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IN THE HIGH COURT OF JUDICATURE AT BOMBAY
O. O.C. J.
ARBITRATION APPLICATION NO.123 OF 2008
Ivory Properties & Hotels Pvt. Ltd. ...Applicant.
Versus
Nusli Neville Wadia. ...Respondent.
.......
Mr.I.M.Chagla, Sr.Advocate with Mr.Tushad Cooper, Ms.Hemlata
Jain, Mr.Amey Nabar, Ms.Sukhada Wagle i/b.M/s.Hariani & Co. for
the Applicant.
Mr.Navroz Seevai, Sr.Advocate with Mr.Venkatesh Dhond, Mr.Rohan
Kelkar, Mr.Shrikant Doijode, Mr.Parag Kabadi and Ms.Falguni
Thakkar i/b.Doijode Associates for the Respondent.
......
CORAM : DR. D.Y. CHANDRACHUD, J.
January 7, 2011.
ORAL JUDGMENT :
This is an application under Section 11(6) of the
Arbitration and Conciliation Act, 1996.
2. An agreement was entered into between the Applicant and
the Respondent on 2 January 1995. Under the agreement, the
Applicant undertook to develop certain immovable property and to
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sell the constructed area, for which the Respondent was to receive
12% in the amount realised from the sale. Under the agreement, a
certain amount was guaranteed as a minimum guarantee payment for
a term of ten years. The agreement contemplates that the Applicant
would be entitled to sell or transfer units in the constructed area to
third parties. The Respondent was to be entitled to receive all the
gross realizations from the disposal or transfer of the constructed area
so that 12% of the realization would be receivable directly from the
purchasers. In this manner, 12% of the realization would belong to
the Respondent while the balance representing 88% would belong to
the Applicant.
3. Disputes and differences arose between the parties which
led to the institution by the Respondent, of a suit on the Original Side
of this Court on 4 February 2008. A criminal complaint had been
instituted by the Respondent, in addition. The reliefs that are sought
in the suit include: (i) A declaration that the agreement dated 2
January 1995 stands vitiated by fraud and/or stands duly determined
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with effect from 1 February 2008; (ii) A declaration that the Powers
of Attorney executed by the Respondent stand validly revoked; (iii)
An injunction restraining the Defendants from carrying out any
further construction on the suit lands; (iv) A declaration that the
Memorandum of Understanding/Agreements entered into by the
Applicant herein with several other parties stand rescinded; (v) A
decree for the removal and demolition of the structures put up on the
lands; and (vi) A decree for damages in the sum of Rs. 350.99 crores.
Apart from the Applicant, who has been impleaded as the First
Defendant to the suit, the array of parties includes thirteen Companies
alleged to be controlled by the Applicant and several other entities.
4. The case of the Respondent in the suit is that the Applicant
could develop segments of the land by constructing buildings thereon
and that the constructed areas could be transferred only to genuine
third parties against the payment of a 12% share to the Respondent.
The allegation of the Respondent is that the Applicant constructed
buildings on the land and paid over 12% of a notionally computed
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consideration and that the transfers were effected not to genuine third
parties, but by incorporating Companies such as Defendant Nos.5 to
17. Consequently, the payment of a 12% share to the Respondent is
allegedly not of the gross realizations as contemplated by the
agreement, but on the basis of a price pre-determined between
related parties. The contention of the Respondent is that a fraud has
been practiced by the Applicant in purported implementation of the
agreement dated 2 January 1995. It is on the basis of the averments
contained in the plaint, that the reliefs which have been sought
include a declaration that the agreement dated 2 January 1995 stands
vitiated by the fraud of Defendant Nos.1 to 4.
5. The Applicant has taken out a Notice of Motion in the suit
under Section 8 of the Arbitration and Conciliation Act, 1996. The
motion is pending before the Learned Trial Judge.
6. Clause 19 of the Agreement dated 2 January 1995 contains
an arbitration agreement which is in the following terms:
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“19. If at any time hereafter any dispute and/or
difference shall arise between the Owner on the one hand
and the Company on the other hand, in respect of and/or
relating to this Agreement and/or the implementation
thereof and/or the respective rights, obligations and/or
responsibilities of the respective parties and/or regarding
the construction or interpretation of any term or provision
hereof and/or any other matter arising out of, concerning
or touching this Agreement or such development project,
the same shall be referred to the sole Arbitration of (a)
Mr.Aziz H.Parpia (Solicitor) (of M/s.A.H.Parpia & Co.) or
failing him(b) Mr.N.V.Iyer (Chartered-Accountant) (of
M/s.C.C.Choksi & Co.). The decision and/or directions
and/or Award of such Arbitrator, shall be final and binding
on both the parties. It is clarified that such Arbitrator shall
be entitled to give interim directions and/or interim Awards
as may from time to time be considered by him to be
necessary or proper and the same shall be carried out and
complied with by the respective parties. Such Arbitrator
shall have Summary Powers. The provisions of the
Arbitration Act, 1940 and/or the statutory amendments
and/or re-enactment thereof, for the time being in force,
shall apply to such Arbitration. The parties record and
confirm that Mr.Aziz H.Parpia has been and continues to be
the Solicitor for the parties in this and other matters and he
is aware of the facts and matters set out in this Agreement.
Both parties have confidence in the impartiality of Mr.Aziz
H.Parpia and have selected him as sole Arbitrator.”
7. Three defences have been set forth to the application under
Section 11(6), during the course of the hearing: (i) In the suit which
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has been instituted by the Respondent against the Applicant, serious
allegations of fraud have been levelled against the Applicant. In view
of the position of law settled by the Supreme Court, where serious
triable issues relating to fraud arise between parties, these cannot be
a subject of a reference to arbitration; (ii) The scope of the suit which
is instituted by the Respondent is wider than the scope of the
reference that is sought to arbitration. The suit inter alia includes
several corporate entities controlled by the C.L. Raheja Group who are
not parties to the arbitration agreement. The bifurcation of the cause
of action which arises in the suit is impermissible, nor can there be a
piece meal reference to arbitration; and (iii) Clause 19 of the contract
which contains an arbitration agreement contemplates a reference to
arbitration by either of two named Arbitrators. Both of them declined
to act as such. The intention of the parties was that the arbitration
should be conducted only by one of the two named Arbitrators and, if
they were not to enter upon the reference, parties implicitly intended
that there should be no arbitration at all.
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8. On behalf of the Applicant it has been submitted that: (i)
The scope of proceedings under Section 11(6) only extends to
determine (a) Whether the application has been filed before a High
Court having jurisdiction; (b) Whether there is a valid agreement to
refer disputes to arbitration; and (c ) Whether there is a dispute
arising within the purview of the arbitration agreement; (ii) The
judgments of the Supreme Court indicate that it is only in a situation
where a party against whom an allegation of fraud is made opts to
proceed to a trial in a Civil Court that an objection to a reference to
arbitration can be maintained at the behest of such a party. In other
words, a party which levels an allegation of fraud cannot be heard to
urge that those allegations should be considered only before the Civil
Court and not in arbitration. Such a defence is only open to a party
against whom an allegation of fraud is made; (iii) It is only in an
application under Section 8 that it would be open to the Court to
consider as to whether the allegations of fraud are of such nature and
character that parties should not be directed to refer their disputes to
arbitration. What is permissible for the Court to consider in an
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application under Section 8, would not be permissible in an
application under Section 11, considering the parameters of the
jurisdiction under Section 11; (iv) If an agreement stands vitiated by
fraud, then the entirety of the agreement has no existence in the eyes
of law and it is only a defence of that nature which can be considered
in an application under Section 11. In the present case, the
allegation is that the agreement dated 2 January 1995 was vitiated as
a result of a fraud practiced in the implementation of the contract.
This is not a situation where the agreement at its inception was
vitiated by fraud. An objection of this nature cannot be a ground to
refuse a reference to arbitration on an application under Section 11.
9. The rival submissions now fall for determination.
10. The power which the Chief Justice or his designate
exercises under Section 11 is judicial. This is settled in view of the
decision of the Supreme Court in SBP & Co. vs. Patel Engineering
Ltd.1 The judgment of the Supreme Court emphasizes the
1 (2005) 8 SCC 618
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complementary nature of the provisions of Sections 8 and 11. The
Court observed that where there is an arbitration agreement between
the parties, and while a party ignoring it files an action before a
judicial authority and the other party raises an objection on the
ground of the existence of an arbitration agreement, the judicial
authority has to consider the objection. If it is found to be
sustainable, the judicial authority is bound to refer parties to
arbitration. The judicial authority is bound to decide the
jurisdictional issue before making or declining to make a reference.
Section 11 only covers another situation. The Supreme Court noted
that it would be anomalous if it was to be held that while the
jurisdictional issue would be decided under Section 8, that issue
could not be determined by the Chief Justice or his designate while
dealing with an application under Section 11. The nature of the
objection is the same and the consequence of accepting the objection
in one case and rejecting it in another would obviously be the same
namely of sending parties to arbitration. The scope of the jurisdiction
on an application under Section 11 was dealt with by the Supreme
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Court. The Supreme Court held that the Chief Justice or his designate
has to decide his own jurisdiction in the sense as to whether the party
making the motion has approached the right High Court. The Chief
Justice or his designate has to similarly decide whether there is an
arbitration agreement as defined under the Act and whether the
person who has decided to seek arbitration is a party to the
agreement. The Chief Justice or his designate could also decide the
question as to whether the claim was barred by time or whether the
dispute has been resolved by recording satisfaction of the mutual
rights and obligations between the parties.
11. The scope of an application under Section 11(6) and the
judgment of seven Judges in Patel Engineering came to be revisited
in a subsequent judgment of the Supreme Court in National
Insurance Company Ltd. vs. Boghara Polyfab Private Limited.2 In
the subsequent judgment, the Supreme Court has divided the issues
into three categories: the first category consists of issues which must
be decided in an application under Section 11; the second set consists
2 (2009) 1 SCC 267
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of issues which may be decided on an application under Section 11
and the third set consists of issues which the Chief Justice or his
designate must, in the considered exercise of his discretion, leave it
open to the arbitral tribunal. Issues in the first category are (i)
whether a party making a motion moved the appropriate High Court;
(ii) whether there is an arbitration agreement; and (iii) whether the
party who has moved the arbitration application, is a party to the
arbitration agreement.
12. The question as to whether allegations of fraud which raise
serious triable issues can appropriately be referred to arbitration has
been the subject matter of several decisions both under the Act of
1940 and under the Act of 1996. In a case which involved the
provisions of Section 20(4) of the Act of 1940, the submission which
had been made before the Supreme Court in Abdul Kadir
Shamsuddin Bubere vs. Madhav Prabhakar Oak,3 was that serious
allegations of fraud have been generally held by the Court to be a
sufficient ground for not ordering an arbitration agreement to be filed
3 AIR 1962 SC 406
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and for not making a reference. Reliance in that regard was placed
on a decision of the Chancery Division in Russell vs. Russell.4 That
was a case where a notice for the dissolution of a partnership was
issued by one of the partners upon which the other partner brought
an action alleging various charges of fraud and seeking a declaration
that the notice of dissolution was void. The partner who was charged
with fraud sought a reference to arbitration. The Court held that in a
case where fraud is charged, the Court will in general refuse to send
the dispute to arbitration if the party charged with the fraud desires a
public enquiry. But where the objection to arbitration is by a party
charging the fraud, the Court will not necessarily accede to it and
would never do so unless a prima facie case of fraud was proved. In
the context of the submission which was made before it, the Supreme
Court observed as follows:
“There is no doubt that where serious allegations of fraud
are made against a party and the party who is charged with
fraud desires that the matter should be tried in open court,that would be a sufficient cause for the court not to order
an arbitration agreement to be filed and not to make the
reference. But it is not every allegation imputing some kind
of dishonesty, particularly in matters of accounts, which4 (1880) 14 Ch.D. 471
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vbc 13 arbap123.08-7.1would be enough to dispose a court to take the matter out
of the forum which the parties themselves have chosen.”13. The Supreme Court held that it is only where serious
allegations of fraud are made which it is desirable, should be tried in
open Court that the Court would be justified in refusing to make a
reference. In the case before the Supreme Court, a civil trial was
opted by the party against whom allegations of fraud were levelled.
The Supreme Court has not however laid down that it is only at the
behest of a party against whom allegations of fraud have been made that
the Court would direct that a serious triable issue of fraud be resolved
at a trial before a Court.
14. A similar issue came up for consideration before the
Supreme Court in a subsequent decision in N.Radhakrishnan vs.
Maestro Engineers.5 In that case, the Respondent had instituted a
suit against the Appellant upon which the Appellant filed an
application under Section 8 of the Act of 1996. The application was
5 (2010) 1 SCC 72
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vbc 14 arbap123.08-7.1dismissed by the trial Court which was affirmed in revision by the
High Court. It was urged before the Supreme Court on behalf of the
Appellant that where there is an express provision to that effect, the
Civil Court was bound to refer disputes between the parties to an
arbitrator. On the other hand, it was urged before the Supreme Court
by the Respondent that where a case involved substantial questions
relating to facts where detailed material evidence, both documentary
and oral, was needed to be produced by either parties, and serious
allegations of malpractice were raised, the matter must be tried in a
Court and an arbitrator is not competent to deal with such matters
which involved an elaborate production of evidence to establish the
claims relating to fraud and criminal misappropriation. The Supreme
Court observed that the High Court had rightly come to the
conclusion that since the case related to allegations of fraud and
serious malpractices on the part of the Respondent , such a situation
can only be settled in Court through furtherance of detailed evidence
by either parties and such a situation cannot be properly gone into by
the arbitrator. The Supreme Court cited with approval, the following
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vbc 15 arbap123.08-7.1statement of law contained in the judgment of the Madras High Court
in Oomor Sait v. O.Aslam Sait:6
“Power of civil court to refuse to stay of suit in
view of arbitration clause on existence of certain grounds
available under the 1940 Act continues to be available
under the 1996 Act as well and the civil court is notprevented from proceeding with the suit despite an
arbitration clause if dispute involves serious questions of
law or complicated questions of fact adjudication of which
would depend upon detailed oral and documentaryevidence.
The civil court can refuse to refer matter to
arbitration if complicated question of fact or law is involved
or where allegation of fraud is made.Allegations regarding clandestine operation of
business under some other name, issue of bogus bills,
manipulation of accounts, carrying on similar businesswithout consent of other partner are serious allegations of
fraud, misrepresentations etc. and therefore, application forreference to arbitrator is liable to be rejected.”
The Supreme Court has, therefore, specifically affirmed the
correctness of the statement of law contained in this judgment of the
Madras High Court. The statement of law is that the Civil Court can
refuse to refer a matter to arbitration if serious questions of law or
6 (2001)3 CTC 269 (Mad)
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vbc 16 arbap123.08-7.1complicated questions of fact are involved adjudication of which
would depend upon detailed oral or documentary evidence or where
allegations of fraud are made.
15. In one such case in an arbitration application which arose
under Section 11 of the Arbitration and Conciliation Act, 1996, a
Learned Designated Judge of the Supreme Court in India Household
and Healthcare Ltd. vs. LG Household and Healthcare Ltd.,7
declined to refer parties to arbitration. Before the Supreme Court, it
was urged on behalf of the Petitioner that once an arbitration
agreement was found to exist, having regard to the provisions of
Section 5, no judicial authority could exercise any jurisdiction in the
matter and the Court should uphold the arbitration agreement
between the parties. On the other hand, it was urged on behalf of the
Respondent that in view of the decision of the Constitution Bench in
Patel Engineering, the Court was obligated to enquire into the
question as to whether the entire agreement is vitiated by fraud as a
result whereof no valid agreement came into being. Moreover, it was
7 (2007) 5 SCC 510
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vbc 17 arbap123.08-7.1urged that a fraud of grave magnitude having been committed, the
entire agreement would stand vitiated. In this context, the Learned
Designated Judge observed as follows:
“It is also no doubt true that where existence of an
arbitration agreement can be found, apart from theexistence of the original agreement, the courts would
construe the agreement in such a manner so as to uphold
the arbitration agreement. However, when a question of fraud is
raised, the same has to be considered differently. Fraud, as is well known,
vitiates all solemn acts. A contract would mean a valid contract; anarbitration agreement would mean an agreement which is enforceable in law.”
(emphasis supplied).A similar view was taken by a Division Bench of this Court in MSM
Satellite (Singapore) Pte. Ltd. vs. World Sport Group (Mauritius)
Ltd., (Appeal (Lodging) No.534 of 2010 in Notice of Motion No.1809
of 2010 in Suit No.1828 of 2010), decided on 17 September 2010.
While adverting to the decisions which were cited before the Court on
behalf of the Respondent, the Division Bench held as follows:
“Even in the decisions that have been brought to our
notice … it has been held that in case of allegations of fraudand serious malpractices on the part of the parties, such a
situation can only be settled in Court through furtherance
of judicial evidence by either party and such a situation
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The Division Bench in that case further held as follows:
“These decisions clearly indicate that when vital issues of
fraud and public policy are raised and when interests of
third parties are involved and affected, then, the choice is
not left to parties. It is for the Court to determine as towhether it will allow the matters to be gone into by a
domestic tribunal in confidentiality or whether they are fit
to be decided by a Court of law in an open trial. Once we
reach the conclusion that when the issues arising out offraud as raised in the present proceedings have a bearing on
the position of BCCI in the game of cricket, the involvementof the general public in the game and the television rights
which are conferred for viewing the games by them, so also
presence of BCCI being necessary, then, the matter is fit foran open public trial by a Court of law. That cannot be left
to be decided by a tribunal chosen by parties. The
repercussions of allowing such matters to be decided by a
domestic tribunal chosen by parties would be serious and inthe longer run affect the judicial process itself. If such a
course is permitted, that might run counter to the objectand purpose of inserting Sections 23 and 28 in the Indian
Contract Act, 1872. In other words, the impact of all this
on Indian laws would be tremendous. We would be failingin our duty if we do not notice the same and take
appropriate corrective steps.”
16. The submission which has been urged on behalf of the
Applicant, however, is that it is only in the context of Section 8 of the
Arbitration and Conciliation Act, 1996, that decided cases indicate
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vbc 19 arbap123.08-7.1that parties have not been referred to arbitration in a situation where
a serious allegation of fraud is made. The law which has been laid
down by the Supreme Court in the decisions to which a reference has
been made earlier, cannot be confined to proceedings only arising
under Section 8. The observations which were made by the Supreme
Court in the decision in Radhakrishnan’s case arose out of
proceeding in an application under Section 8. The principle of law
which has been enunciated by the Supreme Court, cannot be confined
to the scope of an enquiry on an application under Section 8 of the
Act. The rationale for the principle extends to the provisions of
Section 11 as well. Significantly, the Supreme Court has observed
that where allegations of fraud or of serious malpractices are made,
such a situation can only be settled in Court after leading evidence
and cannot fall for determination by an arbitral tribunal. The
Supreme Court has categorically affirmed the correctness of the
statement of law contained in the judgment of the Madras High Court
that a Court would refuse to refer a matter to arbitration if serious
questions of law or complicated questions of fact are involved or
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vbc 20 arbap123.08-7.1where an allegation of fraud is levelled. Now, it is necessary for the
Court to emphasize that it is not every stray allegation of fraud which
would lead to the consequence of a refusal on the part of the Court to
refer parties to arbitration. The law certainly is not that on an
isolated or stray reference to fraud without material particulars that
the jurisdiction to refer parties to arbitration would stand ousted.
Essentially, it is for the Court to determine whether having regard to
the nature of the allegations and the context in which allegations of
fraud have been levelled parties must not be referred to arbitration.
The pleadings have to be scrutinised and each case must turn on a
judicious exercise of power by the Designated Judge. In the suit
which has been instituted by the Respondent against the Applicant,
serious allegations of fraud and malpractice have been levelled. The
Respondent has in the back drop of those allegations sought a
declaration that the agreement dated 2 January 1995 is vitiated by
fraud. Amongst the reliefs that are sought in the suit, is a declaration
that the Powers of Attorney executed by the Respondent stand validly
revoked. The Respondent has sought an injunction not only against
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the Applicant, but against several other entities controlled by the C.L.
Raheja Group, who are parties to the suit from carrying out any
further construction activity on the suit land. Those entities are not
parties to the arbitration agreement. Hence, the Court must also be
mindful of the circumstance that the allegations of fraud in the suit
are also linked to thirteen other corporate entities which are not
parties to the arbitration agreement. In these circumstances. it is not
possible to accept the contention of the Applicant that the allegation
of fraud could at the highest be considered only in an application
under Section 8 and not in the context of an enquiry under Section
11 of the Act. Sections 8 and 11 are complementary and it would be
anomalous to hold that while the Court before which an application
under Section 8 is moved, can decline to refer the parties to
arbitration where there are serious allegations of fraud, such a course
would not be open to the Chief Justice or his designate while
exercising the jurisdiction under Section 11.
17. For all these reasons, I am of the view that having due
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regard to the seriousness and the nature of the allegations of fraud
that have been levelled in the present case, serious triable issues arise
which ought to be determined before the Civil Court.
18. Before concluding, it would be necessary to briefly refer to
the submission which has been urged on behalf of the Respondent
that the arbitration agreement in the present case, contemplated only
a reference to two named Arbitrators and that there would be no valid
arbitration where the two named Arbitrators declined to act. The law
on the subject is not res integra. In the context of the provisions of
Section 8(1)(b) of the Arbitration Act, 1940, the Supreme Court in
Parbhat General Agencies vs. Union of India,8 observed that if an
agreement is silent as regards supply of a vacancy, the law presumes
that the parties intended that the vacancy be supplied. In other
words, unless an arbitration agreement contains a positive affirmation
of the intention of parties not to supply a vacancy, the Court would
not draw such a presumption. This view was reiterated in a
subsequent decision of the Supreme Court in State of West Bengal
8 (1971) 1 SCC 79
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vs. National Builders.9 In the present case, parties contemplated
that the disputes and differences between them should be resolved by
arbitration by (i) A.H. Parpia, Solicitor; or failing him by (ii) N.V.Iyer
of C.C. Choksi & Co. Both the Arbitrators declined to act, the first of
them on ground of health and the second on ground relating to his
professional standing. Whatever be the reasons which prompted the
two Learned Arbitrators to decline to act as such, it is evident that
there was no intent, express or implicit, on the part of the parties that
there would be no arbitration at all if either of the Arbitrators was not
ready and willing to act. Section 14 of the Arbitration and
Conciliation Act, 1996, provides that the mandate of the Arbitrator
shall terminate if he withdraws from his office or he becomes de jure
or de facto unable to perform the functions or for other reasons fails to
act without undue delay. Sub-section (2) of Section 15 provides that
where the mandate of an arbitrator is terminated, a substitute
Arbitrator shall be appointed according to the Rules that were
applicable to the appointment of the Arbitrator being replaced. In the
circumstances, there is no merit in this ground of defence that is
9 (1994) 1 SCC 235
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urged on behalf of the Respondent.
19. For the reasons indicated earlier, and having regard to the
serious triable issues that would arise as between the parties on the
allegations of fraud which have been levelled in the suit, it is not
possible to accept the prayer that is made before the Court in the
Application under Section 11. The Arbitration Application shall, in
the circumstances, stand dismissed. There shall be no order as to
costs.
( Dr.D.Y.Chandrachud, J.)
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