Page 1

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.

Page 2 2

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

Civil Appeal Nos. 8245-8246 of 2016 Page 2 of 51

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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.

3.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

1(2010) 1 SCC 72

2(2014) 6 SCC 677

Civil Appeal Nos. 8245-8246 of 2016 Page 3 of 51

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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.

4.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

Civil Appeal Nos. 8245-8246 of 2016 Page 4 of 51

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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

Civil Appeal Nos. 8245-8246 of 2016 Page 5 of 51

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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

Civil Appeal Nos. 8245-8246 of 2016 Page 6 of 51

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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.”

5.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.

6.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

Civil Appeal Nos. 8245-8246 of 2016 Page 7 of 51

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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.

7.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

Civil Appeal Nos. 8245-8246 of 2016 Page 8 of 51

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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

Civil Appeal Nos. 8245-8246 of 2016 Page 9 of 51

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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

3(2012) 5 SCC 214

Civil Appeal Nos. 8245-8246 of 2016 Page 10 of 51

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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.

8.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.

9.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

Civil Appeal Nos. 8245-8246 of 2016 Page 11 of 51

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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.

4 See – O.P. Malhotra on 'The Law & Practice of Arbitration and Conciliation', Third Edition,

authored by Indu Malhotra. See also note 10 ibid.

Civil Appeal Nos. 8245-8246 of 2016 Page 12 of 51

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10.'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.

11.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

5See – Ramesh Kumar & Anr. v. Furu Ram & Anr., (2011) 8 SCC 613 (a decision rendered under

the Arbitration Act, 1940)

6AIR 1962 SC 406

7(1880) 14 Ch D 471

Civil Appeal Nos. 8245-8246 of 2016 Page 13 of 51

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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.

12.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.

Civil Appeal Nos. 8245-8246 of 2016 Page 14 of 51

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13.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.

14.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

Civil Appeal Nos. 8245-8246 of 2016 Page 15 of 51

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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.”

15.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

8(2000) 4 SCC 539

9(2003) 6 SCC 503

10(2011) 5 SCC 532

Civil Appeal Nos. 8245-8246 of 2016 Page 16 of 51

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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?

16.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

Civil Appeal Nos. 8245-8246 of 2016 Page 17 of 51

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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

Civil Appeal Nos. 8245-8246 of 2016 Page 18 of 51

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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.”

17.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 246

th

Law Commission Report,

which are as under:

““50. The issue of arbitrability of fraud has arisen on

Civil Appeal Nos. 8245-8246 of 2016 Page 19 of 51

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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.”

Civil Appeal Nos. 8245-8246 of 2016 Page 20 of 51

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18.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.

19.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

11(2015) 1 SCC 32

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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.

20.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

12(2005) 8 SCC 618

Civil Appeal Nos. 8245-8246 of 2016 Page 22 of 51

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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

Civil Appeal Nos. 8245-8246 of 2016 Page 23 of 51

Page 24 24

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.

21.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

Civil Appeal Nos. 8245-8246 of 2016 Page 24 of 51

Page 25 25

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.

Civil Appeal Nos. 8245-8246 of 2016 Page 25 of 51

Page 26 26

22.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.

23.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.

Civil Appeal Nos. 8245-8246 of 2016 Page 26 of 51

Page 27 27

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]

A.AYYASAMY .....APPELLANT

Versus

A.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.

2The 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

Civil Appeal Nos. 8245-8246 of 2016 Page 27 of 51

Page 28 28

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

Civil Appeal Nos. 8245-8246 of 2016 Page 28 of 51

Page 29 29

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

Civil Appeal Nos. 8245-8246 of 2016 Page 29 of 51

Page 30 30

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;

13

(2011) 5 SCC 532

Civil Appeal Nos. 8245-8246 of 2016 Page 30 of 51

Page 31 31

(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,

14

(2016) SCC OnLine SC 825

Civil Appeal Nos. 8245-8246 of 2016 Page 31 of 51

Page 32 32

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

15

(1981) 2 SCR 466

16

(2000) 5 SCC 294

Civil Appeal Nos. 8245-8246 of 2016 Page 32 of 51

Page 33 33

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.

10The 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

17

(2012) 2 SCC 506

18

(2015 )1 WBLR (SC) 385

19

Civil Appeal Nos. 8245-8246 of 2016 Page 33 of 51

Page 34 34

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

(2010) 1 SCC 72

Civil Appeal Nos. 8245-8246 of 2016 Page 34 of 51

Page 35 35

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

Civil Appeal Nos. 8245-8246 of 2016 Page 35 of 51

Page 36 36

embodies a conscious departure which is intended to strengthen the efficacy of

arbitration.

11In 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

20

(2000) 4 SCC 539

21

(2003) 6 SCC 503

Civil Appeal Nos. 8245-8246 of 2016 Page 36 of 51

Page 37 37

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:

“19It 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)

Civil Appeal Nos. 8245-8246 of 2016 Page 37 of 51

Page 38 38

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)

Civil Appeal Nos. 8245-8246 of 2016 Page 38 of 51

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12Hence, 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.

13In 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

22

AIR 2015 1303

23

(2009) 10 SCC 103

Civil Appeal Nos. 8245-8246 of 2016 Page 39 of 51

Page 40 40

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)

14The 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

Civil Appeal Nos. 8245-8246 of 2016 Page 40 of 51

Page 41 41

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

Civil Appeal Nos. 8245-8246 of 2016 Page 41 of 51

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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.

15The 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

24

[2007] 1 All E R (COMM) 891

Civil Appeal Nos. 8245-8246 of 2016 Page 42 of 51

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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. (20

th

Defendant) v. Fily Shipping Co. Ltd

25

.

The House of Lords held that claims of fraudulent inducement of the

25

[2007] UKHL 40

Civil Appeal Nos. 8245-8246 of 2016 Page 43 of 51

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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.”

16The 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.

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17Lord 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”.

18Lord 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

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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:

“13In 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

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agreement. Parties having agreed to refer disputes to arbitration, the plain

meaning and effect of Section 8 must ensue.

19In 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”.

26

546 U.S. 440 (U.S.S.Ct.2006)

27

388 US 395 (U.S. S.Ct. 1967)

28

465 U.S. 1 (1984)

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20The 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.

21Academic 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

29

(24

th

Edition, 2015, para 2-007)

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Page 49 49

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.

22Similarly, Redfern and Hunter on International Arbitration

30

contains the following statement of legal position in relation to arbitrability of

matters involving fraud:-

30

(6

th

Edition para 2.154)

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Page 50 50

“(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”.

23The 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

24For 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

31

(2

nd

Edition Vol. I, P.846)

32

(2

nd

Edition p.179)

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Page 51 51

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

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