Arbitration; A. Ayyaswamy Vs. A. Paramasivam [Supreme Court of India, 04-10-2016]

Arbitration and Conciliation Act, 1996 – Section 8 – Commercial Dispute – Fraud – A mere allegation of fraud is not sufficient to detract from the obligation of the parties to submit their disputes to arbitration and may not be a ground to nullify the effect of arbitration agreement between the parties. 




OCTOBER 04, 2016

CIVIL APPEAL NOS. 8245-8246 OF 2016






The parties to this lis, who are brothers, had entered into a deed of partnership dated 01.04.1994 for carrying on hotel business and this partnership firm has been running a hotel with the name ‘Hotel Arunagiri’ located at Tirunelveli, Tamil Nadu. Some disputes arose out of the said partnership deed between the parties. Partnership Deed contains an arbitration clause i.e. Clause (8) which stipulates resolution of disputes by means of arbitration.

2. Notwithstanding the same, the respondents herein have filed a civil suit before the Court of Ist Additional District Munsif Court, Tirunelveli, Madurai (Tamil Nadu) seeking a declaration that as partners they are entitled to participate in the administration of the said hotel. Relief of permanent injunction restraining the defendant (appellant herein) from interfering with their right to participate in the administration of the hotel has also been sought. This suit was filed in the year 2012. The appellant, after receiving the summons in the said suit, moved the application under

Section 8 of the Arbitration and Conciliation Act, 1996

(hereinafter referred to as the ‘Act’) 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 dated 01.04.1994 and submitted that as per the provisions of Section 8 of the Act, it is mandatory for the Court to refer the dispute to the arbitrator. This application was resisted by the respondents with the submission that since acts of fraud were attributed to the appellant by the plaintiffs/respondents, such serious allegations of fraud could not be adjudicated upon by the Arbitral Tribunal and the appropriate remedy was to approach the civil court by filing a suit, and that was exactly done by the respondents. For this purpose, the respondents had relied upon the judgment of this Court in the case of

N. Radhakrishnan v. Maestro Engineers and Others, (2010) 1 SCC 72

This plea of the respondents was sought to be controverted by the appellant by arguing that aforesaid judgment was found to be per incuriam by this Court in

Swiss Timing Ltd. v. Commonwealth Games 2010 Organising Committee, (2014) 6 SCC 677

wherein the application under Section 11 of the Act was allowed holding that such a plea of fraud can be adequately taken care of even by the arbitrator. It was, thus, argued that the parties were bound by the arbitration agreement and there was no reason to file the civil suit. The trial court, however, dismissed the application of the appellant herein by its order dated 25.04.2014, relying upon the judgment in N. Radhakrishnan.

3. Feeling aggrieved by this order, 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 has also chosen to go by the dicta laid down in N. Radhakrishnan with the observations that Swiss Timing Ltd. is the order passed by a single Judge of this Court under Section 11 of the Act whereas judgment in N. Radhakrishnan is rendered by a Division Bench of two Hon. Judges of this Court, which is binding on the High Court. Whether the aforesaid view of the High Court in following the dicta laid down in the case of N. Radhakrishnan, in the facts of this case, is correct or not, is the question that needs determination in the instant appeal.

4. Seminal facts in the context in which the issue falls for determination have already been taken note of above. However, few more facts need to be added to the aforesaid chronology, particularly, the nature of plea of fraud taken in the suit filed by the respondents. The respondents are four in number who are brothers of the appellant. These five brothers are the partners. Their father A. Arunagiri was also a partner along with them who died on 28.04.2009. These six partners had 1/6th share each in the partnership business. Disputes arose between the brothers after the demise of their father. It is the allegation of the respondents, as contained in the plaint, that the subject matter of the suit ‘Hotel Arunagiri’ was managed and administered by their father in a disciplined manner till his death. After his death, the appellant being the eldest brother wanted to take the administration of ‘Hotel Arunagiri’ with the assurance that he will be following the foot prints of his father. The respondents had no other alternative except to accept the said proposal in good faith. It was, at that time resolved by all the brothers, that the daily collection of money from ‘Hotel Arunagiri’ should be deposited on the very next day into the hotel Current Account No.23 maintained with the Indian Overseas Bank, Tirunelveli Junction. It was agreed that about rupees ten to fifteen thousand may be kept as cash for urgent expenses. The respondents reposed confidence with the appellant and believed that his administration would never be detrimental to the smooth running of the business. On the aforesaid understanding, administration of the hotel was taken over by the appellant. But he did not adhere to the said understanding and failed to deposit day to day collection into the bank account as promised. It is also agged that the appellant, fraudulently, signed and issued a cheque for Rs.10,00,050/- dated 17.06.2010 from the bank account in the name of ‘Hotel Arunagiri’ in favour of his son without the knowledge and consent of the other partners and in this manner, the money was siphoned off and misappropriated from the common fund. It is further alleged that the appellant kept the hotel account books with him and did not show it to the respondents for their examination. The respondents sent legal notices but it did not deter the appellant to continue to act in the same manner by not depositing the day to day collections in the account. It is also alleged that appellant’s wife’s younger brother one Dhanapalraj was a member of Bar Council of Tamil Nadu and was also a Vice-Chairman of All India Bar Council, New Delhi. In Chennai, the Central Bureau of Investigation (C.B.I.) raided the houses of the said Dhanapalraj and his co-brother Chandrasekaran and seized Rs.45,00,000/- cash from them. As Dhanapalraj was aware of the disputes between the appellant and the respondents in respect of the ‘Hotel Arunagiri’, a false statement has been given by him before C.B.I. to the effect that the seized money of Rs.45 lakhs belonged to ‘Hotel Arunagiri’. It is reliably learned that the appellant had also, on receipt of summons, appeared before the C.B.I. in New Delhi and given a false statement as if the said seized money of Rs.45 lakhs belonged to ‘Hotel Arunagiri’ which was taken to Chennai to purchase a property. This led to the issuance of another notice dated 22.01.2011 by the third respondent to the appellant stating that the money seized by the C.B.I. belong only to Dhanpalaraj and not ‘Hotel Arunagiri’. On the basis of the aforesaid allegations, which are relevant and material for the purposes of this appeal, following reliefs are sought in the suit filed by the respondents:

“(a) for a declaration that the respondents as partners of the deed of partnership dated 01.04.1994 are entitled to participate in the administration of the Hotel Arunagiri mentioned in the schedule and for consequential permanent injunction restraining the appellant from interfering with the same; (b) for cost of this suit; and (c) for such other reliefs this Honourable Court deem fit and proper in the circumstances of this case.” 5. As already mentioned above, the appellant filed the application under Section 8 of the Act for rejection of the plaint and reference of the dispute to an arbitrator in which attempt the appellant has not succeeded for the reasons stated hereinabove.

6. The two courts below have preferred to adopt the dicta laid down in N. Radhakrishnan while dismissing the application of the appellant under Section 8 of the Act holding that as there are serious allegations as to fraud and malpractices committed by the appellant in respect of the finances of the partnership firm and the case does not warrant to be tried and decided by the arbitrator and a civil court would be more competent which has the requisite means to decide such complicated matter. In this backdrop, it would be appropriate to revisit the law on this aspect before adverting to the question as to whether the approach of the High Court was correct in following the judgment in N. Radhakrishnan in the instant case.

7. In this behalf, we have to begin our discussion with the pertinent observation that insofar as the Arbitration and Conciliation Act, 1996 is concerned, it does not make any specific provision excluding any category of disputes terming them to be non-arbitrable. Number of pronouncements have been rendered laying down the scope of judicial intervention, in cases where there is an arbitration clause, with clear and unambiguous message that in such an event judicial intervention would be very limited and minimal. However, the Act contains provisions for challenging the arbitral awards. These provisions are Section 34 and Section 48 of the Act. Section 34(2)(b) and Section 48(2) of the Act, inter alia, provide that an arbitral award may be set aside if the Court finds that the ‘subject matter of the dispute is not capable of settlement by arbitration under the law for the time being in force.’ Even when such a provision is interpreted, what is to be shown is that there is a law which makes subject matter of a dispute incapable of settlement by arbitration. The aforesaid position in law has been culled out from the combined readings of Sections 5, 16 and 34 of the Act. When arbitration proceedings are triggered by one of the parties because of the existence of an arbitration agreement between them, Section 5 of the Act, by a non-obstante clause, provides a clear message that there should not be any judicial intervention at that stage scuttling the arbitration proceedings. Even if the other party has objection to initiation of such arbitration proceedings on the ground that there is no arbitration agreement or validity of the arbitration clause or the competence of the Arbitral Tribunal is challenged, Section 16, in clear terms, stipulates that such objections are to be raised before the Arbitral Tribunal itself which is to decide, in the first instance, whether there is any substance in questioning the validity of the arbitration proceedings on any of the aforesaid grounds. It follows that the party is not allowed to rush to the Court for an adjudication. Even after the Arbitral Tribunal rules on its jurisdiction and decides that arbitration clause is valid or the Arbitral Tribunal is legally constituted, the aggrieved party has to wait till the final award is pronounced and only at that stage the aggrieved party is allowed to raise such objection before the Court in proceedings under Section 34 of the Act while challenging the arbitral award. The aforesaid scheme of the Act is succinctly brought out in the following discussion by this Court in