The Supreme Court has ruled on the arbitrability of disputes involving allegations of contract fraud and whether proceedings under Section 31 of the Specific Relief Act, 1963 should be treated as in personam or in rem.
Proceedings under Section 31 of the Specific Relief Act, 1963 are to be treated as proceedings in personam.
Date of Judgment:
August 19, 2020.
Justice R. F. Nariman
Justice Navin Sinha
Justice Indira Banerjee
Appellant – Deccan Paper Mills Co. Ltd.
Respondents – Regency Mahavir Properties & Ors.
- Section 8, the Arbitration and Conciliation Act 1996 – Section 8 of the Arbitration and Conciliation Act 1996 states that parties can be ordered to arbitrate by a court based on their arbitration agreement. Section 8 (1) requires an original arbitration agreement that is certified.
- Section 17, the Indian Contract Act, 1872 –In this section, fraud is defined as the false suggestion of a fact by someone who does not believe it to be true, or the active concealment of a fact by someone who knows or believes it to be true. It also includes making a promise without intending to keep it or any other deceptive act. Acts committed by a party to a contract, or his agent, with the intent to deceive another party to the contract or to induce him to enter into it constitute fraud.
- Section 29, the Specific Relief Act, 1963 –A plaintiff seeking specific performance of a written contract may also ask that the contract be rescinded and delivered up for cancellation. If the Court refuses to enforce the contract, it may order it to be revoked and returned.
- Section 31(1) of the Specific Relief Act, 1963 –A person who believes a written instrument against him is void or voidable may sue to have it declared void or voidable.The Court may so adjudge it and order it to be delivered up and cancelled at its discretion.
- Deccan Paper Mills Co. Ltd. ("Deccan") and Ashray Premises Pvt. Ltd. ("Ashray") entered into an agreement on July 22, 2004, to develop a portion of land owned by Deccan. The parties agreed that Deccan would not object if Ashray assigned or delegated the rights or the Power of Attorney/writings executed in furtherance of the Agreement to any other person, firm, or party at any time during the Agreement's continuation, without violating the T&Cs of the Agreement.
- As a result, Ashray entered into a partnership agreement with Regency Mahavir Properties ("Regency").Ashray delegated the Agreement's execution to Regency. The Regency Agreement had an arbitration clause, despite the Agreement not having one. A deed of confirmation then confirmed the Regency Agreement.
- The Deccan Directors agreed to this assignment based on assurances given by Mr. Atul Chordia, who had orchestrated the entire transaction fraudulently. Mr. Atul Chordia chose to retire on May 30 2006, shortly after Ashray assigned development work to Regency and before he fraudulently signed the Deed as an authorised partner of Regency.
- Deccan informed Ashray that the Regency Agreement and Deed are not binding upon it and filed a suit for declaration praying,among other things, for a declaration that the Regency Agreement and Deed are illegal, null, void and not binding upon Deccan and for cancellation of the Agreement, Regency Agreement as well as the Deed.
- Soon after, Regency applied under Section 8 of the Arbitration and Conciliation Act, 1996 seeking arbitration of the dispute, which was granted. Deccan filed a writ petition in the High Court of Bombay, which was dismissed. Thus, Deccan preferred this appeal to the Supreme Court.
- Deccan argued that because the dispute involved the cancellation of written instruments, it would be a proceeding in rem under Section 31 of the Specific Relief Act.
- Whether disputes involving allegations of fraud orchestrated in the execution of an agreement can be arbitrated?
- Whether proceedings under Section 31 of the Specific Relief Act, 1963 would be treated as proceedings in personam or proceedings in rem?
- In dealing with fraud in the execution, the Supreme Court reaffirmed its decision in Avitel Post Studioz Limited & Ors. v. HSBC PI Holding (Mauritius) Ltd., in which it established the law on the use of the "fraud exception." The Avitel decision clarified that a contract's subject matter is arbitrable if it falls under Section 17 of the Indian Contract Act, 1872 ("Contract Act") or if it involves fraud in the performance of the contract, which is a civil wrong.
- In Avitel, the Supreme Court held that just because a transaction has criminal overtones does not make it non-arbitrable. The Supreme Court also noted that there was no averment in this case. The Regency Agreement and Deed were never signed, thus negating the arbitration clause. The suit was inter-party with no "public overtones", thus negating the "fraud exception".
- In relation to the issue of whether the proceeding is"in personam", or "in-rem",the Supreme Court noted that a reading of Section 31(1) of the Specific Relief Act reveals that when a written instrument is found to be void or voidable, a court may order it to be delivered up to the plaintiff and cancelled, in the same way, that a suit for rescission of a contract under Section 29 of the Specific Relief Act can.As a result, the Supreme Court determined that the Section 31(1) action is strictly an action between parties or by persons who obtained derivative title from the parties and that it is therefore in personam.
- The Supreme Court also clarified that when an unregistered instrument is cancelled, an action brought under Section 31(1) of the Specific Relief Act cannot be said to be in personam. When a registered instrument is cancelled, it cannot be said to be in rem. It was also stated that the factum of registration of what is otherwise a private document between parties does not confer any higher legal status on the document due to its registration.
- The Supreme Court also looked at a number of decisions. It came to the conclusion that a judgement passed under Section 31 of the Specific Relief Act binds only the parties to the suit, not everyone who has a claim to the property.
Finally, the Court decided that the District Court and High Court judgments, in this case, did not need to be overturned. As a result, the appeal was dismissed. The Supreme Court has set a high bar for a dispute to fall under the "fraud exception" and be ineligible for arbitration.
The Court cleared up the confusion caused by several High Court judgments that treated a suit under Section 31 of the Specific Relief Act as either in personam or rem. Also, after examining the numerous inconsistencies that would arise if proceedings under Section 31 of the Specific Relief Act were treated as in rem, the Supreme Court decided that such proceedings would be in personam and binding only on the parties to the suit.
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