suit for Declaration and injunction – application for arbitration referrence under sec.8 – fraud alleged as such arbitration clause not applies – both courts dismissed the application = only allegation of fraud that is leveled is that the appellant had signed and issued a cheque of Rs. 10,00,050/- dated 17.06.2010 of ‘Hotel Arunagiri’ in favour of his son without the knowledge and consent of the other partners i.e. the respondents. It is a mere matter of accounts which can be looked into and found out even by the arbitrator. It does not involve any complex issue. If such a cheque is issued from the hotel account by the appellant in favour of his son, it is easy to prove the same and then the onus is upon the appellant to show as to what was the reason for giving that amount from the partnership firm to his son and he will have to account for the same. Likewise, the allegation of the respondents that daily collections are not deposited in the bank accounts is to be proved by the respondents which is again a matter of accounts. Other allegation, which appears to be serious, is about the C.B.I. raid at the house of Dhanapalraj from where cash in the sum of Rs.45 lakhs was seized. Interestingly, though the appellant has taken the position that this cash belongs to ‘Hotel Arunagiri’, they are the respondents who have themselves alleged that the money belonged to Dhanapalraj and not to ‘Hotel Arunagiri’. In view of the aforesaid stand taken by the respondents/plaintiffs themselves, this issue does not fall for consideration and, therefore, is not to be gone by the Arbitral Tribunal. We, therefore, are of the opinion that the allegations of purported fraud were not so serious which cannot be taken care of by the arbitrator. The Courts below, therefore, fell in error in rejecting the application of the appellant under Section 8 of the Act. Reversing these judgments, we allow this appeal and as a consequence, application filed by the appellant under Section 8 in the suit is allowed thereby relegating the parties to the arbitration.

REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NOS. 8245-8246 OF 2016

|A. AYYASAMY |…..APPELLANT(S) |
|VERSUS | |
|A. PARAMASIVAM & ORS. |…..RESPONDENT(S) |
J U D G M E N T

A.K. SIKRI, J.

The parties to this lis, who are brothers, had entered
into a deed of partnership dated 01.04.1994 for carrying on hotel business
and this partnership firm has been running a hotel with the name ‘Hotel
Arunagiri’ located at Tirunelveli, Tamil Nadu. Some disputes arose out of
the said partnership deed between the parties. Partnership Deed contains
an arbitration clause i.e. Clause (8) which stipulates resolution of
disputes by means of arbitration.
2. Notwithstanding the same, the respondents herein have filed a civil
suit before the Court of Ist Additional District Munsif Court, Tirunelveli,
Madurai (Tamil Nadu) seeking a declaration that as partners they are
entitled to participate in the administration of the said hotel. Relief of
permanent injunction restraining the defendant (appellant herein) from
interfering with their right to participate in the administration of the
hotel has also been sought. This suit was filed in the year 2012. The
appellant, after receiving the summons in the said suit, moved the
application under Section 8 of the Arbitration and Conciliation Act, 1996
(hereinafter referred to as the ‘Act’) raising an objection to the
maintainability of the suit in view of arbitration agreement between the
parties as contained in clause (8) of the Partnership Deed dated 01.04.1994
and submitted that as per the provisions of Section 8 of the Act, it is
mandatory for the Court to refer the dispute to the arbitrator. This
application was resisted by the respondents with the submission that since
acts of fraud were attributed to the appellant by the
plaintiffs/respondents, such serious allegations of fraud could not be
adjudicated upon by the Arbitral Tribunal and the appropriate remedy was to
approach the civil court by filing a suit, and that was exactly done by the
respondents. For this purpose, the respondents had relied upon the
judgment of this Court in the case of N. Radhakrishnan v. Maestro Engineers
and Others[1]. This plea of the respondents was sought to be controverted
by the appellant by arguing that aforesaid judgment was found to be per
incuriam by this Court in Swiss Timing Ltd. v. Commonwealth Games 2010
Organising Committee[2], wherein the application under Section 11 of the
Act was allowed holding that such a plea of fraud can be adequately taken
care of even by the arbitrator. It was, thus, argued that the parties were
bound by the arbitration agreement and there was no reason to file the
civil suit. The trial court, however, dismissed the application of the
appellant herein by its order dated 25.04.2014, relying upon the judgment
in N. Radhakrishnan.

Feeling aggrieved by this order, the appellant preferred revision petition
before the High Court repeating his contention that judgment in N.
Radhakrishnan was held to be per incuriam and, therefore, trial court had
committed jurisdictional error in rejecting the application of the
appellant under Section 8 of the Act. Brushing aside this plea, the High
Court has also chosen to go by the dicta laid down in N. Radhakrishnan with
the observations that Swiss Timing Ltd. is the order passed by a single
Judge of this Court under Section 11 of the Act whereas judgment in N.
Radhakrishnan is rendered by a Division Bench of two Hon. Judges of this
Court, which is binding on the High Court.

Whether the aforesaid view of the High Court in following
the dicta laid down in the case of N. Radhakrishnan, in the facts of this
case, is correct or not, is the question that needs determination in the
instant appeal.

Seminal facts in the context in which the issue falls for determination
have already been taken note of above. However, few more facts need to be
added to the aforesaid chronology, particularly, the nature of plea of
fraud taken in the suit filed by the respondents.

The respondents are four in number who are brothers of the
appellant. These five brothers are the partners. Their father A.
Arunagiri was also a partner along with them who died on 28.04.2009. These
six partners had 1/6th share each in the partnership business. Disputes
arose between the brothers after the demise of their father. It is the
allegation of the respondents, as contained in the plaint, that the subject
matter of the suit ‘Hotel Arunagiri’ was managed and administered by their
father in a disciplined manner till his death. After his death, the
appellant being the eldest brother wanted to take the administration of
‘Hotel Arunagiri’ with the assurance that he will be following the foot
prints of his father. The respondents had no other alternative except to
accept the said proposal in good faith. It was, at that time resolved by
all the brothers, that the daily collection of money from ‘Hotel Arunagiri’
should be deposited on the very next day into the hotel Current Account
No.23 maintained with the Indian Overseas Bank, Tirunelveli Junction. It
was agreed that about rupees ten to fifteen thousand may be kept as cash
for urgent expenses. The respondents reposed confidence with the appellant
and believed that his administration would never be detrimental to the
smooth running of the business. On the aforesaid understanding,
administration of the hotel was taken over by the appellant. But he did
not adhere to the said understanding and failed to deposit day to day
collection into the bank account as promised. It is also agged that the
appellant, fraudulently, signed and issued a cheque for Rs.10,00,050/-
dated 17.06.2010 from the bank account in the name of ‘Hotel Arunagiri’ in
favour of his son without the knowledge and consent of the other partners
and in this manner, the money was siphoned off and misappropriated from the
common fund. It is further alleged that the appellant kept the hotel
account books with him and did not show it to the respondents for their
examination. The respondents sent legal notices but it did not deter the
appellant to continue to act in the same manner by not depositing the day
to day collections in the account. It is also alleged that appellant’s
wife’s younger brother one Dhanapalraj was a member of Bar Council of Tamil
Nadu and was also a Vice-Chairman of All India Bar Council, New Delhi. In
Chennai, the Central Bureau of Investigation (C.B.I.) raided the houses of
the said Dhanapalraj and his co-brother Chandrasekaran and seized
Rs.45,00,000/- cash from them. As Dhanapalraj was aware of the disputes
between the appellant and the respondents in respect of the ‘Hotel
Arunagiri’, a false statement has been given by him before C.B.I. to the
effect that the seized money of Rs.45 lakhs belonged to ‘Hotel Arunagiri’.
It is reliably learned that the appellant had also, on receipt of summons,
appeared before the C.B.I. in New Delhi and given a false statement as if
the said seized money of Rs.45 lakhs belonged to ‘Hotel Arunagiri’ which
was taken to Chennai to purchase a property. This led to the issuance of
another notice dated 22.01.2011 by the third respondent to the appellant
stating that the money seized by the C.B.I. belong only to Dhanpalaraj and
not ‘Hotel Arunagiri’. On the basis of the aforesaid allegations, which
are relevant and material for the purposes of this appeal, following
reliefs are sought in the suit filed by the respondents:

“(a) for a declaration that the respondents as partners of the deed of
partnership dated 01.04.1994 are entitled to participate in the
administration of the Hotel Arunagiri mentioned in the schedule and for
consequential permanent injunction restraining the appellant from
interfering with the same;

(b) for cost of this suit; and

(c) for such other reliefs this Honourable Court deem fit and proper in
the circumstances of this case.”

As already mentioned above, the appellant filed the application under
Section 8 of the Act for rejection of the plaint and reference of the
dispute to an arbitrator in which attempt the appellant has not succeeded
for the reasons stated hereinabove.

The two courts below have preferred to adopt the dicta laid down in N.
Radhakrishnan while dismissing the application of the appellant under
Section 8 of the Act holding that as there are serious allegations as to
fraud and malpractices committed by the appellant in respect of the
finances of the partnership firm and the case does not warrant to be tried
and decided by the arbitrator and a civil court would be more competent
which has the requisite means to decide such complicated matter. In this
backdrop, it would be appropriate to revisit the law on this aspect before
adverting to the question as to whether the approach of the High Court was
correct in following the judgment in N. Radhakrishnan in the instant case.

In this behalf, we have to begin our discussion with the pertinent
observation that insofar as the Arbitration and Conciliation Act, 1996 is
concerned, it does not make any specific provision excluding any category
of disputes terming them to be non-arbitrable. Number of pronouncements
have been rendered laying down the scope of judicial intervention, in cases
where there is an arbitration clause, with clear and unambiguous message
that in such an event judicial intervention would be very limited and
minimal. However, the Act contains provisions for challenging the arbitral
awards. These provisions are Section 34 and Section 48 of the Act.
Section 34(2)(b) and Section 48(2) of the Act, inter alia, provide that an
arbitral award may be set aside if the Court finds that the ‘subject matter
of the dispute is not capable of settlement by arbitration under the law
for the time being in force.’ Even when such a provision is interpreted,
what is to be shown is that there is a law which makes subject matter of a
dispute incapable of settlement by arbitration. The aforesaid position in
law has been culled out from the combined readings of Sections 5, 16 and 34
of the Act. When arbitration proceedings are triggered by one of the
parties because of the existence of an arbitration agreement between them,
Section 5 of the Act, by a non-obstante clause, provides a clear message
that there should not be any judicial intervention at that stage scuttling
the arbitration proceedings. Even if the other party has objection to
initiation of such arbitration proceedings on the ground that there is no
arbitration agreement or validity of the arbitration clause or the
competence of the Arbitral Tribunal is challenged, Section 16, in clear
terms, stipulates that such objections are to be raised before the Arbitral
Tribunal itself which is to decide, in the first instance, whether there is
any substance in questioning the validity of the arbitration proceedings on
any of the aforesaid grounds. It follows that the party is not allowed to
rush to the Court for an adjudication. Even after the Arbitral Tribunal
rules on its jurisdiction and decides that arbitration clause is valid or
the Arbitral Tribunal is legally constituted, the aggrieved party has to
wait till the final award is pronounced and only at that stage the
aggrieved party is allowed to raise such objection before the Court in
proceedings under Section 34 of the Act while challenging the arbitral
award. The aforesaid scheme of the Act is succinctly brought out in the
following discussion by this Court in Kvaerner Cementation India Ltd. v.
Bajranglal Agarwal & Anr.[3]:

“3. There cannot be any dispute that in the absence of any arbitration
clause in the agreement, no dispute could be referred for arbitration to an
Arbitral Tribunal. But, bearing in mind the very object with which the
Arbitration and Conciliation Act, 1996 has been enacted and the provisions
thereof contained in Section 16 conferring the power on the Arbitral
Tribunal to rule on its own jurisdiction, including ruling on any objection
with respect to existence or validity of the arbitration agreement, we have
no doubt in our mind that the civil court cannot have jurisdiction to go
into that question.

4. A bare reading of Section 16 makes it explicitly clear that the
Arbitral Tribunal has the power to rule on its own jurisdiction even when
any objection with respect to existence or validity of the arbitration
agreement is raised, and a conjoint reading of sub-sections (2), (4) and
(6) of Section 16 would make it clear that such a decision would be
amenable to be assailed within the ambit of Section 34 of the Act.

5. In this view of the matter, we see no infirmity in the impugned order
so as to be interfered with by this Court. The petitioner, who is a party
to the arbitral proceedings may raise the question of jurisdiction of the
arbitrator as well as the objection on the ground of non-existence of any
arbitration agreement in the so-called dispute in question, and on such an
objection being raised, the arbitrator would do well in disposing of the
same as a preliminary issue so that it may not be necessary to go into the
entire gamut of arbitration proceedings.”

Aforesaid is the position when Arbitral Tribunal is constituted
at the instance of one of the parties and other party takes up the position
that such proceedings are not valid in law.

What would be the position in case a suit is filed by the plaintiff and in
the said suit the defendant files an application under Section 8 of the Act
questioning the maintainability of the suit on the ground that parties had
agreed to settle the disputes through the means of arbitration having
regard to the existence of an arbitration agreement between them?

Obviously, in such a case, the Court is to pronounce upon
arbitrability or non-arbitrability of the disputes.

In the instant case, there is no dispute about the arbitration agreement
inasmuch as there is a specific arbitration clause in the partnership deed.
However, the question is as to whether the dispute raised by the
respondent in the suit is incapable of settlement through arbitration. As
pointed out above, the Act does not make any provision excluding any
category of disputes treating them as non-arbitrable. Notwithstanding the
above, the Courts have held that certain kinds of disputes may not be
capable of adjudication through the means of arbitration. The Courts have
held that certain disputes like criminal offences of a public nature,
disputes arising out of illegal agreements and disputes relating to status,
such as divorce, cannot be referred to arbitration. Following categories
of disputes are generally treated as non-arbitrable[4]:

(i) patent, trademarks and copyright;

(ii) anti-trust/competition laws;

(iii) insolvency/winding up;

(iv) bribery/corruption;

(v) fraud;

(vi) criminal matters.

Fraud is one such category spelled out by the decisions of this
Court where disputes would be considered as non-arbitrable.

‘Fraud’ is a knowing misrepresentation of the truth or concealment of a
material fact to induce another to act to his detriment. Fraud can be of
diffeent forms and hues. Its ingredients are an intention to deceive, use
of unfair means, deliberate concealment of material facts, or abuse of
position of confidence. The Black’s Law Dictionary defines ‘fraud’ as a
concealment or false representation through a statement or conduct that
injures another who relies on it[5]. However, the moot question here which
has to be addressed would be as to whether mere allegation of fraud by one
party against the other would be sufficient to exclude the subject matter
of dispute from arbitration and decision thereof necessary by the civil
court.

In Abdul Kadir Shamsuddin Bubere v. Madhav Prabhakar Oak[6], serious
allegations of fraud were held by the Court to be a sufficient ground for
not making a reference to arbitration. Reliance in that regard was placed
by the Court on a decision of the Chancery Division in Russell v.
Russell[7]. That was a case where a notice for the dissolution of a
partnership was issued by one of the partners, upon which the other partner
brought an action alleging various charges of fraud, and sought a
declaration that the notice of dissolution was void. The partner who was
charged with fraud sought reference of the disputes to arbitration. The
Court held that in a case where fraud is charged, the Court will in general
refuse to send the dispute to arbitration. But where the objection to
arbitration is by a party charging the fraud, the Court will not
necessarily accede to it and would never do so unless a prima facie case of
fraud is proved.

The aforesaid judgment was followed by this Court in N. Radhakrishnan while
considering the matter under the present Act. In that case, the respondent
had instituted a suit against the appellant, upon which the appellant filed
an application under Section 8 of the Act. The applicant made serious
allegations against the respondents of having committed malpractices in the
account books, and manipulation of the finances of the partnership firm.
This Court held that such a case cannot be properly dealt with by the
arbitrator, and ought to be settled by the Court, through detailed evidence
led by both parties.

When the case involves serious allegations of fraud, the dicta contained in
the aforesaid judgments would be understandable. However, at the same
time, mere allegation of fraud in the pleadings by one party against the
other cannot be a ground to hold that the matter is incapable of settlement
by arbitration and should be decided by the civil court. The allegations
of fraud should be such that not only these allegations are serious that in
normal course these may even constitute criminal offence, they are also
complex in nature and the decision on these issues demand extensive
evidence for which civil court should appear to be more appropriate forum
than the Arbitral Tribunal. Otherwise, it may become a convenient mode of
avoiding the process of arbitration by simply using the device of making
allegations of fraud and pleading that issue of fraud needs to be decided
by the civil court. The judgment in N. Radhakrishnan does not touch upon
this aspect and said decision is rendered after finding that allegations of
fraud were of serious nature.

As noted above, in Swiss Timing Ltd. case, single Judge of this Court while
dealing with the same issue in an application under Section 11 of the Act
treated the judgment in N. Radhakrishnan as per incuriam by referring to
the other judgments in the case of P. Anand Gajapathi Raju v. P.V.G.
Raju[8] and Hindustan Petroleum Corpn. Ltd. v. Pinkcity Midway
Petroleums[9]. Two reasons were given in support which can be found in
para 21 of the judgment which makes the following reading:

“21. This judgment was not even brought to the note of the Court in N.
Radhakrishnan’s case. In my opinion, judgment in N. Radhakrishnan’s case
is per incuriam on two grounds; Firstly, the judgment in Hindustan
Petroleum Corpn. Ltd., though referred has not been distinguished but at
the same time is not followed also. The judgment in P. Anand Gajapathi
Raju & Ors. Was not even brought to the notice of this Court. Therefore,
the same has neither been followed nor considered. Secondly, the provision
contained in Section 16 of the Arbitration Act, 1996 were also not brought
to the notice by this Court. Therefore, in my opinion, the judgment in N.
Radhakrishnan does not lay down the correct law and cannot be relied upon.”

We shall revert to the question of per incuriam at a later stage. At this
juncture, we may point out that the issue has been revisited by another
Division Bench of this Court in Booz Allen & Hamilton Inc. v. SBI Home
Finance Limited and others[10]. In this case, one of the questions that
had arisen for determination was, in the context of Section 8 of the Act,
as to whether the subject matter of the suit was ‘arbitrable’ i.e. capable
of being adjudicated by a private forum (Arbitral Tribunal). In this
context, the Court carried out detailed discussion on the term
‘arbitrability’ by pointing out three facets thereof, viz.:

1) whether the disputes are capable of adjudication and settlement by
arbitration?

2) whether the disputes are covered by the arbitration agreement?

3) whether the parties have referred the disputes to arbitration?

As we are concerned with the first facet of the arbitrability of dispute,
on this aspect the Court pointed out that in those cases where the subject
matter falls exclusively within the domain of public fora, viz. the Courts,
such disputes would be non-arbitrable and cannot be decided by the Arbitral
Tribunal but by the Courts alone. The justification and rationale given
for adjudicating such disputes through the process of Courts, i.e. public
fora, and not by Arbitral Tribunals, which is a private forum, is given by
the court in the following manner:

“35. The Arbitral Tribunals are private fora chosen voluntarily by the
parties to the dispute, to adjudicate their disputes in place of courts and
tribunals which are public fora constituted under the laws of the country.
Every civil or commercial dispute, either contractual or non-contractual,
which can be decided by a court, is in principle capable of being
adjudicated and resolved by arbitration unless the jurisdiction of the
Arbitral Tribunals is excluded either expressly or by necessary
implication. Adjudication of certain categories of proceedings are reserved
by the legislature exclusively for public fora as a matter of public
policy. Certain other categories of cases, though not expressly reserved
for adjudication by public fora (courts and tribunals), may by necessary
implication stand excluded from the purview of private fora. Consequently,
where the cause/dispute is inarbitrable, the court where a suit is pending,
will refuse to refer the parties to arbitration, under Section 8 of the
Act, even if the parties might have agreed upon arbitration as the forum
for settlement of such disputes.

36. The well-recognised examples of non-arbitrable disputes are: (i)
disputes relating to rights and liabilities which give rise to or arise out
of criminal offences; (ii) matrimonial disputes relating to divorce,
judicial separation, restitution of conjugal rights, child custody; (iii)
guardianship matters; (iv) insolvency and winding-up matters; (v)
testamentary matters (grant of probate, letters of administration and
succession certificate); and (vi) eviction or tenancy matters governed by
special statutes where the tenant enjoys statutory protection against
eviction and only the specified courts are conferred jurisdiction to grant
eviction or decide the disputes.

37. It may be noticed that the cases referred to above relate to actions
in rem. A right in rem is a right exercisable against the world at large,
as contrasted from a right in personam which is an interest protected
solely against specific individuals. Actions in personam refer to actions
determining the rights and interests of the parties themselves in the
subject-matter of the case, whereas actions in rem refer to actions
determining the title to property and the rights of the parties, not merely
among themselves but also against all persons at any time claiming an
interest in that property. Correspondingly, a judgment in personam refers
to a judgment against a person as distinguished from a judgment against a
thing, right or status and a judgment in rem refers to a judgment that
determines the status or condition of property which operates directly on
the property itself. (Vide Black’s Law Dictionary.)

38. Generally and traditionally all disputes relating to rights in personam
are considered to be amenable to arbitration; and all disputes relating to
rights in rem are required to be adjudicated by courts and public
tribunals, being unsuited for private arbitration. This is not however a
rigid or inflexible rule. Disputes relating to subordinate rights in
personam arising from rights in rem have always been considered to be
arbitrable.”

The Law Commission has taken note of the fact that there is divergence of
views between the different High Courts where two views have been
expressed, one is in favor of the civil court having jurisdiction in cases
of serious fraud and the other view encompasses that even in cases of
serious fraud, the Arbitral Tribunal will rule on its own jurisdiction. It
may be pertinent here to reproduce the observations of the Law Commission
as contained in paragraphs 50 & 51 of the 246th Law Commission Report,
which are as under:

““50. The issue of arbitrability of fraud has arisen on numerous occasions
and there exist conflicting decisions of the Apex Court on this issue.
While it has been held in Bharat Rasiklalv. Gautam Rasiklal, (2012) 2 SCC
144 that when fraud is of such a nature that it vitiates the arbitration
agreement, it is for the Court to decide on the validity of the arbitration
agreement by determining the issue of fraud, there exists two parallel
lines of judgments on the issue of whether an issue of fraud is arbitrable.
In this context, a 2 judge bench of the Supreme Court, while adjudicating
on an application under section 8 of the Act, in Radhakrishnan v. Maestro
Engineers, 2010 1 SCC 72 held that an issue of 28 fraud is not arbitrable.
This decision was ostensibly based on the decision of the three judge bench
of the Supreme Court in Abdul Qadir v. Madhav Prabhakar, AIR 1962 SC 406.
However, the said 3 judge bench decision (which was based on the finding in
Russel v. Russel [1880 14 Ch.D 471]) is only an authority for the
proposition that a party against whom an allegation of fraud is made in a
public forum, has a right to defend himself in that public forum. Yet,
following Radhakrishnan, it appears that issues of fraud are not
arbitrable.

51. A distinction has also been made by certain High Courts between a
serious issue of fraud and a mere allegation of fraud and the former has
been held to be not arbitrable (SeeIvory Properties and Hotels Private Ltd
v. Nusli Neville Wadia, 2011 (2) Arb LR 479 (Bom); CS Ravishankar v. CK
Ravishankar, 2011 (6) Kar LJ 417). The Supreme Court in Meguin GMBH v.
Nandan Petrochem Ltd., 2007 (5) R.A.J 239 (SC), in the context of an
application filed under section 11 has gone ahead and appointed an
arbitrator even though issues of fraud were involved. Recently, the Supreme
Court in its judgment in Swiss Timing Ltd v. Organising Committee, Arb.
Pet. No. 34/2013 dated 28.05.2014, in a similar case of exercising
jurisdiction under section 11, held that the judgment in Radhakrishnan is
per incuriam and, therefore, not good law.”

A perusal of the aforesaid two paragraphs brings into fore that the Law
Commission has recognized that in cases of serious fraud, courts have
entertained civil suits. Secondly, it has tried to make a distinction in
cases where there are allegations of serious fraud and fraud simplicitor.
It, thus, follows that those cases where there are serious allegations of
fraud, they are to be treated as non-arbitrable and it is only the civil
court which should decide such matters. However, where there are
allegations of fraud simplicitor and such allegations are merely alleged,
we are of the opinion it may not be necessary to nullify the effect of the
arbitration agreement between the parties as such issues can be determined
by the Arbitral Tribunal.

Before we apply the aforesaid test to the facts of the present case, a word
on the observations in Swiss Timing Ltd.’s case to the effect that judgment
of N. Radhakrishnan was per incuriam, is warranted. In fact, we do not
have to labour on this aspect as this task is already undertaken by this
Court in State of West Bengal & Ors. v. Associated Contractors[11]. It has
been clarified in the aforesaid case that Swiss Timings Ltd. was a judgment
rendered while dealing with Section 11(6) of the Act and Section 11
essentially confers power on the Chief Judge of India or the Chief Justice
of the High Court as a designate to appoint an arbitrator, which power has
been exercised by another Hon’ble Judge as a delegate of the Chief Justice.
This power of appointment of an arbitrator under Section 11 by the Court,
notwithstanding the fact that it has been held in SBP & Co. v. Patel
Engineering Ltd. & Anr.[12] as a judicial power, cannot be deemed to have
precedential value and, therefore, it cannot be deemed to have overruled
the proposition of law laid down in N.Radhakrishnan.

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 non-arbitrable. 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 for a, 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.

When we apply the aforesaid principles to the facts of this case, we find
that the only allegation of fraud that is levelled is that the appellant
had signed and issued a cheque of Rs. 10,00,050/- dated 17.06.2010 of
‘Hotel Arunagiri’ in favour of his son without the knowledge and consent of
the other partners i.e. the respondents. It is a mere matter of accounts
which can be looked into and found out even by the arbitrator. It does not
involve any complex issue. If such a cheque is issued from the hotel
account by the appellant in favour of his son, it is easy to prove the same
and then the onus is upon the appellant to show as to what was the reason
for giving that amount from the partnership firm to his son and he will
have to account for the same. Likewise, the allegation of the respondents
that daily collections are not deposited in the bank accounts is to be
proved by the respondents which is again a matter of accounts.

Other allegation, which appears to be serious, is about the
C.B.I. raid at the house of Dhanapalraj from where cash in the sum of Rs.45
lakhs was seized. Interestingly, though the appellant has taken the
position that this cash belongs to ‘Hotel Arunagiri’, they are the
respondents who have themselves alleged that the money belonged to
Dhanapalraj and not to ‘Hotel Arunagiri’. In view of the aforesaid stand
taken by the respondents/plaintiffs themselves, this issue does not fall
for consideration and, therefore, is not to be gone by the Arbitral
Tribunal.

We, therefore, are of the opinion that the allegations of purported fraud
were not so serious which cannot be taken care of by the arbitrator. The
Courts below, therefore, fell in error in rejecting the application of the
appellant under Section 8 of the Act. Reversing these judgments, we allow
this appeal and as a consequence, application filed by the appellant under
Section 8 in the suit is allowed thereby relegating the parties to the
arbitration.

At the same time, in order to save the time and having regard to the nature
of the dispute, this Court appoints Hon’ble Ms. Justice Prabha Sridevan, a
retired Judge of the Madras High Court, as the arbitrator. The arbitrator
shall fix her own fee.

No costs.

………………………………………J.

(A.K. SIKRI)

………………………………………J.

(DR. D.Y. CHANDRACHUD)

NEW DELHI;

OCTOBER 04, 2016.

REPORTABLE
IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL Nos. 8245-8246 OF 2016
[Arising out of SLP(C)Nos. 16250-16251 of 2015]
AYYASAMY …..APPELLANT
Versus

PARAMASIVAM & ORS. …..RESPONDENTS

J U D G M E N T

Dr D Y CHANDRACHUD, J

1 I have had the benefit of the lucid exposition of law in the judgment
of my learned brother Justice A K Sikri. I agree with the reasons
contained in His Lordship’s judgment while adding some of my own.

2 The issue which arises in these proceedings has generated a
considerable degree of uncertainty in the law of arbitration in India.
This is an area of law where the intervention of this Court is needed to
ensure that a cloud on the efficacy of arbitral proceedings to resolve
issues of fraud is resolved conclusively. The litigative uncertainty which
the discourse has produced is best set at rest for nothing is as
destructive of legitimate commercial expectations than a state of unsettled
legal precept.
3 The Arbitration and Conciliation Act, 1996 does not in specific
terms exclude any category of disputes – civil or commercial – from
arbitrability. Intrinsic legislative material is in fact to the contrary.
Section 8 contains a mandate that where an action is brought before a
judicial authority in a matter which is the subject of an arbitration
agreement, parties shall be referred by it to arbitration, if a party to or
a person claiming through a party to the arbitration agreement applies not
later than the date of submitting the first statement on the substance of
the dispute. The only exception is where the authority finds prima facie
that there is no valid arbitration agreement. Section 8 contains a
positive mandate and obligates the judicial authority to refer parties to
arbitration in terms of the arbitration agreement. While dispensing with
the element of judicial discretion, the statute imposes an affirmative
obligation on every judicial authority to hold down parties to the terms of
the agreement entered into between them to refer disputes to arbitration.
Article 8 of the UNCITRAL Model Law enabled a court to decline to refer
parties to arbitration if it is found that the arbitration agreement is
null and void, inoperative or incapable of being performed. Section 8 of
the Act of 1996 has made a departure which is indicative of the wide reach
and ambit of the statutory mandate. Section 8 uses the expansive
expression “judicial authority” rather than “court” and the words “unless
it finds that the agreement is null and void, inoperative and incapable of
being performed” do not find place in Section 8.
4 Section 16 empowers the arbitral tribunal to rule upon its own
jurisdiction, including ruling on any objection with respect to the
existence or validity of an arbitration agreement. Section 16(1)(b)
stipulates that a decision by the arbitral tribunal that a contract is null
and void shall not entail ipso jure the invalidity of the arbitration
clause. Hence, the invalidity of the contract between the parties does not
render the arbitration agreement invalid as a consequence of law. This
recognises as inhering in the arbitrator the jurisdiction to consider
whether the main contract (other than the arbitration clause) is null and
void. The arbitration agreement survives for determining whether the
contract in which the arbitration clause is embodied is null and void,
which would include voidability on the ground of fraud. The severability
of the arbitration agreement is a doctrinal development of crucial
significance. For, it leaves the adjudicatory power of the arbitral
tribunal unaffected, over any objection that the main contract between the
parties is affected by fraud or undue influence.

5 Section 34(2)(b) and Section 48(2) provide as one of the grounds
for challenge to or in respect of the enforceability of an award that “the
subject matter of the dispute is not capable of settlement by arbitration
under the law for the time being in force”. Clearly, therefore, the Act
contemplates and acknowledges that before it can be held that a particular
subject matter is not capable of settlement by arbitration, such a
consequence must arise under the law for the time being in force.

6 Ordinarily every civil or commercial dispute whether based on
contract or otherwise which is capable of being decided by a civil court is
in principle capable of being adjudicated upon and resolved by arbitration
“subject to the dispute being governed by the arbitration agreement”
unless the jurisdiction of the Arbitral Tribunal is excluded either
expressly or by necessary implication. In Booz-Allen and Hamilton Inc. v.
SBI Home Finance Ltd.[13], this Court held that adjudication of certain
categories of proceedings is reserved by the legislature exclusively for
public fora as a matter of public policy. Certain other categories of
cases, though not exclusively reserved for adjudication by courts and
tribunals may by necessary implication stand excluded from the purview of
private fora. This Court set down certain examples of non-arbitrable
disputes such as:

(i) Disputes relating to rights and liabilities which give rise to or
arise out of criminal offences;

(ii) Matrimonial disputes relating to divorce, judicial separation,
restitution of conjugal rights and child custody;

(iii) Matters of guardianship;

(iv) Insolvency and winding up;

(v) Testamentary matters, such as the grant of probate, letters of
administration and succession certificates; and

vi) Eviction or tenancy matters governed by special statutes where a
tenant enjoys special protection against eviction and specific courts are
conferred with the exclusive jurisdiction to deal with the dispute.

This Court held that this class of actions operates in rem, which is a
right exercisable against the world at large as contrasted with a right in
personam which is an interest protected against specified individuals. All
disputes relating to rights in personam are considered to be amenable to
arbitration while rights in rem are required to be adjudicated by courts
and public tribunals. The enforcement of a mortgage has been held to be a
right in rem for which proceedings in arbitration would not be
maintainable. In Vimal Kishore Shah v. Jayesh Dinesh Shah[14], this Court
added a seventh category of cases to the six non-arbitrable categories set
out in Booz Allen, namely, disputes relating to trusts, trustees and
beneficiaries arising out of a trust deed and the Trust Act.

7 In Natraj Studios (P) Ltd. v. Navrang Studios[15], a Bench of three
judges of this Court dealt with the issue as to whether a dispute between a
landlord and a tenant falling within the exclusive domain of the Court of
Small Causes at Mumbai, to the exclusion of the civil court, is
arbitrable. This Court held that the Bombay Rent Act is a welfare
legislation aimed at a definite social objective of protecting tenants as a
matter of public policy. The conferment of exclusive jurisdiction on
certain courts was in pursuance of a specific social objective which the
legislation seeks to achieve. Public policy, this Court held, requires
that parties cannot be allowed to contract out of the legislative mandate
which requires certain kinds of disputes to be resolved by special courts
constituted under rent control legislation. Hence, arbitration agreements
between parties whose rights are regulated by rent control legislation
would not be recognised by a court of law.

8 In regard to disputes under the Consumer Protection Act, 1986, this
Court held in Skypak Courier Ltd. v. Tata Chemical Ltd[16], that the
existence of an arbitration clause will not be a bar to the entertainment
of a complaint by a forum under the Consumer Protection Act, 1986 since the
remedy provided under the law is in addition to the provisions of any other
law for the time being in force. This was reiterated in National Seeds
Corporation Ltd. v. M. Madhusudhan Reddy[17], and Rosedale Developers Pvt.
Ltd. v. Aghore Bhattacharya[18]. It was observed that the remedy is merely
optional and is in addition to and not in derogation of the provisions of
any other law for the time being in force.

9 Hence, in addition to various classes of disputes which are generally
considered by the courts as appropriate for decision by public fora, there
are classes of disputes which fall within the exclusive domain of special
fora under legislation which confers exclusive jurisdiction to the
exclusion of an ordinarily civil court. That such disputes are not
arbitrable dovetails with the general principle that a dispute which is
capable of adjudication by an ordinary civil court is also capable of being
resolved by arbitration. However, if the jurisdiction of an ordinary civil
court is excluded by the conferment of exclusive jurisdiction on a
specified court or tribunal as a matter of public policy such a dispute
would not then be capable of resolution by arbitration.

10 The judgment of a two judge Bench of this Court in N. Radhakrishnan
v. Maestro Engineers[19], arose out of a partnership dispute. A suit was
instituted before the civil court for declaratory and injunctive reliefs.
An application under Section 8 of the Act of 1996 was rejected by the trial
court and the order of rejection was affirmed in revision by the High
Court. The submission of the appellant that the dispute between the
partners ought to have been referred to arbitration was met with the
objection that the appellant having raised issues relating to
misappropriation of funds and malpractices, these were matters which ought
to be resolved by a civil court. Affirming the judgment of the High
Court, a Bench of two judges of this Court held as follows:

“The High Court in its impugned judgment has rightly held that since the
case relates to allegations of fraud and serious malpractices on the part
of the respondents, such a situation can only be settled in court through
furtherance of detailed evidence by either parties and such a situation
cannot be properly gone into by the Arbitrator. “ (I.d. at p. 7)
The judgment accepted the submission of the respondent that the appellant
having raised serious matters alleging criminal wrongdoing, such disputes
ought to be adjudicated upon by the civil court:
“The learned counsel appearing on behalf of the respondents on the other
hand contended that the appellant had made serious allegations against the
respondents alleging that they had manipulated the accounts and defrauded
the appellant by cheating the appellant of his dues, thereby warning the
respondents with serious criminal action against them for the alleged
commission of criminal offences. In this connection, reliance was placed in
a decision of this Court in the case of Abdul Kadir Shamsuddin Bubere vs.
Madhav Prabhakar Oak and Another, [AIR 1962 SC 406] in which this Court
under para 17 held as under:
“There is no doubt 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….”
In our view and relying on the aforesaid observations of this Court in the
aforesaid decision and going by the ratio of the above mentioned case, the
facts of the present case does not warrant the matter to be tried and
decided by the Arbitrator, rather for the furtherance of justice, it should
be tried in a court of law which would be more competent and have the means
to decide such a complicated matter involving various questions and issues
raised in the present dispute.”
The above extract from the judgment in N. Radhakrishnan relies extensively
on the view propounded in Abdul Kadir (supra). The decision in Abdul Kadir
arose under the Arbitration Act, 1940 and was in the context of the
provisions of Section 20. In Abdul Kadir, this Court emphasized that sub-
Section (4) of Section 20 of the Arbitration Act, 1940 left a wide
discretion in the court. In contrast, the scheme of the Act of 1996 has
made a radical departure from the position under the erstwhile enactment.
A marked distinction is made in Section 8 where no option has been left to
the judicial authority but to refer parties to arbitration. Abdul Kadir
explains the position under the Arbitration Act, 1940. The present
legislation on the subject embodies a conscious departure which is intended
to strengthen the efficacy of arbitration.

11 In P. Anand Gajapathi Raju v. P.V.G. Raju (Dead)[20], this Court held
that the language of Section 8 is peremptory in nature. Hence, where there
is an arbitration agreement, it is obligatory for the court to refer
parties to arbitration and nothing remains to be decided in the original
action after such an application is made, except to refer the dispute to an
arbitrator. The judgment in Abdul Kadir came up for consideration before a
Bench of two learned judges in Hindustan Petroleum Corporation Ltd. v.
Pinkcity Midway Petroleums[21]. In that case, the appellant had appointed
the respondent as a dealer for selling its petroleum products through a
retail outlet. The dealership agreement contained an arbitration
agreement. In the course of an inspection the appellant found a breach of
the dealership agreement and sales of petroleum products were suspended.
The respondent instituted a suit before the ordinary civil court seeking
declaratory reliefs in which the appellant filed an application under
Section 8 of the Arbitration and Conciliation Act, 1996. The civil court
rejected the application and the High Court in revision affirmed the view.
The submission which weighed with the High Court was that the allegation of
tampering of weights and of measurement seals could only be adjudicated
upon under the Standards of Weights and Measures (Enforcement) Act, 1985
and hence such a dispute was not arbitrable. This Court held that once the
arbitration agreement was admitted, in view of the mandatory language of
Section 8, the dispute ought to have been referred to arbitration. The
judgment of this Court dealt with the submission that since the allegations
in the case related to an element of criminal wrongdoing, the dispute was
not arbitrable. Rejecting this submission, this Court held as follows:

“19 It was argued before the courts below as also before us that the mis-
conduct, if any, pertaining to short-supply of petroleum products or
tampering with the seals would be a criminal offence under the 1985 Act.
Therefore, the investigation into such conduct of the dealer can only be
conducted by such offices and in a manner so specified in the said Act, and
it is not open to the appellant to arrogate to itself such statutory power
of search and seizure by relying on some contractual terms in the
Dealership Agreement. It is further argued that such disputes involving
penal consequences can only be tried by a court of competent jurisdiction
and cannot be decided by an arbitrator…..
20 Having considered the above arguments addressed on behalf of the
respondent as also the findings of the courts below, we are of the opinion
that the same cannot be accepted because the appellant is neither
exercising the power of search and seizure conferred on a competent
authority under the 1985 Act nor does the Dealership Agreement contemplate
the arbitrator to exercise the power of a criminal court while arbitrating
on a dispute which has arisen between the contracting parties. This is
clear from the terms of the Dealership Agreement.” (Id. at p. 19-20)
In the view of this Court, the dispute between the parties was clearly
referable to the terms of the contract and did not entrench upon the
legislative provisions contained in the Standards of Weights and Measures
(Enforcement) Act, 1985:
“The courts below in our opinion, have committed an error by misreading the
terms of the contract when they came to the conclusion that the only remedy
available as against a misconduct committed by an erring dealer in regard
to short-supply and tampering with the seals lies under the provisions of
the 1985 Act. The courts below have failed to notice that when a dealer
short-supplies or tampers with the seal, apart from the statutory
violation, he also commits a misconduct under Clause 20 of the Agreement in
regard to which the appellant is entitled to invoke Clause 30 of the
Agreement to stop supply of petroleum products to such dealer. The power
conferred under the Agreement does not in any manner conflict with the
statutory power under the 1985 Act nor does the prescribed procedure under
the 1985 Act in regard to search and seizure and prosecution apply to the
power of the appellant to suspend the supply of its petroleum products to
an erring dealer. The power exercised by the appellant in such a situation
is a contractual power under the agreement and not a statutory one under
the 1985 Act. The existence of dual procedure; one under the criminal law
and the other under the contractual law is a well-accepted legal phenomenon
in the Indian jurisprudence…….
Therefore, in our opinion, the courts below have erred in coming to the
conclusion that the appellant did not have the legal authority to
investigate and proceed against the respondent for its alleged misconduct
under the terms of the Dealership Agreement. We are also of the opinion
that if the appellant is satisfied that the respondent is indulging in
short-supply or tampering with the seals, it will be entitled to initiate
such action as is contemplated under the agreement like suspending or
stopping the supply of petroleum products to such erring dealer. If in that
process any dispute arises between the appellant and such dealer, the same
will have to be referred to arbitration as contemplated under Clause 40 of
the Dealership Agreement.” (Id. at p. 23-24)
12 Hence, allegations of criminal wrongdoing or of statutory violation
would not detract from the jurisdiction of the arbitral tribunal to resolve
a dispute arising out of a civil or contractual relationship on the basis
of the jurisdiction conferred by the arbitration agreement.

13 In a more recent judgment of two judges of this Court in Sundaram
Finance Ltd. v. T. Thankam[22], the same position in regard to the mandate
of Section 8 has been reiterated. The earlier decisions in Anand Gajapathi
Raju, Pink City and in Branch Manager, Magma Leasing and Finance Ltd. v.
Potluri Madhvilata[23], emphasizing the mandate of Section 8, have been
reaffirmed. This Court has held:

“Once an application in due compliance of Section 8 of the Arbitration Act
is filed, the approach of the civil court should be not to see whether the
court has jurisdiction. It should be to see whether its jurisdiction has
been ousted. There is a lot of difference between the two approaches. Once
it is brought to the notice of the court that its jurisdiction has been
taken away in terms of the procedure prescribed under a special statute,
the civil court should first see whether there is ouster of jurisdiction in
terms or compliance of the procedure under the special statute. The general
law should yield to the special law – generalia specialibus non derogant.
In such a situation, the approach shall not be to see whether there is
still jurisdiction in the civil court under the general law. Such
approaches would only delay the resolution of disputes and complicate the
redressal of grievances and of course unnecessarily increase the pendency
in the court.” (Id. at p. 15)

14 The position that emerges both before and after the decision in
N. Radhakrishnan is that successive decisions of this Court have
given effect to the binding precept incorporated in Section 8. Once there
is an arbitration agreement between the parties, a judicial authority
before whom an action is brought covering the subject matter of the
arbitration agreement is under a positive obligation to refer parties to
arbitration by enforcing the terms of the contract. There is no element of
discretion left in the court or judicial authority to obviate the
legislative mandate of compelling parties to seek recourse to arbitration.
The judgment in N. Radhakrishnan has, however, been utilised by parties
seeking a convenient ruse to avoid arbitration to raise a defence of fraud.
First and foremost, it is necessary to emphasise that the judgment in N.
Radhakrishnan does not subscribe to the broad proposition that a mere
allegation of fraud is ground enough not to compel parties to abide by
their agreement to refer disputes to arbitration. More often than not, a
bogey of fraud is set forth if only to plead that the dispute cannot be
arbitrated upon. To allow such a plea would be a plain misreading of the
judgment in N. Radhakrishnan. As I have noted earlier, that was a case
where the appellant who had filed an application under Section 8 faced with
a suit on a dispute in partnership had raised serious issues of criminal
wrongdoing, misappropriation of funds and malpractice on the part of the
respondent. It was in this background that this Court accepted the
submission of the respondent that the arbitrator would not be competent to
deal with matters “which involved an elaborate production of evidence to
establish the claims relating to fraud and criminal misappropriation”.
Hence, it is necessary to emphasise that as a matter of first principle,
this Court has not held that a mere allegation of fraud will exclude
arbitrability. The burden must lie heavily on a party which avoids
compliance with the obligation assumed by it to submit disputes to
arbitration to establish the dispute is not arbitrable under the law for
the time being in force. In each such case where an objection on the
ground of fraud and criminal wrongdoing is raised, it is for the judicial
authority to carefully sift through the materials for the purpose of
determining whether the defence is merely a pretext to avoid arbitration.
It is only where there is a serious issue of fraud involving criminal
wrongdoing that the exception to arbitrability carved out in N.
Radhakrishnan may come into existence. Allegations of fraud are not alien
to ordinary civil courts. Generations of judges have dealt with such
allegations in the context of civil and commercial disputes. If an
allegation of fraud can be adjudicated upon in the course of a trial before
an ordinary civil court, there is no reason or justification to exclude
such disputes from the ambit and purview of a claim in arbitration.
Parties who enter into commercial dealings and agree to a resolution of
disputes by an arbitral forum exercise an option and express a choice of a
preferred mode for the resolution of their disputes. Parties in choosing
arbitration place priority upon the speed, flexibility and expertise
inherent in arbitral adjudication. Once parties have agreed to refer
disputes to arbitration, the court must plainly discourage and
discountenance litigative strategies designed to avoid recourse to
arbitration. Any other approach would seriously place in uncertainty the
institutional efficacy of arbitration. Such a consequence must be
eschewed.

15 The position as it obtains in other jurisdictions which value
arbitration as an effective form of alternate dispute resolution is no
different. In the UK, Section 24(2) of the Arbitration Act, 1950 provided
that the court could revoke the authority of a tribunal to deal with claims
involving issues of fraud and determine those claims itself. The English
Act of 1979 provided for a stay of proceedings involving allegations of
fraud. However, under the English Arbitration Act, 1996, there is no such
restriction and the arbitral tribunal has jurisdiction to consider and rule
on issues of fraud. In Fiona Trust and Holding Corporation v. Yuri
Privalov[24], the Court of Appeal emphasised the need to make a fresh start
in imparting business efficacy to arbitral agreements. The Court of Appeal
held that:

“For our part we consider that the time has now come for a line of
some sort to be drawn and a fresh start made at any rate for cases arising
in an international commercial context. Ordinary business men would be
surprised at the nice distinctions drawn in the cases and the time taken up
by argument in debating whether a particular case falls within one set of
words or another very similar set of words. If business men go to the
trouble of agreeing that their disputes be heard in the courts of a
particular country or by a tribunal of their choice they do not expect (at
any rate when they are making the contract in the first place) that time
and expense will be taken in lengthy argument about the nature of
particular causes of action and whether any particular cause of action
comes within the meaning of the particular phrase they have chosen in their
arbitration clause. If any business man did want to exclude disputes about
the validity of a contract, it would be comparatively simple to say so. ..
One of the reasons given in the cases for a liberal construction of an
arbitration clause is the presumption in favour of one-stop arbitration.
It is not to be expected that any commercial man would knowingly create a
system which required that the court should first decide whether the
contract should be rectified or avoided or rescinded (as the case might be)
and then, if the contract is held to be valid, required the arbitrator to
resolve the issues that have arisen. This is indeed a powerful reason for
a liberal construction”.

Arbitration must provide a one-stop forum for resolution of disputes. The
Court of Appeal held that if arbitrators can decide whether a contract is
void for initial illegality, there is no reason why they should not decide
whether a contract is procured by bribery, just as much as they can decide
whether a contract has been vitiated by misrepresentation or non-
disclosure. The judgment of the Court of Appeal was affirmed by the House
of Lords in Premium Nafta Products Ltd. (20th Defendant) v. Fily Shipping
Co. Ltd[25]. The House of Lords held that claims of fraudulent inducement
of the underlying contract (i.e. alleged bribery of one party’s officer to
accept uncommercial terms) did not impeach the arbitration clause contained
within that contract. The Law Lords reasoned that “if (as in this case)
the allegation is that the agent exceeded his authority by entering into a
main agreement in terms which were not authorized or for improper reasons,
that is not necessarily an attack on the arbitration agreement”. They went
on to conclude that, “the principle of separability…means that the
invalidity or rescission of the main contract does not necessarily entail
the invalidity or rescission of the arbitration agreement. The arbitration
must be treated as a ‘distinct agreement’ and can be void or voidable only
on grounds which relate directly to the arbitration agreement.”

16 The basic principle which must guide judicial decision making is that
arbitration is essentially a voluntary assumption of an obligation by
contracting parties to resolve their disputes through a private tribunal.
The intent of the parties is expressed in the terms of their agreement.
Where commercial entities and persons of business enter into such dealings,
they do so with a knowledge of the efficacy of the arbitral process. The
commercial understanding is reflected in the terms of the agreement between
the parties. The duty of the court is to impart to that commercial
understanding a sense of business efficacy.

17 Lord Hoffmann, speaking for the House of Lords in Premium Nafta
Products, placed the matter eloquently in the following observations:

“In approaching the question of construction, it is therefore necessary to
inquire into the purpose of the arbitration clause. As to this, I think
there can be no doubt. The parties have entered into a relationship, an
agreement or what is alleged to be an agreement or what appears on its face
to be an agreement, which may give rise to disputes. They want those
disputes decided by a tribunal which they have chosen, commonly on the
grounds of such matters as its neutrality, expertise and privacy, the
availability of legal services at the seat of the arbitration and the
unobtrusive efficiency of its supervisory law. Particularly in the case of
international contracts, they want a quick and efficient adjudication and
do not want to take the risks of delay and, in too many cases, partiality,
in proceedings before a national jurisdiction”.

18 Lord Hoffmann held that if this is the purpose underlying an
agreement to arbitrate, it would be inconceivable that parties would have
intended that some, amongst their disputes should first be resolved by a
court before they proceed to arbitration:

“If one accepts that this is the purpose of an arbitration clause, its
construction must be influenced by whether the parties, as rational
businessmen, were likely to have intended that only some of the questions
arising out of their relationship were to be submitted to arbitration and
others were to be decided by national courts. Could they have intended that
the question of whether the contract was repudiated should be decided by
arbitration but the question of whether it was induced by misrepresentation
should be decided by a court? If, as appears to be generally accepted,
there is no rational basis upon which businessmen would be likely to wish
to have questions of the validity or enforceability of the contract decided
by one tribunal and questions about its performance decided by another, one
would need to find very clear language before deciding that they must have
had such an intention”.

While affirming the judgment of the Court of Appeal, the House of Lords
held:

“13 In my opinion the construction of an arbitration clause should start
from the assumption that the parties, as rational businessmen, are likely
to have intended any dispute arising out of the relationship into which
they have entered or purported to enter to be decided by the same tribunal.
The clause should be construed in accordance with this presumption unless
the language makes it clear that certain questions were intended to be
excluded from arbitrator’s jurisdiction. As Longmore LJ remarked, at para
17: “if any businessmen did want to exclude disputes about the validity of
a contract, it would be comparatively easy to say so”…. If one adopts
this approach, the language of clause 41 of Shelltime 4 contains nothing to
exclude disputes about the validity of the contract, whether on the grounds
that it as procured by fraud, bribery, misrepresentation or anything else.
In my opinion it therefore applies to the present dispute”.
This principle should guide the approach when a defence of fraud is raised
before a judicial authority to oppose a reference to arbitration. The
arbitration agreement between the parties stands distinct from the contract
in which it is contained, as a matter of law and consequence. Even the
invalidity of the main agreement does not ipso jure result in the
invalidity of the arbitration agreement. Parties having agreed to refer
disputes to arbitration, the plain meaning and effect of Section 8 must
ensue.

19 In the United States, the Supreme Court in Buckeye Check Cashing,
Inc. v. Cardegna[26], followed its earlier decisions in Prima Paint Corp.
v. Flood & Conklin Manufacturing Co.[27], and in Southland Corporation v.
Keating[28]. Justice Scalia, who delivered the judgment of the Supreme
Court, summarized the position thus:-

“Prima Paint and Southland answer the question presented here by
establishing three propositions. First, as a matter of substantive federal
arbitration law, an arbitration provision is severable from the remainder
of the contract. Second, unless the challenge is to the arbitration clause
itself, the issue of the contract’s validity is considered by the
arbitrator in the first instance. Third, this arbitration law applies in
state as well as federal courts. The parties have not requested, and we do
not undertake, reconsideration of those holdings. Applying them to this
case, we conclude that because respondents challenge the Agreement, but not
specifically its arbitration provisions, those provisions are enforceable
apart from the remainder of the contract. The challenge should therefore
be considered by an arbitrator, not a court”.

20 The Arbitration and Conciliation Act, 1996, should in my view be
interpreted so as to bring in line the principles underlying its
interpretation in a manner that is consistent with prevailing approaches in
the common law world. Jurisprudence in India must evolve towards
strengthening the institutional efficacy of arbitration. Deference to a
forum chosen by parties as a complete remedy for resolving all their claims
is but part of that evolution. Minimising the intervention of courts is
again a recognition of the same principle.

21 Academic literature on the law of arbitration points in the same
direction. In Russell on Arbitration[29], the doctrine of separability has
been summarized in the following extract:

“The doctrine of separability. An arbitration agreement specifies the
means whereby some or all disputes under the contract in which it is
contained are to be resolved. It is however separate from the underlying
contract: “An arbitration clause in a commercial contract … is an agreement
inside an agreement. The parties make their commercial bargain … but in
addition agree on a private tribunal to resolve any issues that may arise
between them.” This is known as the doctrine of separability and s.7 of
the Arbitration Act 1996 provides a statutory codification of the previous
case law on this subject. As the House of Lords noted in Lesotho Highlands
v Impreglio SpA:

“it is part of the very alphabet of arbitration law as
explained in Harbour Assurance Co. (UK) Ltd. v Kansa General International
Insurance Co. Ltd … and spelled out in s.7 of the Act, the arbitration
agreement is a distinct and separable agreement from the underlying or
principal contract”…..

The Court of Appeal has confirmed that the doctrine of separability as it
applies to arbitration agreements and jurisdiction clauses is
uncontroversial also as a matter of European law”.

Dealing with arbitrability of matters of fraud, the treatise contains the
following statement of the legal position:

“Fraud. Claims involving conduct amounting to fraud can be the subject
matter of arbitration, as s.107(2) of the Arbitration Act makes clear. The
Act expressly recognises that an arbitral tribunal may decide an issue of
fraud, and the courts have acknowledged that an arbitrator has jurisdiction
to decide allegations of bribery against a party to an arbitration
agreement. Even in this context, however, an arbitral tribunal does not
have jurisdiction to impose criminal sanctions on a party, even if bribery
of a public officer is established; its power is limited to the civil
consequences of that conduct”.

Under Section 24(2) of the Arbitration Act, 1950, the court could revoke
the authority of a tribunal to deal with claims involving issues of fraud
and determine those claims itself. This provision has been repealed in
Section 107(2) of the Arbitration Act, 1996.

22 Similarly, Redfern and Hunter on International Arbitration[30]
contains the following statement of legal position in relation to
arbitrability of matters involving fraud:-

“(vi) Fraud
Where allegations of fraud in the procurement or performance of a contract
are alleged, there appears to be no reason for the arbitral tribunal to
decline jurisdiction. Indeed, in the heat of battle, such allegations are
frequently made, although much less frequently proven”.
23 The legal position has been succinctly summarized in International
Commercial Arbitration by Gary B Born[31] thus:

“…..under most national arbitration regimes, claims that the parties’
underlying contract (as distinguished from the parties’ arbitration clause)
was fraudulently induced have generally been held not to compromise the
substantive validity of an arbitration clause included in the contract.
The fact that one party may have fraudulently misrepresented the quality of
its goods, services, or balance sheet generally does nothing to impeach the
parties’ agreed dispute resolution mechanism. As a consequence, only fraud
or fraudulent inducement directed at the agreement to arbitrate will, as a
substantive matter, impeach that agreement. These circumstances seldom
arise: as a practical matter, it is relatively unusual that a party will
seek to procure an agreement to arbitrate by fraud, even in those cases
where it may have committed fraud in connection with the underlying
commercial contract”.

(See also in this context, International Arbitration Law and Practice by
Mauro Rubino-Sammartano)[32]

24 For the above reasons, I agree with the eloquent judgment of my
learned brother in coming to the conclusion that a mere allegation of fraud
in the present case was not sufficient to detract from the obligation of
the parties to submit their disputes to arbitration. I also agree with the
directions issued. A fresh line must be drawn to ensure the fulfilment of
the intent of Parliament in enacting the Act of 1996 and towards supporting
commercial understandings grounded in the faith in arbitration.
…………………………………J
[Dr D Y CHANDRACHUD]
New Delhi
October 04, 2016

———————–
[1] (2010) 1 SCC 72
[2] (2014) 6 SCC 677
[3] (2012) 5 SCC 214
[4] See – O.P. Malhotra on ‘The Law & Practice of Arbitration and
Conciliation’, Third Edition, authored by Indu Malhotra. See also note 10
ibid.

[5] See – Ramesh Kumar & Anr. v. Furu Ram & Anr., (2011) 8 SCC 613 (a
decision rendered under the Arbitration Act, 1940)
[6] AIR 1962 SC 406
[7] (1880) 14 Ch D 471
[8] (2000) 4 SCC 539
[9] (2003) 6 SCC 503
[10] (2011) 5 SCC 532
[11] (2015) 1 SCC 32
[12] (2005) 8 SCC 618
[13]

[14] (2011) 5 SCC 532
[15]

[16] (2016) SCC OnLine SC 825
[17]

[18] (1981) 2 SCR 466
[19]

[20] (2000) 5 SCC 294
[21]

[22] (2012) 2 SCC 506
[23]

[24] (2015 )1 WBLR (SC) 385
[25]

[26] (2010) 1 SCC 72
[27]

[28] (2000) 4 SCC 539
[29]

[30] (2003) 6 SCC 503
[31]

[32] AIR 2015 1303
[33]

[34] (2009) 10 SCC 103
[35]

[36] [2007] 1 All E R (COMM) 891
[37]

[38] [2007] UKHL 40
[39]

[40] 546 U.S. 440 (U.S.S.Ct.2006)
[41]

[42] 388 US 395 (U.S. S.Ct. 1967)
[43]

[44] 465 U.S. 1 (1984)
[45]

[46] (24th Edition, 2015, para 2-007)
[47]

[48] (6th Edition para 2.154)
[49]

[50] (2nd Edition Vol. I, P.846)
[51]

[52] (2nd Edition p.179)

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