2026 (2) TMI 174 - SC - Indian Laws

Arbitrability of alleged forged arbitration agreement: referral to arbitration quashed but appointment of arbitrator refused

Where an arbitration clause is embedded in a contract alleged to be forged, the arbitral jurisdiction is contested at its root and such disputes are ... Arbitrability of disputes involving alleged fraud affecting the arbitration agreement - partnership dispute in which appellant claims entry into the firm by virtue of a document whose execution is stoutly denied and is alleged to be forged - Reference to arbitration u/s 8 - Appointment of arbitrator u/s 11 - Interim relief u/s 9 and prima facie findings - Non-arbitrability where arbitration clause is alleged to be forged or fabricated - Supervisory jurisdiction under Article 227 and limits on reappreciation of evidence - HELD THAT:- While findings in Section 9 proceedings are undoubtedly prima facie in nature, such findings, when they attain finality, cannot be ignored in subsequent proceedings founded on the very same issue. The prima facie satisfaction recorded by the High Court regarding the doubtful existence of the arbitration agreement was, therefore, a relevant consideration while examining applications under Sections 8 and 11 of the Act. The cumulative effect of the aforesaid circumstances lends considerable credence to contention of the appellant that the Admission Deed is not genuine. At the very least, the Admission Deed is under grave cloud of doubt, requiring a detailed and full-fledged inquiry. In the present case, arbitration clause does not exist independently but is embedded in the document whose existence is seriously disputed. Arbitration, it bears reiteration, is founded upon consent. A party may be bound by the arbitral process only if it is first shown, even at a prima facie level, that such a party had agreed to submit disputes to arbitration. Where the arbitration agreement itself is alleged to be forged or fabricated, the disputes ceases to be merely contractual and strikes at the very root of arbitral jurisdiction. A controversy of this nature falls squarely within the category of disputes that are generally recognized as non-arbitrable. Both the Trial Court and the First Appellate Court had concurrently held that the allegations of fraud in the present case were serious and that the respondent no. 1 had failed to produce the original Admission Deed or a certified copy thereof, as required under Section 8(2) of the Act. The aforesaid findings were not perfunctory, but were grounded in the material on record and in the statutory requirements. The supervisory jurisdiction of the High Court under Article 227 of the Constitution is not an appellate jurisdiction in disguise, and it does not permit reappreciation of evidence. The High Court, while exercising jurisdiction under Article 227 of the Constitution, was not justified in dislodging the concurrent findings and directing reference of the dispute to arbitration, particularly when the very existence of the arbitration agreement was under serious doubt. Conversely, the High Court was correct in dismissing the respondent no. 1’s application under Section 11 of the Act. When the existence of the arbitration agreement itself is in serious dispute and requires adjudication, appointment of an arbitrator would be premature and legally impermissible. The appeal challenging the High Court's refusal to appoint an arbitrator is dismissed; the appeal challenging the High Court's direction to refer the suit to arbitration is allowed. Issues: (i) Whether disputes arising from an alleged Admission Deed that is seriously alleged to be forged and which goes to the existence/validity of the arbitration agreement are referable to arbitration under Section 8 of the Arbitration and Conciliation Act, 1996; (ii) Whether an arbitrator can be appointed under Section 11 of the Act when the very existence of the arbitration agreement is in serious doubt.Issue (i): Whether disputes concerning an Admission Deed alleged to be forged and that attack the existence of the arbitration agreement are amenable to arbitration under Section 8 of the Act.Analysis: Two tests from precedents distinguish when allegations of fraud render a dispute non-arbitrable: (a) whether the plea of fraud permeates the entire contract including the arbitration clause so that the arbitration agreement itself cannot be said to exist; and (b) whether the allegations concern public law or matters outside the contract's private domain. Where cogent prima facie material shows the arbitration agreement's existence is in serious doubt, the dispute is of the non-arbitrable class and a court may refrain from referring the matter to arbitration. Concurrent findings at earlier stages that the document is doubtful and statutory requirements (including absence of originals/certified copies as required under Section 8(2)) strengthen the view that the arbitration clause is not established on a prima facie basis.Conclusion: The dispute relating to the Admission Deed involves serious allegations going to the root of the arbitration agreement and is not amenable to arbitration at this stage; the High Court order directing reference to arbitration is unsustainable.Issue (ii): Whether appointment of an arbitrator under Section 11 is permissible when the existence of the arbitration agreement is itself substantially disputed.Analysis: Appointment of an arbitrator presupposes at least a prima facie satisfaction that an arbitration agreement exists. Where substantial and cogent material casts grave doubt on the document embedding the arbitration clause, and where earlier proceedings have recorded final prima facie findings to that effect, appointment would be premature. Supervisory jurisdiction under Article 227 does not permit reappreciation of evidence to dislodge concurrent findings that the allegation of forgery is serious and requires full inquiry.Conclusion: Appointment of an arbitrator in such circumstances would be premature and legally impermissible; the High Court's dismissal of the Section 11 application is justified and is affirmed.Final Conclusion: The overall legal effect is that where prima facie and final findings show serious allegations that the arbitration agreement itself may be forged or non-existent, courts should not refer disputes to arbitration nor appoint an arbitrator until the existence and validity of the arbitration agreement are conclusively determined by appropriate proceedings.Ratio Decidendi: Where cogent prima facie material establishes serious allegations that an agreement containing the arbitration clause is forged or otherwise calls into question the very existence of the arbitration agreement, such disputes are non-arbitrable at that stage and courts must not refer them to arbitration or appoint an arbitrator until the validity and existence of the arbitration agreement are judicially established.