F. I. Rebello, J.
1. The appellants herein are the original plaintiffs. The appellants filed an application under Section 20 of the Indian Arbitration Act before the Additional Civil Judge, Senior Division, Margao, which was numbered as Special Civil Suit No. 179/1988/B. The interim application moved in the said Special Civil Suit was numbered as Civil Miscellaneous Application No. 325/1988/B. The respondent herein contested the application of the appellants herein and contended that in view of the averments made by the appellants themselves in the application claiming dishonesty on the part of the respondent herein and alternatively having claimed that the contract was vitiated by fraud, the court should not under Section 24 of the Arbitration Act refer the matter for arbitration. The Trial Court on hearing both the parties and/on considering the matter on record by its order dated 18th January, 1992 was pleased to hold that he application/petition under Section 20 of the Arbitration Act is liable to be rejected. Insofar as the interim application is concerned though the Trial Court had rejected the application under Section 20 of the Arbitration Act, the Trial Court on merits held that prayer (b)(i) of the interim application could be granted and that the appellants had failed to make out a case in respect of the other prayers and accordingly rejected the same.
2. Aggrieved by the said order the appellants herein have preferred this appeal. Notice was issued before admission to the respondent herein. This Court by its order dated 2nd July, 1992 was pleased to admit the appeal, however, no interim relief was granted. The matter has been listed for hearing after a gap of over 4 years.
3. Mr. Usgaonkar, Senior Counsel appearing on behalf of the appellants, has challenged the findings of the Trial Court on both the counts, namely, that there were serious allegations of fraud and/or dishonesty alleged in the application and also the finding that the appellants themselves had pleaded fraud and consequently, therefore, they could not have moved an application based on a contract which they themselves alleged to be void. Mr. Usgaonkar has taken me through the pleadings of the parties to show that in fact there are no serious allegations made by the appellants against the respondent. That a court in refusing reference under Section 20(4) must arrive at the conclusion that there are serious allegations of fraud and not merely allegations. For the said proposition Mr. Usgaonkar has relied on the judgment of the Apex Court in the case of Abdul Kadir Shamsuddin Bubere v. Madhav Prabhakar Oak and another , as also the judgment of the Apex Court in Damodar Valley Corporation v. K. K. Kar , Mr. Usgaonkar has further relied on a Division Bench judgment of this court in the case of Narsingdas Takhatmal v. Radhakishan Rambakas and others (AIR 1952 Bombay 425), to point out that a party pleading fraud must set out the particulars of fraud and that in the absence of such particulars it could not be said that fraud had been pleaded. He also invited my attention to the provisions of Order VI, Rule 4 of the Code of Civil Procedure which enjoins that the party pleading fraud must specifically set out averments pertaining to fraud. Mr. Usgaonkar then points out that if the pleadings are seen in their entirety, it would be clear that there are no averments of fraud as required and consequently it cannot be said that the appellants though they had alleged that the respondent had no intention of performing the contract by itself would not disclose that the contract was vitiated by fraud. That the averments by the appellants that they have exercised their option to rescind the contract on the ground of fraud should be seen in the light of the totality of the circumstances. If so seen, and more so on the background that there had been no previous correspondence alleging fraud by the appellants, the said averments could not be read in isolation and as such, the Trial Court erred in holding that there were averments of fraud.
Mr. Usgaonkar then drew my attention to the judgment of the Apex Court in the case of The Union of India v. Kishorilal Gupta & Bros. . Mr. Usgaonkar points out that the ratio of the said case would only be applicable if the averments of fraud were there to arrive at a strong prima facie conclusion that the contract dated 6th February, 1987 was vitiated by fraud. That as already pointed out there were no such averments and consequently it could not be said that the pleadings disclose that the contract was vitiated by fraud. The other averments regarding the reliefs were in the context that there were breaches committed by the respondent and that the contract had been terminated on account of the said breaches. Mr. Usgaonkar also invites my attention to the provisions of Sections 39 and 65 of the Indian Contract Act, 1872. Mr. Usgaonkar points out that the word 'voidable' has also to be read in Section 65 of the Indian Contract Act and the word 'voidable' is not restricted or referable to the provisions of Section 17 of the Indian Contract Act. That the words used in the pleadings were referable to Section 65 and if so understood the averments and the relief claimant could only be said to be in the context of the various branches averred in the application by the appellants herein.
Mr. Usgaonkar further contends that if the appeal is rejected he will be non-suited as the provisions of the Indian Limitation Act by themselves do not apply and that they are made applicable by virtue of the provisions of Section 37 of the Arbitration Act. That if one looks at the provisions of Section 37 of the Arbitration Act, the present proceedings would not be covered and consequently their remedy would be barred. Mr. Usgaonkar relies on various judgments including a Division Bench judgment of this court in the case of Purshottamdas Hassaram Sabnani v. Impex (India) Ltd. , Mr. Usgaonkar has also relied on the authority of the Apex Court in The Commissioner of Sales Tax, Uttar Pradesh, Lucknow v. M/s. Parson Tools and Plants, Kanpur , in the authority of Orissa State Co-operative
Marketing Federation Ltd. v. Associated Marketing Co. , in the authority of Seumal Nihalchand v. Mulomal Rahumal (AIR 1914 Sind 122), and in the authority of Satish Chandra Bose and other v. Paliram Agarwala (AIR 1921 Patna 161).
4. Mr. M. S. Sonak, Advocate appearing on behalf of the respondent, has made the following submissions :
(1) When a party who himself alleged fraud and moves a court seeking arbitration, then in such a case if the party against whom fraud is alleged seeks a trial in the open Court the Court should under Section 20(4) of the Arbitration Act refuse to make the reference;
(2) when the party pleads fraud and rescinds the contract on the ground of fraud, in other words, that the contract is non est, then in such an event the clause pertaining to arbitration being a part of the said contract is also non est and consequently the court cannot direct reference of the arbitration to the Arbitrator;
(3) at the stage of hearing the application all that the court must see are the allegations in the plaint and that if the allegations make out averments showing that serious allegations of fraud have been spelt out and/or that the contract is vitiated by fraud, that by itself is sufficient for the court to consider whether the reference should be made or not;
(4) that the Trial Court has considered the matter considering the law and the rulings of the Apex Court and it cannot be said that the said judgment is perverse warranting interference by this court; and
(5) in so far as limitation is concerned, it is the contention of the Counsel that on a reading of Sections 37(3) and 37(5) of the Arbitration Act the period beginning from the issued of notice to the respondent to refer the matter for arbitration till the disposal of the proceedings in this Court will be excluded for the purpose of counting limitation and consequently no prejudice would be occasioned to the appellants and on the contrary if the matter is referred for arbitration the respondent will not be in a position to meet the serious allegations of dishonesty and fraud alleged against him which could only be done in an open trial.
5. In support of his propositions Mr. Sonak has relied on several judgments. Some of the judgments which he has cited are in the case of The Chartered Bank v. The Commissioner for the Port of Calcutta , in the case of The Oriental Fire and General
Insurance Co. Ltd. v. Smt. Usharani Kar and others , and in the case of Chiranjilal Ramachandra Layalka v. Jatashankar N. Joshi (AIR 1942 Bom 297). In so far as the plea of limitation is concerned Mr. Sonak has relied on the judgment of a Single Judge of the Allahabad High Court in the case of The State of U.P. and another v. M/s. Singhal & Co. , and in the case of Jugalkishore Asati v. State of Madhya Pradesh .
6. I have heard both Counsel at length in the said matter. A perusal of the pleadings in the application show that there was a contract entered into between the appellants and respondent dated 6th February, 1987 which involved the transfer of shares of the appellants in four companies, namely, S. Kantilal and Company Private Limited, Shantilal Khushaldas and Brothers Private Limited, Gosalia Shipping Company Private Limited and Goa Ore Transport Private Limited. Pursuant to this contract there were several conditions on both the appellants and respondent which they had to perform. There was in fact a part performance of the contract by which the respondent had parted with certain money to the appellants as set out in the contract itself. It was the allegation of the appellants more so in paragraphs 22, 23, 24, 25, 28, 29, 30, 33 and 34 that the respondent had failed to perform his part of the contract and had committed breach. The appellants in paragraphs 28, 29 and 30 have used the expressions 'falsely, dishonestly, dishonest attitude and falsely'. These are terms used qua the stand of the respondent that he was compelled in terms of the agreement to meet and/or satisfy certain stipulations which the appellants allege that the had to satisfy. In paragraph 33 the appellants have alleged as under :
"The petitioners submit that the respondent had procured execution by the petitioners of the said agreement dated 6th February, 1987, being Exhibit 'A' hereto and the said several other Agreements dated 9th February, 987 without any intention of performing the several obligations on his part contained therein and had thereby practised a fraud upon the petitioners."
It is thereafter averred as under :
"The petitioners further submit that the said Agreement dated 6th February, 1987 being Exhibit 'A' hereto, and the several other Agreements all dated 9th February, 1987 are consequently voidable at the instance of the petitioners and the petitioners thereby avoid the same. The petitioners further submit that having regard to the said repudiation by the respondent of his several obligations thereunder, the petitioners accept such repudiation by the respondent and that consequently the said Agreements have become void and are not enforceable in law. The petitioners further submit that the said transfer of shares held by the 1st petitioner in the said four companies in favour of the respondent and/or his nominees has consequently become void and thereby call upon the respondent to re-transfer of the said shares to the 1st petitioner."
In paragraph 37 the appellants have sought certain interim reliefs pending the hearing and final disposal of the petition. The reliefs as can be seen are claimed not from the date of the breach of the contract but from the very inception of the contract itself, that is, 6th February, 1987.
7. Considering the above pleadings and the law laid down by the Apex Court the question that has to be answered is (a) whether the pleadings disclose serious allegations of fraud on account of which the Trial Court ought to have rejected the application of the appellants for reference to an Arbitrator ? In Abdul Kadir Shamsuddin Bubere (supra) the Apex Court has observed 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. The Apex Court has further observed that it is not in every allegations imputing some kind of dishonesty, particularly in matters of accounts, which would be enough to dispose a court to take the matter out of the Forum which the parties themselves have chosen. The Apex Court thereafter relying on the judgment of the English Court in the case of Russell v. Russell, (1880) 14 Ch. D. 471. has gone on to state as under :
"We are clearly of opinion that merely because some allegations have been made that accounts are not correct or that certain items are exaggerated and so on that is not enough to induce the court to refuse to make a reference to arbitration. It is only in cases of allegations of fraud of a serious nature that the Court will refuse as decided in Rusell's case (supra) to order an arbitration agreement to be filed and will not make a reference."
Thereafter in the same paragraph it is further observed as under :
"It is only when serious allegations of fraud are made which it is desirable should be tried in open Court that a Court would be justified in refusing to order the arbitration agreement to be filed and in refusing to make a reference."
In the light of the law laid down by the Apex Court can it be said that the expressions used by the appellants in the various paragraphs cited above the serious allegations of fraud ? In my opinion they are not. Firstly a lot of correspondence has been exchanged between the parties previous to the application filed before the court. In none of the letters have the appellant alleged fraud or dishonesty in so far as the respondent is concerned. The entire stand of the appellants has been that the respondent was avoiding the performance of duties imposed on him by the contract. In the paragraph cited the words have been used qua the failure by the respondent to perform his part of the contract. The words are used in opposition to honesty. In other words what the appellants have meant is that the plea of refusal by the respondent to perform his part of the contract is not honest but dishonest. This is only for the purpose of pleading breach of the contract. This to my mind cannot be said to be a serious allegations of fraud pleaded by the appellants and which needs to be decided in the open court. The findings of the Trial Court on that count cannot be sustained. Tested on the law laid down by the Apex Court the finding of the Trial Court to that extent will have to be set aside.
8. That takes me to the next question, namely, whether the averments in paragraphs 33, 34 and 37 lead to the conclusion that the appellants were pleading that the contract is non est. Mr. Usgaonkar, as set out earlier, has tried to argue that when a person or party seeks to plead fraud, the essential averment of fraud have to be pleaded. The said averments have to be in the context of requirement or Order VI Rule 4 of the Code of Civil Procedure and the requirement of the pleadings pertaining to fraud. The reliance by Mr. Usgaonkar on the judgment of this court in Narsingdas Takhatmal (supra) would be justified if his argument has to be accepted. The question whether in what circumstances the court should refuse to refer the application for arbitration is no longer res integra. As far back as in the case of Union of India (supra) the Apex Court has laid down the following proposition :
"The following principles relevant to the present case emerge from the aforesaid discussion :
(1) An arbitration clause is a collateral terms of a contract as distinguish from its substantive terms; but none the less it is an integral part of it;
(2) however comprehensive the terms of an arbitration clause may be, the existence of the contract is a necessary condition for its operation, it perishes with the contract;
(3) the contract may be non est in the sense that it never come legally into existence or it was void ab initio;
(4) though the contract was validly executed, the parties may put an end to it as if it had never existed and substitute a new contract for it solely governing their rights and liabilities thereunder;
(5) in the former case, if the original contract has no legal existence, the arbitration clause also cannot operate, for along with the original contract, it is also void, in the later case, as the original contract is extinguished by the substituted one, the arbitration clause of the original contract perishes with it; and
(6) between the two falls many categories of disputes in connection with a contract, such as the question of repudiation, frustration, breach etc. .... In those cases it is the performance of the contract that has come to an end, but the contract is still in existence for certain purposes in respect of disputes arising under it or in connection with it. As the contract subsists for certain purposes, the arbitration clause operates in respect of these purposes."
9. It is in the light of the law laid down by the Apex Court that I shall have to consider the submissions of Mr. Usgaonkar and the contention of Mr Sonak that the said averments are sufficient to show that in fact the appellants themselves had pleaded fraud. Mr. Usgaonkar has tried to explain the said averments by referring to the provisions of Sections 39 and 65 of the Contract Act. As already set out Mr. Usgaonkar has stated that even under Section 65 the expression that has to be read in the said section is in the case where the contract is voidable and, therefore, the choice and/or expression of the words is qua reference to Section 65. That the word 'void' in the application should be read as 'voidable' considering the allegation made by the appellants of breach of contract. I am afraid at this juncture it will not be possible for this court to pronounce on the averments made in paragraphs 33 and 34 read with interim relief sought for in paragraph
37. In paragraph 33 the appellants themselves clearly plead that the agreement dated 9th February, 1987 was entered into by the respondent without any intention of performing the several obligations on his part contained therein. These averments are clearly referable to Section 17(3) of the Indian Contract Act, 1872. Thereafter the appellants have in unmistakable terms pleaded that the agreement dated 9th February, 1987 being voidable at the instance of the appellants herein, the appellants are avoiding the same and in view of the same repudiation by the appellants the agreements have become void and are not enforceable in law. These are prima facie allegations as required by the provisions of Section 19 of the Contract Act. Once those prima facie averments were made by the appellants in the pleadings, it is not for this court to examine at this stage whether the said averments would lead to the conclusion that in fact the agreement is vitiated by fraud. All that is required as set out by the Apex Court is whether the appellants had taken the stand that the contract is vitiated by fraud and consequently non est. If the appellants themselves contend that the contract is non est then the clause pertaining to arbitration being a part of the contract itself would also be non est and consequently a party who so pleads avoidance of the contract cannot thereafter plead fraud of the provisions of the contract. Mr. Sonak has sought reliance on various judgments. I need not go into the said judgments nor examine the same as the Apex Court itself has pronounced on the same. The Trial Court has in paragraph 19 of the judgment also considered this aspect. It may be mentioned that in paragraph 19 the Trial Court had considered both the contentions set out in the earlier paragraphs, namely serious allegations of fraud and avoidance of the contract. The findings of the Trial Court in so far as the averments made by the appellants alleging that the contract is vitiated by fraud cannot be said to be perverse. I see no reason, therefore, to interfere with the findings of the Trial Court in so far as these findings on the pleadings pertaining to fraud are concerned. The order of the Trial Court, therefore, will have to be sustained on the second point.
10. That takes me to the last question, namely, as to whether the provisions of Section 37 of the Arbitration Act will save the limitation from the date the appellants gave notice to the respondent to commence arbitration proceedings till the disposal of this appeal. The relevant provisions of Section 37 are as follows :
"37. Limitations - (1) All the provisions of the Indian Limitation Act, 1908 (9 of 1908), shall apply to arbitrations as they apply to proceedings in court.
(3) For the purpose of this section and of the Indian Limitation Act, 1908 (9 of 1908), an arbitration shall be deemed to be commenced when one party to the arbitration agreement serves on the other parties thereto a notice requiring the appointment of an Arbitrator, or where the arbitration agreement provides that the reference shall be to a person named or designated in the agreement requiring that the difference be submitted to the person so named or designated.
(5) Where the court orders that an award be set aside or orders, after the commencement of an arbitration, that the arbitration agreement shall cease to have effect with respect to the difference referred, the period between commencement of the arbitration and the date of the order of the court shall be excluded in computing the time prescribed by the Indian Limitation Act, 1908 (9 of 1908), for the commencement of the proceedings (including arbitration) with respect to the difference referred."
A bare perusal of the said provisions will show that the provisions of the Limitation Act shall apply to arbitration as they apply to proceedings in court. In other words by virtue of Section 37(1) the provisions of the Indian Limitation Act are applicable to proceedings in arbitration. In Section 37(3) it is set out that the arbitration shall be deemed to be commenced when one party to the arbitration agreement serves to another party thereto a notice requiring the appointment of an arbitrator. Sub-section (5) sets out that where the Court orders after the commencement of an arbitration, that the arbitration agreement shall have ceased to have effect, then it that event the period between commencement of the arbitration and the date of the order of the court shall be excluded in computing the time prescribed by the India Limitation Act for the commencement of the proceedings with respect to the difference referred. Section 37 came up for interpretation before a Division Bench of this court in Purshottamdas Hassaram Sabnani (supra) Chief Justice Chagla, speaking for the Division Bench, after considering the law provisions after the coming into force of the Arbitration Act, 1940 and various judgments has observed as under :
"But the position now, in our opinion, has been wholly simplified by the new Arbitration Act. Neither the Allahabad High Court nor the Nagpur High Court has the new Arbitration Act before them, because the decisions arose before the new Act was put on the statute book. The relevant section that we have to consider in Section 37(1) and that sub-section provides that all the provisions of the Indian Limitation Act shall apply to arbitrations as they apply to proceedings in Court.
Therefore, the Legislature having the decision of the Privy Council before it, instead of leaving it to the courts to apply the provisions of the Limitation Act by analogy, expressly by a statutory enactment applied the provisions of the Limitation Act to the proceedings before Arbitrators. Therefore, after Section 37(1) was enacted no further question arises as to the application of the principles of the Limitation Act merely by analogy to proceedings before Arbitrators ...."
It is, therefore, clear that Section 37 of the Arbitration Act makes applicable the provisions of the Indian Limitation Act to proceedings in arbitration. The question is whether the said provisions will save limitation in so far as the present application is concerned. A Single Judge of the Allahabad High Court in "The State of the U.P. and another (supra) has observed as under :
"Sub-section (5) of Section 37 is an enabling provision and must be liberally construed. The restrictive meaning of the words 'shall cease to have effect" viz., that it would apply only to those cases where arbitration clause was valid initially but ceased to apply subsequently is not contemplated".
11. From a bare perusal of the language of Section 37 itself and the interpretation of the said section by a Division Bench of this Court which makes the provisions of the Limitation Act applicable to proceedings in arbitration, it is clear that the time spent from the date from which the appellants first gave notice to the respondent to refer the matter for arbitration till date will have to be excluded. The appellants in terms of the agreement had moved for arbitration. It is the respondent who contended that in view of the averments the appellant should be relegated to a suit. The said application which was filed in the year 1988 was disposed of by order dated 18th January, 1982. Against the said order the appellants within the limitation period prescribed has filed an appeal before this court. This court admitted the appeal on 2nd July, 1992. Judicial delay in disposing of the application should not come in the way and/or cause prejudice to the parties. In the instant case the application has taken 8 years before a decision by this Court. The appellants have been bona fide prosecuting the application. The contention of the appellants qua the order of the Trial Court has been upheld in respect of one of the findings, it cannot, therefore, be said that the appellants were not prosecuting these proceedings bona fide. In these circumstances it is clear that the appellants will be entitled to exclude all the period from the date they first served notice on the respondent till the appellants are given a certified copy of this order.
12. In view of the above, the appeal stands dismissed. In the circumstances of the case, there shall be, however, no order as to costs.
13. Appeal dismissed.