Whether issue of fraud is arbitrable ?

 In the present case, no such investigation of fraud as a whole is required to
decide the dispute between the Plaintiff and the Defendant. A tangential reference to
the wider fraud in the pleadings may be made, but it appears to me that it is possible
for an arbitral tribunal to adjudicate the dispute, including the question of fraud,
without having to unravel the entire fraud alleged to be perpetrated by the Defendant
Exchange. The primary relief sought by the Plaintiff is specific performance, or
compensation in lieu thereof, and an arbitral tribunal does have the power to order
specific performance of a contract, as held by the Hon’ble Supreme Court in Olympus
Superstructures Pvt. Ltd. v. Meena Vijay Khetan28. Accordingly, I hold that the issue of
fraud is arbitrable and there is insufficient reason to nevertheless refuse to refer the
matter to arbitration.
IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
NOTICE OF MOTION (L) NO. 2036 OF 2013
IN
SUIT (L) NO. 870 OF 2013
National Spot Exchange Limited …Applicant
(Original Defendant)
In the matter of:
Lotus Refineries Private Limited …Plaintiff
Versus
National Spot Exchange Limited …Defendant

CORAM: S.J. KATHAWALLA, J.

Judgment pronounced on: 10 th September, 2014


1. The present Notice of Motion is taken out by the Applicant/Defendant (“the
Defendant”) in the above Suit under the provisions of Section 8 of the Arbitration and
Conciliation Act, 1996 (“the Act”), seeking to refer the parties to the above Suit to
arbitration as contemplated under the Arbitration Agreement between the Plaintiff
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and the Defendant contained in Clause 3.1.2 and Clause 15.4 of the ByeLaws
of the
Defendant Exchange (“Byelaws”),
as also Clause 11.11 of the Undertaking for
Internet Based Trading (“UIBT”) given by the Plaintiff to the Defendant Exchange.
2. The Plaintiff is a private limited company incorporated under the provisions of
the Companies Act, 1956, and is inter alia engaged in the business of manufacturing
and selling edible oils. The Defendant is an unlisted public company incorporated
under the provisions of the Companies Act, 1956, and is the nationallevel
institution
that carries on business as a trading exchange providing for an electronic trading
platform for spot contracts in various commodities on a compulsory delivery basis.
3. According to the Plaintiff, in or around March, 2012, the Plaintiff sought to
participate in the Defendant Exchange based on the representations made by the
officials of the Defendant and with an understanding that the Defendant is duly
constituted under Indian laws and that the Defendant is authorized to offer various
types of contracts on the Exchange under the supervision and control of the Forward
Markets Commission (“FMC”).
4. The Plaintiff commenced trading on the Exchange under its Membership ID
No. 14180 on 5th March, 2012. At the time of taking membership of the Defendant,
the Plaintiff was verbally informed by the representatives of the Defendant that the
documentation for membership would be completed subsequently and accordingly,
the Plaintiff was only provided with Membership ID No. 14180.
5. On 5th March, 2012, the Plaintiff entered into various agreements and
addendums (each valid for a period of 11 months viz. until 4th February, 2013) with
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the Defendant to avail the warehousing services provided by the Defendant at various
locations. In terms of the said agreements and addendums (“Warehouse
Agreements”), the Defendant offered its warehouse management services at the
charges specified therein.
6. On 22nd August, 2012 and 3rd September, 2012, vide emails of even dates,
the representatives of the Defendant requested the Plaintiff to execute and provide
(a) the Membership Agreement in the format provided therein; (b) a postdated
cheque (PDC) as per Clause 9 of the said Agreement; and (c) a postdated cheque
declaration (PDC Declaration) in the format provided therein. The Defendant refers
to the Membership Agreement as the “ExchangeMember
Agreement”.
7. On 25th March, 2013, the Plaintiff by hand delivery, delivered a blank cheque
bearing No. 635423 along with the PDC Declaration to the Defendant, the receipt of
which was acknowledged by the Defendant. The said cheque was issued by the
Plaintiff under the advice of the Defendant as the Plaintiff did not have any predetermined
trading exposure contemplated under Clause 9 of the said Agreement. On
17th April, 2013, the Plaintiff executed and sent the said Agreement to the
Defendant.
8. As a matter of practice, whenever the members/participants of the Exchange
were allowed to commence trading in any commodity, the Defendant would issue a
circular setting out (i) the contract specifications; (ii) the quality and quantity
parameters; (iii) the charges relating to trading settlement and delivery; (iv) the
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procedures, norms, conditions of delivery, quality check and withdrawal process, (v)
the auction procedure; and (vi) other terms and conditions applicable to such trades.
9. Every trade conducted by the members on the Defendant Exchange was
intended to be an independent trade with an obligation cast on the seller that each
contract entered into by it should result in compulsory delivery. As a matter of
illustration, “T” means the Trade Day i.e. the day on which the trade took place, and
“+2” or “+25” means the number of days within which delivery and/or payment
would be effected or settled. For instance, T+2 means that the trade is concluded on
“T” day and the delivery and/or payment would be settled within 2 days. Such a
contract was called a “T+2 Contract”. Similarly, T+25 means that the trade is
concluded on “T” day and the delivery and/or payment would be settled within 25
days. Such a contract was called a “T+25 Contract”. The Plaintiff sold goods under a
series of T+2 Contracts and purchased the same category of goods under a series of
T+25 Contracts.
10. For trading in contracts offered by the Defendant Exchange (including T+2
Contracts and T+25 Contracts), the ByeLaws
specified that the Plaintiff would place
an electronic order with the Defendant on its website. The Defendant represented
that it matched the best buy order with the best sell order. Accordingly, the counter
parties to an order were matched on a pricetime
priority basis through National
Electronic Spot Trading(NEST) or other permitted electronic trading system. Hence,
the Plaintiff neither had any discretionary power nor did it exercise any control in
selecting the counter party to an order and the same was determined by the trading
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system of the Exchange on the basis of the aforesaid order matching rules set out in
the ByeLaws.
11. Each contract was an independent contract governed by the set of terms
provided in the relevant business rules set out in the circular issued by the Defendant
in relation to the specific commodities (“Business Rules”) in accordance with the
terms of the ByeLaws
and the Rules.
12. All payments were received or made to the Defendant by the Plaintiff through
a clearing and settlement account bearing No. 00990680024515 held with the HDFC
Bank which was the clearing bank designated as such by the Defendant.
13. During the period commencing from 5th March, 2012, up to 31st July, 2013,
the Plaintiff had undertaken a series of trades offered on the Exchange. The Plaintiff
undertook total sales worth INR 2606,40,78,400/(
Rupees Two Thousand Six
Hundred and Six Crores Forty Lakhs Seventy Eight Thousand and Four Hundred only)
and total purchases worth INR 2665,04,67,078/(
Two Thousand Six Hundred and
Sixty Five Crores Four Lakhs Sixty Seven Thousand and Seventy Eight only). Owing
to the practice of Netting Off carried on by the Defendant (i.e. netting off the payout
obligations under sales contract of the Plaintiff against its payin
obligations towards
purchase contracts and thereby, crediting the Settlement Account with the differential
amount only, if any), the Settlement Account of the Plaintiff had only been credited
with a sum of INR 455,81,89,603.82/(
Rupees Four Hundred and Fifty Five Crores
Eighty One Thousand Eighty Nine Lakhs Six Hundred and Three only) since 2012.
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14. During the said period, the Plaintiff had purchased commodities such as
Cottonseed Wash Oil, Refined Sunflower Oil (Chennai and Shamshabad), RBD
Palmolein Oil, Mustard Oil, Soya Oil, Mustard Seeds and Soybean Seeds under
various T+25 Contracts. In relation to these respective purchases, the Defendant had
transferred various respective warehouse receipts in favour of the Plaintiff, and levied
warehouse receipt transfer charges towards the same. The title in the said goods
vested with the Plaintiff as a result of the warehouse receipt transfers endorsed by the
Defendant in favour of the Plaintiff. However, according to the Plaintiff, the said
commodities/goods remained in the possession of the Defendant who was acting in
fiduciary capacity for the Plaintiff, and were kept in the warehouse owned and
managed by the Defendant.
15. According to the Plaintiff, whilst the Plaintiff had taken deliveries of certain
commodities viz. Mustard Seeds and Soya Seeds (described in paragraphs 40(g) and
40(h) of the Plaint) where such commodities had been offered for delivery by the
Defendant by way of a delivery order issued in favour of the Plaintiff, the Defendant,
despite having levied charges for issuing warehouse receipt transfers in favour of the
Plaintiff, had neither provided the original warehouse receipts nor issued any delivery
order in respect of other commodities (described in paragraphs 40(a) to 40(f) of the
Plaint) so as to enable the Plaintiff to take delivery of such commodities.
16. Thereafter, on 22nd July, 2013, the Defendant vide its circular bearing
reference no. NSEL/TRD/2013/061, unilaterally changed the payment and delivery
terms of the existing transactions, thereby modifying the payment and delivery dates
of all the T+25 Contracts into that of a T+10 contract, which according to the
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Plaintiff added undue burden and hardship. In terms of the said circular, the Plaintiff
was now required to make payments on the tenth day and not on the twenty fifth day
on the purchases made under the T+25 Contracts that were pending settlement on
23rd July, 2013.
17. On 31st July, 2013, the Defendant vide its circular bearing reference no.
NSEL/TRD/2013/065, once again unilaterally modified the settlement period of the
contracts pending settlement on such date and stated that the delivery and settlement
of all pending contracts would be merged and deferred for a period of 15 days.
According to the Plaintiff, as per the said circular, the Defendant was under the
obligation to settle all pending contracts by making delivery of goods after 15th
August, 2013 for which the Plaintiff had completed its payin
obligations, and which
obligation the Defendant failed to fulfil.
18. The Plaintiff further alleges that on 2nd August, 2013, the Defendant vide an
email sent a draft agreement, purporting to be a settlement agreement, to the Plaintiff
to pay an amount of INR 252,45,43,194/(
Rupees Two Hundred and Fifty Two
Crores Forty Five Lakhs Forty Three Thousand One Hundred and Ninety Four only)
without making any commitment of making deliveries of goods purchased until 31st
July, 2013.
19. The Plaintiff with an intention to resolve this dispute in respect of the claim,
sought the interjection of the FMC vide its letter dated 13th August, 2013, stating
that the claim raised by the Defendant was incorrect and unsubstantiated, while also
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expressing its willingness to pay the amount that might be due and legally payable,
subject to appropriate resolution of the disputes.
20. However, on 14th August, 2013, the Defendant by way of a circular, issued a
settlement calendar setting out the payin
obligations of the Plaintiff for an amount of
INR 252,45,43,194/as
due and payable by 16th August, 2013, although the
Defendant did not set out its obligation to settle the pending contracts by way of
delivery towards the Plaintiff.
21. The Plaintiff alleges that through various reports circulating in the media, it
contemplated that a fraud might have been played on it by the officials of the
Defendant, and that in fact, the goods of the Plaintiff may have been misappropriated
and not be present for delivery. As a result of this, the Plaintiff apprehended that even
if it makes payment to the Defendant, the Defendant may not be in a position to
deliver the commodities to the Plaintiff.
22. Accordingly, on 19th August, 2013, the Plaintiff invoked conciliation
proceedings as per Clause 3.1.2 of the ByeLaws
of the Defendant Exchange, by
sending a notice of conciliation to the Defendant. However, the Defendant vide letter
dated 23rd August, 2013, inter alia rejected the same stating that “the provisions for
Arbitration and reconciliation proceedings as contained in the Bye laws of the Exchange
pertain to dispute between (a) member and a client; (b) member with another member.
It does not pertain to dispute between Exchange and its members. In fact, as a member of
the Exchange, you have submitted an Undertaking that you will abide by the decisions of
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the Exchange and so you cannot resort to arbitration proceedings by raising dispute
against Exchange dues”.
23. In the meantime, on 21st August, 2013, the Defendant, according to the
Plaintiff, arbitrarily, illegally, irrationally presented the PDC to the bank for payment
despite having complete knowledge of the fact that the cheque would not be
honoured. Subsequently, the bank did not honour the cheque and returned the same
to the Defendant. Pursuant to that, the Defendant vide circular dated 22nd August,
2013, bearing reference no. NSEL/LEGAL/2013/071 unilaterally declared the
Plaintiff as a Defaulter, thereby causing serious reputational loss to the Plaintiff and
sent a notice of claim of the same date alleging that despite having previous
knowledge, the Plaintiff had failed to fulfil its payment obligations as per the
settlement calendar and informed the Plaintiff that the Defendant would take
appropriate action against the Plaintiff as per the Rules and ByeLaws
of the
Defendant Exchange.
24. The Plaintiff submits that thereafter, on 27th August, 2013, it informed the
Defendant that it intended to meet its payment obligation subject to the appropriate
settlement of the disputes in relation to the claim by way of arbitration/conciliation.
By the said notice, the Plaintiff intimated the Defendant that an invitation for
conciliation was sent to the Defendant on 19th August, 2013 and consequently
requested the Defendant to notify the Plaintiff the conciliation/arbitration panel so
that the proceedings could be initiated at the earliest to resolve the said disputes.
However, on 28th August, 2013, the Defendant sent a notice under Section 138 of the
Negotiable Instruments Act, 1881, on return of the cheque on 21st August, 2013. In
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the said letter the Defendant alleged that the said cheque was submitted by the
Plaintiff on 16th August, 2013, towards the discharge of the payment obligation of
the Plaintiff fixed under the settlement calendar, whereas according to the Plaintiff
the Plaintiff had in fact provided a PDC on 25th March, 2013, as a security as per the
Defendant’s requirements.
25. The Plaintiff thus apprehended that despite its letters dated 19th August, 2013
and 27th August, 2013, the Defendant will proceed against the Plaintiff without
affording the delivery of any commodity to the Plaintiff and will continue to
declare/treat the Plaintiff as a defaulter and take steps towards the attachment of
properties of the Plaintiff for recovering the purported claim and also pursue criminal
action under Section 138 of the Negotiable Instruments Act, 1881.
26. Since the request of the Plaintiff to invoke the conciliation and consequent
arbitration process was rejected by the Defendant, the Plaintiff was compelled to file
the above Suit praying for the following reliefs:
(a) that the Defendant be ordered, decreed and directed by this
Hon’ble Court to specifically perform its obligation of delivering the
said goods/commodities described in paragraph 40(a) to 40 (f) of the
Plaint to the Plaintiff forthwith;
(b) For the purposes aforesaid, the Defendant be ordered and
directed by this Hon’ble Court to do all such, acts, deeds and things as
are necessary to effectuate delivery of the said goods/commodities
described in paragraph 40(a) to 40(f) of the Plaint to the Plaintiff;
(c) Strictly without prejudice and in the alternative to what is
prayed for hereinabove and only in the event of this Hon’ble Court
coming to a conclusion that specific performance as prayed for
hereinabove cannot or ought not to be granted, the Defendant be
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ordered and decreed to pay to the Plaintiff as and by way of
compensation and/or damages in lieu of specific performance a sum of
INR 2640, 79,80,600/(
Two Thousand Six Hundred and Forty Crores
Seventy Nine Lakhs Eighty Thousand and Six Hundred Rupees only) as
per particulars of claim (marked as EXHIBIT – SS) with interest
thereon at the rate of 18% per annum from the date hereof till
payment and/or realization;
(d) that this Hon’ble Court be pleased to declare that the letter
circular dated 22nd August, 2013 posted on the website of the
Defendant declaring the Plaintiff as a defaulter is illegal, unjust and
arbitrary and the notice of claim dated 22nd August, 2013 addressed
by the Defendant is also illegal, unjust and arbitrary;
(e) that this Hon’ble Court be pleased to pass an order of permanent
injunction restraining the Defendant from taking any action as stated
in the notice of claim dated 22nd August, 2013 addressed by the
Defendant;
(f) that this Hon’ble Court be pleased to order the Defendant to
remove/delete the name of the Plaintiff from the list of defaulters in the
circular dated 22nd August, 2013 appearing on the website of the
Defendant;
(g) that this Hon’ble Court be pleased to order and restrain the
Defendant, its promoters, shareholders, directors, officers,
representatives, servants, agents, successors or assigns by a permanent
order of injunction from in any manner selling, transferring,
encumbering, alienating, dealing with or creating any third party right
title or interest in any manner whatsoever in respect of
goods/commodities described in paragraph nos. 40(a) to 40 (f) of the
Plaint which are in the possession of the Defendant;
(h) that this Hon’ble Court be pleased to order and restrain the
Defendant, its promoters, shareholders, directors, officers,
representatives, servants, agents, successors or assigns by a permanent
order of injunction from disposing of its assets in any manner
whatsoever;

(i) that the Defendant be ordered and decreed to pay to the Plaintiff
a sum of INR 132,49,56,805/(
One Hundred and Thirty Two Crores
Forty Nine Lakhs Fifty Six Thousand Eight Hundred and Five Rupees
Only) as per the Particulars of Claim (EXHIBIT – TT hereto) together
with interest thereon at the rate of 18% per annum from the date of
filing of the suit till payment and/or realization;
(j) that pending the hearing and final disposal of the present Suit,
this Hon’ble Court be pleased to restrain the Defendant its promoters,
shareholders, directors, officers, representatives, servants, agents,
successors or assigns by an order of injunction from in any manner
selling, transferring, encumbering, alienating, dealing with or creating
any third party right title or interest in any manner whatsoever in
respect of goods/commodities described in paragraph nos. 40(a) to 40
(f) of the Plaint which are in the possession of the Defendant;
(k) that pending the hearing and final disposal of the present Suit,
this Hon’ble Court be pleased to restrain the Defendant its promoters,
shareholders, directors, officers, representatives, servants, agents,
successors or assigns by an order of injunction from in any manner
disposing of its assets;
(l) that pending the hearing and final disposal of the suit, the Court
Receiver, High Court, Bombay be appointed Receiver of the
goods/commodities described in paragraph nos. 40(a) to 40(f) of the
Plaint belonging to the Plaintiff and in possession of the Defendant
together with all powers under Order XL Rule 1 of the Code of Civil
Procedure, 1908 including taking inspection of the goods/commodities,
securing them and taking charge of them;
(m) that pending the hearing and final disposal of the suit, this
Hon’ble Court be pleased to order and direct the Defendant to withdraw
the notice/circular dated 22nd August, 2013 declaring the Plaintiff as
a defaulter and restrain the Defendant from taking any actions
pursuant thereto;
(n) that pending the hearing and final disposal of the suit, this
Hon’ble Court be pleased to order and direct the Defendant to
remove/delete the Plaintiff’s name from the list of defaulters appearing
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in the circular dated 22nd August, 2013 on the website of the
Defendant;
(o) for interim and ad interim reliefs in terms of prayers (j), (k),
(l), (m) and (n) above;
(p) for costs; and
(q) For such further and other reliefs as the nature and
circumstances of the case may require.
27. Subsequently, the Defendant has taken out the present Notice of Motion,
requesting the Court to refer the parties to the Suit to arbitration, as per Section 8 of
the Arbitration and Conciliation Act, 1996, based on the Arbitration Agreement/s
contained in Clauses 3.1.2 and 15.4 of the ByeLaws
of the Defendant as also Clause
11.11 of the UIBT given by the Plaintiff to the Defendant.
28. The Plaintiff has submitted that the above Suit cannot be referred to
arbitration. Briefly, the main contentions put forward by the Plaintiff in its written
submissions and before the Court during the hearing are as follows:
i. That the requirements laid down in the case of P. Anand Gajapathi Raju vs.
P.V.G. Raju1 are not met in the present case and that the said judgment has no
application to the facts of the present case.
ii. That the Membership Agreement between the Plaintiff and the Defendant,
contained in the document annexed at Exhibit O to the Plaint, does not contain
any agreement to arbitrate and that the Membership Application at Annexure
A to the Notice of Motion does not reflect the Membership Agreement between
the parties.
1 [2000 (4) SCC 539]

iii. That on an interpretation of Clauses 3.1.2 and 15.4 and the fourth proviso to
Clause 15.10 of the ByeLaws
and Rule 7, it is evident that neither the ByeLaws
nor the Rules of the Defendant Exchange provide for arbitration between
the Defendant Exchange and a trading member such as the Plaintiff.
iv. That the UIBT executed by the Plaintiff not having been signed by both the
parties, is merely a unilateral undertaking and is not a valid arbitration
agreement between the parties as defined in Section 7 of the Act.
v. That independently of the above, even if it is presumed that the purported
arbitration clause contained in Clause 11.11 of the UIBT is an arbitration
agreement under Section 7 of the Act, it does not cover the disputes raised in
the present Suit as the arbitration clause contained in the UIBT is restricted to
the disputes/differences that may arise between the parties pertaining to the
“Terms” of the UIBT and nothing else. Hence, the question of referring the
disputes raised in this Suit to arbitration under Section 8 of the Act does not
arise.
vi. That considering the absolute bar on legal representation contained in Clause
15.22 of the ByeLaws,
even if it were to be presumed that a valid arbitration
agreement does exist, this Court could hardly countenance a situation where
the parties will have to fend for themselves and argue the matter on both fact
and law, unrepresented and unaided by Counsel, Attorney or Advocate in a
matter requiring compliance of procedure as set out in the ByeLaws
of the

Defendant Exchange, as also involving voluminous documentary evidence and
intricate issues of fraud and misrepresentation.
vii. That there are intricate questions of fact and law involving voluminous
documentary evidence/record and serious issues of fraud which cannot be
arbitrated and hence, the same must be tried in Court.
viii. That even presuming that in law such a right existed in its favour, the
Defendant has expressly and irrevocably by its letter dated 23rd August, 2013,
waived its right to refer the dispute to arbitration under Section 8 of the Act.
ix. That the reliance placed by the Defendant on the Order of this Court in
National Spot Exchange Ltd. v. M/s. N.K. Proteins Ltd.2 is misplaced in the light
of the facts and circumstances of the present case.
29. The Defendant has in support of this application under Section 8 of the Act, in
its written submissions and before the Court during the hearing contended the
following:
i. That the parties to the above Suit ought to be referred to arbitration in light of
the arbitration agreement contained in Clauses 3.1.2 and 15.4 of the ByeLaws
and the arbitration agreement contained in Clause 11.11 of the UIBT, which
are each independent, valid and binding arbitration agreements, between the
parties to the suit.
2 Order dated 23rd September, 2013 (Coram: Mrs. Roshan Dalvi, J.) in Arbitration Petition (L)
No. 1524 of 2013

ii. That the document at Exhibit O to the Plaint, which the Plaintiff has alleged in
paragraph 3 of the Plaint to be the duly executed Membership Agreement, is
not the Membership Agreement. The Defendant has instead asserted that the
said document is a Warehouse Agreement which does not contain the terms on
which the Plaintiff was permitted to trade on the Exchange. The Defendant
has stated that the Membership Application executed by the Plaintiff on 11th
June, 2012, which is at Annexure A to the Notice of Motion is in fact the true
Membership Agreement.
iii. That the bar to legal representation contained in Clause 15.22 of the ByeLaws
is a procedural clause and the invalidity of the said clause does not vitiate the
arbitration agreement itself, and that the same clause can be struck down by
the Court while upholding the validity of the reference.
iv. That the present dispute is arbitrable and there is no restriction on referring
the dispute to arbitration due to any alleged intricate questions of fact and law
involving voluminous evidence or the alleged issues of fraud.
v. That the Plaintiff cannot be permitted to resist the reference of the disputes to
arbitration since it was the Plaintiff who had first invoked arbitration under
Clause 3.1.2 of the ByeLaws.
vi. That the Order of this Court in National Spot Exchange Ltd. Vs. M/s. N.K.
Proteins Ltd. (supra) specifically rejected the interpretation of Clause 15.4 of
the Byelaws
so as to imply that the said clause precluded the Exchange from
being a party in a reference to arbitration.
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30. Before this Court proceeds to consider/examine the rival contentions discussed
hereinabove, it may be useful to recall, at the outset, the legal principles developed
as regards Section 8 of the Act. That provision reads as follows:
“8. Power to refer parties to arbitration where there is an
arbitration agreement —
(1) A judicial authority before which an action is brought in a matter
which is the subject of an arbitration agreement shall, if a party so
applies not later than when submitting his first statement on the
substance of the dispute, refer the parties to arbitration.
(2) The application referred to in subsection
(1) shall not be
entertained unless it is accompanied by the original arbitration
agreement or a duly certified copy thereof.
(3) Notwithstanding that an application has been made under subsection
(1) and that the issue is pending before the judicial authority,
an arbitration may be commenced or continued and an arbitral award
made.”
31. This section is modelled on the lines of Article 8 of the UNCITRAL Model Law.
The corresponding provision in the Arbitration Act of 1940 was Section 34, but with
some difference. What Section 8 of the Act requires is for a judicial authority before
which an action is brought in the matter to recognise and give effect to the arbitration
agreement, by referring the parties to arbitration on the application of a party to the
dispute. It has been made amply clear by the Honourable Apex Court’s ruling in P.
Anand Gajapathi Raju v. P.V.G. Raju(Dead) (supra), that in cases where there is an
arbitration clause in the agreement, it is “obligatory” and “peremptory” for the court to
refer the parties to arbitration in terms of their arbitration agreement and nothing
remains to be decided in the original action after such an application is made except
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to refer the dispute to an arbitrator. This is consistent with the language of the
provision, whereby the scope for exercising discretion as provided for under the old
Act has been taken away.
32. However, this does not imply that the operation of the provision is automatic.
Certain conditions are to be fulfilled by the party bringing the application, and it is for
the Court to decide whether those conditions have indeed been satisfied. The
conditions are as follows:
(i) there is an arbitration agreement;
(ii) a party to the agreement brings an action against the other party to the
agreement;
(iii) the subjectmatter
of the action is the same as the subjectmatter
of the
arbitration agreement;
(iv) the other party moves the court for referring the parties to arbitration
before it submits its first statement on the substance of the dispute.
33. Moreover, it cannot be said that Section 8 admits of no exceptions, even where
the applicant has satisfied all the conditions envisaged therein. There are certain
situations when it would be permissible for the judicial authority to decline to refer
the parties to arbitration and continue adjudication of the proceedings. The Hon’ble
Apex Court refused to bifurcate the proceedings in Sukanya Holdings (P) Ltd. v.
Jayesh H. Pandya3, where multifarious reliefs were claimed not only against the
parties to the arbitration agreement but also against third persons, who are strangers
to the arbitration agreement, as it would cause delay, additional costs and possibly
anomalous results. Equally, principles of estoppel, waiver and acquiescence are
3 (2003) 5 SCC 531
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applicable to a party seeking reference of a matter to arbitration and may be applied
to decline to refer the parties to arbitration.
34. With these principles in mind, I proceed to consider the rival contentions of the
parties. There is no question of involvement of any third party or delay in making this
application in the present case. Hence, to decide this application, I must examine(A)
whether there is a binding arbitration agreement between the parties and; (B)if yes,
whether the subjectmatter
of the present action falls within the scope of the
arbitration agreement.
(A) EXISTENCE OF AN ARBITRATION AGREEMENT BETWEEN THE PARTIES
35. For the sake of convenience, I shall consider each agreement that the
Defendant contends is an arbitration agreement between the parties, separately. I
shall first consider: (a) the alleged “Membership Agreement”, which is the document
annexed at Exhibit O to the Plaint, (b) Clauses 3.1.2 and 15.4 and the fourth proviso
to Clause 15.10 of the ByeLaws
and Rule 7 of the Rules of the Defendant Exchange
and finally (c ) the UIBT.
(a) Membership Agreement 36.
It has been submitted by the Plaintiff that the document annexed at Exhibit O
to the Plaint is the duly executed “Membership Agreement” and the same does not
contain an arbitration agreement. Clause 19 of the said Agreement states:
“All disputes and/or differences arising in connection with this Agreement,
shall, to the extent possible be settled amicably”.
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Clause 20 of the said Agreement states:
“This agreement shall be governed by Indian Laws and be subject to the
exclusive jurisdiction of the Courts in Mumbai alone”.
37. It is the Plaintiff’s case that the said document was intended by the parties to
be the membership agreement between the Plaintiff and the Defendant as evidenced
by the emails sent by the Defendant, dated 22nd August, 2012 (Exhibit L to the
Plaint), 3rd September, 2012 (Exhibit M to the Plaint) and 6th April, 2013. This
indicates the format of the draft of the agreement, which is at Exhibit O to the Plaint.
38. However, the Defendant argues that a perusal of the said document which was
executed on 17th April, 2013, shows that it is in fact an agreement for the protection
of investors and to ensure the proper management of warehouses and thus is a
“Warehouse Agreement”. The Defendant has further argued that the said Agreement
was executed on 17th April, 2013, i.e. approximately three months prior to which
trading on the Exchange was suspended and approximately a year after the Plaintiff
commenced trading on the Exchange. The said Agreement was at no point of time
referred to as the Membership Agreement. It was in fact referred to as the “ExchangeMember
Agreement” as is apparent at Exhibit M to the Plaint (i.e. a copy of the email
dated 3rd September, 2012, sent by the Defendant to the Plaintiff) and this reference
was simply due to the fact that the agreement was executed between the Exchange
and a member. The Defendant submits that the same could not be a basis of calling
the same a Membership Agreement. The Defendant further explains that such an
agreement was executed with only nineteen Trading Members who also provided
warehousing facilities/services to the Defendant and that no other Trading Members
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have executed such “ExchangeMember
Agreement”. These other members have
traded on the Exchange on the basis of the Membership Application alone. The
Defendant has thus stated that the Membership Application (Annexure A to the
Affidavit in Support of the Notice of Motion) which was executed on 11th June, 2012,
is the true Membership Agreement as it ostensibly covers all the terms relevant to
trading on the Exchange platform and wherein the Plaintiff has undertaken to abide
by and conform to the binding nature of the ByeLaws
and thereby the arbitration
agreement contained therein. The Defendant has also submitted that a perusal of the
Recitals of the Agreement at Exhibit O to the Plaint demonstrates that the Plaintiff
was already a member of the Defendant Exchange at the time of the Execution of the
said Agreement. The Plaintiff’s membership therefore predated
the execution of the
said Agreement.
39. The Plaintiff has however denied that the Membership Application at Annexure
A to the Notice of Motion reflects the Membership Agreement between the parties.
The Plaintiff has submitted that Annexure A to the Affidavit in Support of the Notice
of Motion is merely an application expressing a desire on the part of the Plaintiff of
becoming a TradingcumClearing
Member of the Defendant Exchange. By this
application, the Plaintiff had undertaken to “apply for the said membership and
undertake to conform to and abide by the Memorandum and Articles of Association, and
the rules, byelaws,
regulations, business rules, circulars and orders issued by the
exchange from time to time”.
40. I am in agreement with the submission of the Defendant that the said
Agreement at Exhibit O is not the Membership Agreement. As correctly pointed out
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by the Defendant, the same was never referred to by the Defendant as the
Membership Agreement. A perusal of the said agreement indicates that the said
document does not, at any point of time, discuss the terms or manner of trading on
the Defendant Exchange platform and hence, considering the fact that the primary
purpose of applying for membership on the Exchange was trading/transacting in the
purchase or sale of commodities, it cannot be deemed to be a Membership
Agreement. Also, the Defendant has correctly stated that both, the Agreement at
Exhibit O to the Plaint and the Membership Application are independent of each
other and are not overridden by one another.
41. I do recognize that irrespective of the nomenclature of this Agreement, if
certain reliefs sought relate to matters covered under the scope of this agreement,
then Clause 19 and Clause 20 will be applicable as regards resolution of the dispute. I
propose to deal with the issue below, when considering the scope of the arbitration
agreements in question.
(b) Provisions in the Byelaws
and Rules of the Defendant Exchange 42.
The Plaintiff submits that Clauses 3.1.2 and 15.4 and the fourth proviso to
Clause 15.10 of the ByeLaws
and Rule 7 of the Rules of the Defendant Exchange, do
not envisage an arbitration between the Defendant Exchange and a trading member
such as the Plaintiff. On the contrary, the Plaintiff argues that when these clauses are
read with the other relevant ByeLaws
and the Rules, it becomes abundantly clear
that the ByeLaws
deliberately and consciously excluded the Defendant Exchange
from the purview of arbitration.
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43. Clause 3.1.2 of the ByeLaws
is reproduced hereunder:
“3.1.2 CONCILIATION AND ARBITRATION
In all claims, differences and disputes, irrespective of whether the
Exchange is a party or not, arising out of or in relation to transactions
on the Exchange including any agreements and contracts, made subject
to these ByeLaws
or the Business Rules or Regulations of the Exchange or
with reference to anything incidental thereto or in pursuance thereof or
relating to their validity, construction, interpretation, fulfilment or the
rights, obligations and liabilities of the parties thereof and including any
question of whether such agreements, contracts and transactions have
been entered into or not, the parties shall adopt conciliation proceedings
subject to the provisions of these ByeLaws
and the Arbitration and
Conciliation Act, 1996. In case the conciliation proceedings do not result
in any settlement, the dispute shall be referred to and decided by
arbitration, as provided in these ByeLaws
and Business Rules and
Regulations as prescribed by the Board or the committee appointed for
the purpose from time to time. For that purpose, the Board or such
committee may provide for.
3.1.2.1 Norms, procedures, forms, jurisdiction, terms,
conditions and scale of arbitration fees and other charges for reference to
arbitration.
3.1.2.2 Appointment of conciliation officers, arbitrators,
substitute arbitrators and umpires
3.1.2.3 Procedure for serving notice of hearing and
adjournment of hearings and communications to the parties and
witnesses.
3.1.2.4 Procedure for appearance, hearing, filing of
information and counter claims and taking witnesses and evidence of
assessors and experts
3.1.2.5 Procedure for issue of arbitration awards
3.1.2.6 Procedure for implementation of arbitration awards.”
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44. The Plaintiff submits that a mere reference to the Exchange in Clause 3.1.2 of
the ByeLaws
does not make the Exchange amenable to arbitration. The Plaintiff
argues that whereas in relation to conciliation, it has been provided that the parties
i.e. a Member on the one hand and the Exchange on the other “shall adopt
conciliation proceedings subject to the provisions of the ByeLaws
and the Act”, the
provision in relation to arbitral proceedings makes no reference to the Act and
provides that: “In case the conciliation proceedings do not result in any settlement, the
dispute shall be referred to and decided by arbitration, as provided in these ByeLaws
and Business Rules and Regulations as prescribed by the Board or the committee
appointed for the purpose from time to time”. The Plaintiff contends that consequently,
in order to ascertain whether a dispute between parties is amenable to arbitration,
one has to turn to the Byelaws,
business rules and regulations, as prescribed by the
Board and that Clause 3.1.2 read in isolation is of no assistance in determining the
presence of an arbitration agreement as contemplated hereinabove.
45. The Plaintiff next submits that Clause 15 of the ByeLaws
exhaustively deals
with the reference to arbitration in 69 subclauses.
Clause 15.4 of the ByeLaws
is
reproduced hereunder:
“15.4 Reference to Arbitration
All claims, differences or disputes between the members inter se or
between a member and a constituent member or between a member and
a registered nonmember
client or arising out of or in relation to trades
executed on the Exchange and made subject to the ByeLaws,
Rules,
Business Rules and Regulations of the Exchange or with reference to
anything incidental thereto or in pursuance thereof or relating to their
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validity, construction, interpretation or fulfilment and/or the rights,
obligations and liabilities of the parties thereto and including any
question of whether such transactions have been entered into or not shall
be submitted to arbitration in accordance with the provisions of these
ByeLaws
and Regulations that may be in force from time to time.
Provided these ByeLaws
shall not in any way affect the jurisdiction of the
Exchange on the clearing member through whom such member has dealt
with or traded in regard thereto and such clearing member shall continue
to remain responsible, accountable and liable to the Exchange in this
behalf.”
46. The Plaintiff submits that the Exchange has not been expressly included within
the purview of Arbitration under the said clause and only those disputes arising
between the members inter se or between a member and a constituent member or
between a member and a registered nonmember
client are amenable to arbitration.
47. Developing this submission further, the Plaintiff contends that Clause 15.10 of
the ByeLaws
is titled as “Reference of the Claims, Differences or Disputes”.The Plaintiff
argues that the Fourth Proviso to Clause 15.10 conclusively establishes that the
Exchange cannot be a party to an arbitral reference. The fourth proviso of Clause
15.10 is reproduced hereunder:
“15.10 Reference of the Claims, Differences or Disputes
[…]
Further provided that no reference can be filed against the Exchange, its
officers, Board of Directors or any office bearer in respect of anything
done or not done.”
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48. The Plaintiff has also drawn my attention to Rule 7 of the Defendant
Exchange’s Rules, which provides for the function of the Arbitration Panel. The
Plaintiff states that by restricting the right of the Arbitrators to give an award only in
cases between different classes of Members of the Exchange, but not between a
Member and the Exchange, the Rule evidences that there is no scope for an
arbitration between a Member and the Exchange which can culminate in an award.
Rule 7 is reproduced hereunder:
“7. Functions of the Members of the Arbitration Panel
To give arbitration award in cases preferred for arbitration, which shall
be between different classes of Members of the Exchange interse,
and
between Members of the Exchange and their clients in terms of the
Rules, Articles and ByeLaws
of the Exchange.”
49. It is thus submitted on behalf of the Plaintiff that when the aforesaid provisions
are read together, it establishes that the draftsman of the ByeLaws,
Rules, etc. chose
to exclude the Exchange from the purview of a reference to arbitration, relegating the
disputant to file a civil suit. The Plaintiff contends that Clause 15.4 must be read in
light of the Fourth Proviso to 15.10 and Rule 7 to avoid any selfcontradictory
provisions and to bring about the harmonious interpretation of the Byelaws
without
rendering any of the clauses nugatory/otiose.
50. The Defendant submits that a bare reading of Clauses 3.1.2 and 15.4 of the
ByeLaws
indicates that an arbitration agreement is contained in each of the Byelaws.
The Defendant argues that though Clause 3.1.2 does not explicitly indicate the
parties to which that Clause is applicable, the plain language clearly contemplates an
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arbitration in relation to “all claims, differences and disputes, irrespective of whether the
Exchange is a party or not, arising out of or in relation to transactions on the
Exchange.” The Defendant emphasizes that Clause 15.4 of the Byelaws
contemplates
an arbitration agreement in relation to “all claims, differences or disputes” not only
specific to the particular parties referred to therein i.e. ‘members inter se’; ‘member
and a constituent member’ and ‘member and a registered nonmember
client’, as the
Plaintiff has argued, but also more widely to the claims, differences or disputes
“arising out of or in relation to trades executed on the Exchange”.
51. The Defendant further submits that the reliance of the Plaintiff on the Fourth
Proviso to Clause 15.10 in order to render Clause 15.4 inapplicable to disputes
between a Member and the Defendant Exchange is incorrect. On the contrary, the
Defendant asserts that the Fourth Proviso to Clause 15.10 is nothing but a logical
extension of Clause 3.8 of the ByeLaws
which reads as under:
“3.8 PROTECTION FOR ACTS DONE IN GOOD FAITH
No claim, suit, prosecution or any other legal proceedings shall lie
against the Exchange or any member of the Board of Directors or any
Committee duly appointed by it or any other duly authorised person
acting for and on behalf of the Exchange, in respect of anything which
is done or intended to be done or omitted or intended to be omitted in
good faith in exercise of any power under these ByeLaws
or Business
Rules or Regulations of the Exchange or in pursuance of any order or
any other kind of communication received by the Exchange, in writing,
from any court, tribunal, Central or State Government or any other
competent regulatory or revenue authority empowered under any law
or delegated legislation for the time being in force in that behalf.”
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52. The Defendant also submits that Clause 15.48 of the ByeLaws
demonstrates
that arbitration by/against the Exchange is specifically contemplated by the ByeLaws.
Clause 15.48 reads as under:
“15.48 INDEMNITY
No party shall bring or file any suit or proceeding whatever against the
Exchange, the Board of Directors, Managing Director, Relevant
Authority, or any employee or employees of the Exchange acting under
his/its authority or against the arbitral tribunal for or in respect of
any matter or thing purported to be done under these ByeLaws,
Rules,
Business Rules and Regulations of the Exchange, save and except any
suit or proceeding for the enforcement of the award against the other
party or parties to the reference. ".
The Defendant submits that such a scenario could only arise where the Exchange is a
party to the arbitration agreement contemplated in the ByeLaws.
53. This Court had sought a clarification from the Plaintiff as to its interpretation
of Clause 15.5 of the ByeLaws,
which reads:
“15.5 Deliveries and Transactions Subject to Arbitration:
In all deliveries and transactions, which are made or deemed to be
made subject to the ByeLaws,
Rules, Business Rules and Regulations of
the Exchange, the provisions relating to arbitration as provided in these
ByeLaws
and Regulations shall form and shall be deemed to form part
of the contract relating to deliveries and transactions and the parties
shall be deemed to have entered into an arbitration agreement in writing
by which all claims, differences or disputes of the nature referred to
in ByeLaw
above shall be submitted to arbitration in accordance with
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the provisions of these Byelaws,
Rules, Business Rules and Regulations
that may be in force from time to time.”.
54. In response to this query, the Plaintiff submitted that Clause 15.5 stipulates
that all contracts dealing with deliveries of and transactions in commodities,
concluded on the platform provided by the Defendant shall include or shall be
deemed to include requisite provisions for arbitration mandating reference of all
disputes arising thereunder to arbitration in the manner contemplated by the Byelaws,
Rules, etc. The Plaintiff further submitted that the deemed arbitration provision
set forth in Clause 15.5 is qua any dispute or difference that may arise between
trading Members inter se in respect of transactions and deliveries between such
parties; and thus does not cover claims, disputes or differences between a Member
and the Exchange qua the transactions or the deliveries actually carried out on or
facilitated by the Exchange. The Plaintiff argued that such an interpretation of Clause
15.5 allowed for harmonious interpretation with the other relevant provisions of the
Byelaws,
which have been discussed earlier.
55. The Defendant in relation to this query submitted that the applicability of
Clause 15.5 is to “all deliveries and transactions”, and that all reliefs prayed for by the
Plaintiff arise out of transactions executed by the Plaintiff on the Defendant Exchange
platform and relate to the Plaintiff’s claim of entitlement to delivery of the goods. The
Defendant hence asserted that the provision does cover claims, disputes or differences
between a Member and the Exchange.
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56. The Court also asked the Defendant to clarify its interpretation of Clause 15.4
of the Byelaws
in light of Rule 7 and Clauses 3.4, 15.11 and 15.12, which
respectively read as follows:
“3.4 LOCATION FOR ARBITRATION BETWEEN MEMBERS OF
THE EXCHANGE, OTHER INTERMEDIARIES AND CLIENTS
The location where arbitration shall take place shall be such place as
may be identified by the Exchange from time to time and intimated to
the arbitrator and the parties to the dispute accordingly.”
“15.11 Limitation Period for Reference to Arbitration
All claims, differences or disputes referred to in the ByeLaws
above
shall be submitted to arbitration within six months from the date of
last transaction or delivery (relate to 15.5) or payment effected
between the member and his client or between two members of the Exchange,
provided where the claim / complaint is not settled / resolved
through the process of conciliation by the Exchange within three
months of the receipt of the claim / complaint, the Exchange shall in
such cases advise the concerned client to refer the case to arbitration.
The time taken in dispute resolution and/or conciliation proceedings, if
any, initiated and conducted in accordance with the provisions of the
Arbitration and Conciliation Act and these ByeLaws
and the time
taken by the Managing Director or Relevant Authority to administratively
resolve the claims, differences or disputes shall be excluded for the
purpose of determining the limitation period of six months under the
ByeLaws,
Rules, Business Rules and Regulations of the Exchange. Any
claim made or any difference / dispute raised by any complainant /
aggrieved person, after expiry of the time limit specified herein, shall
become timebarred
for the purpose of availing of the remedy under
the ByeLaws,
Rules, Business Rules and Regulations of the Exchange
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and may not, however, be invalid for seeking remedy under appropriate
civil laws.”
“15.12 Penalty on Failure to Submit to or Abide by Award
in Arbitration
An exchange member, who fails or refuses to submit to or abide by or
comply with any award in arbitration between Members of the Exchange
or between an exchange member and a nontrading
member/client, as may be provided in these ByeLaws,
and Regulations
shall be declared a defaulter or expelled by the Relevant Authority at
its sole discretion, as is applicable, and thereupon the other party shall
be entitled to institute legal proceedings to enforce the award under the
Civil Procedure Code in the same manner as if it is a decree of the
court.”
57. In its response to this query of the Court, the Defendant submitted that Clauses
3.1.2 and 15.4 of the Byelaws
contain an allencompassing
arbitration agreement,
whereas Clauses 3.4 and 15.11 and 15.12 are provisions made specifically in respect
of disputes between its members and/or their clients and other intermediaries, so as
to enable the Defendant Exchange to ensure that the disputes could be effectively
resolved through arbitration. Thus these clauses cannot be construed as limiting the
scope of the arbitration clause/agreement. Further, the Defendant submitted that Rule
7 and Clauses 3.4, 15.11 and 15.12 deal with matters of procedure and under Section
20(3) of the Act, the arbitrator is empowered to determine the procedure applicable
to the arbitration in the event that the parties have not agreed to the same. The
Defendant added that where it was itself a party to the arbitration, it would not be
proper for it, as the Exchange to dictate the terms of the procedure to the members
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with whom the arbitration is proceeding, and it was for that reason that these
provisions were made.
58. The Defendant further argued that the existence and scope of the arbitration
agreement must be determined on its own terms and without any reference to the
remaining ByeLaws.
The interpretation of an arbitration agreement must be done
independently, flowing from the principle of severability and separability recognised
under Section 16(1) of the Act as well as the decisions of the Hon'ble Supreme Court
in SMS Tea Estates Pvt. Ltd. vs. Chandmari Tea Company Pvt. Ltd.4 and World Sport
Group (Mauritius) Ltd. vs. M.S.M. Satellite (Singapore) Pte. Ltd.5. The Defendant
asserts that an arbitration agreement must be interpreted in the widest possible
manner as laid down in the case of Renusagar Power Co. Ltd. vs. General Electric
Company6. The Defendant submits that consequently, the mere fact that the said Rule
and Clauses relates only to disputes between members of the Exchange and/or
between members and their intermediaries/clients and do not refer to Exchangemember
arbitrations cannot imply that the Arbitration Agreement contained in
Clauses 3.1.2 and 15.4 of the Byelaws
does not contemplate its participation as a
party.
59. The Plaintiff has also submitted that the Defendant’s reliance on the Order of
this Court in National Spot Exchange Ltd. v. M/s. N.K. Proteins Ltd. (supra) , which was
an Arbitration Petition filed by NSEL against M/s. N.K. Proteins Ltd. under Section 9
4 [2011 (14) SCC 66 – paragraph 12(vi)]
5 [24th January, 2014, MANU/SC/0054/2014, paragraphs 2325]
6 [(1984) 4 SCC 679paragraphs
4349]
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of the Act, is misplaced in the light of the facts and circumstances of the present case.
The Plaintiff has respectfully submitted that the said Order is per incurium and it
cannot be considered as having any precedent value in the present case. Developing
this submission, the Plaintiff contends:
(a) that the issues raised by the Plaintiff in its Reply, including those of waiver,
fraud, intricate questions of fact and law were never raised in the N.K. Proteins case,
and therefore not dealt with or pronounced upon;
(b) that though the fourth proviso to Clause 15.10 of the Bye Laws has been
referred to, there is no discussion or reasoning as to why, despite the plain language
of that proviso, it does not exclude the Exchange from arbitration proceedings. The
Plaintiff has submitted that there is a mere conclusion arrived at, devoid of any
reasoning and instead an entirely irrelevant Bye Law i.e. Clause 15.48 is referred to in
the Order to justify the conclusion that the fourth proviso to Clause 15.10 does not
preclude the Exchange from being a party to an arbitration;
(c) that there is no reference to, or analysis or interpretation of Rule 7 of the Rules
which is a rule that is decisive on the issue;
(d) that there is no reference to, or analysis or interpretation of Clause 3.1.2 of the
ByeLaws.
As a matter of fact, though Clause 15.4 is mentioned, it is not discussed,
analyzed or interpreted by the Court in its Order;
(e) that the effect and consequences of Clause 15.22 of the Bye Laws was not even
presented to the Court; and
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(f) that none of the case law cited by the Plaintiff, including on the aspect of
agreement in writing, waiver, fraud, etc. were cited before the Court and hence, the
Court has not discussed or considered any of these judgments.
The Plaintiff reiterates that under the doctrine of precedent, what is binding is not a
conclusion arrived at by the Court on the facts of a particular case, but the ratio
decidendi i.e. the legal principle underlying the conclusion, as emphasized in Delhi
Administration vs. Manoharlal7; CCT vs. Shukla & Brothers8 and Vishnu Dutt Sharma
vs. Manju Sharma9.
60. The Defendant, on its part, submits that the decision of this Court in N.K.
Proteins case (supra) has precedential value as it is a legal interpretation of a
particular clause of the ByeLaws
i.e. Clause 15.4, for the very same purpose i.e.
existence of an arbitration agreement and on an identical argument being raised i.e.
whether the clause amounts to an arbitration agreement between the Exchange and a
Trading Member. The Court in that case specifically rejected an interpretation of
Clause 15.4 of the Byelaws,
which implied the Exchange was precluded from being a
party in a reference to arbitration. The Defendant submits that this order of the coordinate
Court must be treated as binding in the present case, relying on the decision
of the Hon’ble Supreme Court in Vishnu Traders v. State of Haryana10 where the
7 [2002 (7) SCC 222 – paragraph 5]
8 [2010 (4) SCC 785 – paragraph 24]
9 [2009 (6) SCC 739 – paragraph 11]
10 [1995 Supp. (1) SCC 461 – paragraph 3],
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importance of ensuring consistency in the treatment of parties similarly placed was
specifically emphasized.
61. To decide the rival contentions, it is convenient to first consider the prerequisites
of a valid and binding arbitration agreement. Section 2(1)(b) of the Act
defines ‘arbitration agreement’ to be an agreement referred to in Section 7. Section 7
of the Act states that an ‘arbitration agreement’ is an agreement by the parties to
submit to arbitration all or certain disputes which have arisen or which may arise
between them in respect of a defined legal relationship, whether contractual or not.
The arbitration agreement may be in the form of an arbitration clause in a contract or
in the form of a separate agreement and shall be an agreement in writing. It follows
that an arbitration agreement cannot be inferred by implication.
62. In all cases where a court is required to interpret a contract in a dispute, first it
will look at the express terms. In the N.K. Proteins case (supra), this Court considered
Clause 15.4 of the Byelaws,
which is the arbitration agreement in question in this
case. Specifically, it considered an argument in relation to the interpretation of the
said arbitration agreement, which in my view, was similar to the one raised by the
Plaintiff in this case. The Learned Judge in that case concluded that the Exchange can
be a party to an arbitration. The Learned judge sets out at paragraph 8 of the order
the reasons for the conclusion, which are reproduced hereunder:
“8. The Petitioner has sought to invoke the arbitration under clause
15.4 of its bye laws by which the members are governed. Respondent
No. 1 claims that the bye law no. 15.4 is not applicable to the dispute
between the Petitioner and Respondent No. 1 and that it would apply to
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a dispute between members inter se or between a member and a
constituted member or between a member and a registered nonmember
client. The argument cannot be accepted as aside from these three
transactions between parties, all transactions arising out of or in
relation to the trades executed on Petitioner’s exchange and subject to
the bye laws are covered under clause 15.4. It may be mentioned that
reading of bye law clause 15.4 as sought to be argued on behalf of the
Respondent No. 1 would render the important conjunction ‘or’ in line 3
of the clause otiose. […] The Respondent No. 1 would also contend that
since no suit or proceeding could be filed against the Petitioner under
clause 15.48 except suit for enforcing an award against it, no
arbitration would lie against the Petitioner and conversely, therefore the
Petitioner cannot invoke the arbitration. In fact clause 15.48 is a
pointer to the fact that arbitration is contemplated as an award may be
enforced against the Petitioner. […]”
63. I am bound by the decision of the Learned Single Judge in N. K. Proteins case
(supra) that the clauses read together spell out an arbitration agreement between the
member and the exchange.
64. I am unable to agree with the Plaintiff that the decision in N.K. Proteins case
(supra) is per incuriam. It is an established practice followed in Constitutional Courts
of the country that coordinate
benches (i.e. benches of equal strength) of a Court
observe judicial propriety by following the decisions of earlier benches. The doctrine
of per incuriam is meant to be an exception to this practice. In Young v. Bristol
Aeroplane Company Limited11 the House of Lords observed that though ‘Incuria’
11 [(1994) All ER 293]
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literally means ‘carelessness’, In practice per incuriam appears to mean per
ignoratium. In an earlier decision of Huddersfield Police Authority v. Watson12, the
House of Lords held that where a case or statute had not been brought to the court’s
attention and the court gave the decision in ignorance or forgetfulness of the
existence of the case or statute, it would be a decision rendered per incuriam. These
principles have been accepted to form part of Indian law. These principles were
highlighted by the Hon’ble Apex Court, most notably in State of U.P. vs. Synthetics and
Chemicals Ltd.13
65. Nothing is pointed out to the effect that any relevant statute or case law has
been disregarded by the Learned Judge or not pointed out to her or considered by
her. The question before the Court was whether this agreement contained an
arbitration clause. The Learned Judge has come to the conclusion that it did contain
such clause. The entire agreement was before the Learned Judge and construed by
her. It is not open to argue that any particular provision of the agreement, which was
relevant for the interpretation of the agreement, was not considered by the Learned
Judge. That in effect means that the Learned Judge was not right in coming to the
conclusion that she did and that is not permissible for a coordinate
court to hold.
66. However, even if one finds that there is an arbitration agreement and the
disputes are covered by it, one still has to consider whether there is any judicially
recognised exception, for which the Court ought to decline to refer the parties to
arbitration and continue adjudication of the proceedings.
12 [(1947) 2 All ER] 193
13 [(1991) 4 SCC 139]
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67. In this context, the Plaintiff submits that in any event, the Defendant has by its
conduct and correspondence, prior to the institution of the above Suit, waived the
right to refer the dispute to arbitration under Section 8 of the Act. The Plaintiff
contends that with the intention of pursuing appropriate settlement of the disputed
claims towards certain legal liabilities in accordance with the Byelaws
of the
Defendant Exchange, the Plaintiff had by its letter dated 19th August, 2013, invoked
the arbitration and conciliation clause contained in Clause 3.1.2 of the Byelaws
in
the following terms:
“…………………The Bye Laws and Rules of the Exchange are binding on
the Exchange and its members. Therefore, in view of the commercial
dispute described above, we hereby invoke the conciliation proceedings as
per Clause 3.1.2 of the Bye Laws of the Exchange. We request you to
consider this letter as an invitation to conciliation as per Section 62 of the
Arbitration and Conciliation Act, 1996.
We further refer to clause 15.52, 15.53 and 15.54 of the Bye Laws of the
Exchange and request you to provide us with the panel of conciliators of
the Exchange to enable us to appoint a conciliator in respect of the
proceedings.”
However, the Defendant vide letter dated 23rd August, 2013, inter alia rejected the
same stating that:
“….the provisions for Arbitration and reconciliation proceedings as
contained in the Bye laws of the Exchange pertain to dispute between (a)
member and a client; (b) member with another member. It does not
pertain to dispute between Exchange and its members. In fact, as a member
of the Exchange, you have submitted an Undertaking that you will abide
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by the decisions of the Exchange and so you cannot resort to arbitration
proceedings by raising dispute against Exchange dues”.
Thereafter, the Plaintiff vide letter dated 27th August, 2013, informed the Defendant
that the Plaintiff intended to meet its payment obligation subject to the appropriate
settlement of the disputes in relation to the claim by way of arbitration/conciliation in
the following terms:
“6. Our client submits that it will be unable to make payment, if at all
any amount is owed, as per the settlement cycles issued by NSEL until the
disputes in relation to the claim are settled by way of
arbitration/conciliation. We request you to forthwith notify us the
conciliation/arbitration panel so that our client may initiate proceedings
at the earliest to resolve the disputes.”
The Defendant has not responded to this letter by complying with the requisition.
68. The Plaintiff has submitted that the letter dated 23rd August, 2013, clearly
constitutes an unconditional and irrevocable waiver by the Defendant of its right to
have disputes with the Plaintiff referred to arbitration. The Plaintiff in support of this
contention has relied on the decision of the learned Single Judge of the Karnataka
High Court in the case of Ramakrishna Theatre Ltd. v. M/s. General Investments &
Commercial Corpn. Ltd.14
69. The Defendant has advanced a number of submissions in response. The
Defendant has first argued that if at all there is waiver as alleged the same is only
with reference to the arbitration provision contained in the ByeLaws,
and not with
reference to the arbitration clause in the UIBT which is a separate and distinct
14 (AIR 2003 Karnataka 502)
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contract and which is valid and binding, independently of the ByeLaws.
The
Defendant also argues that the aforesaid letter dated 23rd August, 2013, addressed
by the Defendant’s then Managing Director and Chairman – Mr.Sinha, is an erroneous
view expressed by him, and he has now been suspended by the Defendant Exchange.
The Defendant has further argued that under Section 11 of the Act, a specific remedy
was available to a party where one party does not respond to the invocation of
arbitration by another party and accordingly the Plaintiff could have approached the
Court seeking appointment of an arbitrator so as to have a reference of the dispute to
arbitration.
70. The Defendant has finally argued that despite Mr. Sinha’s letter dated 23rd
August, 2013, the Plaintiff once again sought to invoke arbitration by its letter of 27th
August 2013, thereby indicating that it did not accept Mr. Sinha’s contention that
there was no arbitration agreement between the Plaintiff and the Defendant and thus
in such circumstances it cannot be said that the Defendant has waived its right to
invoke arbitration / is estopped from doing so. Thereafter this Court delivered its
judgement in N.K. Protein's case (supra) which settled the controversy as regards the
existence of an arbitration agreement between a trading member and the exchange.
The Defendant has since accepted this interpretation of the agreement and
accordingly taken its current stand regarding the existence of an arbitration
agreement.
71. The sequence of events noted above makes it clear that there is no clear
waiver on the part of the Defendant of the arbitration agreement. Though at one
stage the Defendant did take the stand that there existed no arbitration agreement
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between a trading member and the exchange, that stand was given up after this Court
interpreted the contract document between the trading member and the exchange in
N.K. Protein's case (supra) and that interpretation was accepted by the Defendant. No
waiver, in clear and unequivocal terms, can be spelt out from this conduct of the
Defendant.
72. I am also in agreement with the Defendant’s argument that there is in any
event no waiver at all with reference to the arbitration clause in the UIBT. I have in
the latter part of this judgment found the UIBT to contain an arbitration agreement.
Each arbitration agreement is a separate and distinct contract and so the waiver must
be specific to the right of a party to invoke arbitration proceedings under that
particular agreement. It is clear from Section 8 of the Act that the object and purpose
of that provision is that judicial intervention is to be minimised. The judicial authority
is mandated by that provision to refer the parties to arbitration in the clearest terms.
Thus, the Court must be circumspect in using its discretion to apply an exception such
as waiver or estoppel, to refuse to refer the parties to arbitration.
73. Thus, I hold that the Defendant has not waived its right to the arbitration.
(c) The UIBT 74.
The Plaintiff has countered the submission of the Defendant that the duly
executed UIBT of which Clause 11.11 more specifically contemplates an arbitration
agreement between the parties for disputes in relation to the said UIBT. It is the
Plaintiff’s argument that the UIBT, executed by the Plaintiff, was not signed by both
the parties, and is therefore merely a unilateral undertaking and not a valid
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arbitration agreement between the parties as defined under Section 7 of the Act. The
Defendant argues that the UIBT constitutes an agreement between the parties, but it
is one that is required to be signed and executed only by one of the parties; therefore
a reference to ‘parties’ in Section 7(4)(a) of the Act must be read to mean “party” and
not “parties”. The Plaintiff submits that this contention of the Defendant has not been
supported by any authority and that such an interpretation runs counter to the
principles of the ordinary law of contract. Referring to commentary in Pollock and
Mulla on the Indian Contract Act, the Plaintiff contends that a contract implies two
parties and that a contract can only be bilateral.
75. The Plaintiff has further emphasized that the Defendant’s argument runs
counter to Section 2(1)(b) and (h) read with Sections 7(1) and 7(4)(a) of the Act.
Section 2(1)(b) defines “Arbitration Agreement” to mean an agreement referred to in
Section 7. Section 2(1)(h) defines “party” to mean a party to an Arbitration
Agreement. Section 7(1) clearly indicates that to constitute an Arbitration Agreement,
there has to be an agreement i.e. a valid contract. The parties have to be adidem
on
referring disputes to arbitration under a written, signed agreement. Section 7(4)(a) of
the Act provides that an Arbitration Agreement is in writing if it is contained, inter
alia, in a document signed by the parties. Exfacie
the UIBT is not an agreement, but
a merely unilateral undertaking of the Plaintiff which is not signed by the Defendant
and thus it is not signed by the “parties” as mandated by Section 7(4)(a) of the Act.
In support of these contentions, the Plaintiff has placed reliance on the decision of
this Court in the case of Nasir Husain Films (P) Ltd. vs. Saregama India Ltd.15
15 [2010 (2) Comp.L.J. 393(Bom)(D.B.) – paragraphs 9.4 and 18]
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76. The Defendant submits that the UIBT is admittedly a document in writing
executed between both the Plaintiff and the Defendant Exchange and contains therein
an Arbitration Agreement in Clause 11.11. The Defendant further submits that both
the parties have acted on the basis of this document and all trades conducted by the
Plaintiff are carried out on the Exchange platform on the basis of this agreement i.e.
vide the internet. The Defendant argues that the UIBT is in the nature of an
undertaking given by the Plaintiff to the Defendant Exchange and therefore does not
contemplate the signature of the Defendant Exchange. The document by its very
nature requires the signature of only one party i.e. the Plaintiff. The signature of the
Defendant is not required for its validity/implementation and the Plaintiff ought not
to adopt a hypertechnical
interpretation of Section 7(4)(a) of the Act, to argue that
signatures of both the parties are contemplated.
77. The Defendant further submits that a holistic reading of the UIBT itself
demonstrates that it contemplates an agreement between two parties i.e. the
Defendant Exchange and the Plaintiff. For instance, Clause 10 of the UIBT uses the
expression “either party” indicating thereby the fact that the UIBT is a document
intended for both the Plaintiff and the Defendant to be parties thereto, even though
the agreement contemplated only the Plaintiff’s signature. Clause 10 of the UIBT is
reproduced hereunder:
“10. Notice: Either party hereto shall give notice in writing to the other
and shall be deemed to have been duly given or served, either by
personally delivered to or sent by prepaid Registered Post with
Acknowledgement due at respective addresses herein or at the last known
address.”
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78. The Defendant stresses that all transactions executed by the Plaintiff on the
Exchange platform, whether forming a part of the subject matter of the present
dispute or not, have all been executed in consonance with and under the terms of the
UIBT. The Defendant’s contention hence centres on the point that both parties having
acted upon the terms of the UIBT, have by their conduct accepted the UIBT and the
terms contained therein, inter alia, the arbitration agreement contained in Clause
11.11 thereof. In support of this contention, reliance has been placed by the
Defendant on the decision of the Hon’ble Supreme Court in the case of Unissi (India)
Private Limited vs. Post Graduate Institute of Medical Education and Research16 wherein
a situation similar to the Nasir Husain Films case (supra) arose, but in which case, the
parties by their conduct accepted and acted upon the terms of the agreement in
contention in the said case. The Defendant has also relied on the decision of this
Court in Viraj Holdings vs. Motilal Oswal Securities17 wherein it was held that where a
document contemplates only one party’s signature, the arbitration agreement
contained therein is valid and binding. The Defendant has also placed reliance on the
decision of this Court in the case of Louis Dreyfus Commodities Asia Pte. Ltd. vs.
Govind Rubber Ltd.18
79. Clause 11.11 of the UIBT is reproduced hereunder:
“11.11 Governing Laws & Dispute Resolution:This Terms shall,
in all respects, be governed by and construed in accordance with the laws
of India, without regard to the principles of conflict of laws. All disputes
16 [(2009) 1 SCC 107 (paragraphs 25,
711,
13, 1518)],
17 [2002 (6) Bom CR 759, paragraphs 1014],
18 [2013 (3) Bom CR 174 – paragraphs 5,6 and 8].
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and differences arising out of or in connection with the Terms, which
cannot be settled amicably between the parties hereto through dialogue
or discussion, shall be finally settled exclusively by Arbitration. The
dispute shall be referred to the sole arbitration of a person to be
appointed by the Exchange and arbitration shall be held under the
provisions of the Arbitration and Conciliation Act, 1996 or any reenactment,
modification or amendment thereto. The arbitration
proceedings shall be conducted at Mumbai only. Any award by the single
arbitrator shall be final and binding upon both parties hereto. All
arbitration proceedings and all documents submitted to any arbitration
tribunal shall be in the English language. In relation to any legal action
or proceedings for any urgent, interlocutory or final orders, the parties
irrevocably submit to the exclusive jurisdiction of the courts in Mumbai,
and waive any objection to such proceedings on grounds of venue or on
the grounds that the proceedings have been brought in an inconvenient
forum or that the Services were used/accessed/availed in a different
domestic/international territory.”
80. Section 7 of the Act is relevant to decide this issue. The relevant parts of the
said Section are reproduced hereunder:
“7. Arbitration agreement. —
(1) In this Part, “arbitration agreement” means an agreement by the
parties to submit to arbitration all or certain disputes which have
arisen or which may arise between them in respect of a defined legal
relationship, whether contractual or not.
[…]
(3) An arbitration agreement shall be in writing.
(4) An arbitration agreement is in writing if it is contained in—
(a)a document signed by the parties;
(b)an exchange of letters, telex, telegrams or other means of
telecommunication which provide a record of the agreement; or
(c)an exchange of statements of claim and defence in which the existence
of the agreement is alleged by one party and not denied by the other.
[…]”
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81. On a plain reading of Section 7 itself, it becomes clear that the Plaintiff’s
contention cannot be accepted. The Plaintiff has resorted to a strict interpretation of
Section 7(4)(a) of the Act, to support its contention that the signature of both parties
is required on the arbitration agreement. But as Section 7(4)(b) and (c) show, what is
required by Section 7 is evidence of consensus/agreement between the parties. A
signature is only one of the means of showing such consensus/agreement. But as the
Defendant rightly points out, the UIBT is a document which contemplates the
signature of only one party i.e. the Plaintiff.
82. The reliance placed by the Plaintiff on the judgment in Nasir Husain Films (P)
Ltd. vs. Saregama India Ltd. and Anr. (supra) is erroneous. On reading paragraph 18
of the said judgment, it is clear that the same is based on a factual matrix which is
completely different from the facts of the present case. In that case there was a clear
dispute between the parties as to whether the agreement (which was signed by only
one party) on which reliance was being placed had ever in fact come into existence at
all; and further in the absence of such an agreement whether the correspondence
between the parties was sufficient to make out an arbitration agreement. Moreover,
the document was such as to require the signature of both parties unlike the UIBT.
83. The facts of this case are similar to those in Viraj Holdings v. Motilal Oswal
Securities (supra) which has been cited by the Defendant. That case considered the
effect of a contract note signed only by the registered broker. Such contract notes
were executed as per Regulation 3.5 of National Stock Exchange, framed under the
Securities Contracts (Regulation) Act, 1956, and this regulation required signature of
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only the registered broker. Nevertheless, the arbitration agreement contained therein
was found to be valid by the Court in that case.
84. A perusal of the provisions of the UIBT also indicate that it is a document
wherein both the Plaintiff and the Defendant are intended to be parties, even though
it only contemplates the Plaintiff’s signature. Hence, the contention of the Plaintiff
that the UIBT does not contain a valid arbitration agreement cannot be accepted.
85. Having established that there is a valid arbitration agreement in existence
between the parties, I must now examine whether the present dispute falls within the
scope of such agreement.
(B) SCOPE OF THE ARBITRATION AGREEMENT IN THE UIBT –
86. It is the Plaintiff’s contention that Clause 11.11 of the UIBT, even if held to be
an arbitration agreement under Section 7 of the Act, does not cover the disputes
raised in the present Suit as that Clause is restricted to the disputes/differences that
may arise between the parties pertaining to the “Terms” of the UIBT and nothing
else. It is the Plaintiff’s contention that the UIBT is merely an undertaking that sets
out the terms and conditions governing internet based trading in commodities.
Simply stated, it will allocate an online account which may be operated by the
Plaintiff or its authorized representative to deal on the Exchange as defined and
permitted by the ByeLaws,
Rules and Regulations of the Exchange. The Plaintiff
submits that the overarching
framework under which Members are permitted to
trade in contracts being offered by the Defendant Exchange are the ByeLaws.
The
UIBT contains the terms and conditions governing the member’s right to transact on
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the Defendant’s platform using the services of the Defendant Exchange. Hence,
disputes relating to only to such right and/or arising out of the services provided by
the Defendant under the UIBT are governed by the dispute resolution provisions
contained in Clause 11.11.
87. The Plaintiff has further elaborated that while the services of matching prices
are being provided by the Defendant Exchange, the underlying transactions are
solely between a buyer member and a seller member. Therefore, once the prices are
matched on the Defendant Exchange, the resulting transaction or trades in relation
to any commodity are said to be concluded between the two members and the
agreement governing the rights and obligations of the two members in this respect
are provided in the Business Rules.
88. On the other hand, the Defendant has firstly contended that the scope of
enquiry by the courts at a prearbitration
stage has been very limited as held by the
Supreme Court in the case of National Insurance Company Limited vs. Boghara
Polyfab Private Limited19. The Defendant argues that this decision, though in the
context of a Section 11 application, also applies to cases under Section 8 of the Act
and thus a question as to whether a particular dispute falls within the scope and
ambit of a particular arbitration agreement is a matter that must be left to the
determination of the arbitral tribunal alone and should not be investigated by the
Court.
89. The Defendant, in the alternative, contends that the scope of the Arbitration
Agreement contained in Clause 11.11 of the UIBT clearly covers the disputes as
19 [(2009) 1 SCC 267, paragraphs 22.122.3]
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contained in the present Suit, as it is stated in very wide terms. The relevant part of
Clause 11.11 is stated once again for the sake of convenience:
“11.11 Governing Laws & Dispute Resolution:This Terms
shall, in all respects, be governed by and construed in accordance with
the laws of India, without regard to the principles of conflict of laws. All
disputes and differences arising out of or in connection with the Terms,
which cannot be settled amicably between the parties hereto through
dialogue or discussion, shall be finally settled exclusively by Arbitration.
[…]”
90. The Defendant states that the expression “the Terms” contained in Clause 11.11
is defined at the very outset of the UIBT in the following manner:
“This document contains the terms and conditions (The “Terms”
applicable for the internet based trading used by members, their
authorized users and clients for trading on National Spot Exchange Ltd.
(the “Exchange” or “NSEL”) a Company that has been recognized to
provide trading and clearing facility, commodities and related business
for its Members including facilitating transactions by its Members to
commodities (hereinafter called “the commodities business”).”
91. The Defendant submits that the “Terms” of the UIBT, referred to in Clause
11.11, are thus the terms and conditions contained in the UIBT itself. Therefore, it is
necessary to peruse the various terms and conditions contained in the UIBT itself to
determine the scope of the expression “the Terms” and whether the disputes raised
by the Plaintiff in the above Suit fall within the ambit of the arbitration agreement
contained in Clause 11.11 of the UIBT. According to the Defendant, the following
clauses of the UIBT have been relevant for this purpose.
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“1. Purpose
(i.) The Member or his authorized user identified herein is desirous of
trading in those Commodities admitted for dealing on the Exchange as
defined and permitted by the Rules, ByeLaws
and Regulations of the
Exchange;
(ii.) The Exchange offers and/or proposes to offer the Exchange's Services
to the Member and the Member desires to avail of the Exchange's Services
for purchasing, selling or otherwise dealing in Commodities;
(iii.) The Member has satisfied itself of the capability of the Exchange to
execute transactions in Commodities and wishes to execute its orders
through the Exchange, and the Member shall continue to satisfy itself of
such capability of the Exchange to deal in Commodities before executing
orders through it;
(iv.) The Exchange has, on the basis of information furnished by the
Member and other information (if any), considered relevant by the
Exchange, satisfied itself, and shall continuously be entitled to satisfy itself,
about the genuineness and financial soundness of the Member and
investment objectives relevant to the Services to be provided;
(v.) The Exchange has taken steps and shall take steps to make the
Member aware of the precise nature of the Exchange's liability for business
to be conducted, including any limitation on that liability and the
capacity in which it acts;
(vi.) The Member desires to be bound by these terms relating to the
Exchange's Service to be availed of by the Members and/or his authorized
user.
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These Terms shall form part of the undertaking for Internet based trading
by members entered into between the Exchange and the Member. The
Member's access to and use of the account or authorized user id /s with
the Exchange is subject to his/her/its compliance with all the terms and
conditions set forth herein.”
“3.4 Subject matter of Terms:
It is clarified that the subject matter of the Undertaking is trading, that is
purchase and sale of Commodities and other instruments traded on the
Exchange.”
“5. Transactions and Settlements:
...................
5.2 The Exchange shall not be responsible for any order that is
made by the Member by mistake and every order that is entered by the
Member through the use of the allotted user identification (ID) and
password shall be deemed to be a valid order for which the Member shall
be fully responsible.”
“2. Definitions
2.1
………..
(c) “Exchange” means National Spot Exchange Limited having its
registered office at 102 A, Landmark, B Wing, 3rd Floor, Suren Road,
Chakala, Andheri (East), Mumbai 400 093, its subsidiaries, affiliates,
successors and assigns, and all other entities involved in the provision of
the Commodities Exchange Services to its Registered Members with respect
to specified Commodities;
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(d) “Exchange provisions” means the Rules, Byelaws,
Regulations,
Business Requirement Specifications, handbooks, notices, circulars and
resolutions relating to the Exchange for the time being in force and as
amended from time to time;
(i) “Member” means the person, firm, company or entity indicated in
these Terms and registered with the Exchange as a user of the Services and
(in case of an individual) his/her heirs, executors, administrators, legal
representatives and permitted assigns, (in case of a partnership firm), the
partners for the time being of the said firm, their survivors or survivor and
their respective heirs, executors, administrators, legal representatives and
permitted assigns, (in case the Member is a company or other body
corporate) its successors and permitted assigns;
(l) “Services” means trading and matching Services relating to the
Specified Commodities traded on the Exchange;
(n) “Transactions” refers to the orders placed by the Member on the
Exchange for the purchase or sale of Commodities or other dealings in
Commodities;”
“3. General Terms and Conditions governing the service
3.1 Use of the Services: Subject to the approval and acceptance of the
Membership application and the terms and conditions herein, the Member
is granted a revocable, nonexclusive
and nontransferable
entitlement to
avail the Services for its personal use only. The Member will not and nor
will be deemed to have any right or power to transfer or assign the
permission or entitlement to use the Services or any part thereof hereby
granted. The Member's access to and/or use of the Services shall be
deemed unconditional acceptance of the Services and of these terms.”
“7. Communication
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……
7.7 Conclusiveness of Records: The Exchange's own records of the
trades/transactions maintained through computer systems or otherwise
shall be deemed conclusive and binding on the Member for all purposes.”
“9. Term and Termination: These terms shall continue to be in force
during the validity of Member's registration. Either party hereto may
terminate the use of/ withdraw the Services by giving to the other thirty
days advance written notice. The Exchange may suspend or
discontinue/terminate the use of the Services by the Member forthwith
and without prior notice if the Member has committed any breach or nonobservance
of any of the Terms herein or in case of the Member's death,
bankruptcy or legal incapacity. The Member will remain responsible for
any transactions made in its account through the Trading System of the
Exchange prior to such termination. Closing of the account will not affect
the rights and obligations of either party incurred prior to the date of
Termination. Termination of these Terms due to any material breach by
the Member shall be without prejudice to any other remedy, which the
Exchange may have against the Member. Upon termination of the Services,
all Service Charges and other sums incurred up to such date shall become
immediately due and payable by the Member to the Exchange. The
Member's obligation to pay the Service Charges accrued to the Exchange
shall survive any termination.”
“11.7 Compliance with laws. All transactions that are carried out by
and on behalf of the Member shall be subject to Government notifications,
the rules, regulations and guidelines issued by the statutory and
regulatory authorities and the byelaws,
constitution, rules, regulations,
customs and usage of the Exchanges and its clearing house, if any, on
which such transactions are executed and/or cleared by the Exchange.”
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“The conditions referred above are in addition to those applicable to
members, authorized users and clients as per the byelaws,
rules and
business rules of the Exchange.
Despite the risks indicated in this undertaking and those which inherently
exist or creep in, the Member indemnifies the Exchange and accepts these
conditions for his business and the business of his clients, and authorized
users. I / We further undertake that we shall bring the contents of this
undertaking to the notice of all our authorized user /s and also take an
undertaking from the authorized user /s as per annexure of this
undertaking duly signed by them and furnish the same to NSEL.”
92. The Defendant’s submission is that the above clauses of the UIBT demonstrate
the nature of the agreement as well as indicate that the arbitration agreement would
cover the disputes raised in the present Suit.
93. I first proceed to consider the Defendant’s argument as to whether the scope of
the arbitration agreement is an issue to be left to the arbitral tribunal. The decision of
the Hon’ble Apex Court in the Boghara Polyfab case (supra), on which the Defendant
relies in support of its argument, is of no assistance to the Defendant. Paragraph 20 of
the said judgment of the Hon’ble Court is relevant and is reproduced hereunder:
“Section 16 is said to be the recognition of the principle of Kompetenz Kompetenz.
The fact that the arbitral tribunal has the competence to
rule on its own jurisdiction and to define the contours of its
jurisdiction, only means that when such issues arise before it, the
Tribunal can and possibly, ought to decide them. This can happen when
the parties have gone to the arbitral tribunal without recourse to
Section 8 or 11 of the Act. But where the jurisdictional issues are
decided under these Sections, before a reference is made, Section 16
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cannot be held to empower the arbitral tribunal to ignore the decision
given by the judicial authority or the Chief Justice before the reference
to it was made.”
94. In the Hon’ble Apex Court’s judgment in P. Anand Gajapathi Raju v. P.V.G
Raju(supra), one of the conditions to be fulfilled for an application under Section 8 to
be granted is that the subject matter of the action brought before the judicial
authority must be the same as the subject matter of the arbitration agreement. Thus,
whether a claim made falls within the arbitration agreement or not is very much
necessary to be determined by the Court at this stage.
95. The scope of an arbitration agreement depends on the wording of the
agreement. Whilst interpreting an arbitration agreement and determining its scope,
there has been a movement from a restrictive to a more liberal approach. The liberal
approach is underpinned by a sensible commercial presumption that the parties did
not intend the inconvenience of having possible disputes from their transaction being
heard before two different fora. [Fiona Trust v Privalov]20. Consequently, the
presumption is in favour of parties wanting only one tribunal to decide all disputes
arising out of their relationship.
96. The language used in the arbitration agreement in Clause 11.11 is of a wide
import i.e. “All disputes and differences arising out of or in connection with the
Terms…”The UIBT, as its name indicates is an Undertaking for Internet Based Trading.
Clause 3 of the UIBT specifies the General Terms and Conditions governing “the
service”, which is the Internet based trading service provided by the Defendant
20 [2007] UKHL 40]
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Exchange. However, Clause 3.4 clarifies that the “subject matter of the Undertaking is
trading, that is purchase and sale of Commodities and other instruments traded on
the Exchange.” Clause 4 deals with Order Execution and Clause 4.4 discusses the nonguarantee
of execution of an order placed. Clause 4.13 invokes the Byelaws
and
Business Rules to such orders/trading. Clause 5 relates to Transactions and
Settlements and Clause 5.1 specifically sets out the price the Member can expect to
receive. What emerges from these provisions is that the UIBT, although in the nature
of an undertaking by the trading Member, does set out details regarding the manner
in which the service will be provided by the Defendant Exchange. The action in the
present suit has been brought by the Plaintiff to (i) secure specific performance by the
Defendant of “its obligation of delivering the said goods/commodities described…” in
the Plaint, or payment of compensation in lieu of specific performance and (ii)
remove its name from the list of defaulters appearing in the circular dated 22nd
August, 2013 on the website of the Defendant. To my mind, the nondelivery
of
goods/commodities described has emanated from certain internet based trading and
ostensible problems with the service provided by the Defendant Exchange.
Consequently, it can be said that this is a dispute “in connection with” the Terms in
the UIBT.
(C) OTHER ISSUES –
97. I now turn to the Plaintiff’s objection in relation to the arbitrability of the
dispute. This objection is canvassed on two grounds. First, the Plaintiff submits Clause
15.22 of the ByeLaws
contains an absolute bar on legal representation. Therefore,
even if it were to be presumed that a valid arbitration agreement does exist, this Court
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could hardly countenance a situation where the parties would have to fend for
themselves and argue the matter on both fact and law, unrepresented and unaided by
Counsel, Attorney or Advocate in a matter requiring compliance of procedure as set
out in the ByeLaws
of the Defendant Exchange, as also involving voluminous
documentary evidence and intricate issues of fraud and misrepresentation.
98. The Defendant, on its part, has stated that Clause 15.22 is a procedural
clause and the invalidity of this clause cannot vitiate the arbitration agreement itself.
In support of this submission, the Defendant has placed reliance on the decision of
this Court in Faze Three Exports Ltd. vs. Pankaj Trading Co. & Ors.21 The Defendant
submits that the Court in the said case categorically recognized the validity of an
arbitration reference whilst striking down the bar to legal representation during the
arbitration proceedings. In the said case, the arbitration took place as per the
procedure prescribed by the Hindustan Chamber of Commerce. An Application was
made by one of the parties to the Arbitral Tribunal seeking permission for
representation by a lawyer, which Application was denied by the Arbitral Tribunal.
This Court set aside the said award with the following observations:
“8. Parties have a right to be heard by the arbitral tribunal. The right
of being heard is specifically conferred on the parties under Section 24
of the Act. It is true that the right of hearing per se may not include
and does not necessarily include the right of hearing through a legal
practitioner. In administrative matters, the right of hearing may be
restricted to personal hearing by self or through an authorized
representative in case of person with disability, like illiteracy. It is
however, settled position that the arbitral proceedings are not
21 [2004 (2) BCR 522]
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administrative in nature. They are judicial at least quasijudicial.
Normally in judicial proceedings, the right of hearing includes the right
to be represented by a legal practitioner, though in some case each right
is partly restricted. However, the right to be so represented is required
to be specifically excluded by the statute. Even where the statute
excludes or limits the right of hearing through the legal practitioner,
Courts have often permitted representation through a legal
practitioner….
…… Thus, even where the statute contained provision of an express
bar for representation through legal practitioner without permission of
the Court, this Court has held that such permission should not be normally
be denied. Arbitration and Conciliation Act, 1996 contains no
provision which bars the representation of the parties by a, legal practitioner….
9. The arbitral tribunal appears to have declined the request of the petitioner
to be represented by a legal practitioner on the principal ground
that allowing of advocate's presence would result in delay and protraction
of the proceedings. The advocates and lawyers delay the proceedings
is myth. Sooner the myth is exploded the better it is. May be on
stray occasions, a litigant and sometimes even a Judge may feel that a
particular proceeding could be disposed of quickly without the assistance
of legal practitioners of either side on account of triviality of the
dispute or otherwise. But, that is an exception. By and large, advocates
and lawyers assist the Courts and Tribunals in limiting the scope of enquiry
to the relevant overlooking the irrelevant, separating grain from
the chaff and focusing on the real relevant issues. Generalisation that
advocates and lawyers delay the proceedings is incorrect. Every Court
and Tribunal which is endowed with the duty to act judicially or to determine
any issues affecting the rights of the parties in a judicial or
quasijudicial
enquiry must, in the absence of a statutory provision to
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the contrary, allow the party before it, if it so wishes to be represented
by his authorised representativeincluding
a legal practitioner. Enforcement
of Section 30 (which incidentally has not yet been brought into
force) of the Advocates Act is not necessary for this purpose. Section 30
of the Advocates Act speaks of the right of Advocates to practise. But,
what about the rights of a litigant, who wants to be represented by a
person having knowledge of law. Duty to act fairly is inherent in every
Court, Tribunal and Authority which has a right and duty to decide
upon the rights for the citizens. Giving of a fair opportunity to defend
(or to put up his case) to every party is a part of duty to act fairly.
Grant of a permission to a party to be represented by a person of his
choice, including a legal practitioner, except where statute prohibits it
or the Tribunal feels it to be against the public policy (like in some sensitive
matter involving security of the State) is a part of the duty of the
Tribunal to act fairly.
10. In the present case, the petitioner had specifically made a request to
be represented by a legal practitioner. A partner of M/s Mahimkar and
Mahimkar, Solicitors was present at the venue of arbitration but, was
not allowed to appear for the petitioner. This is recorded in the letter of
the petitioner's Solicitors dated 16th August, 2002. It is thus, clear that
fair opportunity of hearing was not given to the petitioner and to
present his case which he wanted to do through his legal practitioner.
This was done without any authority of law or without any authority
in the arbitrators to prevent the representation of the petitioners
through a legal practitioner. I am of the considered opinion that even
in arbitration proceedings, parties are entitled to be represented by a
legal practitioner if they so desire unless they have agreed in writing
that none of the parties shall be represented by a lawyer.”.
99. The Defendant has submitted that in the said case, this Court expressly
removed the bar against legal representation and remitted the matter back to the
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arbitral tribunal. The Defendant accordingly submits that Clause 15.22 is
unenforceable, but the provision for arbitration is valid and binding, and that
accordingly the parties will be entitled to be represented in the arbitral proceedings.
100. I cannot agree with the Defendant that the Faze Three Exports Ltd. case
(supra)implies that the Court can strike down the said clause while referring the
matter to arbitration. In that case, this Court set aside the award on the ground that
the arbitrators had prevented legal representation without any authority of law or
without any authority in the arbitrators to prevent the same. There was no question
of striking down such a clause; rather, it was the award that was set aside. In the
present case, without any challenge to the said clause, the question of the Court
striking it down suo motu does not arise. The decision in Faze Three Exports Ltd.
(supra) does not assist the Defendant in relation to the principle it seeks to submit.
101. I am conscious however of the fact that the arbitration in the present case will,
as per the order of this Court, proceed under the arbitration agreement contained in
the UIBT. This particular provision i.e. Clause 15.22 is contained in the Byelaws.
It
will be for the arbitral tribunal to consider the effect of the provision on the
arbitration proceeding. Rules of procedure in the light of the arbitration agreement
and the subject matter of disputes, is something within the realm of the Arbitrator's
jurisdiction and need not detain us at the stage of reference of the parties under
Section 8 of the Act. We may simply note Sections 18 and 34 (2) (iii) of the Act in
this behalf. Section 18 states as follows:
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“18. Equal treatment of parties — The parties shall be treated with
equality and each party shall be given a full opportunity to present his
case.”
Section 34(2)(iii) of the Act, in the context of the grounds for setting aside the
award, states as follows:
“34. Application for setting aside arbitral award. —
[…]
(2) An arbitral award may be set aside by the Court only if—
[…]
(iii) the party making the application was not given proper notice of the
appointment of an arbitrator or of the arbitral proceedings or was
otherwise unable to present his case; or
[…]”
102. Consequently, it would not be possible to deny a party the right to legal
representation. As rightly observed by this Court in Faze Three Exports Ltd. (supra),
arbitration is a quasijudicial
proceeding and in such proceeding the right of hearing
includes the right to be represented by a legal practitioner, though in some case each
right is partly restricted. However, the right to be so represented is required to be
specifically excluded by the statute…”, or presumably, by an agreement of the two
parties. As noted above, this question will any way have to be determined by the
arbitral tribunal.
103. The second ground of objection as regards arbitrability of the dispute raised by
the Plaintiff is that there are intricate questions of fact and law involving voluminous
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documentary evidence/record and serious issues of fraud, which cannot be arbitrated
and should be decided by the Court. The Plaintiff submits that the Report of the Court
Receiver reveals that adequate stocks were not found lying at the warehouses visited
by the Court Receiver, although the Defendant in its Stock Report dated 6th August,
2013, published on the website giving details of stock as on 6th August, 2013,
showed against the name of the Plaintiff that there were stocks of 44,586 MT of
refined Palmolein oil at the warehouse of Sarda Agro Oils Ltd., Tank R4. The Plaintiff
adds that the fact that a fraud has indeed been played by the Defendant is
compounded by the very fact that it is regarding these very stocks that the Plaintiff
has been illegally and wrongfully declared as a defaulter on 22nd August, 2013.
Given that there are serious allegations of fraud in relation to the stocks traded on the
Exchange operated by the Defendant and that the same are under investigation, the
Plaintiff submits the matter has to be tried in Court and that such matters cannot be
referred to arbitration. In support of this contention the Plaintiff has relied on the
judgments in (i) N.Radhakrishna vs. Maestro Engineers & Ors.22 ; (ii) India Household
Health Care Ltd. vs. L.G. Household & Healthcare Ltd.23; (iii) M.S.M. Satellite
(Singapore) Pte. Ltd. vs. World Sport Group (Mauritius) Ltd.24; and (iv) Ivory Properties
& Hotels (P) Ltd. vs. Nusli Wadia25.
104. The Defendant, with respect to these submissions, has put forward various
arguments. First, that there are no specific pleadings on fraud in the Plaint and that
22 [2010 (1) SCC 72 – paragraphs 2126]
23 [2007(5) SCC 510 – paragraph 10]
24 [2010 112(9) Bom. L.R. 4292 – paragraphs 58, 59, 62]
25 [2011 (2) BCR 559 – paragraphs 1216].
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only the pleadings in the Plaint can be looked at. As per Order VI Rule 4 of the Code
of Civil Procedure, the fraud is to be pleaded with full particulars. Second, that in any
event no question of fraud arises in the present case as it is a simple case of a contract
for the sale of goods. Third, that the Court is not concerned with other matters that
may be pending adjudication before it, in which fraud may have been specifically
pleaded by the parties. The Defendant has also submitted that the Court cannot take
into account matters in the public domain and matters of common knowledge
pertaining to the alleged fraud. The Defendant has also stated that a reading of the
judgment of the Hon’ble Supreme Court in the case of N. Radhakrishna (supra), the
decision of this Court in Ivory Properties (supra), BishundeoNarain and Anr. vs.
SeogeniRai and Jagernath26 and the unreported judgment of the Calcutta High Court
in Ram KishanMimani vs. Govardhandas Mimani which was followed and applied in
the case of HSBC PI Holdings (Mauritius) Limited vs. Avitel Post Studioz Limited and
Ors. [Arbitration Petition No. 1062 of 2012] indicates that the present case does not
come within the principles enunciated in those judgments as to when a party would
not be referred to arbitration because of allegations of fraud. Finally, The Defendant
contends that the Plaintiff's case does not really depend on establishment of any
fraud on the part of the Defendant and the reliefs claimed by the Plaintiff can be
granted whether or not there is any fraud.
105. It has been submitted on behalf of the Defendant that there are no specific
pleadings on fraud in the Plaint and that as per Order VI Rule 4 of the Code of Civil
Procedure, the fraud is to be pleaded with full particulars. In relation to this
26 [AIR 1951 SC 280 – paragraph 28]
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argument, the Plaintiff has submitted that the Court cannot restrict its scrutiny to the
Plaint and close its eyes to the record before it in this very matter. The Plaintiff
submits that there were various reports circulating in the media that a fraud may
have been played by the Defendant which made the Plaintiff more cautious in
withholding payment without delivery of the goods and until appropriate settlement
of claims, and that there are serious allegations of fraud in relation to the stocks
traded on the Exchange operated by the Defendant and that the same are under
investigation. The Defendant, on its part, argues that the Court cannot consider
matters which are in public domain and matters of common knowledge pertaining to
the alleged fraud involved in the Exchange.
106. The Plaint in the above Suit, on perusal, indicates that a fraud may have been
perpetrated by the Defendant Exchange. The Court cannot ignore the facts on record
which have been produced before this Court. The facts revealed in the Reports of the
Court Receiver dated 21st October, 2013 and 22nd October, 2013, which have been
filed in the present case pursuant to this Court’s adinterim
order dated 3rd October,
2013, ex facie reveal the conduct of the Defendant Exchange proclaiming in its
website details of stock held as on 6th August, 2013, when there were no stocks.
107. As far as the arbitrability of fraud is concerned, the Hon’ble Supreme Court in
N. Radhakrishnan (supra), held that a stay will not be granted under Section 8 of the
1996 Act in favour of a domestic arbitration, “when serious allegations of fraud are
made which it is desirable should be tried in open court.”In the case of in World Sport
Group (Mauritius) v MSM Satellite (Singapore) (supra), the Hon’ble Supreme Court
held that the decision in N. Radhakrishnan (supra) did not apply to a stay in favour of
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foreignseated
arbitrations. This was a case under Section 45 of the Act. That
provision states that an Indian court must stay its own proceedings in favour of
foreignseated
arbitrations, unless the said agreement is null and void, inoperative or
incapable of being performed.
108. This arbitrability question was considered by this Court in HSBC v Avitel
(supra), in the context of an application under Section 9 in relation to arbitration
proceedings in Singapore. The respondents in that case opposed the application on
the basis that, since fraud is not arbitrable under Indian law, the ultimate arbitration
award would not be enforceable in India under section 48; and since section 9 allows
interim relief to be granted only in aid of final relief, it cannot be granted in a case
where the final award would be unenforceable in India. On the facts of the case, the
arbitral tribunal had held, and the Court affirmed, that the law governing the
arbitration was not Indian law, and therefore the question of the arbitrability of fraud
under Indian law did not strictly fall to be decided. However, given the detailed
arguments on the point by both sides, the Court did consider the Supreme Court's
decision in N Radhakrishnan (supra).It concluded that fraud is indeed arbitrable
under Indian law observing:
“[T]he N.Radhakrishnan judgment cannot be read to imply that every
allegation of fraud for malpractice being made, there can no longer be
adjudication of such matters in an arbitration reference.
N.Radhakrishnan has to be read to imply that an exception may be
made to the general rule when it appears to court that a matter
involving serious charges with heavy documentary and oral evidence
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may not be referred to arbitration notwithstanding the dispute being
covered thereby.”
109. In this context, it seems to me that the rationale underlying decisions like N.
Radhakrishnan is that Indian courts may refuse to refer a matter to arbitration under
Section 8 of the Act, if satisfied that there is a sufficient reason why the matter should
not be referred to arbitration. In my view, there would be sufficient reason, in a
dispute involving allegations of fraud, only where a detailed investigation of the fraud
as a whole is required to decide the dispute between the parties. The reason is that such
an investigation may involve the interests and concerns of third parties to the dispute,
or of the general public, which cannot be represented in the private process of
arbitration. Again, if an investigating authority is in the midst of an investigation at
the time of a dispute, and it is expected that certain directions may have to be issued
to such authority as regards the investigation, in order to resolve the dispute between
the parties and/or decide the question of fraud, it would be sufficient reason for the
Court to refuse to refer the matter to arbitration, bearing in mind that the arbitral
tribunal would not have the power to issue such directions to an investigating
authority. It is pertinent to mention in this context that in a recent decision of the
Hon’ble Supreme Court in Swiss Timing Ltd. v Organising Committee, Commonwealth
Games 2010, Delhi27 the Hon’ble Court observed that there is no inherent risk to the
parties in permitting arbitration to proceed, even with criminal proceedings running
simultaneously.
27 Arbitration Petition No. 34 of 2013 dated 28th May, 2014

110. In the present case, no such investigation of fraud as a whole is required to
decide the dispute between the Plaintiff and the Defendant. A tangential reference to
the wider fraud in the pleadings may be made, but it appears to me that it is possible
for an arbitral tribunal to adjudicate the dispute, including the question of fraud,
without having to unravel the entire fraud alleged to be perpetrated by the Defendant
Exchange. The primary relief sought by the Plaintiff is specific performance, or
compensation in lieu thereof, and an arbitral tribunal does have the power to order
specific performance of a contract, as held by the Hon’ble Supreme Court in Olympus
Superstructures Pvt. Ltd. v. Meena Vijay Khetan28. Accordingly, I hold that the issue of
fraud is arbitrable and there is insufficient reason to nevertheless refuse to refer the
matter to arbitration.
111. For the sake of convenience, I summarize my conclusions as follows:
i. The document annexed at Exhibit O to the Plaint is not a “Membership
Agreement”, as sought to be argued by the Plaintiff.
ii. The Exchange has not been kept out of the purview of arbitration proceedings
under the Byelaws
and Clause 15.4 of the ByeLaws
is a valid arbitration
agreement by which the Exchange may be made party to an arbitration.
iii. Clause 11.11 of the UIBT is a valid and binding arbitration agreement between
the parties and the Defendant can invoke that agreement in order to request
the Court to refer the present dispute to arbitration.
iv. The Defendant has not waived its right to arbitrate.
28 [AIR 1999 SC 2102]

v. The dispute is arbitrable, even though it involves allegations of fraud.
112. The parties are referred to arbitration and are directed to take necessary steps
to commence the arbitration.
113. The above Notice of Motion is accordingly disposed of.
[S.J. KATHAWALLA, J.]

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