In view of our aforesaid discussions, we are of
the opinion that mere allegation of fraud simplicitor
may not be a ground to nullify the effect of
arbitration agreement between the parties. It is only
in those cases where the Court, while dealing with
Section 8 of the Act, finds that there are very
serious allegations of fraud which make a virtual
case of criminal offence or where allegations of
fraud are so complicated that it becomes absolutely
essential that such complex issues can be decided
only by civil court on the appreciation of the
voluminous evidence that needs to be produced, the
Court can sidetrack the agreement by dismissing
application under Section 8 and proceed with the suit
on merits. It can be so done also in those cases
where there are serious allegations of
forgery/fabrication of documents in support of the
plea of fraud or where fraud is alleged against the
arbitration provision itself or is of such a nature
that permeates the entire contract, including the
agreement to arbitrate, meaning thereby in those
cases where fraud goes to the validity of the
contract itself of the entire contract which contains
the arbitration clause or the validity of the
arbitration clause itself. Reverse position thereof
would be that where there are simple allegations of
fraud touching upon the internal affairs of the party
inter se and it has no implication in the public
domain, the arbitration clause need not be avoided
and the parties can be relegated to arbitration.
While dealing with such an issue in an application
under Section 8 of the Act, the focus of the Court
has to be on the question as to whether jurisdiction
of the Court has been ousted instead of focusing on
the issue as to whether the Court has jurisdiction or
not. It has to be kept in mind that insofar as the
statutory scheme of the Act is concerned, it does not
specifically exclude any category of cases as nonarbitrable.
Such categories of non-arbitrable
subjects are carved out by the Courts, keeping in
mind the principle of common law that certain
disputes which are of public nature, etc. are not
capable of adjudication and settlement by arbitration
and for resolution of such disputes, Courts, i.e.
public fora, are better suited than a private forum
of arbitration. Therefore, the inquiry of the Court,
while dealing with an application under Section 8 of
the Act, should be on the aforesaid aspect, viz.
whether the nature of dispute is such that it cannot
be referred to arbitration, even if there is an
arbitration agreement between the parties. When the
case of fraud is set up by one of the parties and on
that basis that party wants to wriggle out of that
arbitration agreement, a strict and meticulous
inquiry into the allegations of fraud is needed and
only when the Court is satisfied that the allegations
are of serious and complicated nature that it would
be more appropriate for the Court to deal with the
subject matter rather than relegating the parties to
arbitration, then alone such an application under
Section 8 should be rejected.
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 paragraph 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.
Judged by these two tests, it is clear that this is a
case which falls on the side of “simple allegations” as
there is no allegation of fraud which would vitiate the
partnership deed as a whole or, in particular, the
arbitration clause concerned in the said deed. Secondly,
all the allegations made which have been relied upon by the
learned counsel appearing on behalf of the respondent,
pertain to the affairs of the partnership and siphoning of
funds therefrom and not to any matter in the public domain.
This being the case, we are of the view that the
disputes raised between the parties are arbitrable and,
hence, a Section 11 application under the Arbitration Act
would be maintainable.
‘REPORTABLE’
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 7005 OF 2019
RASHID RAZA Vs SADAF AKHTAR
R. F. NARIMAN, J.
Dated:September 04, 2019.
The present case arises out of a partnership dispute
in which an FIR dated 17.11.2017 was lodged by one of the
partners alleging siphoning of funds and various other
business improprieties that were committed. The FIR is at
present under investigation.
An Arbitration Petition dated 02.01.2018 was filed by
the appellant before the High Court under Section 11 of the
Arbitration and Conciliation Act, 1996, seeking appointment
of an Arbitrator under the Arbitration clause which is to be
found in the partnership deed between the parties which is
dated 30.01.2015. The High Court, by the impugned order
dated 06.12.2018, has cited our judgment in ‘A. Ayyasamy v.
A. Paramasivam and Others’ [(2016) 10 SCC 386] and after
extracting paragraph 26 from the said judgment has held:
“…….The allegation of fraud that was levelled
against the appellant was that he had signed and
issued a cheque of Rs.10,00,050 on 17th June, 2010 of
Hotel Arunagiri in favour of his son without the
knowledge and consent of the other partners i.e.
respondents. It was a mere matter of account which
could be looked into and found out even by the
arbitrator. The facts of the instant case however
are much more complex as the materials on records
disclose. This Court however does not intend to
make any comments on the merits of the allegations
lest it may prejudice the case of the parties in an
appropriate proceeding before competent court.
However, considered in totality this Court is of the
firm view that the nature of the dispute involving
serious allegations of fraud of complicated nature
are not fit to be decided in an arbitration
proceedings. The dispute may require voluminous
evidence on the part of both the parties to come to
a finding which can be only properly undertaken by a
civil court of competent jurisdiction.”
Consequently, while purportedly following this
judgment, the Section 11 application was dismissed.
Having heard learned counsel for both the sides, it is
clear that the law laid down in A. Ayyasamy’s case is in
paragraph 25 and not in paragraph 26. Paragraph 25 of the
said judgment states as follows:
25. In view of our aforesaid discussions, we are of
the opinion that mere allegation of fraud simplicitor
may not be a ground to nullify the effect of
arbitration agreement between the parties. It is only
in those cases where the Court, while dealing with
Section 8 of the Act, finds that there are very
serious allegations of fraud which make a virtual
case of criminal offence or where allegations of
fraud are so complicated that it becomes absolutely
essential that such complex issues can be decided
only by civil court on the appreciation of the
voluminous evidence that needs to be produced, the
Court can sidetrack the agreement by dismissing
application under Section 8 and proceed with the suit
on merits. It can be so done also in those cases
where there are serious allegations of
forgery/fabrication of documents in support of the
plea of fraud or where fraud is alleged against the
arbitration provision itself or is of such a nature
that permeates the entire contract, including the
agreement to arbitrate, meaning thereby in those
cases where fraud goes to the validity of the
contract itself of the entire contract which contains
the arbitration clause or the validity of the
arbitration clause itself. Reverse position thereof
would be that where there are simple allegations of
fraud touching upon the internal affairs of the party
inter se and it has no implication in the public
domain, the arbitration clause need not be avoided
and the parties can be relegated to arbitration.
While dealing with such an issue in an application
under Section 8 of the Act, the focus of the Court
has to be on the question as to whether jurisdiction
of the Court has been ousted instead of focusing on
the issue as to whether the Court has jurisdiction or
not. It has to be kept in mind that insofar as the
statutory scheme of the Act is concerned, it does not
specifically exclude any category of cases as nonarbitrable.
Such categories of non-arbitrable
subjects are carved out by the Courts, keeping in
mind the principle of common law that certain
disputes which are of public nature, etc. are not
capable of adjudication and settlement by arbitration
and for resolution of such disputes, Courts, i.e.
public fora, are better suited than a private forum
of arbitration. Therefore, the inquiry of the Court,
while dealing with an application under Section 8 of
the Act, should be on the aforesaid aspect, viz.
whether the nature of dispute is such that it cannot
be referred to arbitration, even if there is an
arbitration agreement between the parties. When the
case of fraud is set up by one of the parties and on
that basis that party wants to wriggle out of that
arbitration agreement, a strict and meticulous
inquiry into the allegations of fraud is needed and
only when the Court is satisfied that the allegations
are of serious and complicated nature that it would
be more appropriate for the Court to deal with the
subject matter rather than relegating the parties to
arbitration, then alone such an application under
Section 8 should be rejected.
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 paragraph 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.
Judged by these two tests, it is clear that this is a
case which falls on the side of “simple allegations” as
there is no allegation of fraud which would vitiate the
partnership deed as a whole or, in particular, the
arbitration clause concerned in the said deed. Secondly,
all the allegations made which have been relied upon by the
learned counsel appearing on behalf of the respondent,
pertain to the affairs of the partnership and siphoning of
funds therefrom and not to any matter in the public domain.
This being the case, we are of the view that the
disputes raised between the parties are arbitrable and,
hence, a Section 11 application under the Arbitration Act
would be maintainable.
The Judgment under appeal is set aside. With the
consent of the parties, we appoint Justice Amareshwar Sahay,
Retired Jugde of the Jharkhand High Court to be the sole
arbitrator to resolve all disputes between the parties.
Nothing said in our judgment will affect the
investigation that is being conducted pursuant to the FIR.
The appeal stands disposed of.
…………………………………………………………………., J.
[ ROHINTON FALI NARIMAN ]
…………………………………………………………………., J.
[ R. SUBHASH REDDY ]
…………………………………………………………………., J.
[ SURYA KANT ]
New Delhi;
September 04, 2019.
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