not be decided piecemeal, and on this ground also, ought not to have been referred to arbitration and relying upon section 31 of the Specific Relief Act, 1963 stated as the suit is one for cancellation of three “written instruments” and the proceeding under section 31 being a proceeding in rem, would fall within one of the exceptions made out in Booz Allen & Hamilton Inc. v. SBI Home Finance Ltd., (2011) 5 SCC 532. Thirdly fraud vitiates every solemn act and that a conspiracy with a view to deprive the rights of others in relation to a property would render the transaction void ab initio. Deccan had also raised the issue of applicability of section 31 of the Specific Relief Act and a judgment of the High Court of Judicature at Hyderabad for Telangana and Andhra Pradesh in Aliens Developers Pvt. Ltd. v. M. Janardhan Reddy, (2016) 1 ALT 194 (DB)
The Supreme Court reiterated that the judgment in Avitel Post Studioz Limited & Ors. v. HSBC PI Holding (Mauritius) Ltd., Civil Appeal No. 5145 of 2016, laid down the law on invocation of the “fraud exception” in some detail, which reasoning we adopt and follow. The said judgment indicates 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, as has been held in the aforesaid judgment, which would amount to deceit, being a civil wrong, the subject matter of such agreement would certainly be arbitrable. Further, merely because a particular transaction may have criminal overtones as well, does not mean that its subject matter becomes non-arbitrable. The Appellants had made no averment that the agreement dated 20.05.2006 and the deed of confirmation dated 13.07.2006 were not entered into at all, as a result of which the arbitration clause would be non-existent. Further, it is equally clear that the suit is one that is inter parties with no “public overtones”, as has been understood in paragraph 14 of Avitel (supra), as a result of which this exception would clearly not apply to the facts of this case.
Post amendment of the Arbitration Act, it is clear that the judicial authority before which an action is brought shall, if the other conditions of section 8 are met, refer the parties to arbitration unless it finds that prima facie, no valid arbitration agreement exists. As has been held hereinabove, in the present case, the finding that is returned is correct – a valid arbitration agreement certainly exists as the agreements that are sought to be cancelled are not stated not to have ever been entered into.
Referring to judgements of the Supreme Court in Suhrid Singh v. Randhir Singh, (2010) 12 SCC 112, Razia Begum vs Shahebzadi Anwar Begum and Satrucharla Vijaya Rama Raju vs Nimmaka Jaya Raju, would expose the incongruous result of section 31 of the Specific Relief Act being held to be an in rem provision. 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. All these anomalies only highlight the impossibility of holding that an action instituted under section 31 of the Specific Relief Act, 1963 is an action in rem.
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