IN THE SUPREME COURT OF INDIA
Civil Appeal Nos. 8245-8246 of 2016
Decided On: 04.10.2016
Appellants: A. Ayyasamy
Vs.
Respondent: A. Paramasivam and Ors.
Case Note:
Arbitration - Agreement - Maintainability of suit - Applicability of precedent - Section 8 of Arbitration and Conciliation Act, 1996 - Parties had entered into deed of partnership containing arbitration Clause - Respondents filed civil suit - Appellant moved application under Section 8 of Act, 1996 raising objection to maintainability of suit in view of arbitration agreement between parties - Trial Court dismissed application, relying upon judgment in N. Radhakrishnan v. Maestro Engineers and Ors. - Appellant preferred petition before High Court - High Court had also chosen to go by dicta laid down in N. Radhakrishnan - Hence, present appeal - Whether view of High Court in following dicta laid down in case of N. Radhakrishnan was correct or not - Whether dispute raised by Respondents in suit was incapable of settlement through arbitration
Facts:
The parties, who were brothers, had entered into a deed of partnership for carrying on hotel business. Some disputes arose out of the said partnership deed between the parties. Partnership Deed contains an arbitration Clause which stipulated resolution of disputes by means of arbitration. Notwithstanding the same, the Respondents filed a civil suit seeking a declaration that as partners they were entitled to participate in the administration of the said hotel. Relief of permanent injunction restraining the Appellant/Defendant from interfering with their right to participate in the administration of the hotel had also been sought. The Appellant moved the application under Section 8 of the Arbitration and Conciliation Act, 1996 raising an objection to the maintainability of the suit in view of arbitration agreement between the parties as contained in Clause (8) of the Partnership Deed and submitted that as per the provisions of Section 8 of the Act, it was mandatory for the Court to refer the dispute to the Arbitrator. The Trial Court dismissed the application of the Appellant by its order, relying upon the judgment in N. Radhakrishnan v. Maestro Engineers and Ors.
The Appellant preferred revision petition before the High Court repeating his contention that judgment in N. Radhakrishnan was held to be per incuriam and, therefore, Trial Court had committed jurisdictional error in rejecting the application of the Appellant under Section 8 of the Act. Brushing aside this plea, the High Court had also chosen to go by the dicta laid down in N. Radhakrishnan with the observations that Swiss Timing Ltd. v. Commonwealth Games 2010 Organising Committee is the order passed by a Single Judge of present Court under Section 11 of the Act whereas judgment in N. Radhakrishnan is rendered by a Division Bench of present Court, which was binding on the High Court. Hence, the present appeal.
Held, while allowing the appeal:
(i) The Act does not make any provision excluding any category of disputes treating them as non-arbitrable. Notwithstanding the above, the Courts have held that certain kinds of disputes may not be capable of adjudication through the means of arbitration. The Courts have held that certain disputes like criminal offences of a public nature, disputes arising out of illegal agreements and disputes relating to status, such as divorce, cannot be referred to arbitration. [9]
(ii) Mere allegation of fraud simplicitor 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 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 sidetrack the agreement by dismissing application Under Section 8 and proceed with the suit on merits. It can be so done also in those cases where there are serious allegations of forgery/fabrication of documents in support of the plea of fraud or where fraud is alleged against the arbitration provision itself or is of such a nature that permeates the entire contract, including the agreement to arbitrate, meaning thereby in those cases where fraud goes to the validity of the contract itself of the entire contract which contains the arbitration Clause or the validity of the arbitration Clause itself. [20]
(iii) The only allegation of fraud that was levelled was that the Appellant had signed and issued a cheque in favour of his son without the knowledge and consent of the other partners i.e. the Respondents. The allegations of purported fraud were not so serious which cannot be taken care of by the arbitrator. The Courts below fell in error in rejecting the application of the Appellant Under Section 8 of the Act. The application filed by the Appellant Under Section 8 in the suit was allowed thereby relegating the parties to the arbitration. [21] and[22]
(iv) In addition to various classes of disputes which are generally considered by the courts as appropriate for decision by public fora, there are classes of disputes which fall within the exclusive domain of special fora under legislation which confers exclusive jurisdiction to the exclusion of an ordinarily civil court. That such disputes are not arbitrable dovetails with the general principle that a dispute which is capable of adjudication by an ordinary civil court is also capable of being resolved by arbitration. However, if the jurisdiction of an ordinary civil court is excluded by the conferment of exclusive jurisdiction on a specified court or tribunal as a matter of public policy such a dispute would not then be capable of resolution by arbitration. [32]
(v) The judgment of a two judge Bench of present Court in N. Radhakrishnan, arose out of a partnership dispute. A suit was instituted before the civil court for declaratory and injunctive reliefs. An application under Section 8 of the Act was rejected by the Trial Court and the order of rejection was affirmed in revision by the High Court. The submission of the Appellant that the dispute between the partners ought to have been referred to arbitration was met with the objection that the Appellant having raised issues relating to misappropriation of funds and malpractices, these were matters which ought to be resolved by a civil court. The judgment of the High Court was affirmed by a Bench of two judges of present Court. [33]
(vi) Allegations of criminal wrongdoing or of statutory violation would not detract from the jurisdiction of the arbitral tribunal to resolve a dispute arising out of a civil or contractual relationship on the basis of the jurisdiction conferred by the arbitration agreement. [35]
(vii) The position that emerges both before and after the decision in N. Radhakrishnan is that successive decisions of present Court have given effect to the binding precept incorporated in Section 8. Once there is an arbitration agreement between the parties, a judicial authority before whom an action is brought covering the subject matter of the arbitration agreement is under a positive obligation to refer parties to arbitration by enforcing the terms of the contract. It is necessary to emphasise that as a matter of 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 for the purpose of determining 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. [37]
(viii) The basic principle which must guide judicial decision making is that arbitration is essentially a voluntary assumption of an obligation by contracting parties to resolve their disputes through a private tribunal. The intent of the parties is expressed in the terms of their agreement. Where commercial entities and persons of business enter into such dealings, they do so with a knowledge of the efficacy of the arbitral process. The commercial understanding is reflected in the terms of the agreement between the parties. The duty of the court is to impart to that commercial understanding a sense of business efficacy. 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. [39] and[47]
Civil Appeal Nos. 8245-8246 of 2016
Decided On: 04.10.2016
Appellants: A. Ayyasamy
Vs.
Respondent: A. Paramasivam and Ors.
Case Note:
Arbitration - Agreement - Maintainability of suit - Applicability of precedent - Section 8 of Arbitration and Conciliation Act, 1996 - Parties had entered into deed of partnership containing arbitration Clause - Respondents filed civil suit - Appellant moved application under Section 8 of Act, 1996 raising objection to maintainability of suit in view of arbitration agreement between parties - Trial Court dismissed application, relying upon judgment in N. Radhakrishnan v. Maestro Engineers and Ors. - Appellant preferred petition before High Court - High Court had also chosen to go by dicta laid down in N. Radhakrishnan - Hence, present appeal - Whether view of High Court in following dicta laid down in case of N. Radhakrishnan was correct or not - Whether dispute raised by Respondents in suit was incapable of settlement through arbitration
Facts:
The parties, who were brothers, had entered into a deed of partnership for carrying on hotel business. Some disputes arose out of the said partnership deed between the parties. Partnership Deed contains an arbitration Clause which stipulated resolution of disputes by means of arbitration. Notwithstanding the same, the Respondents filed a civil suit seeking a declaration that as partners they were entitled to participate in the administration of the said hotel. Relief of permanent injunction restraining the Appellant/Defendant from interfering with their right to participate in the administration of the hotel had also been sought. The Appellant moved the application under Section 8 of the Arbitration and Conciliation Act, 1996 raising an objection to the maintainability of the suit in view of arbitration agreement between the parties as contained in Clause (8) of the Partnership Deed and submitted that as per the provisions of Section 8 of the Act, it was mandatory for the Court to refer the dispute to the Arbitrator. The Trial Court dismissed the application of the Appellant by its order, relying upon the judgment in N. Radhakrishnan v. Maestro Engineers and Ors.
The Appellant preferred revision petition before the High Court repeating his contention that judgment in N. Radhakrishnan was held to be per incuriam and, therefore, Trial Court had committed jurisdictional error in rejecting the application of the Appellant under Section 8 of the Act. Brushing aside this plea, the High Court had also chosen to go by the dicta laid down in N. Radhakrishnan with the observations that Swiss Timing Ltd. v. Commonwealth Games 2010 Organising Committee is the order passed by a Single Judge of present Court under Section 11 of the Act whereas judgment in N. Radhakrishnan is rendered by a Division Bench of present Court, which was binding on the High Court. Hence, the present appeal.
Held, while allowing the appeal:
(i) The Act does not make any provision excluding any category of disputes treating them as non-arbitrable. Notwithstanding the above, the Courts have held that certain kinds of disputes may not be capable of adjudication through the means of arbitration. The Courts have held that certain disputes like criminal offences of a public nature, disputes arising out of illegal agreements and disputes relating to status, such as divorce, cannot be referred to arbitration. [9]
(ii) Mere allegation of fraud simplicitor 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 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 sidetrack the agreement by dismissing application Under Section 8 and proceed with the suit on merits. It can be so done also in those cases where there are serious allegations of forgery/fabrication of documents in support of the plea of fraud or where fraud is alleged against the arbitration provision itself or is of such a nature that permeates the entire contract, including the agreement to arbitrate, meaning thereby in those cases where fraud goes to the validity of the contract itself of the entire contract which contains the arbitration Clause or the validity of the arbitration Clause itself. [20]
(iii) The only allegation of fraud that was levelled was that the Appellant had signed and issued a cheque in favour of his son without the knowledge and consent of the other partners i.e. the Respondents. The allegations of purported fraud were not so serious which cannot be taken care of by the arbitrator. The Courts below fell in error in rejecting the application of the Appellant Under Section 8 of the Act. The application filed by the Appellant Under Section 8 in the suit was allowed thereby relegating the parties to the arbitration. [21] and[22]
(iv) In addition to various classes of disputes which are generally considered by the courts as appropriate for decision by public fora, there are classes of disputes which fall within the exclusive domain of special fora under legislation which confers exclusive jurisdiction to the exclusion of an ordinarily civil court. That such disputes are not arbitrable dovetails with the general principle that a dispute which is capable of adjudication by an ordinary civil court is also capable of being resolved by arbitration. However, if the jurisdiction of an ordinary civil court is excluded by the conferment of exclusive jurisdiction on a specified court or tribunal as a matter of public policy such a dispute would not then be capable of resolution by arbitration. [32]
(v) The judgment of a two judge Bench of present Court in N. Radhakrishnan, arose out of a partnership dispute. A suit was instituted before the civil court for declaratory and injunctive reliefs. An application under Section 8 of the Act was rejected by the Trial Court and the order of rejection was affirmed in revision by the High Court. The submission of the Appellant that the dispute between the partners ought to have been referred to arbitration was met with the objection that the Appellant having raised issues relating to misappropriation of funds and malpractices, these were matters which ought to be resolved by a civil court. The judgment of the High Court was affirmed by a Bench of two judges of present Court. [33]
(vi) Allegations of criminal wrongdoing or of statutory violation would not detract from the jurisdiction of the arbitral tribunal to resolve a dispute arising out of a civil or contractual relationship on the basis of the jurisdiction conferred by the arbitration agreement. [35]
(vii) The position that emerges both before and after the decision in N. Radhakrishnan is that successive decisions of present Court have given effect to the binding precept incorporated in Section 8. Once there is an arbitration agreement between the parties, a judicial authority before whom an action is brought covering the subject matter of the arbitration agreement is under a positive obligation to refer parties to arbitration by enforcing the terms of the contract. It is necessary to emphasise that as a matter of 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 for the purpose of determining 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. [37]
(viii) The basic principle which must guide judicial decision making is that arbitration is essentially a voluntary assumption of an obligation by contracting parties to resolve their disputes through a private tribunal. The intent of the parties is expressed in the terms of their agreement. Where commercial entities and persons of business enter into such dealings, they do so with a knowledge of the efficacy of the arbitral process. The commercial understanding is reflected in the terms of the agreement between the parties. The duty of the court is to impart to that commercial understanding a sense of business efficacy. 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. [39] and[47]
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