Recently, the Supreme Court ruled that courts cannot compel parties to arbitrate when the very foundation of the arbitration agreement is under serious doubt due to allegations of forgery, while deciding appeals arising from a protracted partnership dispute involving a reconstitution of a gold trading firm. Emphasising the consensual nature of arbitration, the Court made it clear that when consent itself is credibly questioned on grounds of fabrication, arbitral jurisdiction fails at the very threshold.
Brief Facts:
The dispute traces back to a partnership firm, M/s RDDHI Gold, constituted under a partnership deed dated 01.12.2005between the appellant and respondent nos. 2 and 3. Respondent no.1 later claimed entry into the firm on the basis of an alleged Admission Deed dated 17.04.2007, purportedly executed through a power of attorney, under which the original partners retired and she acquired a majority stake. The appellant categorically denied the execution of this document, branding it as forged and fabricated. The controversy deepened when, in 2016, respondent no.1 asserted rights based on the disputed deed, leading to civil proceedings, applications under Sections 8, 9, and 11 of the Arbitration and Conciliation Act, 1996, and conflicting High Court orders, one referring disputes to arbitration and another refusing appointment of an arbitrator due to doubts over the arbitration agreement itself.
Contentions of the Respondent:
The respondent argued that allegations of fraud do not automatically oust arbitral jurisdiction and that disputes concerning the validity of contractual documents are arbitrable. It was submitted that observations made by courts in Section 9 proceedings are only tentative and cannot bind proceedings under Sections 8 or 11 of the Act. Relying on precedents such as A. Ayyasamy v. A. Paramasivam and Vidya Drolia v. Durga Trading Corporation, the respondent contended that the High Court rightly exercised its supervisory jurisdiction under Article 227 to refer the dispute to arbitration and that an arbitrator ought to have been appointed.
Contentions of the Appellant:
The appellant countered that the alleged Admission Deed itself was a forged document, negating any privity of contract or consent to arbitrate. It was argued that when the arbitration clause is embedded in a document whose existence is seriously disputed, the matter becomes non-arbitrable. Emphasis was placed on the High Court’s earlier prima facie findings under Section 9, which had attained finality, and on the concurrent findings of the Trial Court and Appellate Court rejecting arbitration due to serious fraud and non-production of the original deed as mandated by Section 8(2).
Observations of the Court:
The Court undertook a detailed examination of the law on arbitrability in cases involving serious fraud, reiterating that while mere allegations of fraud are insufficient, fraud that goes to the root of the arbitration agreement renders the dispute non-arbitrable. Applying this settled position, the Court found “substantial and cogent material which casts serious doubt on the genuineness of the Admission Deed.” It highlighted inconsistencies between the respondent’s own admissions and the deed’s recitals, the unexplained absence of the document from records for nearly nine years, and contemporaneous banking documents showing the respondent acting merely as a guarantor and not as a partner.
The Court further relied on the High Court’s earlier observation that “if a party had not been diligent enough to protect her interest for a period of ten years, the party could not have come to court and expected any positive order by way of interim measure.” Stressing that arbitration is consensual, the Court observed that where the arbitration clause “does not exist independently but is embedded in a document whose existence is seriously disputed,” the dispute strikes at the very foundation of arbitral jurisdiction.
The decision of the Court:
The Apex Court held that the dispute involving the alleged Admission Deed dated 17.04.2007 contains serious allegations going to the root of the arbitration agreement and is therefore not amenable to arbitration at this stage. It set aside the High Court’s order referring the civil suit to arbitration under Section 8, while affirming the High Court’s refusal to appoint an arbitrator under Section 11. Ratio Decidendi, where the existence of the arbitration agreement itself is credibly disputed on grounds of forgery or fabrication, courts must adjudicate the issue and cannot compel parties into arbitration.
Case Title: Rajia Begum & Anr vs. Barnali Mukherjee & Anr
Case No.: SLP (C) No.6013 of 2021
Coram: Hon’ble Justice Pamidighantam Sri Narasimha, Hon’ble Justice Alok Aradhe
Advocate for the Petitioner: Adv. Siddhartha Dave, Adv. Shailesh Madiyal, Aor. Aakash Sirohi, Adv. Indra Lal, Adv. Subhojit Seal, Adv. Sunando Raha, Adv. Sk Sayan Uddin, Adv. Manishitha Bhattacharjee, Aor. Aviral Saxena
Advocate for the Respondent: Adv. Subhojit Seal, Adv. Sunando Raha, Aor. Aviral Saxena, Sr. Adv. Siddhartha Dave, Sr. Adv. Shailesh Madiyal, Aor. Aakash Sirohi, Adv. Indra Lal
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