[Cites 40, Cited by 0]
Karnataka High Court
Sarfaraz Munaf vs Mr Siraj Ummer on 8 April, 2026
-1-
COMAP No. 277 of 2024
IN THE HIGH COURT OF KARNATAKA AT BENGALURU
DATED THIS THE 8TH DAY OF APRIL, 2026
PRESENT
THE HON'BLE MR. VIBHU BAKHRU, CHIEF JUSTICE
AND
THE HON'BLE MR. JUSTICE C.M. POONACHA
COMMERCIAL APPEAL NO. 277 OF 2024
BETWEEN:
1. SARFARAZ MUNAF
PARTNER M/S SEA LINE TRADING (R)
AGED ABOUT 45 YEARS
S/O ABDUL MUNAF
RESIDING AT D NO.6-2
BEACH ROAD, NEAR MALPE BEACH
MALPE, UDUPI - 576 108
...APPELLANT
(BY SRI SYED KHALEEL PASHA, ADVOCATE)
AND:
1. MR. SIRAJ UMMER
AGED ABOUT 51 YEARS
Digitally S/O UMMER
signed by
VEERENDRA RESIDING AT D NO.3-3-5F
KUMAR K M "SRI RAKSHA"
Location:
High Court of NEAR ST JUDE AUTOMOBILE WORKSHOP
Karnataka BEEDU MARG, AMBALAPADY
UDUPI - 573 103
2. M/S SEA LINE TRADING
A REGISTERED PARTNERSHIP FIRM
REPRESENTED BY ITS MANAGING PARTNER
HAVING ITS OFFICE AT D NO. 30-34-4
NEAR CORPORATION BANK
PO MALPE - 576 108
UDUPI TALUK AND DISTRICT
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COMAP No. 277 of 2024
3. HANEEF MOHAMMED
MANAGING PARTNER
M/S SEA LINE TRADING (R)
AGED ABOUT 56 YEARS
S/O BMA KHADER
RESIDING AT FLAT No. 704
MANDAVI COURT, COURT ROAD
UDUPI - 576 101
4. RONALD MANOHAR KARKADA
PARTNER M/S SEA LINE TRADING(R)
AGED ABOUT 60 YEARS
S/O ROBERT KARKADA
RESIDING AT H NO.6-29
SHANTHINAGAR
UDYAVARA, UDUPI - 574 118
5. SHAHID MASOUD
PARTNER M/S SEA LINE TRADING (R)
AGED ABOUT 53 YEARS
S/O AZIMUR RAHAMAN
FLAT NO.804 MANDAVI COURT APARTMENT
OPP. UDUPI DISTRICT COURT
COURT ROAD, UDUPI - 576 101
6. MOHAMMED IQBAL SHAIK
PARTNER M/S SEA LINE TRADING (R)
AGED ABOUT 57 YEARS
S/O MOHAMMED IQBAL SHAIK
RESIDING AT No. 6-2-28A, 4MM
MAHALASA BLOCK
SHANTHANAND RESIDENCY
MISSION HOSPITAL ROAD
UDUPI - 576 101
7. SALAHUDDIN SAHEB
PARTNER M/S SEA LINE TRADING (R)
AGED ABOUT 78 YEARS
S/O KODAVOOR GAFOOR SAHEB
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COMAP No. 277 of 2024
HOUSE D NO. 32
HIS GRACE APRTEMENT
MARTIN PAIS ROAD
ASHOK NAGAR
HATHILL MANGALORE - 575 006
8. SRIKANTH BHAT
PARTNER M/S SEA LINE TRADING (R)
AGED ABOUT 43 YEARS
S/O GOPALAKRISHNA BHAT
RESIDING AT NO.4-22A, MATHRU VIJAYA
ESHWAR NAGARA
NEAR MAHALINGESHWARA TEMPLE
KODAVOOR
TENKANIDIYOOR - 576 106
...RESPONDENTS
(BY SRI. SACHIN B.S., ADVOCATE FOR R-1,
R-4, R-5 & R-8 ARE SERVED AND
R-2, R-3, R-6 & R-7 ARE DELETED
VIDE COURT ORDER DATED 28.10.2025)
THIS COMMERCIAL APPEAL IS FILED UNDER SECTION
13(1A) OF THE COMMERCIAL COURTS ACT 2015 READ WITH
ORDER 41 RULE 1 OF THE CPC, PRAYING TO SET ASIDE THE
ORDER IN I.A. No.3 IN COM.OS No.121/2023 DATED 25/04/2024
PASSED BY THE HON'BLE II ADDITIONAL DISTRICT JUDGE
COMMERCIAL COURT, UDUPI AND ETC.
THIS COMMERCIAL APPEAL HAVING BEEN HEARD AND
RESERVED FOR JUDGMENT, COMING ON FOR PRONOUNCEMENT
THIS DAY, JUDGMENT WAS PRONOUNCED AS UNDER:
CORAM: HON'BLE MR. VIBHU BAKHRU, CHIEF JUSTICE
and
HON'BLE MR. JUSTICE C.M. POONACHA
C.A.V. JUDGMENT
(PER: HON'BLE MR. VIBHU BAKHRU, CHIEF JUSTICE)
1. The appellant has filed the present appeal under Section
37(1)(a) of the Arbitration and Conciliation Act, 1996 [A&C Act],
impugning an order dated 25.04.2024 passed by the learned II
Additional District Commercial Court, Udupi District [Commercial
Court] rejecting I.A.No.3 in Com.OS.No.121/2023. The appellant
had filed the said application under Section 8 of the A&C Act,
praying that the parties be referred to arbitration.
2. Respondent No.1 [the plaintiff] had filed the aforementioned
suit (Com.OS.No.121/2023) seeking recovery of an amount of
`4,00,10,000/-, along with interest at the rate of 18% per annum
from the date of the suit till payment, as well as the costs.
3. It was the plaintiff's case that he intended to enter into a
partnership with the appellant [defendant no.3] and respondent
Nos.3 to 5 [defendant Nos. 2, 4 and 5]. The plaintiff stated that
the defendants Nos.2 to 5 were partners in the firm M/s Sea Line
Trading [defendant No.1 firm], which was arrayed as defendant
No.1 in the suit, and was engaged in the business of trading in
seafood. The plaintiff claimed that defendant Nos.2 to 5 had
demanded a sum of `2,85,00,000/- (Rupees Two Crores Eighty
Five Lakhs Only) from the plaintiff as investment and had
represented that on the plaintiff investing the said amount, he
would be joined as a partner in the defendant No.1 firm. He also
claimed that persons arrayed as defendant Nos.6 to 8 had also
promised to join as partners in defendant No.1 firm. The plaintiff
claimed that he was under a bona fide belief that all defendant
Nos.2 to 8 were partners in defendant No.1 firm. And, on the said
basis, he transferred a sum of `2,85,00,000/- directly in the account
of the defendant No.1's firm. However, inconsistent with the said
pleading, the plaintiff also claimed that out of the said sum, he had
paid a sum of `2,72,57,315/- in the said bank accounts of the firm
and `12,42,685/- in cash.
4. The plaintiff claimed that despite making huge investments,
the defendants were hesitating to enter into any documents to
evidence the plaintiff's entering as a partner of the firm. However,
after repeated reminders, they agreed to reduce the terms into
writing. The plaintiff also averred that "the transaction of the
plaintiff entering into the Partnership is evidenced by an agreement
and deed of retirement of partners from the partnership firm M/s.
Sea Line Trading on 01.03.2019 ".
5. He claimed that in the said agreement, defendant Nos.2, 5,
6, 7 and 8 were shown as partners and the plaintiff was shown as
an incoming partner, who had invested `2,85,00,000/- (Rupees
Two Crores Eighty Five Lakhs Only).
6. The plaintiff claimed that the actual registered partnership
deed was amongst defendant Nos.2 to 5 as partners and
defendant Nos.6 to 8 were not partners. However, by
misrepresentation, had joined the agreement and the deed of
retirement dated 01.03.2019 to "dupe the plaintiff".
7. The plaintiff claimed that after realising the fraudulent
intention of the defendants, he pressurised them for a refund of his
investment. The defendants issued cheques dated 20.05.2019 and
06.06.2019 for a sum of `95,00,000/- (Rupees Ninety Five Lakhs
Only) each, but both the cheques were dishonoured. The plaintiff
filed a complaint under Section 138 of the Negotiable Instruments
Act, 1881, which is pending.
8. The plaintiff claimed that after receiving court summons, the
defendants had come forward and entered into a compromise on
28.10.2022 and settled the disputes for a sum of `4,00,00,000/-
(Rupees Four Crores Only), inclusive of interest, in full discharge of
the said amount. It is stated that the defendants had issued
cheques aggregating to `4,00,00,000/- to discharge the liability.
However, the said cheques were dishonoured on presentation. The
concerned bank returned the cheques with the remarks "account
blocked".
9. Defendant No.3 (the appellant in the present case) filed an
application under Section 8 of the A&C Act seeking that the parties
be referred to arbitration.
10. The appellant has produced three (03) documents, each
containing an arbitration clause. The first is a registered partnership
deed dated 23.06.2015, executed by defendant Nos.2 to 5. As per
the terms of the said partnership deed, the partners agreed to carry
on the business in the name of M/s Sea Line Trading. The second
document is an admission-cum-retirement/reconstitution deed
dated 26.04.2018. There are eight signatories to the said deed.
The same reflects that the partnership firm M/s Sea Line Trading
was reconstituted with the plaintiff and the defendant Nos.6 to 8
joining as partners with defendant Nos.2 and 5, and defendant
Nos.3 and 4, retiring from the said firm. The said deed also
includes an arbitration clause. The third document is a deed of
retirement of partners from partnership deed of M/s. Sea Line
Trading dated 01.03.2019, which reflects that the plaintiff had
retired from the firm, which was constituted in terms of the
admission-cum-retirement/re-constitution deed dated 26.04.2018.
The said deed also includes an arbitration clause. In the aforesaid
context, defendant No.3 (appellant) had filed the application for
referring the parties to arbitration.
THE IMPUGNED ORDER
11. The learned Commercial Court rejected the application on
the ground that the claim made by the plaintiff pertained to lending
money without entering into any agreement containing an
arbitration clause. Thus, the subsequent deeds entered into by the
plaintiff would not bind him to refer the disputes to arbitration.
Paragraphs 13 and 15 of the impugned order are relevant and are
set out below.
"13. Along with the written statement the defendant has
produced the xerox copy of admission cum
retirement/reconstitution deed, office copy of reply sent
by 4th defendant to the notice of the plaintiff, GST
registration certificate etc. Copy of the partnership deed
dated 23.06.2015, deed of retirement of partners from
partnership deed dated 01.03.2019. Admission come
retirement/reconstitution deed dated 26.04.2018 are
also produced. The partnership deed dated 23.06.2015
wherein the plaintiff is not a party to the partnership
firm. Though it contains Arbitration clause in No.15 and
any disputes are difference arises in respect of
business of the partnership. The same shall be referred
to Arbitrator in Arbitration and Conciliation Act, 1996.
The deed of retirement of partner from partnership
deed to which the plaintiff is shown as one of the party
which was came into force on 01.03.2019 which
contains Arbitration clause admission cum
retirement/reconstitution deed dated 26.04.2018 reveal
that the plaintiff is not a party to the said deed despite
containing Arbitration clause. What ever the suit claim
mentioned in the plaint are pertaining to earlier lending
of money and plaint averment reveal that the plaintiff
lent money to the defendants on his personal capacity
without entering into any agreement containing
arbitration clause. Therefore, subsequent deed in
which the plaintiff is a party does not binding upon him
to refer dispute to the arbitrator.
14. *** *** *** ***
15. Whatever the suit claim of the plaintiff is not
covered with an arbitration agreement containing
arbitration clause the plaintiff is not claiming recovery of
money based on mutual agreement containing
arbitration clause. Hence, question of referring the
dispute to the arbitration does not arise. Therefore, I
answered point No.1 in the Negative."
SUBMISSIONS
12. The learned counsel appearing for the respondents
attempted to support the decision on three grounds. First, he stated
that the deed dated 26.04.2018 - which reflects that the
partnership firm, M/s Sea Line Trading, was reconstituted by the
plaintiff and defendant Nos.6 to 8 joining as partners, and
defendant Nos.3 and 4 retiring from the firm - is not registered
under the Partnership Act, 1932. He stated that an application
under Section 8 of the A&C Act relying on the arbitration clause
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under the said deed was not maintainable by virtue of Section
69(3) of the Partnership Act.
13. He also referred to the decision of the Supreme Court in the
case of Jagdish Chander Gupta v. Kajaria Traders(India) Ltd.1
in support of the said contention. Second, he submitted that by
virtue of the Commercial Courts Act, 2015, [CC Act] only the
Commercial Courts had the jurisdiction to hear suits involving
commercial disputes. He contended that Section 21 of the CC Act
has an overriding effect over other laws and thus the said Act
superseded any agreement between the parties to refer the
disputes to arbitration. He relied on the decision of the Supreme
Court in Jaycee Housing Private Limited and others v.
Registrar (General), Orissa High Court, Cuttack and others2 in
support of the said contention. Third, he submitted that the plaintiff
has also alleged fraud and therefore the disputes were not
arbitrable.
REASONS AND CONCLUSION
14. At the outset, it is relevant to note that the impugned order,
rejecting the application under Section 8 of the A&C Act, rests
1964 SCR (8) 50
2023 1 SCC 549
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solely on the ground that the disputes are not arbitrable. It is not
premised on any of the contentions as advanced by the respondent
and as noted above.
15. The learned Commercial Court had reasoned that the suit
filed by the plaintiff was for recovery of amounts that were paid
prior to the execution of the partnership deed dated 26.04.2018.
The learned Commercial Court also noted that the plaintiff's case
was that he had lent money to the defendants in his personal
capacity, without entering into an arbitration agreement. However,
the said conclusion overlooks certain averments made in the plaint.
As noted above, it is the plaintiff's case that he has paid an amount
of `2,85,00,000/- directly to the account of the defendant No.1 firm
and this investment was made on the assurance of defendant
Nos.2 and 3 that the plaintiff would be joined as a partner in the
said firm. The plaintiff further stated that despite substantial
investments, the defendants were hesitant to enter into any
document evidencing the plaintiff's entry as a partner in the firm.
The plaintiff also stated that the plaintiff entered into a partnership
as evidenced by an agreement and deed of retirement of the
partners from the partnership firm M/s Sea Line Trading(R) on
01.03.2019.
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16. The plaint also refers to the partnership deed dated
20.04.2018. But no such deed has been placed on record before
this court. However, the respondents have placed a copy of the
deed dated 26.04.2018 on record, which contains an arbitration
clause.
17. In view of the aforesaid, it cannot be stated that the disputes
are not connected with the agreement to constitute a partnership
firm.
18. The plaintiff allegedly joined the reconstituted firm M/s Sea
Line Trading as a partner and later retired from the same.
19. We may note at this stage that the learned counsel for the
respondents did not dispute that the subject disputes are covered
under the said arbitration agreement (arbitration clause) under the
Partnership Deed dated 26.04.2018. His contentions were confined
to three grounds as noted hereinbefore.
20. At this stage we may also refer to the language of Sub-
section (1) of Section 8 of the A&C Act. The same is set out below.
"8. Power to refer parties to arbitration where there
is an arbitration agreement.--(1)A judicial authority,
before which an action is brought in a matter which is
the subject of an arbitration agreement shall, if a party
to the arbitration agreement or any person claiming
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through or under him, so applies not later than the
date of submitting his first statement on the substance
of the dispute, then, notwithstanding any judgment,
decree or order of the Supreme Court or any Court,
refer the parties to arbitration unless it finds that prima
facie no valid arbitration agreement exists.
21. A plain reading of Section 8(1) of the A&C Act indicates that
the Court is bound to refer the parties to arbitration unless it prima
facie finds that no valid arbitration agreement exists.
22. In the present case, the plaintiff does not dispute that he
signed the reconstitution deed dated 26.04.2018 and the deed of
retirement dated 01.03.2019, both of which contain an arbitration
clause. However, he claims that he did not understand the same as
he does not know the language. Although he claims the defendants
committed fraud, the details are sketchy. His case is that he made
investments on the representation that defendant Nos.2 to 5 who
were partners of the firm. However, subsequently, documentation
was prepared to show that defendant Nos.2, 5, 6, 7 and 8 as
partners.
23. It is a trite law that an arbitration agreement is a separate
and independent agreement. The arbitration agreement, even
though embodied as a clause in the principal agreement, is a
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separate agreement, and the validity or invalidity of the principal
agreement may not affect the arbitration agreement.
24. In Interplay between Arbitration Agreement under
Arbitration and Conciliation Act 1996 and Stamp Act 1899 In
Re:3 the Supreme Court had referred to the concept of separability
of the arbitration agreement in various jurisdictions as well as in
this country and had summarised the law as under:
"120. In view of the above discussion, we formulate
our conclusions on this aspect. First, the separability
presumption contained in Section 16 is applicable not
only for the purpose of determining the jurisdiction of
the Arbitral Tribunal. It encapsulates the general rule
on the substantive independence of an arbitration
agreement. Second, parties to an arbitration
agreement mutually intend to confer jurisdiction on the
Arbitral Tribunal to determine questions as to
jurisdiction as well as substantive contractual disputes
between them. The separability presumption gives
effect to this by ensuring the validity of an arbitration
agreement contained in an underlying contract,
notwithstanding the invalidity, illegality, or termination
of such contract. Third, when the parties append their
signatures to a contract containing an arbitration
agreement, they are regarded in effect as
independently appending their signatures to the
arbitration agreement. The reason is that the parties
intend to treat an arbitration agreement contained in
an underlying contract as distinct from the other terms
of the contract; and Fourth, the validity of an
arbitration agreement, in the face of the invalidity of
the underlying contract, allows the Arbitral Tribunal to
assume jurisdiction and decide on its own jurisdiction
by determining the existence and validity of the
arbitration agreement. In the process, the separability
(2024) 6 SCC 1
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presumption gives effect to the doctrine of
competence-competence."
25. It would also be apposite to observe that at the stage of
referral under Section 8 of the A&C Act, the approach is not to
determine whether the Court can retain jurisdiction, but to
determine whether its jurisdiction is ousted.
26. In K.Mangayarkarasi and another v. N.J.Sundaresan and
another4, the Supreme Court has observed as under:
"21. Once an application in due compliance with
Section 8 of the 1996 Act is filed, the approach of the
civil court should be not to see whether the court has
jurisdiction. It should be to see whether its jurisdiction
has been ousted. There is a lot of difference between
the two approaches."
27. In view of the above, the impugned order, rejecting the
application to refer the parties to arbitration on the ground that the
disputes are not arbitrable is erroneous and liable to be set aside.
28. The next question to be examined is whether defendant
No.3's application under Section 8 of the A&C Act is not
maintainable by virtue of Section 69 of the Partnership Act, 1932.
Section 69 of the said Act is set out below:
69. Effect of non-registration.--(1) No suit to
enforce a right arising from a contract or conferred by
this Act shall be instituted in any Court by or on behalf
(2025) 8 SCC 299
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of any person suing as a partner in a firm against the
firm or any person alleged to be or to have been a
partner in the firm unless the firm is registered and the
person suing is or has been shown in the Register of
Firms as a partner in the firm.
(2) No suit to enforce a right arising from a contract
shall be instituted in any Court by or on behalf of a
firm against any third party unless the firm is
registered and the persons suing are or have been
shown in the Register of Firms as partners in the firm.
(3) The provisions of sub-sections (1) and (2) shall
apply also to a claim of set-off or other proceeding to
enforce a right arising from a contract, but shall not
affect--
(a) the enforcement of any right to sue for the
dissolution of a firm or for accounts of a dissolved
firm, or any right or power to realise the property of
a dissolved firm, or
(b) the powers of an official assignee, receiver or
Court under the Presidency-towns Insolvency Act,
1909 (2 of 1909), or the Provincial Insolvency Act,
1920 (5 of 1920), to realise the property of an
insolvent partner.
(4) This section shall not apply--
(a) to firms or to partners in firms which have no place
of business in the territories to which this Act extends,
or whose places of business in the said territories are
situated in areas to which, by notification under
section 56, this Chapter does not apply, or
(b) to any suit or claim of set-off not exceeding one
hundred rupees in value which, in the Presidency-
towns, is not of a kind specified in section 19 of the
Presidency Small Cause Courts Act, 1882 (5 of 1882),
or, outside the Presidency-towns, is not of a kind
specified in the Schedule II to the Provincial Small
Cause Courts Act, 1887 (9 of 1887), or to any
proceeding in execution or other proceeding incidental
to or arising from any such suit or claim.
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29. A plain reading of Section 69(1) of the Partnership Act
indicates that it proscribes a suit by a person suing as a partner or
on his behalf to enforce a right arising from a contract or as
conferred by the Partnership Act. Section 69(2) of the Partnership
Act, 1932 posits that no suit to enforce a right arising from a
contract, shall be instituted in any Court by or on behalf of a firm
against any third party unless the firm is registered and the persons
suing are or have been shown in the Register of Firms as partners.
30. Sub-section (3) of Section 69 clarifies that provisions of
subsection (1) and (2) shall also apply to claims of set off or other
proceedings to enforce a right arising from a contract. According to
the learned counsel for the plaintiff, an application under Section 8
of the A&C Act would qualify as another proceeding and thus would
not be maintainable. However, defendant No.3 does not seek to
maintain the application under Section 8 of the A&C Act as a
partner of an unregistered firm. He seeks to defend the suit, inter
alia, on the ground that, having retired from the firm, he would not
be liable for the plaintiff's claim in respect of any investment in the
firm. In this view, we are unable to accept that defendant No.3's
application under Section 8 of the A&C Act could be discarded and
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rejected as not maintainable by virtue of Section 69 of the
Partnership Act.
31. Next question to be examined is, whether the application
filed for reference of parties to arbitration as required, to be
rejected on the ground that the CC Act overrides other acts. In our
view, the said contention is bereft of any merit.
32. Arbitration is an alternative dispute resolution mechanism
outside the Court's adjudicatory processes. However, the courts
have a limited role in arbitration matters. Section 5 of the A&C Act
also provides the extent of judicial intervention in matters governed
by Part I of the A&C Act.
33. Section 2(1)(e) of the A&C Act defines the terms "Court" as
under:
2(1)(e) "Court" means--
(i) in the case of an arbitration other than
international commercial arbitration, the principal Civil
Court of original jurisdiction in a district, and includes
the High Court in exercise of its ordinary original civil
jurisdiction, having jurisdiction to decide the questions
forming the subject-matter of the arbitration if the
same had been the subject-matter of a suit, but does
not include any Civil Court of a grade inferior to such
principal Civil Court, or any Court of Small Causes;
(ii) in the case of international commercial
arbitration, the High Court in exercise of its ordinary
original civil jurisdiction, having jurisdiction to decide
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the questions forming the subject-matter of the
arbitration if the same had been the subject-matter of
a suit, and in other cases, a High Court having
jurisdiction to hear appeals from decrees of courts
subordinate to that High Court;"
34. In case of arbitration relating to commercial disputes of the
Specified Value (as defined under Section 2(1)(i) of the CC Act),
the Courts exercising jurisdiction have been specified under the CC
Act. Subsection (2) of Section 12 of the CC Act provides for the
determination of the specified value in an arbitration of a
commercial dispute for determining "whether such arbitration is
subject to the jurisdiction of a Commercial Division, Commercial
Appellate Division or Commercial Court, as the case may be".
35. The CC Act does not oust arbitration, but provides for
recourse to the Commercial Division, the Commercial Appellate
Division, or the Commercial Court, to the limited extent as
contemplated under the A&C Act.
36. This is expressly clear from Section 10 of the CC Act which
reads as under.
"10. Jurisdiction in respect of arbitration
matters.--Where the subject-matter of an arbitration
is a commercial dispute of a Specified Value and--
(1) If such arbitration is an international commercial
arbitration, all applications or appeals arising out of
such arbitration under the provisions of the Arbitration
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and Conciliation Act, 1996 (26 of 1996) that have
been filed in a High Court, shall be heard and
disposed of by the Commercial Division where such
Commercial Division has been constituted in such
High Court.
(2) If such arbitration is other than an international
commercial arbitration, all applications or appeals
arising out of such arbitration under the provisions of
the Arbitration and Conciliation Act, 1996 (26 of 1996)
that have been filed on the original side of the High
Court, shall be heard and disposed of by the
Commercial Division where such Commercial Division
has been constituted in such High Court.
(3) If such arbitration is other than an international
commercial arbitration, all applications or appeals
arising out of such arbitration under the provisions of
the Arbitration and Conciliation Act, 1996 (26 of 1996)
that would ordinarily lie before any principal civil court
of original jurisdiction in a district (not being a High
Court) shall be filed in, and heard and disposed of by
the Commercial Court exercising territorial jurisdiction
over such arbitration where such Commercial Court
has been constituted."
37. The contention that Section 10 excludes arbitration in
commercial disputes is insubstantial.
38. The last question to be examined is, whether the request to
refer the parties to arbitration is required to be declined on the
ground that the plaintiff has alleged fraud. The position that all
disputes involving allegations of fraud are not arbitrable, is
erroneous.
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39. In Abdul Kadir Shamsuddin Bubere v. Madhav Prabhakar
Oak5, the Supreme Court had observed as under:
"17. There is no doubt that where serious
allegations of fraud are made against a party and the
party who is charged with fraud desires that the matter
should be tried in open court, that would be a sufficient
cause for the court not to order an arbitration
agreement to be filed and not to make the reference."
40. Following the aforesaid decision, the Supreme Court in
N.Radhakrishnan v. Maestro Engineers6, held that the disputes
involving alleged fraud are not arbitrable.
41. However, in Swiss Timing Ltd. v. Commonwealth Games
2010 Organizing Committee7 a Single Judge in the Supreme
Court doubted the said decision in N.Radhakrishnan (supra). The
Court held that the said decision was per incuriam as it had not
noted the earlier decision in the case of P.Anand Gajapathi Raju
v. P.V.G. Raju (Dead)8 and Hindustan Petroleum Corporation
Ltd. v. Pinkcity Midway Petroleums9.
42. In A. Ayyasamy v. A.Paramasivam10, the Supreme Court
observed that an allegation of fraud simpliciter would not nullify the
AIR 1962 SC 406
(2010) 1 SCC 72
(2014) 6 SCC 677
(2000) 4 SCC 539
(2003) 6 SCC 503
(2016) 10 SCC 386
- 22 -
effect of an arbitration agreement between the parties. The Court
explained that it is only in those cases where the Court 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 for the same to be
decided in a Civil Court, that a reference of the parties to arbitration
under Section 8 of the A & C Act may be denied.
43. We may also note the following observations of
Dr.D.Y.Chandrachud, J., in his concurring opinion:
"43. Hence, the allegations of criminal wrongdoing
or of statutory violation would not detract from the
jurisdiction of the Arbitral Tribunal to resolve a dispute
arising out of a civil or contractual relationship on the
basis of the jurisdiction conferred by the arbitration
agreement.
xxxx xxxx xxxx
45. The position that emerges both before and
after the decision in N. Radhakrishnan [N.
Radhakrishnan v. Maestro Engineers, (2010) 1 SCC
72 : (2010) 1 SCC (Civ) 12] is that successive
decisions of this Court have given effect to the binding
precept incorporated in Section 8. Once there is an
arbitration agreement between the parties, a judicial
authority before whom an action is brought covering
the subject-matter of the arbitration agreement is
under a positive obligation to refer parties to
arbitration by enforcing the terms of the contract.
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. The
judgment in N. Radhakrishnan [N. Radhakrishnan v.
Maestro Engineers, (2010) 1 SCC 72 : (2010) 1 SCC
- 23 -
(Civ) 12] has, however, been utilised by parties
seeking a convenient ruse to avoid arbitration to raise
a defence of fraud:
45.1. First and foremost, it is necessary to
emphasise that the judgment in N. Radhakrishnan [N.
Radhakrishnan v. Maestro Engineers, (2010) 1 SCC
72 : (2010) 1 SCC (Civ) 12] does not subscribe to the
broad proposition that a mere allegation of fraud is
ground enough not to compel parties to abide by their
agreement to refer disputes to arbitration. More often
than not, a bogey of fraud is set forth if only to plead
that the dispute cannot be arbitrated upon.
To allow such a plea would be a plain misreading
of the judgment in N. Radhakrishnan [N.
Radhakrishnan v. Maestro Engineers, (2010) 1 SCC
72 : (2010) 1 SCC (Civ) 12]. As I have noted earlier,
that was a case where the appellant who had filed an
application under Section 8 faced with a suit on a
dispute in partnership had raised serious issues of
criminal wrongdoing, misappropriation of funds and
malpractice on the part of the respondent. It was in
this background that this Court accepted the
submission of the respondent that the arbitrator would
not be competent to deal with matters "which involved
an elaborate production of evidence to establish the
claims relating to fraud and criminal misappropriation".
Hence, it is necessary to emphasise that as a matter
of first principle, this Court has not held that a mere
allegation of fraud will exclude arbitrability. The burden
must lie heavily on a party which avoids compliance
with the obligation assumed by it to submit disputes to
arbitration to establish the dispute is not arbitrable
under the law for the time being in force. In each such
case where an objection on the ground of fraud and
criminal wrongdoing is raised, it is for the judicial
authority to carefully sift through the materials for the
purpose of determining whether the defence is merely
a pretext to avoid arbitration. It is only where there is a
serious issue of fraud involving criminal wrongdoing
that the exception to arbitrability carved out in N.
Radhakrishnan [N. Radhakrishnan v. Maestro
Engineers, (2010) 1 SCC 72 : (2010) 1 SCC (Civ) 12]
may come into existence.
- 24 -
45.2. Allegations of fraud are not alien to ordinary
civil courts. Generations of judges have dealt with
such allegations in the context of civil and commercial
disputes. 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 and purview of a claim in
arbitration. The parties who enter into commercial
dealings and agree to a resolution of disputes by an
arbitral forum exercise an option and express a choice
of a preferred mode for the resolution of their disputes.
The parties in choosing arbitration place priority upon
the speed, flexibility and expertise inherent in arbitral
adjudication. Once parties have agreed to refer
disputes to arbitration, the court must plainly
discourage and discountenance litigative strategies
designed to avoid recourse to arbitration. Any other
approach would seriously place in uncertainty the
institutional efficacy of arbitration. Such a
consequence must be eschewed."
[Emphasis Supplied]
44. In a subsequent decision in Rashid Raza v. Sadaf Akhtar11,
the Supreme Court held as under:
"4. The principles of law laid down in this appeal
make a distinction between serious allegations of
forgery/fabrication in support of the plea of fraud as
opposed to "simple allegations". Two working tests
laid down in para 25 are : (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."
45. In Vidya Drolia and others v. Durga Trading
Corporation12, the Supreme Court expressly overruled
N.Radhakrishnan v. Maestro Engineers (supra).
(2019) 8 SCC 710
- 25 -
46. In a later decision in Avitel Post Studioz Ltd. v. HSBC PI
Holdings (Mauritius) Ltd.,13 the Supreme Court further explained
the arbitrability of disputes involving an allegation of fraud, as
under:
"35. After these judgments, it is clear that "serious
allegations of fraud" arise only if either of the two tests
laid down are satisfied, and not otherwise. The first
test is satisfied only when it can be said that the
arbitration clause or agreement itself cannot be said to
exist in a clear case in which the court finds that the
party against whom breach is alleged cannot be said
to have entered into the agreement relating to
arbitration at all. The second test can be said to have
been met in cases in which allegations are made
against the State or its instrumentalities of arbitrary,
fraudulent, or mala fide conduct, thus necessitating
the hearing of the case by a writ court in which
questions are raised which are not predominantly
questions arising from the contract itself or breach
thereof, but questions arising in the public law
domain."
47. Additionally, the Supreme Court also observed as under:
"43. In the light of the aforesaid judgments, para
27(vi) of Afcons [Afcons Infrastructure Ltd. v. Cherian
Varkey Construction Co. (P) Ltd., (2010) 8 SCC 24 :
(2010) 3 SCC (Civ) 235] and para 36(i) of Booz Allen
[Booz Allen & Hamilton Inc. v. SBI Home Finance Ltd.,
(2011) 5 SCC 532 : (2011) 2 SCC (Civ) 781], must
now be read subject to the rider that the same set of
facts may lead to civil and criminal proceedings and if
it is clear that a civil dispute involves questions of
fraud, misrepresentation, etc. which can be the subject
matter of such proceeding under Section 17 of the
Contract Act, and/or the tort of deceit, the mere fact
that criminal proceedings can or have been instituted
(2021) 2 SCC 1
(2021) 4 SCC 713
- 26 -
in respect of the same subject matter would not lead
to the conclusion that a dispute which is otherwise
arbitrable, ceases to be so."
48. In K.Mangayarkarasi and another v. N.J.Sundaresan and
another14, the Madras High Court referred to the various decisions
and observed as under:
24. The allegation of fraud must have some
implication in public domain to oust jurisdiction of
arbitration. If an allegation of fraud exists directly
between the parties concerned, the same will not be
termed to be of serious nature of fraud and hence
would not be barred for arbitration. At this juncture, it
is worthwhile to refer the decision of the Hon'ble Apex
Court in Sushma Shivkumar Daga case (cited supra).
Further, relying on a earlier Judgment of the Apex
Court in Rashid Raza's case (cited supra) the
Supreme Court holds that two parties in an
Agreement. The first is that the plea permeates the
entire contract option of the arbitration agreement
rendering it void or secondly whether the allegation of
fraud touches upon the internal affairs of the parties
inter se having no implication in the public domain.
The allegation must have some implication in public
domain to oust jurisdiction of arbitration. If an
allegation of fraud exists directly between the parties
concerned, the same will not be termed to be of
serious nature of fraud and hence would not be barred
for arbitration. Further, the Apex Court in the
Judgment in Deccan Paper Mills's case (cited supra)
held that where the suit is inter parties with no public
domain, fraud as laid down in the case of Avitel Post
Studioz Ltd., (cited supra)) is not applicable. Where
rectification of instrument under Section 31 of the
Specific Relief Act is strictly action inter parties or by
person who obtained derivative title from parties, such
action is in personam and the dispute is arbitrable.
2025 SCC Online MAD 2630
- 27 -
49. In K.Mangayarkarasi and another v. N.J.Sundaresan and
another (supra), the Supreme Court upheld the said view of the
Madras High Court and observed as under:
"20. The law is well settled that allegations of fraud or
criminal wrongdoing or of statutory violation would not
detract from the jurisdiction of the Arbitral Tribunal to
resolve a dispute arising out of a civil or contractual
relationship on the basis of the jurisdiction conferred
by the arbitration agreement."
50. In the present case, the allegations of fraud are a facet of
disputes inter se the parties. Thus, we are unable to accept that the
disputes involving allegations of fraud are not arbitrable.
51. In view of the above, the present appeal is allowed. The
impugned order is set aside, and the parties are referred to
arbitration.
Sd/-
(VIBHU BAKHRU)
CHIEF JUSTICE
Sd/-
(C.M. POONACHA)
JUDGE
SD/KMV
