Mere allegation of fraud simplicitor may not be a ground to nullify the effect of an arbitration agreement between the parties.

JUDGMENT

R. F. NARIMAN, J.

1. The present case arises out of a partnership dispute in which an FIR dated 17.11.2017 was lodged by one of the partners alleging siphoning of funds and various other business improprieties that were committed. The FIR is at present under investigation.

2. An Arbitration Petition dated 02.01.2018 was filed by the appellant before the High Court under Section 11 of the Arbitration and Conciliation Act, 1996, seeking appointment of an Arbitrator under the Arbitration clause which is to be found in the partnership deed between the parties which is dated 30.01.2015. The High Court, by the impugned order dated 06.12.2018, has cited our judgment in ‘A. Ayyasamy v. A. Paramasivam and Others’ [(2016) 10 SCC 386] and after extracting paragraph 26 from the said judgment has held:

“…….The allegation of fraud that was levelled against the appellant was that he had signed and issued a cheque of Rs.10,00,050 on 17th June, 2010 of Hotel Arunagiri in favour of his son without the knowledge and consent of the other partners i.e. respondents. It was a mere matter of account which could be looked into and found out even by the arbitrator. The facts of the instant case however are much more complex as the materials on records disclose. This Court however does not intend to make any comments on the merits of the allegations lest it may prejudice the case of the parties in an appropriate proceeding before competent court. However, considered in totality this Court is of the firm view that the nature of the dispute involving serious allegations of fraud of complicated nature are not fit to be decided in an arbitration proceedings. 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.”

3. Consequently, while purportedly following this judgment, the Section 11 application was dismissed.

4. Having heard learned counsel for both the sides, it is clear that the law laid down in A. Ayyasamy’s case is in paragraph 25 and not in paragraph 26. Paragraph 25 of the said judgment states as follows:

25. In view of our aforesaid discussions, we are of the opinion that 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. Reverse position thereof would be that where there are simple allegations of fraud touching upon the internal affairs of the party inter se and it has no implication in the public domain, the arbitration clause need not be avoided and the parties can be relegated to arbitration. While dealing with such an issue in an application under Section 8 of the Act, the focus of the Court has to be on the question as to whether jurisdiction of the Court has been ousted instead of focusing on the issue as to whether the Court has jurisdiction or not. It has to be kept in mind that insofar as the statutory scheme of the Act is concerned,