The allegations of siphoning of the funds and various other business improprieties, by one partner against another led to the dispute. As per the partnership deed, the partner invoked arbitration by filing a Section 11 petition before the High Court.
The High Court rejected the petition by following the test laid down in Division Bench and held:
However, considering everything, the Court was of the firm view that the nature of the dispute involving serious allegations of fraud of complicated nature is not fit to be decided in an arbitration proceeding.
The dispute may require voluminous evidence on the part of both the parties to come to a finding which can be only properly undertaken by a civil court of competent jurisdiction.
The petitioner challenged the decision of the High court by filing a special leave petition before the Hon’ble Supreme Court of India.
ISSUES – Arbitrability of Fraud
JUDGEMENT–
In the view of further discussions, it was concluded that mere allegation of fraud may not be a ground to nullify the effort of the arbitration agreement.
Only in these cases, it can be held where the court while dealing with section 8 fines that there are very serious offences committed which shall constitute to criminal offence on where fraud is so harmful that only civil court can decide the matter based on evidence.
In such a situation the court can sidetrack the agreement by dismissing the application under section 8 and proceeds with the suit. It can also be done when fraud is done against the arbitration clause itself.
Though, there is no law in regard which says that arbitration shall be ruled out be it’s at the discretion of the court. As the matters which involve public offence are to be treated in courts. Thus the sole focus should be on the question of how grave nature is of the offence committed.
Supreme Court used 2 tests to see the present case
Does the plea permeate the entire contract and arbitration clause?
Does the offence committed are in the public domain?
After applying these 2 tests it was found that this is a case that falls on the side of the simple allegation and not of the severe allegation. Hence in this, the dispute raised between the parties is arbitrable and sec 11 application under the Arbitration Act would be maintainable. The judgment under the appeal was set aside.
This judgment applies only to the Indian seated arbitral tribunal and for the foreign seated arbitral tribunal, the arbitral tribunal has the jurisdiction to listen to any nature of arbitral fraud.
