- Bench: Justices A.K. Sikri, D.Y. Chandrachud
- Appellant: A. Ayyasamy
- Respondent: A. Paramasivam & Ors
Issue
· What are the distinctions between simple allegations and allegations which "demand extensive evidence" and were mere "complex in nature" with reference to the arbitrability of fraud claims?
· Under what conditions would fraud be considered as arbitrable?
Facts
· The respondents entered into a partnership deed with the appellant for running the hotel and further filed an injunction before a civil court preventing the appellant from managing the affairs of the enterprise.
· The appellant filed for the appointment of an arbitrator under Section 8 of the Arbitration and Conciliation Act, 1996. This application was resisted by the respondent by submitting that 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.
· The trial court, however, dismissed the application by the appellant and relied upon the judgement in N.Radhakrishnan case. It was further taken to HC were it was set aside again.
Appellant's Contentions
· The appellant contended that since there existed a valid arbitration agreement between the parties, as per Section 8 of the Act, the matter must be referred to an arbitral tribunal by the civil court.
· The Appellant also urged the civil court to follow the ratio laid down in the Swiss Timing case and thus hold that the matter was arbitrable
Respondent's Contentions:
· The respondent's argued that matters of fraud are not arbitrable and that the civil court was the right authority in deciding the matter.
· It alleged the appellant of fraud and argued that allegations of fraud were enough for the Court to decide on arbitral proceedings.
· It relied its arguments on the Radhakrishnan case thereby submitting the need for avoiding or nullifying the involvement of the arbitral process.
Judgement
The SC attempted to strike a balance in the considerations of arbitrability of fraud and held that while matters that involved allegations of "serious fraud" would not be arbitrable, matters that had "mere allegations" of fraud were arbitrable.
In the present case, the matter was referred to arbitration as the fraud claims were deemed to be " not so serious which cannot be taken care of by the arbitrator".
Relevant paragraphs
"Hence, it is necessary to emphasise that as a matter of the 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 to determine 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.
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