Monday, 17 October 2016

Whether Mere allegation of fraud will nullify arbitration agreement?


 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.
REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NOS. 8245-8246 OF 2016
A. AYYASAMY
VERSUS
A. PARAMASIVAM & ORS. 
Dated:October 04, 2016
Citation: 2016 SCCONLINE 1110,AIR 2016 SC 4675


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 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
1 (2010) 1 SCC 72
2 (2014) 6 SCC 677

this Court under Section 11 of the Act whereas judgment in N.
Radhakrishnan is rendered by a Division Bench of two Hon.
Judges of this Court, which is binding on the High Court.
Whether the aforesaid view of the High Court in following
the dicta laid down in the case of N. Radhakrishnan, in the facts
of this case, is correct or not, is the question that needs
determination in the instant appeal.
4. Seminal facts in the context in which the issue falls for
determination have already been taken note of above. However,
few more facts need to be added to the aforesaid chronology,
particularly, the nature of plea of fraud taken in the suit filed by the
respondents.
The respondents are four in number who are brothers of the
appellant. These five brothers are the partners. Their father A.
Arunagiri was also a partner along with them who died on
28.04.2009. These six partners had 1/6th share each in the
partnership business. Disputes arose between the brothers after
the demise of their father. It is the allegation of the respondents,
as contained in the plaint, that the subject matter of the suit 'Hotel
Arunagiri' was managed and administered by their father in a

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.”
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
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
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
3 (2012) 5 SCC 214

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

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.

10. 'Fraud' is a knowing misrepresentation of the truth or
concealment of a material fact to induce another to act to his
detriment. Fraud can be of diffeent forms and hues. Its
ingredients are an intention to deceive, use of unfair means,
deliberate concealment of material facts, or abuse of position of
confidence. The Black's Law Dictionary defines 'fraud' as a
concealment or false representation through a statement or
conduct that injures another who relies on 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 issued by
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

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.

13. When the case involves serious allegations of fraud, the dicta
contained in the aforesaid judgments would be understandable.
However, at the same time, mere allegation of fraud in the
pleadings by one party against the other cannot be a ground to
hold that the matter is incapable of settlement by arbitration and
should be decided by the civil court. The allegations of fraud
should be such that not only these allegations are serious that in
normal course these may even constitute criminal offence, they
are also complex in nature and the decision on these issues
demand extensive evidence for which civil court should appear to
be more appropriate forum than the Arbitral Tribunal. Otherwise,
it may become a convenient mode of avoiding the process of
arbitration by simply using the device of making allegations of
fraud and pleading that issue of fraud needs to be decided by the
civil court. The judgment in N. Radhakrishnan does not touch
upon this aspect and said decision is rendered after finding that
allegations of fraud were of serious nature.
14. As noted above, in Swiss Timing Ltd. case, single Judge of this
Court while dealing with the same issue in an application under
Section 11 of the Act treated the judgment in N. Radhakrishnan
as per incuriam by referring to the other judgments in the case of

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
was, in the context of Section 8 of the Act, as to whether the
subject matter of the suit was 'arbitrable' i.e. capable of being
8 (2000) 4 SCC 539
9 (2003) 6 SCC 503
10 (2011) 5 SCC 532

adjudicated by a private forum (Arbitral Tribunal). In this context,
the Court carried out detailed discussion on the term 'arbitrability'
by pointing out three facets thereof, viz.:
1) whether the disputes are capable of adjudication and settlement
by arbitration?
2) whether the disputes are covered by the arbitration agreement?
3) whether the parties have referred the disputes to arbitration?
16. As we are concerned with the first facet of the arbitrability of
dispute, on this aspect the Court pointed out that in those cases
where the subject matter falls exclusively within the domain of
public fora, viz. the Courts, such disputes would be non-arbitrable
and cannot be decided by the Arbitral Tribunal but by the Courts
alone. The justification and rationale given for adjudicating such
disputes through the process of Courts, i.e. public fora, and not by
Arbitral Tribunals, which is a private forum, is given by the court in
the following manner:
“35. The Arbitral Tribunals are private fora
chosen voluntarily by the parties to the dispute,
to adjudicate their disputes in place of courts and
tribunals which are public fora constituted under
the laws of the country. Every civil or commercial
dispute, either contractual or non-contractual,
which can be decided by a court, is in principle

capable of being adjudicated and resolved by
arbitration unless the jurisdiction of the Arbitral
Tribunals is excluded either expressly or by
necessary implication. Adjudication of certain
categories of proceedings are reserved by the
legislature exclusively for public fora as a matter
of public policy. Certain other categories of
cases, though not expressly reserved for
adjudication by public fora (courts and tribunals),
may by necessary implication stand excluded
from the purview of private fora. Consequently,
where the cause/dispute is inarbitrable, the court
where a suit is pending, will refuse to refer the
parties to arbitration, under Section 8 of the Act,
even if the parties might have agreed upon
arbitration as the forum for settlement of such
disputes.
36. The well-recognised examples of
non-arbitrable disputes are: (i) disputes relating
to rights and liabilities which give rise to or arise
out of criminal offences; (ii) matrimonial disputes
relating to divorce, judicial separation, restitution
of conjugal rights, child custody; (iii) guardianship
matters; (iv) insolvency and winding-up matters;
(v) testamentary matters (grant of probate, letters
of administration and succession certificate); and
(vi) eviction or tenancy matters governed by
special statutes where the tenant enjoys
statutory protection against eviction and only the
specified courts are conferred jurisdiction to
grant eviction or decide the disputes.
37. It may be noticed that the cases referred to
above relate to actions in rem. A right in rem is a
right exercisable against the world at large, as
contrasted from a right in personam which is an
interest protected solely against specific
individuals. Actions in personam refer to actions
determining the rights and interests of the parties
themselves in the subject-matter of the case,
whereas actions in rem refer to actions
determining the title to property and the rights of
the parties, not merely among themselves but

also against all persons at any time claiming an
interest in that property. Correspondingly, a
judgment in personam refers to a judgment
against a person as distinguished from a
judgment against a thing, right or status and a
judgment in rem refers to a judgment that
determines the status or condition of property
which operates directly on the property itself.
(Vide Black's Law Dictionary.)
38. Generally and traditionally all disputes
relating to rights in personam are considered to
be amenable to arbitration; and all disputes
relating to rights in rem are required to be
adjudicated by courts and public tribunals, being
unsuited for private arbitration. This is not
however a rigid or inflexible rule. Disputes
relating to subordinate rights in personam arising
from rights in rem have always been considered
to be arbitrable.”
17. The Law Commission has taken note of the fact that there is
divergence of views between the different High Courts where two
views have been expressed, one is in favor of the civil court
having jurisdiction in cases of serious fraud and the other view
encompasses that even in cases of serious fraud, the Arbitral
Tribunal will rule on its own jurisdiction. It may be pertinent here to
reproduce the observations of the Law Commission as contained
in paragraphs 50 & 51 of the 246th Law Commission Report,
which are as under:
““50. The issue of arbitrability of fraud has arisen on

numerous occasions and there exist conflicting
decisions of the Apex Court on this issue. While it
has been held in Bharat Rasiklalv. Gautam Rasiklal,
(2012) 2 SCC 144 that when fraud is of such a
nature that it vitiates the arbitration agreement, it is
for the Court to decide on the validity of the
arbitration agreement by determining the issue of
fraud, there exists two parallel lines of judgments
on the issue of whether an issue of fraud is
arbitrable. In this context, a 2 judge bench of the
Supreme Court, while adjudicating on an
application under section 8 of the Act, in
Radhakrishnan v. Maestro Engineers, 2010 1 SCC
72 held that an issue of 28 fraud is not arbitrable.
This decision was ostensibly based on the decision
of the three judge bench of the Supreme Court in
Abdul Qadir v. Madhav Prabhakar, AIR 1962 SC
406. However, the said 3 judge bench decision
(which was based on the finding in Russel v.
Russel [1880 14 Ch.D 471]) is only an authority
for the proposition that a party against whom an
allegation of fraud is made in a public forum, has a
right to defend himself in that public forum. Yet,
following Radhakrishnan, it appears that issues of
fraud are not arbitrable.
51. A distinction has also been made by certain
High Courts between a serious issue of fraud and a
mere allegation of fraud and the former has been
held to be not arbitrable (SeeIvory Properties and
Hotels Private Ltd v. Nusli Neville Wadia, 2011 (2)
Arb LR 479 (Bom); CS Ravishankar v. CK
Ravishankar, 2011 (6) Kar LJ 417). The Supreme
Court in Meguin GMBH v. Nandan Petrochem Ltd.,
2007 (5) R.A.J 239 (SC), in the context of an
application filed under section 11 has gone ahead
and appointed an arbitrator even though issues of
fraud were involved. Recently, the Supreme Court
in its judgment in Swiss Timing Ltd v. Organising
Committee, Arb. Pet. No. 34/2013 dated
28.05.2014, in a similar case of exercising
jurisdiction under section 11, held that the judgment
in Radhakrishnan is per incuriam and, therefore,
not good law.”

18. A perusal of the aforesaid two paragraphs brings into fore that the
Law Commission has recognized that in cases of serious fraud,
courts have entertained civil suits. Secondly, it has tried to make a
distinction in cases where there are allegations of serious fraud
and fraud simplicitor. It, thus, follows that those cases where
there are serious allegations of fraud, they are to be treated as
non-arbitrable and it is only the civil court which should decide
such matters. However, where there are allegations of fraud
simplicitor and such allegations are merely alleged, we are of the
opinion it may not be necessary to nullify the effect of the
arbitration agreement between the parties as such issues can be
determined by the Arbitral Tribunal.
19. Before we apply the aforesaid test to the facts of the present
case, a word on the observations in Swiss Timing Ltd.'s case to
the effect that judgment of N. Radhakrishnan was per incuriam,
is warranted. In fact, we do not have to labour on this aspect as
this task is already undertaken by this Court in State of West
Bengal & Ors. v. Associated Contractors11. It has been clarified
in the aforesaid case that Swiss Timings Ltd. was a judgment
11 (2015) 1 SCC 32

rendered while dealing with Section 11(6) of the Act and Section
11 essentially confers power on the Chief Judge of India or the
Chief Justice of the High Court as a designate to appoint an
arbitrator, which power has been exercised by another Hon'ble
Judge as a delegate of the Chief Justice. This power of
appointment of an arbitrator under Section 11 by the Court,
notwithstanding the fact that it has been held in SBP & Co. v.
Patel Engineering Ltd. & Anr.12 as a judicial power, cannot be
deemed to have precedential value and, therefore, it cannot be
deemed to have overruled the proposition of law laid down in
N.Radhakrishnan.
20. In view of our aforesaid discussions, we are of the opinion that
mere allegation of fraud simplicitor may not be a ground to nullify
the effect of arbitration agreement between the parties. It is only
in those cases where the Court, while dealing with Section 8 of
the Act, finds that there are very serious allegations of fraud which
make a virtual case of criminal offence or where allegations of
fraud are so complicated that it becomes absolutely essential that
such complex issues can be decided only by civil court on the
appreciation of the voluminous evidence that needs to be
12 (2005) 8 SCC 618

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.
21. When we apply the aforesaid principles to the facts of this case,
we find that the only allegation of fraud that is levelled is that the
appellant had signed and issued a cheque of Rs. 10,00,050/-
dated 17.06.2010 of 'Hotel Arunagiri' in favour of his son without

the knowledge and consent of the other partners i.e. the
respondents. It is a mere matter of accounts which can be looked
into and found out even by the arbitrator. It does not involve any
complex issue. If such a cheque is issued from the hotel account
by the appellant in favour of his son, it is easy to prove the same
and then the onus is upon the appellant to show as to what was
the reason for giving that amount from the partnership firm to his
son and he will have to account for the same. Likewise, the
allegation of the respondents that daily collections are not
deposited in the bank accounts is to be proved by the
respondents which is again a matter of accounts.
Other allegation, which appears to be serious, is about the C.B.I.
raid at the house of Dhanapalraj from where cash in the sum of
Rs.45 lakhs was seized. Interestingly, though the appellant has
taken the position that this cash belongs to 'Hotel Arunagiri', they
are the respondents who have themselves alleged that the money
belonged to Dhanapalraj and not to 'Hotel Arunagiri'. In view of
the aforesaid stand taken by the respondents/plaintiffs
themselves, this issue does not fall for consideration and,
therefore, is not to be gone by the Arbitral Tribunal.

22. We, therefore, are of the opinion that the allegations of purported
fraud were not so serious which cannot be taken care of by the
arbitrator. The Courts below, therefore, fell in error in rejecting the
application of the appellant under Section 8 of the Act. Reversing
these judgments, we allow this appeal and as a consequence,
application filed by the appellant under Section 8 in the suit is
allowed thereby relegating the parties to the arbitration.
23. At the same time, in order to save the time and having regard to
the nature of the dispute, this Court appoints Hon'ble Ms. Justice
Prabha Sridevan, a retired Judge of the Madras High Court, as
the arbitrator. The arbitrator shall fix her own fee.
No costs.
.............................................J.
(A.K. SIKRI)
.............................................J.
(DR. D.Y. CHANDRACHUD)
NEW DELHI;
OCTOBER 04, 2016.

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

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;
13
(2011) 5 SCC 532

(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

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

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
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 Engineers19, arose out of a partnership dispute. A suit was
17
(2012) 2 SCC 506
18
(2015 )1 WBLR (SC) 385
19

instituted before the civil court for declaratory and injunctive reliefs. An
application under Section 8 of the Act of 1996 was rejected by the trial court
and the order of rejection was affirmed in revision by the High Court. The
submission of the appellant that the dispute between the partners ought to have
been referred to arbitration was met with the objection that the appellant having
raised issues relating to misappropriation of funds and malpractices, these were
matters which ought to be resolved by a civil court. Affirming the judgment
of the High Court, a Bench of two judges of this Court held as follows:
“The High Court in its impugned judgment has rightly
held that since the case relates to allegations of fraud
and serious malpractices on the part of the
respondents, such a situation can only be settled in
court through furtherance of detailed evidence by
either parties and such a situation cannot be properly
gone into by the Arbitrator. “ (I.d. at p. 7)
The judgment accepted the submission of the respondent that the appellant
having raised serious matters alleging criminal wrongdoing, such disputes
ought to be adjudicated upon by the civil court:
“The learned counsel appearing on behalf of the
respondents on the other hand contended that the
appellant had made serious allegations against the
respondents alleging that they had manipulated the
accounts and defrauded the appellant by cheating the
appellant of his dues, thereby warning the respondents
with serious criminal action against them for the
alleged commission of criminal offences. In this
connection, reliance was placed in a decision of this
Court in the case of Abdul Kadir Shamsuddin
(2010) 1 SCC 72

Bubere vs. Madhav Prabhakar Oak and Another,
[AIR 1962 SC 406] in which this Court under para 17
held as under:
“There is no doubt that where serious allegations
of fraud are made against a party and the party
who is charged with fraud desires that the matter
should be tried in open court, that would be a
sufficient cause for the court not to order an
arbitration agreement to be filed and not to make
the reference….”
In our view and relying on the aforesaid observations
of this Court in the aforesaid decision and going by
the ratio of the above mentioned case, the facts of the
present case does not warrant the matter to be tried
and decided by the Arbitrator, rather for the
furtherance of justice, it should be tried in a court of
law which would be more competent and have the
means to decide such a complicated matter involving
various questions and issues raised in the present
dispute.”
The above extract from the judgment in N. Radhakrishnan relies extensively
on the view propounded in Abdul Kadir (supra). The decision in Abdul
Kadir arose under the Arbitration Act, 1940 and was in the context of the
provisions of Section 20. In Abdul Kadir, this Court emphasized that
sub-Section (4) of Section 20 of the Arbitration Act, 1940 left a wide discretion
in the court. In contrast, the scheme of the Act of 1996 has made a radical
departure from the position under the erstwhile enactment. A marked
distinction is made in Section 8 where no option has been left to the judicial
authority but to refer parties to arbitration. Abdul Kadir explains the position
under the Arbitration Act, 1940. The present legislation on the subject

embodies a conscious departure which is intended to strengthen the efficacy of
arbitration.
11 In P. Anand Gajapathi Raju v. P.V.G. Raju (Dead)20, this Court held
that the language of Section 8 is peremptory in nature. Hence, where there is
an arbitration agreement, it is obligatory for the court to refer parties to
arbitration and nothing remains to be decided in the original action after such
an application is made, except to refer the dispute to an arbitrator. The
judgment in Abdul Kadir came up for consideration before a Bench of two
learned judges in Hindustan Petroleum Corporation Ltd. v. Pinkcity
Midway 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
20
(2000) 4 SCC 539
21
(2003) 6 SCC 503

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. 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
22
 AIR 2015 1303
23
 (2009) 10 SCC 103

would only delay the resolution of disputes and
complicate the redressal of grievances and of course
unnecessarily increase the pendency in the court.” (Id.
at p. 15)
14 The position that emerges both before and after the decision in
N. Radhakrishnan is that successive decisions of this Court have given effect
to the binding precept incorporated in Section 8. Once there is an arbitration
agreement between the parties, a judicial authority before whom an action is
brought covering the subject matter of the arbitration agreement is under a
positive obligation to refer parties to arbitration by enforcing the terms of the
contract. There is no element of discretion left in the court or judicial authority
to obviate the legislative mandate of compelling parties to seek recourse to
arbitration. The judgment in N. Radhakrishnan has, however, been utilised
by parties seeking a convenient ruse to avoid arbitration to raise a defence of
fraud. First and foremost, it is necessary to emphasise that the judgment in N.
Radhakrishnan does not subscribe to the broad proposition that a mere
allegation of fraud is ground enough not to compel parties to abide by their
agreement to refer disputes to arbitration. More often than not, a bogey of
fraud is set forth if only to plead that the dispute cannot be arbitrated upon. To
allow such a plea would be a plain misreading of the judgment in N.
Radhakrishnan. As I have noted earlier, that was a case where the appellant
who had filed an application under Section 8 faced with a suit on a dispute in
partnership had raised serious issues of criminal wrongdoing, misappropriation

of funds and malpractice on the part of the respondent. It was in this
background that this Court accepted the submission of the respondent that the
arbitrator would not be competent to deal with matters “which involved an
elaborate production of evidence to establish the claims relating to fraud
and criminal misappropriation”. Hence, it is necessary to emphasise that as
a matter of first principle, this Court has not held that a mere allegation of
fraud will exclude arbitrability. The burden must lie heavily on a party which
avoids compliance with the obligation assumed by it to submit disputes to
arbitration to establish the dispute is not arbitrable under the law for the time
being in force. In each such case where an objection on the ground of fraud
and criminal wrongdoing is raised, it is for the judicial authority to carefully
sift through the materials for the purpose of determining whether the defence is
merely a pretext to avoid arbitration. It is only where there is a serious issue of
fraud involving criminal wrongdoing that the exception to arbitrability carved
out in N. Radhakrishnan may come into existence. Allegations of fraud are
not alien to ordinary civil courts. Generations of judges have dealt with such
allegations in the context of civil and commercial disputes. If an allegation of
fraud can be adjudicated upon in the course of a trial before an ordinary civil
court, there is no reason or justification to exclude such disputes from the
ambit and purview of a claim in arbitration. Parties who enter into commercial
dealings and agree to a resolution of disputes by an arbitral forum exercise an
option and express a choice of a preferred mode for the resolution of their

disputes. Parties in choosing arbitration place priority upon the speed,
flexibility and expertise inherent in arbitral adjudication. Once parties have
agreed to refer disputes to arbitration, the court must plainly discourage and
discountenance litigative strategies designed to avoid recourse to arbitration.
Any other approach would seriously place in uncertainty the institutional
efficacy of arbitration. Such a consequence must be eschewed.
15 The position as it obtains in other jurisdictions which value arbitration as
an effective form of alternate dispute resolution is no different. In the UK,
Section 24(2) of the Arbitration Act, 1950 provided that the court could revoke
the authority of a tribunal to deal with claims involving issues of fraud and
determine those claims itself. The English Act of 1979 provided for a stay of
proceedings involving allegations of fraud. However, under the English
Arbitration Act, 1996, there is no such restriction and the arbitral tribunal has
jurisdiction to consider and rule on issues of fraud. In Fiona Trust and
Holding Corporation v. Yuri 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
24
 [2007] 1 All E R (COMM) 891

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. Ltd25
.
The House of Lords held that claims of fraudulent inducement of the
25
[2007] UKHL 40

underlying contract (i.e. alleged bribery of one party’s officer to accept
uncommercial terms) did not impeach the arbitration clause contained within
that contract. The Law Lords reasoned that “if (as in this case) the allegation is
that the agent exceeded his authority by entering into a main agreement in
terms which were not authorized or for improper reasons, that is not
necessarily an attack on the arbitration agreement”. They went on to conclude
that, “the principle of separability…means that the invalidity or rescission of
the main contract does not necessarily entail the invalidity or rescission of the
arbitration agreement. The arbitration must be treated as a ‘distinct agreement’
and can be void or voidable only on grounds which relate directly to the
arbitration agreement.”
16 The basic principle which must guide judicial decision making is that
arbitration is essentially a voluntary assumption of an obligation by contracting
parties to resolve their disputes through a private tribunal. The intent of the
parties is expressed in the terms of their agreement. Where commercial
entities and persons of business enter into such dealings, they do so with a
knowledge of the efficacy of the arbitral process. The commercial
understanding is reflected in the terms of the agreement between the parties.
The duty of the court is to impart to that commercial understanding a sense of
business efficacy.

17 Lord Hoffmann, speaking for the House of Lords in Premium Nafta
Products, placed the matter eloquently in the following observations:
“In approaching the question of construction, it is
therefore necessary to inquire into the purpose of the
arbitration clause. As to this, I think there can be no
doubt. The parties have entered into a relationship, an
agreement or what is alleged to be an agreement or
what appears on its face to be an agreement, which
may give rise to disputes. They want those disputes
decided by a tribunal which they have chosen,
commonly on the grounds of such matters as its
neutrality, expertise and privacy, the availability of
legal services at the seat of the arbitration and the
unobtrusive efficiency of its supervisory law.
Particularly in the case of international contracts, they
want a quick and efficient adjudication and do not
want to take the risks of delay and, in too many cases,
partiality, in proceedings before a national
jurisdiction”.
18 Lord Hoffmann held that if this is the purpose underlying an agreement
to arbitrate, it would be inconceivable that parties would have intended that
some, amongst their disputes should first be resolved by a court before they
proceed to arbitration:
“If one accepts that this is the purpose of an
arbitration clause, its construction must be influenced
by whether the parties, as rational businessmen, were
likely to have intended that only some of the
questions arising out of their relationship were to be
submitted to arbitration and others were to be decided
by national courts. Could they have intended that the
question of whether the contract was repudiated
should be decided by arbitration but the question of
whether it was induced by misrepresentation should
be decided by a court? If, as appears to be generally
accepted, there is no rational basis upon which

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

agreement. Parties having agreed to refer disputes to arbitration, the plain
meaning and effect of Section 8 must ensue.
19 In the United States, the Supreme Court in Buckeye Check Cashing,
Inc. v. 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”.
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)

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 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
29
 (24th Edition, 2015, para 2-007)

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 Arbitration30
contains the following statement of legal position in relation to arbitrability of
matters involving fraud:-
30
(6th Edition para 2.154)

“(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 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
31
(2nd Edition Vol. I, P.846)
32
(2nd Edition p.179)

present case was not sufficient to detract from the obligation of the parties to
submit their disputes to arbitration. I also agree with the directions issued. A
fresh line must be drawn to ensure the fulfilment of the intent of Parliament in
enacting the Act of 1996 and towards supporting commercial understandings
grounded in the faith in arbitration.
 .......................................J
 [Dr D Y CHANDRACHUD]
New Delhi
October 04, 2016

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