2016 (10) TMI 1147 - SC - Companies Law

Fraud Allegations Insufficient to Prevent Arbitration; SC Reverses Decision, Appoints Retired Judge to Expedite Process.

The SC concluded that the allegations of fraud were not severe enough to exclude arbitration. The Court reversed lower court decisions, granted the ... Dispute capable of adjudication and settlement by arbitration - Held that:- Only allegation of fraud that is levelled is that the Appellant had signed and issued a cheque of ₹ 10,00,050/- dated 17.06.2010 of 'Hotel Arunagiri' in favour of his son without the knowledge and consent of the other partners i.e. the Respondents. It is a mere matter of accounts which can be looked into and found out even by the arbitrator. It does not involve any complex issue. If such a cheque is issued from the hotel account by the Appellant in favour of his son, it is easy to prove the same and then the onus is upon the Appellant to show as to what was the reason for giving that amount from the partnership firm to his son and he will have to account for the same. Likewise, the allegation of the Respondents that daily collections are not deposited in the bank accounts is to be proved by the Respondents which is again a matter of accounts. Other allegation, which appears to be serious, is about the C.B.I. raid at the house of Dhanapalraj from where cash in the sum of ₹ 45 lakhs was seized. Interestingly, though the Appellant has taken the position that this cash belongs to 'Hotel Arunagiri', they are the Respondents who have themselves alleged that the money belonged to Dhanapalraj and not to 'Hotel Arunagiri'. In view of the aforesaid stand taken by the Respondents/plaintiffs themselves, this issue does not fall for consideration and, therefore, is not to be gone by the Arbitral Tribunal. We, therefore, are of the opinion that the allegations of purported fraud were not so serious which cannot be taken care of by the arbitrator. The Courts below, therefore, fell in error in rejecting the application of the Appellant Under Section 8 of the Act. Reversing these judgments, we allow this appeal and as a consequence, application filed by the Appellant Under Section 8 in the suit is allowed thereby relegating the parties to the arbitration. Also consent by the other judge a mere allegation of fraud in the present case was not sufficient to detract from the obligation of the parties to submit their disputes to arbitration. A fresh line must be drawn to ensure the fulfilment of the intent of Parliament in enacting the Act of 1996 and towards supporting commercial understandings grounded in the faith in arbitration. Issues Involved:1. Validity of the arbitration clause in the partnership deed.2. Jurisdiction of the civil court vs. arbitration tribunal in cases involving allegations of fraud.3. Application of precedents and statutory provisions under the Arbitration and Conciliation Act, 1996.Detailed Analysis:1. Validity of the Arbitration Clause:The parties, who are brothers, entered into a partnership deed dated 01.04.1994 to run a hotel business. The deed included an arbitration clause (Clause 8) for dispute resolution. Despite this, the respondents filed a civil suit in 2012 seeking a declaration of their rights to participate in the hotel's administration and a permanent injunction against the appellant. The appellant moved an application under Section 8 of the Arbitration and Conciliation Act, 1996, arguing that the dispute should be referred to arbitration as per the deed. The trial court dismissed this application, relying on the judgment in N. Radhakrishnan v. Maestro Engineers and Ors. (2010) 1 SCC 72, which held that serious allegations of fraud could not be adjudicated by an arbitral tribunal.2. Jurisdiction of Civil Court vs. Arbitration Tribunal in Cases Involving Fraud:The respondents argued that due to serious allegations of fraud against the appellant, the dispute should be adjudicated by a civil court. They cited the N. Radhakrishnan case, which supported their position. However, the appellant contended that this judgment was per incuriam, as later judgments, including Swiss Timing Ltd. v. Commonwealth Games 2010 Organising Committee (2014) 6 SCC 677, allowed arbitration even in cases involving fraud. The Supreme Court revisited the law on this aspect, noting that the Arbitration and Conciliation Act, 1996, does not specifically exclude any category of disputes as non-arbitrable. The Court emphasized that mere allegations of fraud should not automatically exclude arbitration unless the allegations are of such a serious nature that they constitute criminal offenses or are complex, requiring extensive evidence best handled by a civil court.3. Application of Precedents and Statutory Provisions:The Supreme Court analyzed various precedents, including Abdul Kadir Shamsuddin Bubere v. Madhav Prabhakar Oak AIR 1962 SC 406 and Booz Allen and Hamilton Inc. v. SBI Home Finance Limited and Ors. (2011) 5 SCC 532, to determine the arbitrability of disputes involving fraud. The Court held that only in cases of serious fraud, where the allegations are complex and akin to criminal offenses, should the matter be excluded from arbitration. The Court also clarified that the judgment in N. Radhakrishnan was not overruled by Swiss Timing Ltd. but noted that the latter judgment was rendered under Section 11 of the Act, which deals with the appointment of arbitrators and does not have precedential value in this context.Conclusion:The Supreme Court concluded that the allegations of fraud in this case were not so serious as to preclude arbitration. The allegations were primarily related to financial mismanagement, which could be adequately addressed by an arbitrator. Consequently, the Court reversed the lower courts' decisions, allowed the appellant's application under Section 8, and referred the parties to arbitration. To expedite the process, the Court appointed a retired judge as the arbitrator.Separate Judgment by Dr. D.Y. Chandrachud:Dr. D.Y. Chandrachud concurred with the judgment, adding that the Arbitration and Conciliation Act, 1996, does not exclude any category of disputes from arbitrability. He emphasized the need to uphold the efficacy of arbitration agreements and minimize judicial intervention. He also highlighted that the doctrine of separability allows the arbitration agreement to survive even if the main contract is challenged on grounds of fraud. He concluded that mere allegations of fraud should not deter arbitration unless they involve serious criminal wrongdoing.