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The bench of Justice Shekhar B. Saraf in the case of M/S Ugro Capital Limited v. Raj Drug Agency (AP No. 200 of 2022) concluded that just because the respondents disagree about the legitimacy of the arbitration clause in the agreement and their signature on it does not render the matter unarbitrable. It further concluded that the mere potential or presence of criminal proceedings deriving from the same circumstances would not exclude the issue from being resolved through arbitration.

Facts of the Case:

The first respondent is a sole proprietorship in the pharmaceutical and medical drug sector. The firm’s only proprietor is the second respondent. In the year 2000, the second respondent provided the fourth respondent the authority to administer the proprietary company, including managing the bank accounts, and this arrangement was reaffirmed in the year 2015 for another ten years. The parties reached an agreement on November 28, 2020, in which the respondent no. 1 was granted a loan of Rs. 25.45 lakhs, repayable in 36 monthly instalments of Rs. 93,934. A disagreement emerged between the parties when the respondent’s ECS issued to settle its monthly payments was rejected by the bank.  Accordingly, the petitioner issued a notice under Section 25 of the Payment and Settlement System Act, 2007 demanding the payment of the due amount. However, the respondent failed to repay in the stipulated time which led the petitioner to file an application under Section 9 of the A&C Act. The Court allowed the application and directed an injunction on the property of the respondent to the extent of the due amount. Thereafter, the petitioner preferred an application for the appointment of the arbitrator.

Judgment Review:

The Court referred to the judgment of the Supreme Court in Rashid Raza v. Sadaf Akhtar, (2019) 8 SCC 710 wherein the Apex Court laid down a two-fold test to determine the nature of the fraud for the purpose of Section 11. The Apex Court held as under: “4. The principles of law laid down in this appeal make a distinction between serious allegations of forgery/fabrication in support of the plea of fraud as opposed to “simple allegations”. Two working tests laid down in para 25 are: (1) does this plea permeate the entire contract and above all, the agreement of arbitration, rendering it void, or (2) whether the allegations of fraud touch upon the internal affairs of the parties inter se having no implication in the public domain.”

Then the Court referred to the judgment of the Supreme Court in Avitel Post Studioz v. HSBC PI Holdings (2021) 4 SCC 713 wherein the Apex Court elaborated on the above two-fold test. The Apex Court held as under: “35. After these judgments, it is clear that “serious allegations of fraud” arise only if either of the two tests laid down are satisfied, and not otherwise. The first test is satisfied only when it can be said that the arbitration clause or agreement itself cannot be said to exist in a clear case in which the court finds that the party against whom breach is alleged cannot be said to have entered into the agreement relating to arbitration at all. The second test can be said to have been met in cases in which allegations are made against the State or its instrumentalities of arbitrary, fraudulent, or mala fide conduct, thus necessitating the hearing of the case by a writ court in which questions are raised which are not predominantly questions arising from the contract itself or breach thereof, but questions arising in the public law domain.”

The Court evaluated the circumstances of the case in light of the Supreme Court’s ruling. It concluded that because the money was credited to the first respondent’s bank account and the second respondent had empowered the fourth respondent to handle the firm, including the bank accounts, a clear inference that the Agreement was not entered into by the replying respondents cannot be formed. Furthermore, the mere possibility or existence of criminal proceedings arising from the same facts would not bar the dispute from being resolved through arbitration, as explained in the Avitel (supra) decision. As a result, the Court granted the motion and assigned a single arbitrator.

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JUDGMENT REVIEWED BY DIVYA SHREE GN