Now let’s take up a private arbitration dispute matter which is that of Rashid Raza v. Sadaf Akhtar, (2019) 8 SCC 710—which is a 2019 SC case.

BRIEF FACTS:

The brief facts of this case are: 

A dispute arose out of a partnership in which an FIR was lodged by one of the partners alleging siphoning of funds and various other business improprieties that were committed by the other party. While the FIR was under investigation, the appellant filed an arbitration petition under Section 11 of the Arbitration & Conciliation Act before the High Court, seeking appointment of an arbitrator under the Arbitration clause which was found in their partnership deed between those parties. Relying on the case of A. Ayyasamy v. Paramasivam and Others’, (2016) 10 SCC 386—which is a 2016 case, the citation of which I have provided here, the High Court dismissed the application on the ground that the nature of the dispute involving serious allegations of fraud of complicated nature are not fit to be decided in any arbitration proceedings.

Hence, this appeal was filed.

ISSUES:

Now let’s take up the issue in this case. Whether an allegation of fraud can be decided through arbitration proceedings?

HELD:

The Supreme Court was of the opinion that mere allegation of fraud simpliciter 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 a 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 side track the agreement by dismissing application under Section 8 and proceed with the suit on merits.

The Court relied on the two working tests laid down in paragraph 25 in the A. Ayyasamy’s case, which are as follows:

(1) does this plea permeate the entire contract and above all, the agreement of arbitration, rendering it void, and

(2) whether the allegations of fraud touches upon the internal affairs of the parties inter se having no implication in the public domain.

The Court, in the present case, made a distinction between serious allegations of forgery/fabrication in support of the plea of fraud as opposed to “simple allegations”.

It was further held that the case 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 partnership deed. Also, since the allegations made pertain to the affairs of the partnership and siphoning of internal funds and not to any matter in the public domain, the dispute can be referred to arbitration proceedings.

RATIO:

Now if I derive the ratio—Mere allegation of simple or plain fraud are not sufficient to nullify an arbitration agreement.

A two working test has been followed: (a) whether the plea of fraud permeates the entire contract rendering it void and (b) whether the allegations of fraud touch upon the internal affairs of the parties, inter se having no implication in the public domain.