Cancellation of written instruments under Section 31 of Specific Relief Act- whether an action in rem and hence not arbitrable
Almost a decade ago, the Apex Court held in the case of Booz Allen & Hamilton Inc. Vs. SBI Home Finance Ltd.1, that generally and traditional all disputes relating to rights in personam are arbitrable whereas all disputes relating to rights in rem are to be adjudicated by the courts and public tribunals. Recently, in the case of Deccan Paper Mills Co. Ltd. v. Regency Mahavir Properties & Ors2, the Apex Court, while deciding whether an action for cancellation of written instruments under Section 31 of Specific Relief Act (“SRA”), 1963 is arbitrable or not, re-visited its judgement in Booz Allen’s case in order to consider if a further exception can be carved out to the categories of non-arbitrable cases, laid down therein.
Facts of the Case
- Deccan Paper Mills Co. Ltd. “Deccan” owner of approximately 80,200 sq. meters of land bearing Survey Nos. 96B, 96C and 96D at village Mundhwa, District Pune,
decided to develop a portion of the said land i.e. 32,659 sq. meters and for the same Deccan entered into an agreement dated 22.07.2004 with M/s Ashray Premises Pvt. Ltd. “Ashray”. This agreement did not contain any arbitration clause. However, clause 2(m) in the agreement permitted assignment of the right of 1 (2011) 5 SCC 532.
2 Civil Appeal No 5147 of 2016 decided by a larger bench of Hon’ble Justice R F Nariman, Hon’ble Justice Navin Sinha and Hon’ble Justice Indira Banerjee, on 19.08.2020 the developer to any other person.
- In light of the aforesaid clause, Ashray entered into an agreement dated 20.05.2006 with Regency Mahavir Properties “Regency” by which Ashray assigned the execution of the previous agreement dated 22.07.2004 to Regency. This agreement contained an arbitration clause.
- Vide a deed of confirmation dated 13.07.2006, to be treated as part of the agreement dated 20.05.2006, the assignment by Ashray to Regency was reaffirmed.
- Deccan alleged that it was made to believe by one of the leading partners of Regency that the development of the said property shall be carried out as quickly as possible. Deccan was under a bonafide belief that Mr. Atul Chordia (ex-partner of Regency) would be responsible for the development of the said property. However, on enquiry on a later date due to delay in progress of construction, it came to learn that Mr. Chordia was no more responsible for development of the said property, since he had assigned the development rights way back in the year 2006.
- Deccan stated that the agreement of assignment and deed of confirmation were tainted with fraud and thus ab initio null and void and no more binding on them.
- In light of the aforesaid facts, Deccan prayed before the Ld. Civil Judge (Senior Division) Pune to declare all the agreements and deed obtained by fraud be
declared illegal, ab initio null and void and not binding on them. In the prayer clause, they also sought cancellation of agreements and the deed.
- An application dated 19.07.2010 filed under Section 8 of Arbitration and Conciliation Act, 1996 (“Act”) on behalf of Regency to refer the parties to arbitration by virtue of the arbitration clause in the agreement dated 20.05.2006. Plaintiff/ Deccan resisted the enforceability of the agreement on the grounds of it being null and void. After hearing both sides, the Ld. court at Pune referred the parties to arbitration.
Writ Petition before the Hon’ble Bombay High Court (“BHC”)
In a writ petition filed by Deccan, the BHC vide judgment dated 18.03.2015 upheld the decision of the trial court and referred the parties to arbitration. In doing so, the bench referred to numerous Apex Court judgments, especially the decision in Swiss Timing Ltd. v. Commonwealth Games 2010 Organising Committee3 holding that N. Radhakrishnan4 case was not correct in law and held that the allegations of fraud can be determined by arbitration where an arbitration agreement exists between the parties.
Proceedings before the Hon’ble Supreme Court of India (“SC”/“Apex Court”)
In its appeal before the SC, Deccan contended against the arbitrability of the dispute primarily on two grounds, firstly, disputes arising from the agreement allegedly executed on the basis of fraud are not arbitrable, secondly, as one of the prayers in the suit was for cancellation of three written instruments, which is a 3 (2014) 6 SCC 677 4 (2010) 1 SCC 72 proceeding under Section 31 of the SRA, 1963 and the same being a proceeding in rem, falling within one of the exception laid out in Booz Allen (supra), the dispute would not be arbitrable.
The Respondent, on the other hand, relying on the Apex Court’s judgment in the case of Rashid Raza v. Sadaf Akhtar5 contended that “fraud exception” would apply only if it can be stated that the agreement itself was never executed, and not otherwise. In response to the issue of an action under Section 31 of the SRA, 1963, Respondent contended that court’s discretion under the said provision is for the benefit of the party interested in setting aside a written instruments,therefore, proceedings would be in personam. It was also contended by the Respondent that in light of the recent amendments to the Act, only thing necessary to be seen while deciding an application under Section 8 of the Act is existence of a valid arbitration agreement.
Decision of the Apex Court
Firstly¸ on the issue of arbitrability of dispute in face of allegations of fraud, the SC, followed its recent judgment Avitel Post Studioz Limited & Ors. v. HSBC PI Holding (Mauritius) Ltd.6 and held that if an allegation between parties lies within Section 17 of the Indian Contract Act, or involves fraud in performance of contract, the subject matter would be arbitrable.
Secondly, in terms of Section 8 of the Act the SC made it clear that when an action is brought before the judicial authority to refer the parties to arbitration, such 5 (2019) 8 SCC 710 6 Civil Appeal No. 5145 and 5158 of 2016 decided on 19.08.2020.judicial authority shall do so unless prima facie, no arbitration agreement is found to exist.
Thirdly and most importantly, to determine whether the proceedings under Section 31 of the SRA, 1963 is one in rem or in personam, the SC set out to examine the correctness of the law laid down by a division bench of Hon’ble Delhi High Court in the case of Alien Developers Pvt. Ltd. Vs. M. Jamardhan Reddy7, which held that the action under Section 31 of the SRA, 1963 is an action in rem and therefore not arbitrable. After detailed analysis of law, the Apex Court held that the judgement in the case of Alien Developers is not a good law and overruled the same. For concluding that action under Section 31 of the SRA is not an action in rem , SC examined the issue from various angles, as highlighted below:
- Apex court carried out in depth scrutiny of various provisions of the SRA, 1963 and different expressions used therein8. SC noted that Section 31 (1) refers to “any person against whom a written instrument is void or voidable…….”. Thereafter, the SC cited with approval the judgment of full bench of Madras High Court reported as Muppudathi Pillai Vs. Krishnaswami Pillai9, involving determination of scope of pari materia provisions of SRA 1877. In the said judgement, the Hon’ble Madras High Court had held that jurisdiction under Section 39 of the SRA 1877(which is the pari materia provision to Section 31 of SRA 1963) was protective or preventive one. The SC further held that a reading of the full bench judgment of Madras High Court would make it clear that expression “any person” does not include a third party but is restricted to a party 7 (2016) 1 ATL 194 (DB) 8 “Any person interested in the contract” in Section 27, “any person entitled to any legal character” used in Section 34 as against “any person” used in Section 31 of the SRA, 1963 9 AIR 1960 Mad 1 to the written instrument or any person who can bind such party. It was further held that reading of Section 31 SRA, 1963 shows that when a written instrument is adjudged void or voidable, the court may then order it to be delivered up to the plaintiff and cancelled in exactly the same way as a suit for rescission of a contract under Section 29 SRA, 1963. SC held that it is clear that action under Section 31(1) is strictly an action inter parties and this is an action in personam.
- The Apex Court further examined as to whether Section 31(2) makes any difference to the aforesaid determination in law. The SC disapproved the reasons given by the Hon’ble Delhi High Court in the matter of Alien Developers. SC held whether or not the written instrument is registered, makes no difference in order to hold that the proceeding in relation thereto will be proceeding in rem or in personam. SC relied on its earlier judgment in the case of Gopal Das Vs. Sri Thajuri10 which was followed by a division bench of Madhya Pradesh High Court in case of Rekha Vs. Rantashree11 for holding that a deed of conveyance or other document executed by any person is not an act nor record of an act of sovereign authority or of any official body or tribunal, or of any public officer, legislative, judicial or executive. Nor is it a public record kept in a state of any private document. Referring to the provisions of Section 74 of the Evidence Act defining the expression ‘public document’, the SC held that factum of registration of what is otherwise private document inter parties does not clothe the document with any higher legal status by virtue of its registration.
- Further, following its earlier judgment in the case Olympus Superstructures Vs. Meena Vijay Khetan12, the SC held that the dispute or 10 AIR 1943 PC 83 11 (2006) 1 MP LJ 103 12 (1999) 5 SCC 651 differences which parties to an arbitration agreement agree to refer must consist of justiciable issue triable civilly. With the said finding, the court held that specific performance is justiciable issue triable civilly and expression “court” appearing throughout the SRA 1963 will have to be substituted by “arbitrator” or “arbitral tribunal”.
- The apex court also referred to the definition of expression “in rem” in the law dictionaries, as well to the meaning of the said expression in foreign jurisdiction besides taking cognizance of the fact that how proceeding “in rem” is understood in practice as compared to literal meaning of the said expression. After considering the same, the court came to the conclusion that Section 31 is with reference to specific persons and not with reference to all who may be concerned with the property underlying the instrument and hence a judgment delivered under Section 31 cannot bind all persons claiming an interest in the property inconsistent with the judgement, even though pronounced in their absence.
- Referring to the provisions of Section 32, 33, 34, and 35 read with Section 413 of the of the SRA 1963, the SC held that actions under these provisions are actions in personam and it would be most incongruous to say that every other provision of the SRA 1963, refers to actions in personam and Section 31 alone being out of step i.e. referring to in rem actions.
- Lastly the SC referred to the judgment in the case of Suhrid Singh Vs. Randhir Singh14, wherein it was held that where an executant to a deed wants it 13 Section 4:- Specific relief can be granted only for the purpose of enforcing individual civil rights and not for the mere purpose of enforcing a penal law. 14 (2010) 12 SCC 112 to be annulled, he has to seek cancellation of the deed (under Section 31 of the SRA 1963) whereas if a non-executant seeks annulment of a deed, he has to
seek declaration that the deed is invalid (which can be done by filing of suit under Section 34 of the SRA, 1963). The SC held that it would be wholly incorrect to hold that cancellation of very same deed, if done under Section 31 would be an action in rem, however, if done under Section 34 of SRA would be an action in personam. On the basis of above discussion, the SC held that an action instituted under Section 31 SRA, 1963 is an action in personam and not an action in rem.
By virtue of this judgment, the Apex Court has put to rest most of the controversies surrounding arbitrability of the disputes seeking specific performance of contract. It has been clearly brought out that specific relief is granted only for the purpose of enforcing individual civil rights in light of Section 4 of the SRA, 1963 and hence all actions under the SRA are actions in personam. This determination of the apex court is in line with principle highlighted in Halsbury’s Laws of England to the effect that justiciable issues triable civilly are arbitrable and a fair test of this is whether difference can be compromised lawfully by way of accord and satisfaction. Accordingly, no exception was required to be carved out to the categories of non-arbitrable cases as mentioned in the case of Booz Allen.