Mere allegation of fraud does not render the case to be incapable of being settled by arbitration.

[Case Brief] A. Ayyasamy v/s A. Paramasivam & Ors

 

Case Name A. Ayyasamy v/s A. Paramasivam & Ors
Case Number Civil Appeal Number 8245-8246 of 2016
Court Supreme Court of India
Bench Justice A.K. Sikri and Justice DY Chandrachud
Author of the judgment Justice AK Sikri
Decided on  October 4, 2016
Relevant Act/Sections  Arbitration and Conciliation Act, 1996- Section 8
Author of the case brief Lavanya Gupta ([email protected])

Brief Facts and Procedural History:

The Appellant and Respondent brothers had entered into a partnership agreement for carrying on hotel business. Soon, disputes arose between the brothers with regards to management and administration of the hotel. The Respondents sent several notices to the Appellant to desist from misappropriating funds; however, even after such notices being sent, there was no change in the Appellant’s action. The Respondents filed a civil suit before the Ist Additional District Munsif Court of Tirunelveli for a declaration that they were entitled to participate in the administration of their hotel. Subsequently, the Appellant moved an application under Section 8 of the Arbitration and Conciliation Act (“Act”) regarding maintainability of the Respondents’ suit in view of the arbitration clause in the agreement. The said suit of the Appellant was dismissed and so he filed a revision petition before the High Court. The High Court upheld the Munsif’s decision and cited the N. Radhakrishnan case (N. Radhakrishnan vs M/s Mastero Engineers & Others, 2009) in coming to a conclusion. It was against the High Court’s decision that the present appeal was filed before the Supreme Court.

Issues before the Court of Law:

1) Whether or not the High Court was correct in dismissing the Appellant’s revision petition in view of the N. Radhakrishnan case?

2) Whether or not the dispute between the parties with regard to fraud can be settled through arbitration?

Ratio of the judge:

  1. The dismissal of the revision petition was held to be incorrect in law by the High Court. The Act does not give a black and white text with regards to any class (or classes) of disputes to be arbitrable or non-arbitrable. The “arbitrability” of issues is a concept, which has evolved over time through judicial pronouncements. The only connection which can be established between the concept of arbitrability and the Act is though Section 34(2)(b) and Section 48(2) which inter alia provide that the arbitral award may be set aside if the Court finds that the ‘subject matter of the dispute in not capable of settlement by arbitration under the law for the time being in force’. In the present case, the Court(s) had to look into the seriousness of the allegations made by the Respondent to decide upon the arbitrability. Instead, the Court straight away rejected the plea to be referred to arbitration in view of a judicial precedent and did not apply its mind.
  2. As mentioned above, the issue of arbitrability has been settled by courts through precedents and the general list of disputes which are non-arbitrable include inter alia criminal matters, matrimonial matters and disputes relating to fraud. However, in the present case, as the dispute relating to fraud was not of a serious nature, it could be decided by an arbitrator.

Decision Held:

Mere allegation of fraud does not render the case to be incapable of being settled by arbitration. Only when the allegations are serious in nature and capable of taking the form of criminal offences, they should be decided by the Courts. Thus, a distinction needs to be made on a case-to-case basis to decide whether disputes relating to fraud can be referred to arbitration. The present case could be adjudicated upon by an arbitrator because the nature was not so serious and the lower courts fell in error of judgement.

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