Cancellation of Registered Instruments Between Parties Is Arbitrable: Supreme Court Settles the Law
Background and Context
The Supreme Court of India, in Deccan Paper Mills Co. Ltd. Vs Regency Mahavir Properties & Ors., has delivered a significant ruling clarifying two important questions of law: first, whether disputes involving allegations of civil fraud in the performance of a contract are arbitrable; and second, whether a suit for cancellation of a registered written instrument under Section 31 of the Specific Relief Act, 1963 constitutes a proceeding in rem that falls outside the jurisdiction of an arbitral tribunal.
The Court answered both questions in favour of arbitrability, dismissing the appeal and affirming the orders of the courts below that had referred the parties to arbitration.
Factual Matrix
The dispute arose from a chain of agreements relating to development rights over land situated at village Mundhwa, District Pune.
The Original Development Agreement
Deccan Paper Mills Co. Ltd. (Deccan), as owner of approximately 80,200 sq. meters of land bearing Survey Nos. 96B, 96C, and 96D, entered into a development agreement dated 22.07.2004 with M/s Ashray Premises Pvt. Ltd. (Ashray) for the development of 32,659 sq. meters of that land. This agreement did not contain any arbitration clause. Clause 7(m) of that agreement, however, permitted Ashray to assign its rights under the agreement to any other person, firm, or party without disturbing the terms and conditions of the arrangement.
The Assignment and Deed of Confirmation
Exercising the right conferred by clause 7(m), Ashray entered into an assignment agreement dated 20.05.2006 with Regency Mahavir Properties (Regency), a partnership firm, by which the execution of the development agreement was assigned to Regency. Crucially, clause 14 of this assignment agreement contained an arbitration clause, which read as follows:
"If during the continuance of the said Agreement/these presents or at any time afterwards any difference shall arise between the parties herein and the heirs, executors or administrators of the other of them or between their respective heirs, executors or administrators in regard to the construction of any of the articles herein contained or to any division (..illegible) thing to be made or done in pursuance hereto or to any other matter or thing relating to the said Agreement/these presents the same shall be forthwith referred to one arbitrator if the parties agree or otherwise to two arbitrators, one to be appointed by each party to the reference or to an Umpire to be chosen by the Arbiters before entering upon the reference and every such reference shall be deemed to be an Arbitration in accordance with and subject to the provisions of The Arbitration & Conciliation Act, 1996 or any statutory modification or re-enactment thereof for the time being in force."
A deed of confirmation dated 13.07.2006 followed, which reaffirmed the assignment from Ashray to Regency and was stated to form part of the 20.05.2006 agreement.
Deccan's Allegation of Fraud
Deccan later filed Special Civil Suit No. 1400 of 2010 on 13.07.2010, alleging that one Mr. Atul Chordia (Respondent No. 3 / Defendant No. 3) had played a fraud upon its directors. The core of the allegation, as pleaded in the suit, was that:
- Mr. Chordia had represented to Deccan's directors that he would be a leading partner of Regency and would be personally responsible for the development of the property.
- Deccan's directors, relying on this assurance, agreed to become a consenting party to the assignment agreement.
- It later emerged that Mr. Chordia had retired from Regency as far back as 30.05.2006 — before the deed of confirmation dated 13.07.2006 was signed — yet he signed that deed purportedly as an authorised partner of Regency.
- Deccan's directors discovered this only around April/May 2010 when they approached one of Regency's actual partners regarding delays in construction.
As stated in the plaint:
"Directors of Plaintiff Company therefore say that Defendant No.1 in collusion with Defendant No.2 and in active concealment of material fact, by misrepresenting Plaintiff Company and by practicing fraud upon the Plaintiff Company have obtained consent of Plaintiff Company on the agreement of assignment and Deed of Confirmation. Directors of Plaintiff Company therefore say that said agreement of assignment and Deed of Confirmation being tainted with fraud are ab initio null and void and not binding on Plaintiff Company."
The prayers in the suit sought:
- A declaration that the agreements dated 22.07.2004, 20.05.2006, and the deed of confirmation dated 13.07.2006 were obtained by fraud and hence void.
- A direction by mandatory injunction to execute and register a deed of cancellation of the said instruments.
- A perpetual injunction restraining further development activity on the suit property.
Proceedings Before the Lower Courts
Application Under Section 8
Almost immediately after the suit was filed, Regency filed an application dated 19.07.2010 under Section 8 of the Arbitration and Conciliation Act, 1996 before the Civil Judge (Senior Division), Pune, seeking reference of the dispute to arbitration on the basis of the arbitration clause in the 20.05.2006 agreement.
Deccan opposed the application, contending that since the very agreement containing the arbitration clause was being challenged as having been procured by fraud and was therefore null and void, the arbitration clause within it was equally unenforceable.
Order of the Additional Judge, Small Causes Court, Pune
By a judgment dated 19.07.2011, the Additional Judge, Small Causes Court, Pune allowed the application and referred the parties to arbitration, observing that:
"After perusing the above mentioned cited cases, it shows that when there is a clause of arbitration it is mandated on the Civil Court to refer the dispute and parties for arbitration as per agreement. In present case the plaintiffs have materially contention about playing fraud by Defendant No.3 but there is no any contents in agreement as alleged by plaintiff in plaint about keeping faith on Defendant No.3..."