1. The Appellants/Petitioners challenge an order passed by a Sole Arbitrator under Section-16 of the Arbitration and Conciliation Act, 1996 (œAct?) upholding the Respondents' objection to the jurisdiction of the Arbitrator to adjudicate upon the disputes referred to arbitration. For the sake of convenience, parties are referred to in this order with reference to their respective designations in Arbitration Petition No.257 of 2013.
2. The Petitioner and Respondents were partners in a firm by the name of M/s Laxmi Centre. The firm was constituted under a Deed of Partnership dated 25 June 1976, a further Deed of Partnership dated 7 September 1985 and a Supplementary Deed of Partnership dated 4 March 1997. The partnership was at will. There was an arbitration clause in the Deed. Disputes and differences arose between the parties. A dissolution notice was served by the Petitioner on the Respondents. Subsequently, the Petitioner invoked the arbitration agreement between the parties and appointed her nominee arbitrator. Respondent No.1 did not accept the nomination and instead filed an application under Section 11 for appointment of arbitrator. By its order dated 29 July 2010, this court appointed Mr. Snehal Shah, Advocate, as the Sole Arbitrator. Statement of Claim was filed by Respondent No.1 before the Arbitrator. The Petitioner filed her Statement of Defence and Counter-claim. A few hearings were held and directions were issued by the Arbitrator. Thereafter, Respondent No.1 filed an application under Section-16 of the Act contesting the jurisdiction of the Arbitrator to entertain the Counter-claim. The alternative prayers claimed in that application were (a) a declaration that the Counterclaim was not arbitrable in view of the allegations of fraud and forgery therein and a direction to continue with the arbitration proceedings based on the Statements of Claim and Defence alone, and (b) in the alternative, a direction to the Respondent (i.e. Petitioner herein) to give particulars of fraud and forgery and a permission to the Claimant (i.e. Respondent No.1 herein) to amend his pleadings after such particulars were furnished.
3. The basis of the application under Section-16 was stated to be as follows:
The parties were doing business in partnership since 1976. The Petitioner started creating problems in the running of the business and filed a false criminal complaint that her signature on a certain document was forged by Respondent No.1. As a result disputes arose between the parties, which were referred to arbitration. In her Counter-claim, the Petitioner alleged forgery of her signature and a fraud and manipulation of records by Respondent No.1. In view of these allegations of forgery and fraud, the arbitral tribunal was not competent to entertain the Counter-claim.
4. At the hearing of the application before the learned Arbitrator, Counsel for Respondent No.1 submitted that the entire dispute between the parties (i.e. the dispute raised in the Statement of Claim as well as Counterclaim) was not arbitrable having regard to the various judgments of the Supreme Court and our Court.
5. The learned Arbitrator held that the disputes between the parties ought not to be decided by arbitration as they involved determination of a dispute which œgives rise to or arises out of criminal offences?, namely, forgery, manipulation of records and fraud. The learned Arbitrator also held that in any event, determination of this dispute would involve voluminous evidence, which œcannot be properly dealt with by the Arbitrator?. In this view of the matter, though the learned Arbitrator recorded his satisfaction that the application under Section 16 was not moved by Respondent No.1 bona fide, he proceeded to hold that the disputes could not be decided by arbitration. The application was accordingly allowed.
6. Mr. Dhond and Mr. Andhyarujina, the learned Counsel appearing for the Petitioners in Arbitration Petitions No.257 of 2013 and 258 of 2013 respectively, submit that though Respondent No.1 had indicated in his application under Section 11 of the Act that there were issues of forgery and fraud, this Court had referred the disputes to arbitration. Counsel submit that after such reference it was not permissible for the Arbitrator to refuse to adjudicate upon the disputes. Secondly, it is submitted that the judgments holding that matters involving serious allegations of fraud ought not to be referred to arbitration, are all based on the discretion of the Court to refer the disputes to arbitration and there is no absolute bar for such reference.
7. Mr. Merchant, the learned Counsel appearing for the Respondents, on the other hand, submits that the issue of forgery and fabrication of documents was not before the Court and therefore, obviously not decided by the Court, whilst referring the disputes to arbitration. He submits that the learned Arbitrator was, accordingly, within his rights to decide that issue under Section-16. Secondly, the learned Counsel submits that there was a complete lack of jurisdiction in the Arbitrator to decide the disputes herein, since they involved serious questions of fraud, forgery and manipulation of accounts and required leading of elaborate documentary and oral evidence.
8. Before the legal issues involved are considered, it may be apposite to note the nature of allegations made in the dispute, on the basis of which the learned Arbitrator has declined to adjudicate. It is claimed by Respondent No.1 in the Statement of Claim before the Arbitrator, that there was an understanding between the parties that the Mumbai business of the firm would be handed over and managed by Respondent No.1, whilst the business at Bhilai, Jabalpur and Raipur would be managed by the husband of the Petitioner; that in furtherance of this understanding, a letter dated 1 June 2000 was prepared and signed by all three partners and sent to ITC Limited, the principal with whom the firm had an agreement for distribution-ship; that after disputes arose between the parties, the Petitioner filed a false police complaint that her signature on the letter of 1 June 2000 was forged; that similar complaint was made to ITC Limited; that thereupon ITC Limited withdrew their business with the firm; and that as a result the firm and Respondent No. 1 incurred damages. Based on these allegations a claim or damages was made against the Petitioner by Respondent No. 1. (It was this dispute which was referred to arbitration by this court.) The Petitioner's Counterclaim before the Arbitrator was on the basis that the letter of 1 June 2000 was prepared by Respondent No. 1 as part of a fraud to aggrandize himself more share of the business of the firm; that as a result of that letter, and a subsequent failure to withdraw the same and retrace the fraudulent act, the Petitioner was constrained to send a dissolution notice; and that the Petitioner was entitled to dissolution and accounts and towards that end a special audit was needed to be conducted into the accounts having regard to various acts of manipulation of accounts and siphoning of frauds by Respondent No.1. The Petitioner, accordingly, prayed inter alia for relief of a declaration that she continued to be a partner till dissolution of the firm by her notice, an account from Respondent No.1 and payment of her 50% share of the partnership.
9. The disputes between the parties, forming the subject matter of the arbitral reference, thus, mainly concern (i) the entitlement of Respondent No.1 to damages on account of the Petitioner's complaint of forgery to ITC Limited and (ii) the Petitioner's continuance as a partner of the firm and her entitlement to dissolution and accounts inter alia on the basis of true ascertainment of accounts after a special audit. Incidentally, these disputes involve inter alia the issues, namely, (i) whether the letter of 1 June 2000 reflected the actual understanding between the parties or was it forged, and (ii) whether there was any manipulation of partnership accounts by Respondent No.1. The question of forgery of the letter really arises on the claim of Respondent No.1, whereas the question of manipulation of accounts arises on the counter-claim of the Petitioner.
10. The contours of this dispute were very much clear when Respondent No.1 applied to the Court under section-11 for appointment of arbitrator. In-fact, the application of Respondent No.1 did refer to the criminal complaint filed by the Petitioner. Respondent No.1 craved leave to refer to the proceedings of the complaint when produced. The application also referred to the dissolution notice as also the invocation letter issued by the Petitioner. These were matters described as disputes and differences between the parties, and to resolve these matters of appointment of an arbitrator was sought by Respondent No. 1 from the Court.
11. This Court allowed the application, holding as follows:
œ2. The parties carry on business as partners in the firm, name and style of Laxmi Centre on the terms and conditions contained in a supplementary deed of partnership dated 4th March, 1997. Clause 18 thereof pertains to arbitration. Respondent No.1 had, in fact, invoked the arbitration. The disputes pertain to the dissolution of the said firm and for accounts. The same fall within the ambit of the arbitration clause.?
Both parties were represented through Counsel before the Court when this order was passed.
12. There are two questions which need to be addressed here. The first is, the authority of an arbitrator to decide on his jurisdiction in the face of a reference made to him by the court under Section 11 of the Act. The learned Arbitrator in the present case held under Section 16 of the Act that he had no jurisdiction to adjudicate upon the disputes on the ground that the disputes involved a case of fraud and forgery and required leading of elaborate evidence and therefore, were not arbitrable. A question which directly arises is: can he do so after a reference was made to him by court on the basis that conditions for referring the disputes to arbitration were satisfied and the disputes were required to be decided by arbitration. One needs to consider the interplay between Sections 11 and 16 of the Act to decide this question. The second question is, even otherwise can an arbitrator decline to adjudicate upon disputes which involve a case of fraud, forgery, etc. and require elaborate documentary and oral evidence. This calls for interpretation of Section 16 of the Act as it stands.
13. As indicated by the scheme of the Act, in a domestic arbitration a reference can come before an arbitrator through a court order under Section 8 or Section 11 or directly by an act of the parties acting under the appointment procedure in the arbitration agreement. It is now established by the Supreme Court judgment in the case of SBP and Co. Vs. Patel Engineering Ltd (2005) 8 Supreme Court Cases 618). that the power of the Chief Justice or his designate to refer the disputes is as much a judicial power as the power of the court to refer under Section 8. There are preliminary matters to be determined under both Sections. These involve jurisdictional issues raised before the court, or the Chief Justice or his designate, as the case may be. These jurisdictional issues take within their fold various aspects such as existence of the arbitration agreement between the parties, validity of the arbitration agreement, arbitrability of the claims required to be referred, etc. The nature of these preliminary issues and the extent of inquiry contemplated in connection therewith, have been a subject matter of quite a few decisions of the Supreme Court. These may now be noticed. Since we are concerned here with the interplay between Sections 11 and 16, the authorities considered below are in relation to Section 11 in particular, though the Supreme Court has also held that the two Sections, Sections 8 and 11, are complementary and cover the same field but operate in different situations.
14. In the case of SBP and Co. (supra), the Supreme Court held as follows:
œ9. Normally, any tribunal or authority conferred with a power to act under a statute, has the jurisdiction to satisfy itself that the conditions for the exercise of that power existed and that the case calls for the exercise of that power. Such an adjudication relating to its own jurisdiction which could be called a decision on jurisdictional facts, is not generally final, unless it is made so by the Act constituting the tribunal. Here, sub-section (7) of Section 11 has given a finality to the decisions taken by the Chief Justice or any person or institution designated by him in respect of matters falling under sub-sections (4), (5) and (6) of Section 11. Once a statute creates an authority, confers on it power to adjudicate and makes its decision final on matters to be decided by it, normally, that decision cannot be said to be a purely administrative decision. It is really a decision on its own jurisdiction for the exercise of the power conferred by the statute or to perform the duties imposed by the statute. Unless the authority satisfies itself that the conditions for exercise of its power exist, it could not accede to a request made to it for the exercise of the conferred power. While exercising the power or performing the duty under Section 11(6) of the Act, the Chief Justice has to consider whether the conditions laid down by the section for the exercise of that power or the performance of that duty exist. Therefore, unaided by authorities and going by general principles, it appears to us that while functioning under Section 11 (6) of the Act, a Chief Justice or the person or institution designated by him, is bound to decided whether he has jurisdiction, whether there is an arbitration agreement, whether the applicant before him is a party, whether the conditions for exercise of the power have been fulfilled, and if an arbitrator is to be appointed, who is the fit person, in terms of the provision. Section 11 (7) makes his decision on the matters entrusted to him, final.?
15. The statement of law in SBP and Co (supra) was further explained by the Supreme Court in the case of National Insurance Co. Ltd. Vs. Boghara Polyfab Pvt. Ltd. (AIR 2009 Supreme Court 170.)The Supreme Court in that case categorized the preliminary issues which arise for consideration in an application under Section-11 in the following words:
œ17. Where the intervention of the court is sought for appointment of an Arbitral Tribunal under section-11, the duty of the Chief Justice or his designate is defined in SBP and Co. This Court identified and segregated the preliminary issues that may arise for consideration in an application under section-11 of the Act into three categories, that is (i) issues which the Chief Justice or his Designate is bound to decide; (ii) issues which he can also decide, that is issues which he may choose to decide; and (iii) issues which should be left to the Arbitral Tribunal to decide.
17.1 The issues (first category) which Chief Justice/his designate will have to decide are:
(a) Whether the party making the application has approached the appropriate High Court.
(b) Whether there is an arbitration agreement and whether the party who has applied under section-11 of the Act, is a party to such an agreement.
17.2 The issues (second category) which the Chief Justice/his designate may choose to decide (or leave them to the decision of the arbitral tribunal) are:
(a) Whether the claim is a dead (long barred) claim or a live claim.
(b) Whether the parties have concluded the contract/transaction by recording satisfaction of their mutual rights and obligation or by receiving the final payment without objection.
17.3 The issues (third category) which the Chief Justice/his designate should leave exclusively to the arbitral tribunal are:
(i) Whether a claim made falls within the arbitration clause (as for example, a matter which is reserved for final decision of a departmental authority and excepted or excluded from arbitration).
(ii) Merits of any claim involved in the arbitration.?
16. It is clear from the foregoing discussion that there are preliminary issues to be decided by the Chief Justice or his designate “ some of which the Chief Justice/designate is bound to decide, whilst some he may choose to decide. Once such issues are decided, the decision has been accorded finality under Section 11 (7). The effect of such decision vis-a-vis the jurisdiction of the arbitrator to rule on his own jurisdiction under Section-16, has also been considered by the Supreme Court in a number of judgments. The issue came up for the first time before the Supreme Court in SBP and Co.'s case itself. This is what the Supreme Court had to say:
œ12. Section-16 of the Act only makes explicit what is even otherwise implicit, namely, that the Arbitral Tribunal constituted under the Act has the jurisdiction to rule on its own jurisdiction, including ruling on objections with respect to the existence or validity of the arbitration agreement. Sub-section (1) also directs that an arbitration clause which form part of a contract shall be treated as an agreement independent of the other terms of the contract. It also clarifies that a decision by the Arbitral Tribunal that the contract is null and void shall not entail ipso jure the invalidity of the arbitration clause. Sub-section (2) of Section 16 enjoins that a party wanting to raise a plea, that the Arbitral Tribunal does not have jurisdiction, has to raise that objection not later than the submission of the statement of defense, and that the party shall not be precluded from raising the plea of jurisdiction merely because he has appointed or participated in the appointment of an arbitrator. Sub-section (3) lays down that a plea that the Arbitral Tribunal is exceeding the scope of its authority, shall be raised as soon as the matter alleged to be beyond the scope of its authority is raised during the arbitral proceedings. When the Tribunal decides these two questions, namely, the question of jurisdiction and the question of exceeding the scope of authority or either of them, the same is open to immediate challenge in an appeal, when the objection is upheld and only in an appeal against the final award, when the objection is overruled. Sub-section(5) enjoins that if the Arbitral Tribunal overrules the objections under sub-section (2) or (3), it should continue with the arbitral proceedings and make an award. Sub-section (6) provides that a party aggrieved by such an arbitral award overruling the pleas on lack of jurisdiction and the exceeding of the scope of authority, may make an application on these grounds for setting aside the award in accordance with Section-34 of the Act. The question, in the context of sub-section (7) of Section 11 is, what is the scope of the right conferred on the Arbitral Tribunal to rule upon its own jurisdiction and the exercise of the arbitration clause, envisaged by Section-16 (1), once the Chief Justice or the person designated by him had appointed an arbitrator after satisfying himself that the conditions for the exercise of power to appoint an arbitrator are present in the case. Prima facie, it would be difficult to say that in spite of the finality conferred by sub-section (7) of Section-11 of the Act, to such a decision of the Chief Justice, the Arbitral Tribunal can still go behind that decision and rule on its own jurisdiction or on the existence of an arbitration clause. It also appears to us to be incongruous to say that after the Chief Justice had appointed an Arbitral Tribunal, the Arbitral Tribunal can turn round and say that the Chief Justice had no jurisdiction or authority to appoint the Tribunal, the very creature brought into existence by the exercise of power by its creator, the Chief Justice. The argument of the learned Senior Counsel, Mr. K.K. Venugopal that Section-16 has full play only when an Arbitral Tribunal is constituted without intervention under Section-11(6) of the Act, is one way of reconciling that provision with Section-11 of the Act, especially in the context of sub-section (7) thereof. We are inclined to the view that the decision of the Chief Justice on the issue of jurisdiction and the existence of a valid arbitration agreement would be binding on the parties when the matter goes to the Arbitral Tribunal and at subsequent stages of the proceeding except in an appeal in the Supreme Court in the case of the decision being by the Chief Justice of the High Court or by a Judge of the High Court designated by him.?
17. Even in National Insurance Co.'s case (supra), the Supreme Court observed as follows (in para 17):
œIt is clear from the scheme of the Act as explained by this Court in SBP and Co., that in regard to issues falling under the second category, if raised in any application under section-11 of the Act, the Chief Justice/ his designate may decide them, if necessary by taking evidence. Alternatively, he may leave those issues open with a direction to the Arbitral Tribunal to decide the same. If the Chief Justice of his Designate chooses to examine the issue and decides it, the Arbitral Tribunal cannot re-examine the same issue. The Chief Justice/his designate will, in choosing whether he will decide such issue or leave it to the Arbitral Tribunal, be guided by the object of the Act (that is expediting the arbitration process with minimum judicial intervention). Where allegations of forgery/fabrication are made in regard to the document recording discharge of contract by full and final settlement, it would be appropriate if the Chief Justice/his designate decides the issue.?
18. The next judgment is in the case of ASP Kushwaha (SSI Unit) Vs. Municipal Corporation Gwalior, (2011) 13 Supreme Court Cases 258)where the Supreme Court held as follows:
œ8. In SBP and Co. v. Patel Engg. Ltd., a Constitutional Bench of this Court held that once the Chief Justice or his designate appoints an arbitrator in an application under Section-11 of the Act, after satisfying himself that the conditions for exercise of power to appoint an arbitrator are present, the Arbitral Tribunal could not go behind such decision and rule on its own jurisdiction or on the existence of an arbitration clause. Therefore the contention of the respondents that the arbitrator ought to have considered the objection relating to jurisdiction and held that he did not have jurisdiction, cannot be accepted.?
19. The net result of the authorities discussed above is that the Chief Justice or his designate in an application under Section-11 of the Act has to satisfy himself that the conditions for exercise of power to appoint an arbitrator are present and once the appointment is made after such satisfaction, the arbitral tribunal could not go behind such decision or rule on its own jurisdiction.
20. That still leaves a subsidiary question open, namely, whether the satisfaction of the Chief Justice or his designate must be found recorded in the order of reference or reflected in it. Can a party argue that the particular question was either not before the Chief Justice or his designate or not decided by him whilst making the reference. Here one must distinguish between the two categories of issues, as discussed in the case of National Insurance Co. (supra). An issue which the Chief Justice or his designate is bound to decide (i.e. the first category issue as explained in National Insurance Co.) can never be said to be not decided in an order of reference under Section-11. A party is bound to raise such an issue in an application under Section-11 and the Chief Justice or his designate necessarily decides the same, whether or not the order of reference reflects any discussion on the issue. It is out of the preview of an arbitrator appointed under Section-11 to rule on his own jurisdiction by reference to such an issue. Any other interpretation is bound to raise a plethora of intractable questions. The first category issues really concern the jurisdiction of, and exercise of power by, the Chief Justice or his designate under Section-11. Once the jurisdiction and power are exercised, any question concerning such exercise is out of bounds for the arbitrator to whom the reference is made through that very exercise.
21. On the other hand, if it is an issue which the Chief Justice or his designate may or may not choose to decide (i.e. a category two issue), it is eminently reasonable to hold that such issue is not actually decided if a decision on the issue is not reflected in the order of reference. The party who asserts that such decision was made will have to show that the particular issue was raised before, and decided by, the Chief Justice or his designate.
22. Having regard to the law discussed above, all that remains to be done now is placing of the issue in the present case, based on which the learned Arbitrator has declined to adjudicate upon the disputes, in a correct category and considering whether there is any decision thereon in the application under Section-11.
23. The issue whether the matter should be referred to arbitration at all concerns satisfaction of the Chief Justice or his designate under Section 11, or of a Court under Section-8, as to whether conditions for exercise of power to appoint an arbitrator are present. It is a threshold issue which the Chief Justice or his designate, or the Court as the case may be, is bound to decide before appointing an arbitrator or referring the parties to arbitration. By its very nature such an issue cannot be left to the arbitrator to decide. It is for the Court or judicial authority to determine whether, considering the allegations made by the parties, the disputes might properly have to be dealt with by a civil court and not by an arbitrator.
24. Secondly, it must be borne in mind that under Section-8 as well as Section-11 the Court or judicial authority has a discretion whether to refer or not to refer the parties to arbitration on the basis of allegations of fraud and serious malpractices. This is clear from the judgment of the Supreme Court in the case of N. Radhakrishnan Vs. Maestro Engineers And Others (2010) 1 Supreme Court Cases 72). In that case the contention of the Respondents was that the case involved substantial questions relating to facts where detailed evidence (both documentary and oral) needed to be produced by either parties, and serious allegations pertaining to fraud and malpractices were raised, and therefore, the matter must be tried in Court and not be left to the Arbitrator. This is what the Supreme Court had to say on the submission :
œ21. In our opinion, the contention of the respondents relating to the jurisdiction of the arbitrator to decide a dispute pertaining to a matter of this proportion should be upheld, in view of the facts and circumstances of the case. The High Court in its impugned judgment has rightly held that since the case relates to allegations of fraud and serious malpractices on the part of the respondents, such a situation can only be settled in court through furtherance of detailed evidence by either parties and such a situation cannot be properly gone into by the arbitrator.?
The judgment of the Madras High Court, in H.G. Oomor Sait vs. O. Aslam Sait (2001) 2 MLJ 672)which was approved by the Supreme Court in Maestro Engineers case (supra), brings out the point more clearly. That was a case under Section 8. After an extensive review of authorities under the 1940 Act dealing with the power of the Court to refer (under Section 20 of that Act) and noticing Section-8 of the 1996 Act in its backdrop, the Madras High Court observed as follows :
9. It is true that the discretion of the Civil Court to proceed with the suit is narrowed down, but I am unable read to anything from the Act which would place a total embargo on the Civil Court to continue the proceedings before it only on the mere existence of an arbitration clause. A combined reading of all the provisions of the 1996 Act as well as section-8 discloses that the time-tested reasons which were behind the several judgments of the various Courts as well as the English Courts holding that Civil Court can refuse to stay the suit and can proceed with the suit under certain circumstances continue to hold good even now. The short-comings and deficiencies of the enquiry before an arbitrator are well known. The nature of the enquiry before an arbitrator is summary and Rules of procedure and evidence are not binding. The Arbitrator need not be even a law-knowing person. That is the reason why over a century, Courts have repeatedly held that in cases where substantial questions of law arise for consideration or issues which require serious consideration of evidence relating to fraud and misrepresentation etc. are involved, such cases are best left to the civil court and that the Arbitrator will not be competent to go into the said issues.
My endeavour is only to show that the Arbitration Act, 1996 does not in any manner deviate from the accepted principles behind the civil court's discretion to refer or not to refer a dispute to the arbitrator under certain given facts and circumstances and the provisions of the Arbitration Act cannot also override the provisions of the Partnership Act, 1932. Nor can any one afford to ignore the inherent short-comings and deficiencies of a proceeding before the Arbitrator compared to that of Civil Court. Therefore, wherever the dispute involves consideration of substantial questions of law or complicated questions of fact which would depend upon detailed oral and documentary evidence, the Civil Court is not prevented from proceeding with the suit and to refuse to refer the dispute to the Arbitrator. The fact that even the 1996 Act does not visualise any absolute embargo on the discretion or the jurisdiction of the Civil Court to deal with the suit would be evident even on a reading of Section 8 itself on which learned Counsel for the petitioner places strong reliance. The Section recognises the age old principle that a party seeking recourse to the Arbitrator should have applied for at the first instance itself before submitting his first statement. Therefore, the mere usage of the word œshall? in Section 8 cannot lead to the presumption that the Arbitration Act 1996 had in any manner deviated from the time-tested principles relating to the powers of the Civil Court to refer or not to refer the dispute before the Arbitrator. The contention of the learned Counsel for the petitioner that the 1996 Act leaves no discretion to the Civil Court in the said context, is not sustainable.?
This decision of Madras High Court was quoted with approval by the Supreme Court in Maestro Engineers, with an observation that the Supreme Court was œin consonance with the above-referred decision made by the High Court in the matter concerned?.
25. I am also fortified in this view by a judgment of a learned Single Judge of our Court in the case of HSBC PI Holdings (Mauritius) Limited Vs. Avitel Post Studioz Limited (Arbitration Petition No.1062 of 2012, Coram: R.D. Dhanuka, J. dtd. 6 December 2013.). In that case, after consideration of the cases of Maestro Engineers and H.G. Oomor Sait (supra) the learned Judge held as follows :-
œ83. A perusal of judgment of the Supreme Court in the case of N. Radhakrishnan (supra) would indicate that the issue before the Supreme Court was whether the said case falls within the jurisdiction of the arbitrator and if it was, whether the procedural requirements under Section 8(2) of the Act had been complied with to the satisfaction of the court. Supreme Court considered the submission made by the respondents that when a case involves substantial questions relating to facts where detailed material evidence was needed to be produced by either parties and serious allegations pertaining to fraud and malpractice were raised, the matter must be tried in a court and the arbitrator could not be competent to deal with such matters which involved an elaborate production of evidence to establish the claims relating to fraud and criminal misappropriation. It is held by the Supreme Court that the contention of the respondents relating to the jurisdiction of the arbitrator to decide a dispute pertaining to a matter of that proportion should be upheld in view of the facts and circumstances of the case. Such allegations cannot be properly gone into by the arbitrator. Supreme Court has held that in the facts of that case it did not warrant the matter to be tried and decided by the arbitrator, rather for the furtherance of justice, it should be tried in the court of law which could be more competent and have a means to decide such a complicated matter involving various questions and issues raised in the said dispute. Supreme court agreed with the views taken by the Madras High Court in case of H.G. Oomor Sait vs. O. Aslam Sait (2001) 3 CTS 269. In paragraphs 26 of the said judgment in case of N. Radhakrishnan (supra), it is held that in view of the serious allegations made against the respondents alleging them to commit mal-practises in the account books and manipulates the finances of the partnership firm, such allegations could not be properly raised with before the arbitrator. It is held that such issues involved detailed evidence which could be done only by a civil court. A perusal of the judgment of the Supreme Court in case of N. Radhakrishnan (supra) minutely, I am of the view that it would be at the discretion of the court in facts of each case to decide that though arbitration agreement exists, whether such disputes could be appropriately dealt with by an arbitrator or by a civil court considering the seriousness of the allegations made by the parties in the facts of each case. The said judgment in my view holds that it is at the discretion of the court to refer the matter to arbitration or whether the same can be decided by the court appropriately in the facts of each case. The judgment of the Supreme Court in my view is based on the facts of that case as is clear in paragraphs 21, 23 and 26 of the said judgment.?
26. Even in Ivory Properties and Hotels Pvt. Ltd. Vs. Nusli Neville Wadia (Arbitration Application No.123 of 2008 Coram: Dr. D.Y. Chandrachud, J. dtd. 7 January 2011.), this Court held as follows :-
œSignificantly, the Supreme Court has observed that where allegations of fraud or of serious malpractices are made, such a situation can only be settled in Court after leading evidence and cannot fall for determination by an arbitral tribunal. The Supreme Court has categorically affirmed the correctness of the statement of law contained in the judgment of the Madras High Court that a Court would refuse to refer a matter to arbitration if serious questions of law or complicated questions of fact are involved or where an allegation of fraud is levelled. Now, it is necessary for the Court to emphasize that it is not every stray allegation of fraud which would lead to the consequence of a refusal on the part of the Court to refer parties to arbitration. The law certainly is not that on an isolated or stray reference to fraud without material particulars that the jurisdiction to refer parties to arbitration would stand ousted. Essentially, it is for the Court to determine whether having regard to the nature of the allegations and the context in which allegations of fraud have been levelled parties must not be referred to arbitration. The pleadings have to be scrutinised and each case must turn on a judicious exercise of power by the Designated Judge.?
27. It is clear from the above discussion that it is essentially for the Chief Justice or his designate to determine under Section-11 whether, having regard to the nature of the allegations and the context in which allegations of fraud have been levelled, parties must not be referred to arbitration. The issue concerns the jurisdiction and authority of the Chief Justice or his designate to allow a reference under Section-11. It is clearly a 'first category issue' (as explained in National Insurance case), which falls for the decision of the Chief Justice or his designate.
28. It therefore follows that after a reference to the Arbitrator under Section-11 is made, whether or not the reference order deals with the particular issue, the Arbitrator to whom such disputes are referred cannot refuse to arbitrate on the ground that there are serious allegations of fraud or malpractice, on which elaborate evidence needs to be led.
29. There is one more reason why an arbitrator cannot do so, and that has to do with the nature of the arbitrator's authority to rule on his jurisdiction under Section-16 as also the nature of the issue involved. Section-16 deals with the competence of the arbitral tribunal to rule on its own jurisdiction. The arbitral tribunal considers under Section-16 a plea that it does not have jurisdiction. Such a plea may be based on an objection to the existence or validity of the arbitration agreement or an objection relating to the arbitrability of the dispute.
30. The term arbitrability has been explained by the Supreme Court in the case of Booz Allen and Hamilton Inc. v. SBI Home Finance Ltd. and Ors.(AIR 2011 Supreme Court 2507)The Supreme Court has brought out three facets of arbitrability of the disputes which bear on the jurisdiction of the Arbitral Tribunal. They are as follows:-
(i) Whether the disputes are capable of adjudication and settlement by arbitration?
(ii) Whether the disputes are covered by arbitration agreement?
(iii) Whether the parties have referred the disputes to arbitration?
All these aspects are within the purview of the Arbitrator whilst ruling on his jurisdiction under Section-16, (subject of course to what is said above in connection with the interplay of Sections-11 and 16).
31. We are particularly concerned here with the first of the above three facets of arbitrability, namely, the capability of adjudication and settlement by arbitration. The question in such a case is, whether the disputes, having regard to their very nature, could be resolved by a private forum chosen by the parties (the Arbitral Tribunal) or whether they would exclusively fall within the domain of public fora appointed by the State (Courts). In Booz Allen and Hamilton Inc. (supra) the Supreme Court considered this facet of arbitrability in detail and held as follows:
œ22. Arbitral tribunals are private fora chosen voluntarily by the parties to the dispute, to adjudicate their disputes in place of courts and tribunals which are public fora constituted under the laws of the country. Every civil or commercial dispute, either contractual or non-contractual, which can be decided by a court, is in principle capable of being adjudicated and resolved by arbitration unless the jurisdiction of arbitral tribunals is excluded either expressly or by necessary implication. Adjudication of certain categories of proceedings are reserved by the Legislature exclusively for public fora as a matter of public policy. Certain other categories of cases, though not expressly reserved for adjudication by a public fora (courts and Tribunals), may by necessary implication stand excluded from the purview of private fora. Consequently, where the cause/dispute is in-arbitrable, the court where a suit is pending, will refuse to refer the parties to arbitration, under section 8 of the Act, even if the parties might have agreed upon arbitration as the forum for settlement of such disputes. The well recognized examples of non-arbitrable disputes are : (i) disputes relating to rights and liabilities which give rise to or arise out of criminal offences; (ii) matrimonial disputes relating to divorce, judicial separation, restitution of conjugal rights, child custody; (iii) guardianship matters; (iv) insolvency and winding up matters; (v) testamentary matters (grant of probate, letters of administration and succession certificate); and (vi) 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.?
32. In Booz Allen's case the Supreme Court went on to explain the principle behind excluding the six categories of cases from the purview of arbitration. These cases essentially relate to actions in rem. A right in rem is a right exercisable against the word at large, as contrasted from a right in personam which is an interest protected solely against specific individuals. The Supreme Court noted that generally and traditionally disputes relating to rights in personam are considered to be amenable to arbitration, whereas all disputes relating to rights in rem are required to be adjudicated by courts and public tribunals. Private tribunals chosen by the parties are inherently unsuitable for adjudication of these latter rights. At the same time, the Supreme Court noted that this was not a rigid or inflexible rule and the disputes relating to subordinate rights in personam arising from rights in rem have always been considered to be arbitrable. The Supreme Court next noted that though the 1996 Act does not specifically exclude any category of disputes as being not arbitrable, Sections 34(2)(b) and 48(2) of the Act make it clear that an arbitral award will be set aside if the Court finds that œ the subject matter of the dispute is not capable of settlement by arbitration under the law for the time being in force?. The Court considered the above-referred six categories of cases as involving subject matters which are not capable of being settled by arbitration, having regard to the nature of these rights, which are rights in rem, and the types of remedies which these rights involve, which only public fora can grant. For example, in a liability arising out of a criminal offence, the Arbitrator cannot impose a fine or a term of imprisonment. So also, he cannot make an award which is binding on third parties or affects the public at large, such as a judgment in rem against a ship or an assessment of the ratable value of land or a divorce decree or a winding up order. These are disputes where the Arbitral Tribunal, which is a private forum chosen by parties, inherently lacks jurisdiction having regard to the nature of the right or remedy claimed. If these matters are brought before the Arbitrator, the Arbitrator can appropriately say that these disputes are not capable of being adjudicated and settled by arbitration and the Arbitrator inherently lacks jurisdiction to adjudicate upon them.
33. Let us now examine the nature of the dispute raised between the parties when an allegation of fraud or malpractice or indeed commission of any criminal offence is made by a party against the other party. If it is claimed that as a result of this act of fraud, malpractice or criminal offence, a remedy of imposition of a fine or imprisonment is claimed, the dispute is obviously incapable of being settled by arbitration and by its very nature the jurisdiction of the arbitrator is clearly ousted. Take the case, however, of an act of a party which, though amounting to a criminal offence, at the same time may entail a personal injury giving right to, say, damages payable to the injured party. An action for damages is essentially a civil right action in personam. There is no reason why such a dispute should not go before a privately chosen forum by the two parties concerned. Take also the case of an agreement between the parties where the consent of one party is vitiated by fraud undermining the very execution of the agreement. Whether or not there is an agreement between the parties in such a case is a matter of civil law and concerns civil rights and remedies arising in personam. There is nothing in the subject matter of such a dispute which is inherently incapable of settlement by arbitration. Such a matter may very well be referred to arbitration. Infact the Supreme Court in the case of Olympus Superstructures Pvt. Ltd. v. Meena Vijay Khetan and others (1999(5) SCC 651 :(AIR 1999 SC 2102: 1999 AIR SCW 1831)countenanced the possibility of settlement by arbitration of matters incidental to a criminal offence or even a matrimonial dispute. The Court in that case after noting the law stated in Halsbury observed as follows (para 35 ):-
œReference is made there to certain disputes like criminal offences of a public nature, disputes arising out of illegal agreements and disputes relating to status, such as divorce, which cannot be referred to arbitration. It has, however, been held that if in respect of facts relating to a criminal matter, (say) physical injury, if there is a right to damages for personal injury, then such a dispute can be referred to arbitration (Keir v. Leeman) (1846) 9 QB 371. Similarly, it has been held that a husband and wife may refer to arbitration the terms on which they shall separate, because they can make a valid agreement between themselves on that matter ¦..?
34. In a matter, therefore, when a fraud or malpractice or even an act of criminal offence is brought to the notice of the Arbitrator, the Arbitrator cannot simply stay his hands and refuse to exercise jurisdiction. If it is a matter which requires determination of private rights, the Arbitrator certainly has jurisdiction and ought to adjudicate upon the matter, even if the act complained of may give rise independently to a criminal offence which can be tried only before public fora. Thus, in a matter where it is brought to the notice of the Arbitrator that there are allegations of fraud or malpractice and which require leading of elaborate evidence, the Arbitrator cannot refuse to exercise jurisdiction. The Arbitrator does not lack inherent jurisdiction to decide such a dispute. It is another matter that the Court whilst exercising its powers under Section-8 or the Chief Justice or his designate exercising his jurisdiction under Section-11 may find a matter unsuitable for being referred to arbitration on the ground that having regard to the nature of the allegations and the evidence involved, the disputes may not be appropriately decided by an arbitrator but ought to be decided by a civil court. This aspect reflects on the discretion of the Court, as noted above. But it is quite another matter for the Arbitrator to say that because the dispute involves a fraud or leading of elaborate evidence, the Arbitrator has no jurisdiction to decide such a dispute. The Arbitrator can decline to exercise his jurisdiction under Section 16 only when he lacks inherent jurisdiction to adjudicate upon a dispute. There is no discretion in the Arbitrator to adjudicate or not to adjudicate.
35. In the present case, the Arbitrator's refusal to adjudicate upon the disputes is, thus, vitiated on two counts. It cannot be said that the Arbitrator lacked inherent jurisdiction to adjudicate upon the disputes. So also, as explained above, the matter being within the purview of the Court under Section-11 of the Act and the Court having exercised its jurisdiction and referred the matter to Arbitrator, the Arbitrator could not have revisited the issue and ruled out his jurisdiction.
36. For all these reasons, the order passed by the learned Arbitrator cannot be sustained. The order is, accordingly, set aside and the matter is remanded to the arbitrator for adjudication on merits. There shall be no order as to costs.