Friday, October 14, 2016

A. AYYASAMY v/s. A. PARAMASIVAM & ORS - October 04, 2016


                        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


                 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

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

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

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

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

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

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.


                                                                (A.K. SIKRI)


                                                      (DR. D.Y. CHANDRACHUD)


OCTOBER 04, 2016.


                        CIVIL APPELLATE JURISDICTION

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

AYYASAMY                                     .....APPELLANT


PARAMASIVAM & ORS.                      .....RESPONDENTS

                               J U D G M E N T


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
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

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

“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

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.

                                             [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

[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

      [14]                    (2011) 5 SCC 532

      [16]                    (2016) SCC OnLine SC 825

      [18]                    (1981) 2 SCR 466

      [20]                    (2000) 5  SCC 294

      [22]                    (2012) 2 SCC 506

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

      [26]                    (2010) 1 SCC 72

      [28]                    (2000) 4 SCC 539

      [30]                    (2003) 6 SCC 503

      [32]                      AIR 2015 1303

      [34]                     (2009) 10 SCC 103

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

      [38]                    [2007] UKHL 40

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

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

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

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

      [48]                    (6th Edition para 2.154)

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

      [52]                    (2nd Edition p.179)

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