Fraud allegation cannot nullify arbitration agreement

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In a recent judgment, the Supreme Court held that the mere allegation of simple or plain fraud may not be a ground to nullify the effect of an arbitration agreement between the parties.

In the Rashid Raza v Sadaf Akhtar case, the court was hearing an appeal filed against the judgment passed by the Jharkhand High Court, which had refused a plea seeking appointment of an arbitrator by one partner, taking note that a first information report (FIR) lodged by some other partners alleging siphoning of funds and various other business improprieties, is presently under investigation. The high court had cited judgment in A Ayyasamy v A Paramasivam and Others (2016) to rule that disputes involving serious allegations of fraud of a complicated nature are not fit to be decided in arbitration proceedings.

In the subsequent appeal, the Supreme Court observed that two tests had been laid down in the A. Ayyasamy judgment, which are: (1) does the 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.

In reference to the two tests, the bench said: “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 that would vitiate the partnership deed as a whole or, in particular, the arbitration clause concerned in the said deed. Secondly, all the allegations made that 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.”

Holding that the disputes raised between the parties in this case are arbitrable, the Supreme Court set aside the judgment of the high court while holding that a section 11 application under the Arbitration and Conciliation Act, 1996, would be maintainable, and appointed a retired judge of Jharkhand High Court as an arbitrator.

The dispute digest is compiled by Bhasin & Co, a corporate law firm based in New Delhi. The authors can be contacted at [email protected]. Readers should not act on the basis of this information without seeking professional legal advice.