2001 (7) TMI 1237 - HC - Companies Law

Issues Involved:
1. Whether the dispute between the parties is one arising under the terms of the agreement or outside the terms?
2. Whether the charge of fraud leveled by the plaintiff is a matter which can be decided by the arbitrator?
3. Whether the relief asked for by the plaintiff in the suit is beyond the powers of the arbitrators and can only be granted by the court?

Detailed Analysis:

Issue 1: Whether the dispute between the parties is one arising under the terms of the agreement or outside the terms?

The second and third defendants filed applications to refer the dispute to arbitration as per the bye-laws of the National Stock Exchange (NSE). They argued that the plaintiff, a registered NSE member, had executed a formal client member agreement with them, subjecting all transactions to the NSE bye-laws, which mandate arbitration for all disputes. The defendants contended that the suit filed by the plaintiff was frivolous and not maintainable, as the subject matter was referable only to arbitration. They also claimed that the plaintiff had fraudulently inserted transactions in their accounts. The plaintiff, however, argued that serious allegations of fraud were involved, which required judicial intervention and could not be resolved through arbitration.

Issue 2: Whether the charge of fraud leveled by the plaintiff is a matter which can be decided by the arbitrator?

The plaintiff contended that the first defendant had committed fraud by manipulating multiple accounts and transactions, which could not be adequately addressed by an arbitrator lacking legal training. The plaintiff argued that the arbitration clause did not cover such serious allegations of fraud, which needed to be proved in court. The court noted that the allegations were substantial and not made recklessly, thus requiring judicial scrutiny. The court referred to precedents where serious fraud allegations warranted judicial intervention rather than arbitration.

Issue 3: Whether the relief asked for by the plaintiff in the suit is beyond the powers of the arbitrators and can only be granted by the court?

The plaintiff sought relief that included piercing the corporate veil of the second and third defendants to hold the first defendant accountable for fraud. The court observed that such relief was beyond the scope of arbitration, which is limited to the terms of the agreement. The court cited previous judgments emphasizing that disputes involving serious fraud and complex legal questions should be resolved by the court, not by arbitrators. The court concluded that the plaintiff had made a prima facie case of fraud, justifying judicial intervention.

Conclusion:

The court dismissed the applications filed by the second and third defendants to refer the dispute to arbitration. It held that the allegations of fraud were serious and required judicial determination, which was beyond the scope of the arbitration agreement. The court found that the dispute raised by the plaintiff was outside the terms and conditions of the NSE bye-laws and thus could not be resolved by arbitration. The court emphasized that the parties could still present their defenses in the suit, and the order would not bar them from doing so.

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