‘REPORTABLE’

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 7005 OF 2019 (Arising out of SLP (C) No. 4061 of 2019)

RASHID RAZA                                   Appellant(s)

VERSUS

SADAF AKHTAR                                  Respondent(s)

J U D G M E N T

R. F. NARIMAN, J.

The present case arises out of a partnership dispute

in which an FIR dated 17.11.2017 was lodged by one of the

partners  alleging  siphoning  of  funds  and  various  other

business improprieties that were committed.  The FIR is at

present under investigation.

An Arbitration Petition dated 02.01.2018 was filed by

the appellant before the High Court under Section 11 of the

Arbitration and Conciliation Act, 1996, seeking appointment

of an Arbitrator under the Arbitration clause which is to be

found in the partnership deed between the parties which is

dated 30.01.2015.  The High Court, by the impugned order

dated 06.12.2018, has cited our judgment in ‘A. Ayyasamy v.

A. Paramasivam and Others’  [(2016) 10 SCC 386] and after

extracting paragraph 26 from the said judgment has held:

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CIVIL APPEAL NO. 7005 OF 2019 (Arising out of SLP (C) No. 4061 of 2019)

“…….The  allegation  of  fraud  that  was  levelled against  the  appellant  was  that  he  had  signed  and issued a cheque of Rs.10,00,050 on 17th June, 2010 of Hotel  Arunagiri  in  favour  of  his  son  without  the knowledge  and  consent  of  the  other  partners  i.e. respondents.  It was a mere matter of account which could  be  looked  into  and  found  out  even  by  the arbitrator.  The facts of the instant case however are much more complex as the materials on records disclose.   This  Court  however  does  not  intend  to make any comments on the merits of the allegations lest it may prejudice the case of the parties in an appropriate  proceeding  before  competent  court. However, considered in totality this Court is of the firm view that the nature of the dispute involving serious allegations of fraud of complicated nature are  not  fit  to  be  decided  in  an  arbitration proceedings.   The  dispute  may  require  voluminous evidence on the part of both the parties to come to a finding which can be only properly undertaken by a civil court of competent jurisdiction.”

Consequently,  while  purportedly  following  this

judgment, the Section 11 application was dismissed.

Having heard learned counsel for both the sides, it is

clear that the law laid down in  A. Ayyasamy’s case is in

paragraph 25 and not in paragraph 26.  Paragraph 25 of the

said judgment states as follows:

25. In view of our aforesaid discussions, we are of the opinion that mere allegation of fraud simplicitor may  not  be  a  ground  to  nullify  the  effect  of arbitration agreement between the parties. It is only in those cases where the Court, while dealing with Section  8  of  the  Act,  finds  that  there  are  very serious  allegations  of  fraud  which  make  a  virtual case  of  criminal  offence  or  where  allegations  of fraud are so complicated that it becomes absolutely essential  that  such  complex  issues  can  be  decided only  by  civil  court  on  the  appreciation  of  the voluminous evidence that needs to be produced, the Court  can  sidetrack  the  agreement  by  dismissing application under Section 8 and proceed with the suit

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CIVIL APPEAL NO. 7005 OF 2019 (Arising out of SLP (C) No. 4061 of 2019)

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 fora, are better suited than a private forum of arbitration. Therefore, the inquiry of the Court, while dealing with an application under Section 8 of the  Act,  should  be  on  the  aforesaid  aspect,  viz. whether the nature of dispute is such that it cannot be  referred  to  arbitration,  even  if  there  is  an arbitration agreement between the parties. When the case of fraud is set up by one of the parties and on that basis that party wants to wriggle out of that arbitration  agreement,  a  strict  and  meticulous inquiry into the allegations of fraud is needed and only when the Court is satisfied that the allegations are of serious and complicated nature that it would be more appropriate for the Court to deal with the subject matter rather than relegating the parties to arbitration,  then  alone  such  an  application  under Section 8 should be rejected.   

The principles of law laid down in this appeal make a

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CIVIL APPEAL NO. 7005 OF 2019 (Arising out of SLP (C) No. 4061 of 2019)

distinction  between  serious  allegations  of

forgery/fabrication  in  support  of  the  plea  of  fraud  as

opposed to  “simple allegations”.   Two  working tests  laid

down in paragraph 25 are : (1) does this plea permeate the

entire contract and above all, the agreement of arbitration,

rendering it void, or (2) whether the allegations of fraud

touch  upon  the  internal  affairs  of  the  parties  inter  se

having no implication in the public domain.   

Judged by these two tests, it is clear that this is a

case  which  falls  on  the  side  of  “simple  allegations”  as

there  is  no  allegation  of  fraud  which  would  vitiate  the

partnership  deed  as  a  whole  or,  in  particular,  the

arbitration clause concerned in the said deed.  Secondly,

all the allegations made which have been relied upon by the

learned  counsel  appearing  on  behalf  of  the  respondent,

pertain to the affairs of the partnership and siphoning of

funds therefrom and not to any matter in the public domain.

This  being  the  case,  we  are  of  the  view  that  the

disputes  raised  between  the  parties  are  arbitrable  and,

hence, a Section 11 application under the Arbitration Act

would be maintainable.   

The  Judgment  under  appeal  is  set  aside.   With  the

consent of the parties, we appoint Justice Amareshwar Sahay,

Retired Jugde of the Jharkhand High Court to be the sole

arbitrator to resolve all disputes between the parties.

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CIVIL APPEAL NO. 7005 OF 2019 (Arising out of SLP (C) No. 4061 of 2019)

Nothing  said  in  our  judgment  will  affect  the

investigation that is being conducted pursuant to the FIR.

The appeal stands disposed of.

…………………………………………………………………., J. [ ROHINTON FALI NARIMAN ]

…………………………………………………………………., J. [ R. SUBHASH REDDY ]

…………………………………………………………………., J. [ SURYA KANT ]

New Delhi; September 04, 2019.

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