Case Note & Summary
The present case arises out of a partnership dispute between Rashid Raza (appellant) and Sadaf Akhtar (respondent). An FIR dated 17.11.2017 was lodged by one partner alleging siphoning of funds and other business improprieties, which is under investigation. The appellant filed an Arbitration Petition dated 02.01.2018 before the High Court under Section 11 of the Arbitration and Conciliation Act, 1996, seeking appointment of an arbitrator based on the arbitration clause in the partnership deed dated 30.01.2015. The High Court, by order dated 06.12.2018, dismissed the application relying on paragraph 26 of A. Ayyasamy v. A. Paramasivam and Others, holding that the nature of the dispute involving serious allegations of fraud of complicated nature are not fit for arbitration and require voluminous evidence to be decided by a civil court. The Supreme Court, in appeal, examined the law laid down in A. Ayyasamy and found that the correct law is in paragraph 25, not paragraph 26. The Court held that mere allegation of fraud simplicitor is not a ground to nullify the arbitration agreement. It is only in cases of very serious allegations of fraud that make a virtual case of criminal offence or where fraud is so complicated that it requires voluminous evidence, or where fraud permeates the entire contract including the arbitration clause, that the court can sidetrack arbitration. Applying the two working tests from paragraph 25, the Court found that the allegations in this case are simple allegations touching upon internal affairs of the partnership, with no implication in the public domain, and do not vitiate the partnership deed or the arbitration clause. Therefore, the disputes are arbitrable. The Supreme Court set aside the High Court order, appointed Justice Amareshwar Sahay, Retired Judge of the Jharkhand High Court, as sole arbitrator to resolve all disputes between the parties, and clarified that nothing in the judgment affects the investigation pursuant to the FIR.
Headnote
A) Arbitration Law - Arbitrability of Fraud Allegations - Section 11, Arbitration and Conciliation Act, 1996 - Mere allegation of fraud simplicitor is not a ground to nullify arbitration agreement; only serious allegations of fraud that make a virtual case of criminal offence or are so complicated that they require voluminous evidence to be decided by civil court can sidetrack arbitration. (Paras 25-26) B) Arbitration Law - Simple vs Serious Fraud - Section 11, Arbitration and Conciliation Act, 1996 - Two working tests: (1) whether the fraud plea permeates the entire contract including the arbitration clause rendering it void, or (2) whether allegations touch upon internal affairs of parties inter se having no implication in public domain. If allegations are simple and internal, arbitration clause need not be avoided. (Para 25) C) Partnership Law - Arbitrability of Partnership Disputes - Section 11, Arbitration and Conciliation Act, 1996 - Allegations of siphoning of funds from partnership are simple allegations pertaining to internal affairs of partnership and do not vitiate the arbitration clause; such disputes are arbitrable. (Paras 25-26)
Issue of Consideration
Whether disputes involving allegations of fraud in a partnership are arbitrable under the Arbitration and Conciliation Act, 1996, or whether such disputes must be decided by a civil court.
Final Decision
The Supreme Court set aside the High Court order, allowed the appeal, and appointed Justice Amareshwar Sahay, Retired Judge of the Jharkhand High Court, as sole arbitrator to resolve all disputes between the parties. The Court clarified that nothing in the judgment affects the investigation pursuant to the FIR.
Law Points
- Arbitration and Conciliation Act
- 1996
- Section 11
- Section 8
- arbitrability of fraud allegations
- simple allegations vs serious fraud
- partnership disputes
- siphoning of funds
- public domain test
- permeates entire contract test
