Point of law: civil aspect of fraud is considered to be arbitrable in contemporary arbitration jurisprudence, with the only exception being where the allegation is that the arbitration agreement itself is vitiated by fraud or fraudulent inducement, or the fraud goes to the validity of the underlying contract, and impeaches the arbitration clause itself.

ORDER :

P. Naveen Rao, J.

1. Averments of the application disclose that applicant is a Company, registered under the Companies Act, 1956 having its registered office at Hyderabad, involved in manufacture of environmental simulation systems and is a subsidiary of a company by name Weiss Umwelttechnik GmbH registered in the Germany. The respondent was appointed as Head-Administration and Finance in the year 2011 and presently working as Vice President - Administration and Finance. On 31.08.2011 the applicant and the respondent entered into Employment Agreement. The applicant alleges that the respondent breached the confidence reposed in her, indulged in fraudulent activities, and misappropriated and siphoned off the funds of the applicant, causing huge loss to the applicant. Vide proceedings dated 20.03.2020, respondent was suspended from service. On 17.06.2020, show-cause notice was issued calling upon the respondent to explain the alleged illegalities committed by her. In the meantime, the applicant appointed M/s. Nathu and Pathak, Chartered Accountants, to conduct a forensic audit. The forensic audit report was submitted on 15.10.2020. The report pointed out misappropriation of Rs.11,44,26,184/-.

2. After analyzing the findings of audit report, on 17.10.2020 notice was issued to the respondent proposing to refer the inter se dispute to an arbitrator by invoking clauses 13.3 and 13.4 of the Employment Agreement. In the notice, applicant suggested the name of Mr. Kranthi Kumar Reddy as sole arbitrator. In the reply dated 23.11.2020, while accepting that there is a provision for resolution of inter se disputes by arbitration, the respondent rejected the proposal to appoint Mr. Kranthi Kumar Reddy, practicing Advocate, as sole arbitrator and instead suggested the name of Justice A. Gopal Reddy, Retired Judge of this Court as sole arbitrator. The name suggested by the respondent as arbitrator was not agreeable to the applicant. Therefore, in the reply dated 08.12.2020 the applicant suggested the name of Justice L. Narasimha Reddy, former Judge of this Court and retired Chief Justice of Patna High Court, as sole arbitrator. This was not agreeable to the respondent. Since there is no consensus on the appointment of the arbitrator, this application is filed.

3. In the counter-affidavit, respondent points out that when serious allegations of fraud are levelled, arbitration proceedings are not maintainable. The allegations of fraud are complicated and it is essential that such complex issues ought to be decided only by a civil Court on appreciation of the evidence and, therefore, the allegation of fraud committed by the respondent cannot be an arbitral issue. Further, respondent denied the existence of arbitration agreement.

4. Heard Mr. Tarun G. Reddy, learned counsel for the applicant and Mr. M. Krishna Chaitanya, learned counsel for the respondent.

5. Taking through the employment agreement clauses, more particularly, clauses-5, 13.3 and 13.4, learned counsel for the applicant submitted that the respondent failed to discharge the duties and responsibilities with utmost devotion and dedication and breached trust reposed in her. There are serious disputes on siphoning and misappropriating the funds of the applicant and in terms of clauses 13.3 and 13.4 of the employment agreement, if there are disputes between the employer and the employee, the disputes have to be referred to arbitrator. He therefore submitted that arbitration clause was validly invoked by the applicant. He further submitted that the respondent has also agreed to refer the disputes to the arbitrator. The only area where there is no agreement between the parties is on who should be the arbitrator. He submitted that Court may appoint an arbitrator.

6. Learned counsel for respondent while reiterating the specific assertions in the counter-affidavit further submitted that in the allegation of misappropriation of funds though several other employees are also involved, but no acti