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REPORTABLE

        IN THE SUPREME COURT OF INDIA

        CIVIL APPELLATE JURISDICTION

          CIVIL APPEAL No. 6198 OF 2016        (ARISING OUT OF SLP (C) No. 25473/2015)

Velugubanti Hari Babu …….Appellant(s)

VERSUS

Parvathini Narasimha Rao & Anr. ……Respondent(s)

          J U D G M E N T

Abhay Manohar Sapre, J.

1. Leave granted.

2. This appeal is filed by the appellant against the

final judgment and order dated 13.02.2015 passed

by the High Court of Judicature at Hyderabad for

the  State  of  Telangana  and  the  State  of  Andhra

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Pradesh in Arbitration Application No. 79 of 2014

whereby the High Court allowed the application filed

by the respondents herein under Section 11(5) & (6)

of  the  Arbitration  and  Conciliation  Act,  1996

(hereinafter referred to as “the Act”) and appointed

the sole arbitrator to decide the disputes alleged to

have arisen between the parties in relation to MoU

dated  27.05.2013  and  further  directed  the

arbitrator to decide the legality and validity of the

MoU by taking evidence.  

3. Facts  of  the  case  lie  in  a  narrow  compass.

They, however, need mention in brief to appreciate

the short controversy involved in the appeal.

4. The appellant (who was respondent before the

High  Court)  is  the  owner  of  the  plot  of  land

measuring 15.53 acres situated in Sy. No. 416/2B2

having come into possession of it in the year 1990

by way of a registered gift deed.  He is since then

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enjoying peaceful possession of the said land.

5. According  to  the  respondents,  the  appellant

and the respondents  entered into Memorandum of

Understanding (MoU) dated 27.05.2013.  The MoU,

inter alia, provided that the respondents will resolve

certain  disputes  that  are  pending  between  the

appellant  and  certain  other  persons,  namely,

Mattaparthi  Sivayya,  Mattaparthi  Satyanarayana

and Mattaparthi Srinu, sons of late Appa Rao and

another  dispsute  with  Kanchumarthi  Venkata

Ramachandra Rao s/o Seetarama Rao, with respect

to the land in question and, in return, the appellant

will sell 50% of the land to the respondents at the

rate  of  Rs.1  crore  per  acre.   According  to  the

respondents,  as per the MoU, they paid a sum of

Rs.7,00,000/-  as token money to the appellant.   

6. In terms of the MoU, both parties agreed that if

any  dispute  arises  in  connection  with  the

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enforcement of the terms of the MoU, that shall be

resolved  through  an  Arbitrator,  who  would  be

appointed  by  both  the  parties  with  their  mutual

consent under the provisions of the Act.    

7. On 11.12.2013, the respondents sent a letter

to the appellant.  In the letter, it was alleged that

since disputes have arisen between them in relation

to execution of MoU and hence the respondents, in

terms of  MoU,  appoint  one  Sanyasi  Rao –  retired

District  Judge  as  an  arbitrator  to  decide  the

disputes.

8. As the respondents did not get any response,

they  filed  an  application  being  Arbitration

Application No.  79 of  2014 before the High Court

under  Section  11(5)  and  11(6)  of  the  Act  for

appointment  of  an  arbitrator  out  of  which  this

appeal by special leave arises.   

9. During  the  pendency  of  the  arbitration

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application before the High Court, the respondents

also filed a petition being A.A.O.P. No. 41 of 2013

before the Principal Sessions Judge, Rajahmundry

under Section 9 of  the Act for grant of injunction

restraining the appellant herein from alienating the

property which was the subject matter of MoU.  The

appellant contested the application and denied the

very execution of MoU by him.  It was alleged that

the so called MoU relied on by the respondents in

their application is forged and fabricated document

and that  he  has  never  signed any such MoU.  It

was,  therefore,  not  binding  on the  appellant.   By

order  dated  20.06.2014,  the  Principal  Sessions

Judge allowed the petition.

10. The appellant also contested the petition filed

under  Section  11(5)  &  (6)  and   filed  a  counter

affidavit therein stating,  inter alia,  that the MoU in

question  is  forged  and  fabricated  document  and

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that he never signed any such document with the

respondents.

11. By impugned order dated 13.02.2015, the High

Court  allowed the  application by holding  that  the

legality and validity of the MoU including arbitration

agreement  can  be  examined  by  the  Arbitrator  on

taking  evidence and accordingly  appointed Mr.  B.

Prakash Rao, a retired High Court Judge as the sole

arbitrator  to adjudicate  all  the disputes raised by

the  parties  including  to  decide  the  question

regarding legality and genuineness of MoU.

12. Challenging the said order, the appellant has

filed this appeal by way of special leave before this

Court.

13. Heard Mr. V.V.S. Rao, learned senior counsel

for the appellant and Mr. Basant R., learned senior

counsel for the respondents.

14. Mr.  V.V.S  Rao,  learned  senior  counsel

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appearing  for  the  appellant  while  assailing  the

legality  and  correctness  of  the  impugned  order

argued two points.  

15. In the first place, learned counsel urged that

the  High  Court  erred  in  allowing  the  application

filed by the respondents under Section 11(5) & (6) of

the Act and further erred in directing the arbitrator

to decide the legality and validity of the MoU along

with the disputes arising out of MoU.

16. In  the  second  place,  learned  counsel  urged

that the directions issued to the arbitrator to decide

the  legality  and  genuineness  of  the  MoU  are

contrary to the law laid down by this Court in SBP

& Co.  vs.  Patel  Engg.  Ltd.,  (2005)  8  SCC  618,

National Insurance Co. Ltd. Vs. Boghara Polyfab

(P)  Ltd.,  (2009)  1  SCC 267 and  Bharat  Rasiklal

Ashra vs. Gautam Rasiklal Ashra & Anr., (2012) 2

SCC 144  and  hence such directions are not legally

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sustainable and are  liable to be set aside.  

17. Learned  counsel  further  submitted  that  in  a

case of this nature where the question arises before

the  High  Court  in  Section  11  proceedings  as  to

whether the agreement/MoU is a valid and genuine

document and whether it is enforceable or not, it is

the  duty  of  the  High  Court  to  first  decide  such

questions keeping in view the law laid down in SBP

&  Co.  (supra),   National  Insurance  Co.  Ltd.,

(supra) and Bharat Rasiklal Ashra (supra) and if it

is  held to be a valid and genuine document then

whether it is binding on the parties and depending

upon the outcome of the findings on such question,

appropriate orders as required under Sections 11(5)

and (6) of the Act has to be passed.  

18. Learned  counsel  further  urged  that  since  in

this case, the High Court instead of deciding these

questions  on  their  merits,  which  had  admittedly

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arisen  on  the  basis  of  pleadings,  straightaway

proceeded to appoint the arbitrator and directed the

arbitrator to decide the validity and genuineness of

the MoU, such exercise of power by the High Court

was  wholly  without  jurisdiction  and  renders  the

impugned  order  legally  unsustainable.  In  other

words, submission of the learned counsel was that

the High Court had the jurisdiction under Section

11 of the Act to decide the question of validity and

genuineness of MoU one way or other on merits as

held  by  this  Court  in  abovementioned  three

decisions whereas it had no jurisdiction to ask the

arbitrator  to  decide  such question  and,  therefore,

non-deciding  the  question  amounts  to  failure  to

exercise jurisdiction vested in it by law and renders

the impugned order bad in law.

19. In reply, Mr. Basant R., learned senior counsel

appearing for the respondents while elaborating his

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submissions  supported  the  reasoning  and  the

conclusion arrived at by the learned Chief Justice

and contended that no interference is called for in

the impugned order.

20. Having  heard  the  learned  counsel  for  the

parties and on perusal of the record of the case, we

find force in the submissions of the learned counsel

for the appellant, which deserve acceptance.

21. This  is  how  the  learned  Chief  Justice  dealt

with the matter in hand and held as under :

“I  am  of  the  view  that  the  legality  and validity  of  the  Memorandum  of Understanding  and  also  the  Arbitration Agreement  can  also  be  examined  by  the learned Arbitrator on taking evidence in this matter, particularly, under Section 16 of the said Act.  As I notice and taking prima facie material,  such  question  cannot  be adjudicated  conclusively  by  me  effectively and  it  would  be  proper  for  the  learned Arbitrator to do so.  I, therefore, appoint Mr. Justice  B.  Prakash  Rao,  a  retired  Judge  of this Court as sole Arbitrator to adjudicate all the disputes raised by the parties.  If the plea of  existence  and  validity  of  the  aforesaid Memorandum of  Understanding  is  taken on any  ground  and  so  also  the  Arbitration Agreement, such pleas have to be adjudicated together with other pleas.”

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      22. The  short  question  which  arises  for

consideration  in  this  appeal  is  whether  the  High

Court  (Designate  Judge)  was  justified  in  not

deciding the question as to whether MoU, which is

denied  by  the  appellant  herein  in  Section  11

proceedings,  is  valid  and  genuine  document  and

whether  the  High Court  was justified  in  directing

the arbitrator to decide the said question.  

23. The question posed by us remains no more res

integra and is already answered by the Constitution

Bench of this Court in SBP & Co. (supra) and then

in  National Insurance Co. Ltd. (supra) and lastly

in   Bharat  Rasiklal  Ashra  (supra).  It  is  really

unfortunate  that  the  learned  Chief  Justice  while

deciding the application did not take note of any of

these  decisions  and  passed  the  impugned  order

which is  apparently  against  the  law laid down in

these decisions.  

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24. Justice Raveendran, speaking for the Bench in

Bharat  Rasiklal  Ashra’s  case  (supra)  which  also

involved the  same question,  took note  of  law laid

down in earlier two decisions of SBP & Co. (Supra)

and  National  Insurance  Co.  Ltd. (supra)  and

succinctly  explaining  the  ratio  of  these  decisions

laid down the following proposition of law in paras

10 to 13 which read as under:

“10. Therefore, the following question arises for consideration in this appeal:

“Where the arbitration agreement between the parties is denied by the respondent, whether the Chief Justice  or  his  designate,  in exercise  of  power  under  Section 11  of  the  Act,  can  appoint  an arbitrator  without  deciding  the question  whether  there  was  an arbitration  agreement  between the parties, leaving it open to be decided by the arbitrator?”

11. The question is covered by the decisions of  this  Court  in  SBP & Co. v.  Patel  Engg. Ltd.,  (2005)  8  SCC  618 and  National Insurance  Co.  Ltd. v.  Boghara  Polyfab  (P) Ltd., (2009) 1 SCC 267 In SBP & Co.(supra) a Constitution  Bench  of  this  Court  held  that when an application under Section 11 of the Act is filed, it is for the Chief Justice or his

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designate  to  decide  whether  there  is  an arbitration agreement, as defined in the Act and  whether  the  party  who  has  made  a request  before  him,  is  a  party  to  such  an agreement.  The  said  decision  also  made  it clear as to which issues could be left to the decision of the arbitrator.

12. Following  the  decision  in  SBP  &  Co. (supra) this Court in  National Insurance Co. Ltd.(supra) held  as  follows:  (National Insurance Co. Ltd. Case (supra), SCC p. 283, paras 22 & 22.1-22.3)

“22.  Where  the  intervention  of the  court  is  sought  for appointment  of  an  Arbitral Tribunal  under  Section  11,  the duty  of  the  Chief  Justice  or  his designate is defined in SBP & Co. This  Court  identified  and segregated the preliminary issues that  may  arise  for  consideration in  an  application  under  Section 11  of  the  Act  into  three categories,  that  is,  (i)  issues which  the  Chief  Justice  or  his designate is bound to decide; (ii) issues which he can also decide, that  is,  issues  which  he  may choose to decide; and (iii)  issues which  should  be  left  to  the Arbitral Tribunal to decide.

22.1.  The  issues  (first  category) which  the  Chief  Justice/his designate will have to decide are: (a) Whether the party making the application  has  approached  the appropriate High Court.

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(b)  Whether  there  is  an arbitration  agreement  and whether  the  party  who  has applied under Section 11 of the Act,  is  a  party  to  such  an agreement.

22.2. The issues (second category) which  the  Chief  Justice/his designate  may  choose  to  decide (or leave them to the decision of the Arbitral Tribunal) are:

(a)  Whether  the  claim is  a  dead (long-barred) claim or a live claim.

(b)  Whether  the  parties  have concluded  the  contract /transaction  by  recording satisfaction of their mutual rights and obligation or by receiving the final payment without objection.

22.3.  The  issues  (third  category) which  the  Chief  Justice/his designate should leave exclusively to the Arbitral Tribunal are:

(i)  Whether  a  claim  made  falls within  the  arbitration  clause  (as for  example,  a  matter  which  is reserved  for  final  decision  of  a departmental  authority  and excepted  or  excluded  from arbitration).

(ii)  Merits  or  any claim involved in the arbitration.”

       (emphasis supplied)

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13. It  is  clear  from the  said  two  decisions that  the  question  whether  there  is  an arbitration agreement has to be decided only by  the  Chief  Justice  or  his  designate  and should  not  be  left  to  the  decision  of  the Arbitral  Tribunal.  This  is  because  the question  whether  there  is  an  arbitration agreement is a jurisdictional issue and unless there  is  a  valid  arbitration  agreement,  the application under Section 11 of the Act will not be maintainable and the Chief Justice or his  designate  will  have  no  jurisdiction  to appoint an arbitrator under Section 11 of the Act. This Court also made it clear that only in regard to the issues shown in the second category, the Chief Justice or his designate has  the  choice  of  either  deciding  them or leaving them to the decision of the Arbitral Tribunal. Even in regard to the issues falling under the second category, this Court made it clear that where allegations of forgery or fabrication  are  made  in  regard  to  the documents, it would be appropriate for the Chief Justice or his designate to decide the issue. In view of this settled position of law, the  issue  whether  there  was  an  arbitration agreement ought to have been decided by the designate of the Chief Justice and only if the finding was in the affirmative, he could have proceeded to appoint the arbitrator.”

         (emphasis supplied)

25. Keeping  in  view  the  law  laid  down  in  the

aforementioned  three  cases  quoted  supra  which

does not need any more elaboration by us, we have

no hesitation  in  setting  aside  the  direction which

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directs  the  arbitrator  to  decide  the  question  of

legality and validity of the agreement/(MoU).  

26. In  our  considered  opinion,  such  directions

issued by the High Court are plainly against the law

laid down by this Court in three decisions quoted

above.   Indeed,  the  High  Court  ought  to  have

decided the questions itself and recoded a finding as

to whether the MoU dated 27.05.2013 is a valid and

genuine document or it is a forged and fabricated

document  and then depending upon the findings,

appropriate  directions,  if  necessary,  should  have

been passed for disposal of the application finally.

Unfortunately, it was not done.

27. This  takes  us  to  the  next  argument  of  Mr.

Basant  R.,  learned  senior  counsel  for  the

respondents.  It was argued that since the appellant

failed  to  give  reply  to  the  notice  given  by  the

respondents  for  appointment  of  an arbitrator,  the

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appellant should not be allowed to raise such plea

at a belated stage in Section 11 proceedings. We do

not agree with the submission.

28. We  find  that  the  appellant  in  reply  to  the

respondents’  petition  filed  under  Section  9  of  the

Act  has  specifically  denied  having  signed  or/and

executed  such  agreement/(MoU).   He  has  also

contended therein that it is a bogus and fabricated

MoU. The appellant again in his reply to application

filed by the respondents under Section 11 of the Act

denied the very existence of MoU.

29.  In our opinion, this was sufficient for joining

issue on the validity and genuineness of  the MoU

which was raised timely in appropriate proceedings

by the appellant.  The submission of Mr. Basant R.

is,  therefore,  wholly  devoid  of  merit  and  is

accordingly rejected.

30. In  view  of  foregoing  discussion,  the  appeal

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succeeds and is allowed. The impugned order is set

aside.  The  case  is  remanded  to  the  learned

designate Judge to decide the question of legality,

validity and genuineness of the agreement/(MoU) in

question on its merits on the basis of pleadings and

evidence of the parties keeping in view the law laid

down  by  this  Court  in  three  decisions  referred

supra.  Depending  upon  the  findings  on  the

question, appropriate orders including the order for

appointment  of  arbitrator,  if  occasion  arises,  be

passed  for  final  disposal  of  the  application  filed

under Section 11 of the Act.  

31. No costs.

                       ………...................................J.

  [J. CHELAMESWAR]

                             …...……..................................J.

 [ABHAY MANOHAR SAPRE] New Delhi; July 13, 2016   

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