The arbitrator could not decide upon the legal issue of fraud and criminal misappropriation of funds in arbitration proceedings

[Case Brief] N. Radhakrishnan v/s M/s Maestro Engineers & Ors

Case name N. Radhakrishnan v/s M/s Maestro Engineers & Ors
Case number Civil Appeal Number 7019 of 2009
Court Supreme Court of India
Bench Justice Tarun Chaterjee
Decided on October 22, 2009
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 had entered into a partnership agreement with the Respondent partners for carrying on the business of engineering works under the name of “Maestro Engineers”. After passage of some time, differences arose between the Appellant and Respondents. The Appellant vide various notices pointed out that his capital contribution was INR 2,70,000/- as against  INR 1,00,000/- that was mentioned in the partnership agreement. The Appellant also alleged that the Respondents were guilty of malpractices and siphoning of funds and called upon the Respondents to pay his share so that he could retire from the partnership firm.

The Respondents filed a suit before the Court of District Munsif of Coimbatore and prayed for a declaration that the Appellant was not a partner of the firm. The Appellant also filed another suit before the Court of Additional District Munsif under Section 8 of the Arbitration and Conciliation Act, 1996 (“Act”) for appointment of an arbitrator, however the same was rejected. The appeal against the said order of the Additional District Munsif was also dismissed by the High Court of Madras. The present case is a special leave petition by the Appellant against the High Court’s order.

Issues before the Court of Law:

1) Whether or not the issue of validity of partnership deed could be decided by an arbitrator?

2) Whether or not the issue of allegations of the Appellant could be decided by an arbitrator?

Ratio of the Court:

  1. Yes. One of the disputes in the present case was regarding the reconstitution of partnership firm and a subsequent deed entered into, to that effect. In other words, it was a dispute relating to continuation of the Appellant as a partner of the firm especially after the Respondents had filed an application to the effect that the Appellant was not a part of their firm anymore. Thus, the dispute fell clearly within the purview of the arbitrator’s jurisdiction to decide on the existence of the original deed and its validity thereof.
  2. No, the arbitrator could not take up the issue of allegations by the Appellant against the Respondent for misappropriation and malpractice. The matter required material evidence to be produced by both parties to prove their case and as the allegations were serious in nature, the matter had to be tried in a court.

Decision Held:

In view of the preceding history of the case, the Additional District Munsif of Coimbatore was wrong in holding that the matter of validity of partnership agreement was outside the arbitrator’s jurisdiction. However, the arbitrator could not decide upon the legal issue of fraud and criminal misappropriation of funds as alleged by the Appellants. Thus, the parties were allowed to produce their evidence before the appropriate Court of law, in respect of the issue of fraud as well as retirement of the Appellant.

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