"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 the civil court……the court can sidetrack the agreement by dismissing the application under Section 8…”
In this landmark case, the Bombay High Court stepped into the intricacies of fraud allegations within a partnership dispute, examining whether such claims can override an arbitration agreement. The Court’s detailed analysis of fraud and arbitrability opens a dialogue on when judicial intervention is warranted and when arbitration must take its course, especially in cases involving allegations that could affect the very core of the agreement.
Brief Facts:
The dispute concerns M/s Tiwari Enterprises, a partnership firm originally comprising Narayan Tiwari (now deceased), Defendant No.2 (Petitioner), and Defendant No.3, with profits shared in a 50:25:25 ratio. After Narayan Tiwari’s illness and death in 2017, his legal heirs (Plaintiffs) alleged that Defendant No.2 took over the firm, forged documents, and falsely inducted his son as a partner. They filed a suit seeking rendition of accounts and determination of Narayan Tiwari’s share.
Defendant No.2 sought referral to arbitration under Section 8 of the Arbitration and Conciliation Act, 1996, citing an arbitration clause in the 2003 Partnership Deed. The Trial Court rejected the application due to allegations of fraud. On appeal, the District Judge also dismissed the matter, observing that Defendant No.2 himself disputed the original deed’s enforceability. Defendant No.2 then moved the High Court under Article 227.
Contentions of the Petitioner:
Senior Advocate Mr. Abhay Khandeparkar, for the Petitioner (Defendant No.2), argued that the courts erred in rejecting referral to arbitration despite an explicit clause in the 2003 Partnership Deed. He submitted that mere allegations of fraud cannot bar arbitration under Section 8 of the Arbitration and Conciliation Act, 1996, as party autonomy must be upheld.
He further contended that the District Judge wrongly held that the Petitioner denied the existence of the partnership. The Petitioner had only referred to a reconstitution of the firm, not a denial of the original deed, which was expressly acknowledged in the reconstitution document. Hence, the arbitration clause remained binding on all parties, including legal heirs.
Contentions of the Respondent:
Counsel for the Respondents-Plaintiffs, Mr. Sumedh Modak, supported the lower court’s decision, arguing that the Plaintiffs, being legal heirs of the deceased partner Narayan Tiwari, were not bound by the arbitration clause in the original Partnership Deed. He relied on the distinction between “party” and “parties” under Sections 2(1)(h) and 7(1) of the Arbitration and Conciliation Act, 1996, to argue that only those who were original signatories to the arbitration agreement can be compelled to arbitrate.
He placed strong reliance on the Supreme Court’s Constitution Bench decision in Cox and Kings Ltd. v. SAP India Pvt. Ltd. (2024), to contend that the Plaintiffs, not being signatories, could not be forced into arbitration.
Observation of the Court:
In a detailed pronouncement, the Bombay High Court reaffirmed the legal position that the mere presence of fraud allegations does not, by itself, oust the jurisdiction of an arbitral tribunal under Section 8 of the Arbitration and Conciliation Act, 1996. The Court reiterated that such allegations must meet a stringent threshold, either rendering the arbitration agreement itself void or raising issues of complex fraud with public implications, to justify exclusion from arbitration.
At the outset, the Court acknowledged the undisputed fact that the Plaintiffs’ father, Narayan Tiwari, was a partner in the firm under a Deed of Partnership dated 31st January 2003, which contained an arbitration clause in Clause 17 and provided in Clause 12 that the “death, retirement or insolvency of any partner shall not dissolve the firm.” The primary controversy centered around whether Narayan Tiwari remained a partner until his demise in May 2017, and whether the Plaintiffs, as his legal heirs, were entitled to accounts and share in the partnership.
The Plaintiffs alleged that a Deed of Reconstitution dated 2nd March 2015, which purportedly retired Narayan Tiwari from the firm, was forged. The Civil Judge and subsequently the District Judge declined to refer the dispute to arbitration, primarily relying on these allegations of forgery and fraud.
The High Court held this refusal to be erroneous, firmly anchoring its reasoning in settled precedent. Citing A. Ayyasamy v. A. Paramasivam (2016), the Court emphasized that courts must distinguish between serious, complex fraud affecting public interest and “fraud simplicitor.” It reproduced the Supreme Court’s observation in Ayyasamy:
“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 the civil court… the court can sidetrack the agreement by dismissing the application under Section 8…”
It further drew strength from the Supreme Court’s caution in Vidya Drolia v. Durga Trading Corporation (2020), where the Court, through Chandrachud J. (as he then was), stated:
“There is no element of discretion left in the court or judicial authority to obviate the legislative mandate of compelling parties to seek recourse to arbitration… a bogey of fraud is set forth if only to plead that the dispute cannot be arbitrated upon… If an allegation of fraud can be adjudicated upon in the course of a trial before an ordinary civil court, there is no reason or justification to exclude such disputes from the ambit… of arbitration.”
The High Court then relied on the framework laid down in Rashid Raza v. Sadaf Akhtar (2019), where the Supreme Court articulated a two-fold test to determine arbitrability in the context of fraud:
“(1) does this plea permeate the entire contract and above all, the agreement of arbitration, rendering it void, or (2) whether the allegations of fraud touch upon the internal affairs of the parties inter se having no implication in the public domain.”
The Court noted that the Plaintiffs’ allegations of forgery were limited to the Deed of Reconstitution and did not impugn the Deed of Partnership which contained the arbitration clause. It observed: “the allegations of fraud are in relation to the execution of Deed of Reconstitution of the firm and not in relation to the Deed of Partnership which contains the arbitration clause.”
Referring to Avitel Post Studioz Ltd. v. HSBC PI Holdings (Mauritius) Ltd. (2020), the Court noted that: “serious allegations of fraud” arise only if either of the two tests laid down are satisfied, and further emphasized that: “the mere fact that criminal proceedings can or have been instituted in respect of the same subject matter would not lead to the conclusion that a dispute which is otherwise arbitrable, ceases to be so.”
The Court rejected the contention that the arbitration agreement was rendered inapplicable due to Defendant No. 2’s alleged denial of the partnership deed. It observed that Defendant No. 2 did not, in fact, deny the partnership or the arbitration clause, and further held:
“Clause 7 of the Deed of Reconstitution of firm explicitly states that subject to the modifications brought about by the reconstitution of the firm all other stipulations in the Deed of Partnership would govern the rights and liabilities of the partners.”
On the issue of whether legal representatives could be bound by the arbitration clause, the Court invoked the Constitution Bench ruling in Cox and Kings Ltd. v. SAP India Pvt. Ltd. (2024), clarifying that the phrase “persons claiming through or under” a party is distinct from a “party” as defined under Section 2(1)(h) of the Arbitration Act. However, the Court deemed the principle to be of limited application in the present case, as it found:
“The Plaintiffs are the legal representatives of the deceased partner. The Partnership Deed contains a clear and explicit Arbitration Agreement. The decision of the Arbitrator would bind not only the partners but their legal representatives.”
The Court also cited Section 40(1) of the Arbitration Act, which stipulates: “an arbitration agreement shall not be discharged by the death of any party thereto... but shall in such event be enforceable by or against the legal representative of the deceased.”
The Court held that the allegations raised by the Plaintiffs did not meet the threshold of serious fraud affecting the arbitrability of the dispute. It found that the issues in question pertained purely to the internal affairs of the partnership and were amenable to resolution by arbitration. The decisions of the Civil and District Judges were therefore found to be legally unsustainable.
Accordingly, the Court allowed the application under Section 8 and directed the parties to resolve their disputes through arbitration in terms of the Deed of Partnership.
The decision of the Court:
The petition was allowed. The impugned orders of the District Judge and Trial Court were quashed and set aside. The parties were referred to arbitration. Advocate Vishal Kanade was appointed as the sole Arbitrator with the consent of counsel. The Arbitrator was requested to file the disclosure statement within two weeks. The parties were directed to appear before the Arbitrator on a date fixed by him. Fees were directed to be paid as per the Bombay High Court (Fee Payable to Arbitrators) Rules, 2018.
Case Title: Bholashankar Ramsuresh Dubey v. Dinesh Narayan Tiwari
Case no: WRIT PETITION NO. 17174 OF 2024
Coram: Hon’ble Justice N. J. Jamadar
Advocate for Petitioner: Sr. Adv. Mr. Abhay S. Khandeparkar, with Adv. Rushikesh Bhagat, Adv. Rohit P Mahadik, Adv. Farhan Shaikh, Adv. Apoorva Khandeparkar, Adv. Vaibhav Kulkarni and Adv. Sudarshan Bhilare, i/b Khandeparkar & Associates
Advocate for Respondent: Adv. Mr. Sumedh S. Modak
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