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.

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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

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Others1.  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  Committee2,  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

this Court under Section 11 of the Act whereas judgment in  N. 1 (2010) 1 SCC 72 2 (2014) 6 SCC 677

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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

disciplined manner till  his death.  After his death, the appellant

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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

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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

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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

case does not warrant to be tried and decided by the arbitrator

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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

being in force.'  Even when such a provision is interpreted, what is

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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

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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

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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

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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-arbitrable4:

(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.

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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  different  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 it5.  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 Oak6,  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.  Russell7.  That

was a case where a notice for the dissolution of a partnership was

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

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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.

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.

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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.

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Radhakrishnan  as  per  incuriam  by  referring  to  the  other

judgments  in  the  case  of  P. Anand  Gajapathi  Raju v.  P.V.G.

Raju8 and  Hindustan  Petroleum  Corpn.  Ltd. v.  Pinkcity

Midway Petroleums9.  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 others10.  In

this case, one of the questions that had arisen for determination 8 (2000) 4 SCC 539 9 (2003) 6 SCC 503 10 (2011) 5 SCC 532  

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was,  in the context  of  Section 8 of  the Act,  as to whether  the

subject  matter  of  the suit  was 'arbitrable'  i.e.  capable of  being

adjudicated by a private forum (Arbitral Tribunal).  In this context,

the Court carried out detailed discussion on the term 'arbitrability'

by pointing out three facets thereof, viz.:

1) whether the disputes are capable of adjudication and settlement

by arbitration?

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

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

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,

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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

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determining the rights and interests of the parties themselves  in  the  subject-matter  of  the  case, whereas  actions  in  rem  refer  to  actions determining the title to property and the rights of the  parties,  not  merely  among  themselves  but also against all persons at any time claiming an interest  in  that  property.  Correspondingly,  a judgment  in  personam  refers  to  a  judgment against  a  person  as  distinguished  from  a judgment against a thing, right or status and a judgment  in  rem  refers  to  a  judgment  that determines  the  status  or  condition  of  property which  operates  directly  on  the  property  itself. (Vide Black's Law Dictionary.)

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

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 favour  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

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in  paragraphs  50  &  51  of  the  246th Law Commission  Report,

which are as under:

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

51.  A distinction  has  also  been  made  by  certain High Courts between a serious issue of fraud and a mere allegation of fraud and the former has been held to be not arbitrable (SeeIvory Properties and Hotels Private Ltd  v. Nusli Neville Wadia,  2011 (2) Arb  LR  479  (Bom);  CS  Ravishankar  v.  CK Ravishankar, 2011 (6) Kar LJ 417). The Supreme Court in Meguin GMBH v. Nandan Petrochem Ltd., 2007  (5)  R.A.J  239  (SC),  in  the  context  of  an application filed under section 11 has gone ahead and appointed an arbitrator even though issues of fraud were involved. Recently, the Supreme Court in its judgment in  Swiss Timing Ltd  v.  Organising

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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.”

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

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West Bengal & Ors.  v. Associated Contractors11.  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.

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 11 (2015) 1 SCC 32 12 (2005) 8 SCC 618

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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

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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 fora, are better suited than a private forum of

arbitration.  Therefore, the inquiry of the Court, while dealing with

an  application  under  Section  8  of  the  Act,  should  be  on  the

aforesaid aspect, viz. whether the nature of dispute is such that it

cannot be referred to arbitration,  even if  there is  an arbitration

agreement between the parties.  When the case of fraud is set up

by one of the parties and on that basis that party wants to wriggle

out of that arbitration agreement, a strict and meticulous inquiry

into the allegations of fraud is needed and only when the Court is

satisfied  that  the  allegations  are  of  serious  and  complicated

nature that it would be more appropriate for the Court to deal with

the subject matter rather than relegating the parties to arbitration,

then  alone  such  an  application  under  Section  8  should  be

rejected.

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

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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

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themselves,  this  issue  does  not  fall  for  consideration  and,

therefore, is not to be gone by the Arbitral Tribunal.

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)

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NEW DELHI;

OCTOBER 04, 2016.

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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.   

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

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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

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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

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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

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(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 Shah14, 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

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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  Studios15,  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 Ltd16, 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

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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  Reddy17,  and  Rosedale  Developers  Pvt.  Ltd.  v.  Aghore

Bhattacharya18.  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 ordinary

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   Engineers19,  arose  out  of  a  partnership  dispute.   A suit  was 17

(2012) 2 SCC 506 18

(2015 )1 WBLR (SC) 385 19

(2010) 1 SCC 72

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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,

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36

[AIR 1962 SC 406] in which this Court under para 17 held as under:  

“There is no doubt that where serious allegations of fraud are made against  a party and the party who is charged with fraud desires that the matter should be tried in open court,  that would be a sufficient  cause  for  the  court  not  to  order  an arbitration agreement to be filed and not to make the reference….”  

In our view and relying on the aforesaid observations of this Court in the aforesaid decision and going by the ratio of the above mentioned case, the facts of the present case does not warrant the matter to be tried and  decided  by  the  Arbitrator,  rather  for  the furtherance of justice, it should be tried in a court of law which  would  be more competent  and have  the means to decide such a complicated matter involving various  questions  and  issues  raised  in  the  present dispute.”  

The above extract from the judgment in N. Radhakrishnan relies extensively

on the view propounded in  Abdul  Kadir (supra).   The  decision  in Abdul

Kadir arose under the Arbitration Act,  1940 and was in the context of the

provisions  of  Section  20.   In Abdul  Kadir,  this  Court  emphasized  that

sub-Section (4) of Section 20 of the Arbitration Act, 1940 left a wide discretion

in the court.  In contrast, the scheme of the Act of 1996 has made a radical

departure  from  the  position  under  the  erstwhile  enactment.   A  marked

distinction is made in Section 8 where no option has been left to the judicial

authority but to refer parties to arbitration.  Abdul Kadir explains the position

under  the  Arbitration  Act,  1940.  The  present  legislation  on  the  subject

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

arbitration.  

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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  Petroleums21.    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

20

(2000) 4 SCC 539 21

(2003) 6 SCC 503

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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)

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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)

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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. Thankam22, 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 Madhvilata23,  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

22

  AIR 2015 1303 23

 (2009) 10 SCC 103

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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

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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,

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flexibility and expertise inherent in arbitral adjudication.  Once parties have

agreed to refer disputes to arbitration, the court must plainly discourage and

discountenance litigative strategies designed to avoid recourse to arbitration.

Any  other  approach  would  seriously  place  in  uncertainty  the  institutional

efficacy of arbitration.  Such a consequence must be eschewed.

15 The position as it obtains in other jurisdictions which value arbitration as

an effective form of alternate dispute resolution is no different.  In the UK,

Section 24(2) of the Arbitration Act, 1950 provided that the court could revoke

the authority of a tribunal to deal with claims involving issues of fraud and

determine those claims itself.  The English Act of 1979 provided for a stay of

proceedings  involving  allegations  of  fraud.   However,  under  the  English

Arbitration Act, 1996, there is no such restriction and the arbitral tribunal has

jurisdiction  to  consider  and  rule  on  issues  of  fraud.   In  Fiona  Trust  and

Holding Corporation v. Yuri Privalov24, 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

24

[2007] 1 All E R (COMM) 891

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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. Ltd25.

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

25

[2007] UKHL 40

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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:   

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“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

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to find very clear language before deciding that they must have had such an intention”.

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

held:   

“13 In my opinion the construction of an arbitration clause  should  start  from  the  assumption  that  the parties,  as  rational  businessmen,  are  likely  to  have intended any dispute  arising  out  of  the  relationship into which they have entered or purported to enter to be decided by the same tribunal. The clause should be construed in accordance with this presumption unless the  language  makes  it  clear  that  certain  questions were  intended  to  be  excluded  from  arbitrator’s jurisdiction.  As Longmore LJ remarked,  at  para 17: “if  any  businessmen  did  want  to  exclude  disputes about  the  validity  of  a  contract,  it  would  be comparatively easy to say so”....   If one adopts this approach,  the  language of  clause  41 of  Shelltime 4 contains nothing to exclude disputes about the validity of  the  contract,  whether  on  the  grounds  that  it  as procured  by  fraud,  bribery,  misrepresentation  or anything else.  In my opinion it therefore applies to the present dispute”.   

This principle should guide the approach when a defence of fraud is raised

before a judicial authority to oppose a reference to arbitration.  The arbitration

agreement between the parties stands distinct from the contract in which it is

contained, as a matter of law and consequence.  Even the invalidity of the main

agreement  does  not  ipso  jure  result  in  the  invalidity  of  the  arbitration

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

meaning and effect of Section 8 must ensue.   

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19 In the United States, the Supreme Court in  Buckeye Check Cashing,

Inc.   v.  Cardegna26, followed its earlier decisions in  Prima Paint Corp. v.

Flood & Conklin Manufacturing Co.27,  and in  Southland Corporation v.

Keating28.   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

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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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 Arbitration29, 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”.  

29

(24th Edition, 2015,  para 2-007)

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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, 1940, 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  Arbitration30

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”.   

 30

(6th Edition para 2.154)

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23 The  legal  position  has  been  succinctly  summarized  in  International

Commercial Arbitration by Gary B Born31 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

31

(2nd Edition Vol. I, P.846) 32

(2nd Edition p.179)

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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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