RASHID RAZA versus SADAF AKHTAR

[2019] 12 S.C.R. 460

[2019] 12 S.C.R.

RASHID RAZA

SADAF AKHTAR

(Civil Appeal No. 7005 of 2019)

BSEPTEMBER 04, 2019

[R. F. NARIMAN, R.SUBHASH REDDY AND

SURYA KANT, JJ.]

Arbitration and Conciliation Act, 1996: s. 11 – AppointmentCof arbitrator – Partnership deed between the parties – Partnershipdispute – FIR by one of the partners alleging siphoning of fundsand various business improprieties – Application u/s. 11 forappointment of arbitrator under the arbitration clause – Dismissalof the application – On appeal, held: There is distinction betweenserious allegations of forgery/fabrication in support of the plea ofDfraud as opposed to “simple allegations” – Two working tests arewhether the plea permeate the entire contract and above all, theagreement of arbitration, rendering it void, or whether theallegations of fraud touch upon the internal affairs of the partiesinter se having no implication in the public domain – In view thereof,Ein the instant case there are simple allegations since there is noallegation of fraud which would vitiate the partnership deed as awhole or, in particular, the arbitration clause concerned in the saiddeed – All the allegations pertain to the affairs of the partnershipand siphoning of funds therefrom and not to any matter in the publicdomain – Thus, the disputes raised between the parties are arbitrableFand, hence, s. 11 application is maintainable.

A. Ayyasamy v. A. Paramasivam and Others (2016) 10SCC 386 : [2016] 11 SCR 521 – relied on.

Case Law Reference

G[2016] 11 SCR 521relied onPara 5, 6

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 7005of 2019.

From the Judgment and Order dated 06.12.2018 of the High Courtof Jharkhand at Ranchi in Arbitration Application No. 1 of 2018.H

Shivam Singh, Animesh Kumar, Neeraj Shekhar, Shadab Eqbal,Sumit Kumar, Ms. Ekta Bharati, Murari Kumar, Advs. for the Appellant.

Shree Prakash Sinha, Rishi Pallav, Rakesh Mishra, Ms. MarinaWheeler, Ms. Mohua Sinha, Shekhar Kumar, Advs. for the Respondent.

The Judgment of the Court was delivered by

R. F. NARIMAN, J.

1. The present case arises out of partnership dispute in whichan FIR dated 17.11.2017 was lodged by one of the partners allegingsiphoning of funds and various other business improprieties that werecommitted. The FIR is at present under investigation.

2. An Arbitration Petition dated 02.01.2018 was filed by theappellant before the High Court under Section 11 of the Arbitration andConciliation Act, 1996, seeking appointment of an Arbitrator under theArbitration clause which is to be found in the partnership deed betweenthe parties which is dated 30.01.2015. The High Court, by the impugnedorder dated 06.12.2018, has cited our judgment in ‘A. Ayyasamy v. A.Paramasivam and Others’ [(2016) 10 SCC 386] and after extractingparagraph 26 from the said judgment has held:

“…….The allegation of fraud that was levelled against theappellant was that he had signed and issued cheque ofRs.10,00,050 on 17[th] June, 2010 of Hotel Arunagiri in favour ofhis son without the knowledge and consent of the other partnersi.e. respondents. It was mere matter of account which could belooked into and found out even by the arbitrator. The facts of theinstant case however are much more complex as the materials onrecords disclose. This Court however does not intend to makeany comments on the merits of the allegations lest it may prejudicethe case of the parties in an appropriate proceeding beforecompetent court. However, considered in totality this Court is ofthe firm view that the nature of the dispute involving seriousallegations of fraud of complicated nature are not fit to be decidedin an arbitration proceedings. The dispute may require voluminousevidence on the part of both the parties to come to finding whichcan be only properly undertaken by civil court of competentjurisdiction.”

A3. Consequently, while purportedly following this judgment, theSection 11 application was dismissed.

4. Having heard learned counsel for both the sides, it is clear thatthe law laid down in A. Ayyasamy’s case is in paragraph 25 and not inparagraph 26. Paragraph 25 of the said judgment states as follows:

25. In view of our aforesaid discussions, we are of the opinionthat mere allegation of fraud simplicitor may not be ground tonullify the effect of arbitration agreement between the parties. Itis only in those cases where the Court, while dealing with Section8 of the Act, finds that there are very serious allegations of fraudwhich make virtual case of criminal offence or where allegationsof fraud are so complicated that it becomes absolutely essentialthat such complex issues can be decided only by civil court on theappreciation of the voluminous evidence that needs to be produced,the Court can sidetrack the agreement by dismissing applicationunder Section 8 and proceed with the suit on merits. It can be sodone also in those cases where there are serious allegations offorgery/fabrication of documents in support of the plea of fraudor where fraud is alleged against the arbitration provision itself oris of such nature that permeates the entire contract, includingthe agreement to arbitrate, meaning thereby in those cases wherefraud goes to the validity of the contract itself of the entire contractwhich contains the arbitration clause or the validity of the arbitrationclause itself. Reverse position thereof would be that where thereare simple allegations of fraud touching upon the internal affairsof the party inter se and it has no implication in the public domain,the arbitration clause need not be avoided and the parties can berelegated to arbitration. While dealing with such an issue in anapplication under Section 8 of the Act, the focus of the Court hasto be on the question as to whether jurisdiction of the Court hasbeen ousted instead of focusing on the issue as to whether theCourt has jurisdiction or not. It has to be kept in mind that insofaras the statutory scheme of the Act is concerned, it does notspecifically exclude any category of cases as non-arbitrable. Suchcategories 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 adjudicationand settlement by arbitration and for resolution of such disputes,Courts, i.e. public fora, are better suited than private forum ofarbitration. Therefore, the inquiry of the Court, while dealing withan application under Section 8 of the Act, should be on the aforesaidaspect, viz. whether the nature of dispute is such that it cannot bereferred to arbitration, even if there is an arbitration agreementbetween the parties. When the case of fraud is set up by one ofthe parties and on that basis that party wants to wriggle out ofthat arbitration agreement, strict and meticulous inquiry into theallegations of fraud is needed and only when the Court is satisfiedthat the allegations are of serious and complicated nature that itwould be more appropriate for the Court to deal with the subjectmatter rather than relegating the parties to arbitration, then alonesuch an application under Section 8 should be rejected.

5. The principles of law laid down in this appeal make distinctionbetween serious allegations of forgery/fabrication in support of the pleaof fraud as opposed to “simple allegations”. Two working tests laiddown in paragraph 25 are : (1) does this plea permeate the entire contractand above all, the agreement of arbitration, rendering it void, or (2) whetherthe allegations of fraud touch upon the internal affairs of the parties interse having no implication in the public domain.

6. Judged by these two tests, it is clear that this is case whichfalls on the side of “simple allegations” as there is no allegation of fraudwhich would vitiate the partnership deed as whole or, in particular, thearbitration clause concerned in the said deed. Secondly, all the allegationsmade which have been relied upon by the learned counsel appearing onbehalf of the respondent, pertain to the affairs of the partnership andsiphoning of funds therefrom and not to any matter in the public domain.

7. This being the case, we are of the view that the disputes raisedbetween the parties are arbitrable and, hence, Section 11 applicationunder the Arbitration Act would be maintainable.

8. The Judgment under appeal is set aside. With the consent ofthe parties, we appoint Justice Amareshwar Sahay, Retired Jugde of theJharkhand High Court to be the sole arbitrator to resolve all disputesbetween the parties.

464SUPREME COURT REPORTS[2019] 12 S.C.R.

A9. Nothing said in our judgment will affect the investigation that is

being conducted pursuant to the FIR.

20. The appeal stands disposed of.

Nidhi JainB

Appeal disposed of.