Holding

Mere allegations of fraud simplicitor do not defeat the effect of an arbitration agreement; only serious, criminal or highly complex fraud can render a dispute non‑arbitrable, so the Section 8 application was wrongly rejected.

Summary

The appellant, a partner in a hotel partnership, filed an application under Section 8 of the Arbitration and Conciliation Act, 1996 seeking to refer a civil suit filed by the other partners to arbitration. The respondents argued that serious allegations of fraud and mis‑appropriation of funds made the dispute non‑arbitrable and should be tried in court. The Supreme Court examined the nature of fraud, holding that only allegations that are serious, criminal in nature or so complex that they require extensive evidence justify staying arbitration. The Court found the fraud allegations in this case to be simple matters of account‑keeping that could be decided by an arbitrator. Consequently, the lower courts erred in rejecting the Section 8 application. The appeal was allowed, the parties were ordered to arbitrate, and a retired judge was appointed as arbitrator.

Issues considered

Whether a civil suit is maintainable despite an existing arbitration agreement under Section 8 of the Arbitration and Conciliation Act, 1996.
Whether allegations of fraud render a dispute non‑arbitrable.
What constitutes ‘serious’ fraud that justifies exclusion from arbitration.
Whether the arbitration clause is separable from the main contract when fraud is alleged.
Whether the trial court and High Court correctly dismissed the Section 8 application.

Legislation cited

Arbitration Act, 1940s. 20, s. 24(2)
Arbitration and Conciliation Act, 1996s. 16, s. 34(2)(b), s. 48(2), s. 5, s. 7, s. 8

Subjects

ArbitrationSection 8FraudArbitrabilityNon‑arbitrable disputesPartnership disputeArbitration agreementSeparability doctrineCivil suit

Judgment

(2016] 11 S.C.R. 521

A. AYYASAMY A
v.
A. PARAMASIVAM & ORS.
(Civil Appeal Nos. 8245-8246 of 2016)
OCTOBER 04, 2016 B

(A.K. SIKRI AND DR. D.Y. CHANDRACHUD, JJ.]
Arbitration and Conciliation Act, 1996:
s. 8 - Application under - Qziestioning the maintainability of
the suit on the ground that the parties had agreed to settle the dispute c
through arbitration - Application dismissed holding that suit was
maintainable as the case involved serious allegations as to fraud
and malpractices - The order affirmed by High Court - On appeal,
held: The cases where there are serious allegations offraud that in
normal course constitute criminal offence, and are complex in nature
D
demanding extensive evidence, are to be treated as non-arbitrable
and civil court should decide the matter - However, mere allegation
of fraud simplicitor may not nullify the effect of arbitration
agreement - Jn the present case, the allegations of fraud were not
so serious which could not be decided by the arbitrator -
Application u/s. 8 was wrongly rejected. E
Words and Phrases:
"Fraud" - Meaning of
Allowing the appeals, the Court
HELD: F
Per A.K. Sikri, J.
1. The Arbitration and Conciliation Act, 1996 does not
make any provision excluding any category of disputes treating
them as non-arbitrable. Notwithstanding the above, the Courts
G
have held that certain kinds of disputes may not be capable of
adjudication through the means of arbitration. The Courts have
held that certain disputes like criminal offences of a public nature,
disputes arising out of illegal agreements and disputes relating
to status, such as divorce, cannot be referred to arbitration.
H
521
522 SUPREME COURT REPORTS [2016111 S.C.R.

A Patent, trademarks and copyright; anti-trust/competition laws;
insolvency/winding up; bribery/corruption; fraud; criminal
matters are the categories of disputes which are generally treated
as non-arbitrable. Thus, fraud is one such category spelled out
by the decisions of this Court where disputes would be considered
as non-arbitrable. [Para 9) (535-B-E)
B
2. 'Fraud' is a knowing misrepresentation of the truth or
concealment of a material fact to induce another to act to his
detriment. Fraud can be of different forms and hues. Its
ingredients are an intention to deceive, use of unfair means,
deliberate concealment of material facts, or abuse of position
c of confidence. [Para 10) [535-F]
The _Black's Law Dictionary - referred to.
3. However, mere allegation of fraud in the pleadings by
one party against the other, cannot be a ground to hold that the
D matter is incapable of settlement by arbitration and should be
decided by the civil court. The allegations of fraud should be
such that not only these allegations are serious that in normal
course these may even constitute criminal offence, they are also
complex in nature and the decision on these issues demand
extensive evidence for which civil court should appear to be more
E appropriate forum than the Arbitral Tribunal. Otherwise, it may
become a convenient mode of avoiding the process of arbitration
by simply using the devi':!e of making allegations of fraud and
pleading that issue of fraud needs to be decided by the civil court.
The Law Commission has recognized that in cases of serious
F fraud, courts have entertained civil suits. It has tried to make a
distinction in cases where there are allegations of serious fraud
and fraud simplicitor. [Paras 13 and 18) [536-F-G; 537-A; 541-A]
Boaz Allen & Hamilton Inc. v. SB! Home Finance Limited
and others 2011 (7) SCR 310 : (2011) 5 SCC 532;
G
State of West Bengal & Ors. v. Associated Contractors
2014 (10) SCR 426 : (2015) 1 SCC 32 - relied on.
N. Radhakrishnan v. Maestro Engineers and Others
2009 (15) SCR 371 : (2010) 1 SCC 72; Abdul Kadir
Shamsuddin Bubere v. Madhav Prabhakar Oak AIR
1962 SC 406 : 1962 Suppl. SCR 702 - distinguished.
H
A. AYYASAMY v. A. PARAMASIVAM & ORS. 523

Ramesh Kumar & Am: v. Furu Ram & Anr. (2011) 8 A
SCC 613 : 2011 (10) SCR 453; P. Anand Gajapathi
Raju v. P. V.G Raju 2000 (2) SCR 684 : (2000) 4 SCC
539; Hindustan Petroleum Corpn. Ltd. v. Pinkcity
Midway Petroleums (2003) 6 SCC 503 - referred to.
Russell v. Russell (1880) 14 Ch D 471 - referred to. B
4. Thus, 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 c
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 D
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 E
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 F
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. [Para 20) (541-F-H; 542-A-C] G
5. It has to be kept in mind that insofar as the statutory
scheme of the Act is concerned, it does not specifically exclude
any category of cases as non-arbitrable. Such categories of non-
arbitrable subjects are carved out by the Courts, keeping in
mind the principle of common law that certain disputes which
H
524 SUPREME COURT REPORTS (2016) 11 S.C.R.

A are of public nature, etc. are not capable of adjudication and
settlement by arbitration and for resolution of such disputes,
Courts, i.e. public fora are better suited than a private forum of
arbitration. Therefore, the inquiry of the Court, while dealing
with an application under Section 8 of the Act, should be on the
aforesaid aspect, viz. whether the nature of dispute is such that
B
it cannot be referred to arbitration, even if there is an arbitration
agreement between the parties. When the case of fraud is set up
by one of the parties and on that basis that party wants to
wriggle out of that arbitration agreement, a strict and meticulous
inquiry into the allegations of fraud is needed and only when
c the Court is satisfied that the allegations are of serious and
complicated nature that it would be more appropriate for the Court
to deal with the subject matter rather than relegating the
parties to arbitration, then alone such an application under Section
8 s~ould be rejected. [Para 20) [542-C-F)
D 6. In the present case, the only allegation of fraud that is
levelled is that the appellant had signed and issued a cheque of
Rs. 10,00,050/- dated 17.06.2010 of the hotel in favour of his son
without the knowledge and consent of the other partners of the
hotel i.e. the respondents . .It is a mere matter of accounts which
can be looked into and found out even by the arbitrator. It does
E not involve any complex issue. If such a cheque is issued from
the hotel accpunt by the appellant in favour of his son, it is. easy
to prove the same and then the onus is upon the appellant to
show as to what was the reason for giving that amount from the
partnership firm to his son and he will have to account for the
F same. Likewise, the allegation of the respondents that daily
collections were not deposited in the bank accounts is to be
proved by the respondents which is again a matter of accounts.
Other allegation, which appears to be serious, is about the
C.B.I. raid at the house of brother-in-law of the appellant, from
where cash in the sum of Rs.45 lakhs was seized. The
G respondents have themselves alleged that the money did not
belong to the hotel. In view of the aforesaid stand taken by the
respondents/plaintiffs themselves, this issue does not fall for
consideration and, therefore, is not to be gone into by the
Arbitral Tribunal. Thus, the allegations of purported fraud
H
A. AYYASAMYv. A. PARAMASIVAM & ORS. 525

were not so serious which cannot be taken care of by the A
arbitrator. The Courts below, therefore, fell in error in rejecting
the application of the appellant under Section 8 of the Act. [Paras
21 and 22] [542-G-H; 543-A-D]
Swiss Timing Ltd. v. Commonwealth Games 2010
Organising Committee 2014 (6) SCR 514 : (2014) 6 B
SCC 677; Kvaerner Cementation India Ltd. v.
Bajranglal Agarwal & Anr. (2012) 5 SCC 214; SBP & .
Co. v. Patel Engineering Ltd & Anr. 2005 (4) Suppl.
SCR 688 : (2005) 8 SCC 618 - referred to.
Per Dr. D. Y; Chandrachud. J. (Concurring): c
1. The Arbitration and Conciliation Act, 1996 does not in
specific terms exclude any category of disputes - civil or
commercial - from arbitrability. The Act contemplates and
acknowledges that before it can be held that a particular subject
matter is not capable of settlement by arbitration, such a D
consequence must arise under the law for the time being in force.
[Paras 3 and 5) [544-A; 545-A-B)
2. Ordinarily every civil or commercial dispute whether
based on contract or otherwise which is capable of being decided
by a civil court is in principle capable of being adjudicated upon E
and resolved by arbitration "subject to the dispute being
governed by the arbitration agreement" unless the jurisdiction
of the Arbitral Tribunal is excluded either expressly or by
necessary implication; [Para 6) [545-B-C]
3. In addition to various classes of disputes which are
F
generally considered by the courts as appropriate for decision by
public fora, there are classes of disputes which fall within the
exclusive domain of special fora under legislation which confers
exclusive jurisdiclion to the exclusion of an ordinary civil court.
That such disputes are not arbitrable dovetails with the general
principle that a dispute which is capable of adjudication by an G
ordinary civil court is also capable of being resolved by arbitration.
If the jurisdiction of an ordinary civil court is excluded by the
conferment of exclusive jurisdiction on a specified court or
tribunal as a matter of public policy such a dispute would not then
be capable of resolution by arbitration. (Para 9)[546-G; 547-A-B)
H
526 SUPREME COURT REPORTS f2016l 1l S.C.R.

A Boaz-Allen and Hamilton Inc. v. SB/ Home Finance
Ltd. (2011) 5 sec 532 : 2011 (7) SCR 310; Vimal
Kishore Shah v. Jayesh Dinesh Shah (2016) SCC
OnLine SC 825; Natraj Studios (P) Ltd. v. Navrang
Studios (1981) 2 SCR 466; Skypak Courier Ltd. v.
Tata Chemical Ltd. (2000) 5 SCC 294; National
B
Seeds Corporation Ltd. v. M. Madhusudhan Reddy
(2012) 2 SCC 506; Rosedale Developers Pvt. Ltd. v.
Aghore Bhattacharya (2015) 1 WBLR (SC) 385;
N. Radhakrishnan v. Maestro Engineers (2010) 1 SCC
72; P. Anand Gajapathi Raju v. P. V.G Raju (Dead)
c (2000) 4 SCC 539 : 2000 (2) SCR 684; Hindustan
Petroleum Corporation Ltd. v. Pinkcity Midway
Petroleums (2003) 6 SCC 503; Sundaram Finance Ltd.
v. T. Thankam AIR 2015 1303 : 2015 (2) SCR 228;
Anand Gajapathi Raju, Pink City and in Branch
Manager, Magma Leasing and Finance Ltd. v. Potluri
D
Madhvilata (2009) 10 SCC 103 : 2009 (14) SCR 815
- referred to.
4. 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
E 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. (Para 14)
[552-A-B]
F 5. The basic principle which must guide judicial decision-
making is that arbitration is essentially a voluntary assumption
of an obligation by contracting parties to resolve their disputes
through a private tribunal. The intent of the parties is expressed
in the terms of their agreement. Where commercial entities
G and persons of business enter into such dealings, they do so
with a knowledge of the efficacy of the arbitral process. The
commercial understanding is reflected in the terms of the
agreement between the parties. The duty of the court is to
impart to that commercial understanding a sense of business
efficacy. The arbitration agreement between the parties stands
H distinct from the contract in which it is contained, as a matter of
A. AYYASAMY v. A. PARAMASIVAM & ORS. 527

law and consequence. Even the invalidity of the main ngreement A
does not ipso jure result in the invalidity of the arbitration
agreement. Parties having agreed to refer disputes to arbitration,
the plain meaning and effect of Section 8 must ensue. [Paras 16
and 18) (554-G-H; 555-A-B; 556-F-G)
Fiona Trust and Holding Corporation v. Yuri Privalov B
(2007) 1 All E R (COMM) 891; Premium Na/ta
Products Ltd. (20th Defendant) v. Fily Shipping Co.
Ltd [2007] UKHL 40- referred to.
6. The Arbitration and Conciliation Act, 1996, should be
interpreted so as to bring in line the principles underlying its c
interpretatfon in a manner that is consistent with prevailing
approaches in the common law world. Jurisprudence in India
must evolve towards strengthening the institutional efficacy of
arbitration. Deference to a forum chosen by. parties as a
complete remedy for resolving all their claims is but part of that
evolution. Minimising the intervention of courts is again a D
recognition of the same principle. [Para 20) (557-D-E]
Buckeye Check Cashing, Inc. v. Cardegna 546 U.S. 440
(U.S.S.Ct.2006); Prima Paint Corp. v. Flood & Conklin
Manufacturing Co. 388 US 395 (U.S. S.Ct. 1967);
Southland Corporation v. Keating 465 U.S. 1 (1984) E
- referred to.
7. Under.Section 24(2) of the Arbitration Act, 1940, the
court could revoke the authority of a tribunal to deal with claims
involving issues of fraud and determine those Claims itself.
This provision has b'een repealed in Section 107(2) of the F
Arbitration and Conciliation Act, 1996. [Para 21) (558-F-GJ
Russell on Arbitration (24th Edition, 2015, para 2007)
- referred to.
8. A mere allegation of fraud, in the present case, was not
G
sufficient to detract from the obligation of the parties to submit
their disputes to arbitration. A fresh line must be drawn to ensure
the fulfilment of the intent of Parliament in enacting the Act of
1996 and towards supporting commercial understandings
grounded in the faith in arbitration. [Para 24) (559-F-G] ·
H
528 SUPREME COURT REPORTS f2016l 11 S.C.R.

A International Arbitration by Redfern and Hunter (6th
Edition para 2.154); Internatio11al Co111111ercial
Arbitration by Gary B Born (2nd Edition Vol. I, P. 846);
International Arbitration Law and Practice by Mauro
Rubino-Sammartano (2•d Edition p. 179) - referred to.
B Case Law Reference
In the Judi:ment of A. K. Sikri1 J:
2009 (15) SCR 371 distinguished Para2
2014 (6) SCR 514 referred to Para2
c (201Zl 5 sec 214 referred to Para7
2011 (10) SCR 453 referred to Para 10
1962 Suppl. SCR 702 distinguished Para 11
(1880) 14 Ch D 471 referred to Para 11
D 2900 (2) SCR 684 referred to Para 14
c2003) 6 sec 503 referred to Para 14
2011 (7) SCR 310 relied on Para 15
2014 (10) SCR 426 relied on Para 19
E
2005 (4) Suppl. SCR 6SS referred to Para 19
In the Jud11.ment of Dr. D.Y. Chandrachud 1 J:
2011 (~) SCR 310 referred to Para6
(2016) SCC OnLine SC S25 referred to Para6
F
(19Sl) 2 SCR 466 referred to Para7
c2000) 5 sec 294 referred to Paras
c2oq> 2 sec 506 referred to Paras
(2015 )l WBLR (SC) 3S5 referred to Paras
G
(2010) 1 sec 12 referred to Para 10
2000 (Z) SCR 6S4 referred to Para 11
(200~> 6 sec 503 referred to Para 11

H 2015 (2) SCR 22S referred to Para 13
A. AYYASAMY v. A. PARAMASIVAM & ORS. 529

2009 (14) SCR 815 referred to Para 13 A
(2007) 1 All E R (COMM) 891 referred to Para 15
(2007) UKHL 40 referred to Para 15
546 U.S. 440 (U.S.S.Ct.2006) referred to Para 19
388 US 395 (U.S. S.Ct. 1967) referred to Para 19 B
46~ u.s. 1 (1984) referred to Para 19
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 8245-
8246 of2016. .
From the Judgment and Order dated 11.12.2014 ofthe High Court C
of Madras at Madurai in CRPMD No. 1687 of2014 & 1688 of2014.
T. R. B. Sivakumar and K.V. Vijayakumar, Advocates for the
Appellant.
Y. Aruna Giri, Rahul Joshi and P. Ramesh, Advocates for the
Respondents. D
The Judgment of the Court was delivered by
A• .f{. SIKRI, J, 1. The parties to this /is, who are brothers, had
entered into a deed of partnership dated 01.04.1994 for carrying on hotel
business and this partnership firm has been running a hotel with the E
name' Hotel Arunagiri' located at Tirunelveli, Tamil Nadu. Some disputes .
arose out of the said partnership deed between the parties. Partnership
Deed contains an arbitration clause i.e. Clause (8) which stipulates
resolution of disputes by means of arbitration.
2. Notwithstanding the same, the respondents herein have filed a F
civil suit before the Court of 1st Additional District Munsif Court,
Tirunelveli, Madurai (Tamil Nadu) seeking a declaration that as partners
they are entitled to participate in the administration of the said hotel.
Reliefofpermanent injunction restraining the defendant (appellant herein)
from interfering with their right to participate in the administration of the
hotel has also been sought. This suit was filed in the year 2012. The G
appellant, after receiving the summons in the said suit, moved the
application under Section 8 of the Arbitration and Conciliation Act, 1996
(hereinafter referred to as the 'Act') raising an objection to the
'maintainability of the suit in view of arbitration agreement between the
parties as contained in clause (8) of the Partnership Deed dated
I-I
530 SUPREME COURT REPORTS [2016] II S.C.R.

A 01.04.1994 and submitted that as per the provisions of Section 8 of the
Act, it is mandatory for the Court to refer the dispute to the arbitrator.
This application was resisted by the respondents with the submission
that since acts offraud were attributed to the appellant by the plaintiffs/
respondents, such serious allegations of fraud could not be adjudicated
upon by the Arbitral Tribunal and the appropriate remedy was to approach
B
the civil court by filing a suit, and that was exactly done by the
respondents. For this purpose, the respondents had relied upon the
judgment of this Court in the case of N. Rtullwkrislman v. Mllestro
Engineers llnd Otl1ers 1• This plea of the respondents was sought to be
controverted by the appellant by arguing that aforesaid judgment was
c found to be per incuriam by this Court in Swiss Timing Ltd. v.
Commonwealth Gllmes 2010 Orgllnising Committee=, wherein the
application under Section II of the Act was allowed holding that such a
plea of fraud can be adequately taken care of even by the arbitrator. It
was, thus, argued that the parties were bound by the arbitration agreement
and there was no reason to file the civil suit. The trial court, however,
D
dismissed the application of the appellant herein by its order dated
25.04.2014, relying upon the judgment in N. R{l(//U1krisl11wn.
3. Feeling aggrieved by this order, the appellant preferred revision
petition before the High Court repeating his contention that judgment in
N. Radltakrislman was held to be per incuriam and, therefore, trial
E court had committed jurisdictional error in rejecting the application of
tk appellant under Section 8 of the Act. Brushing aside this plea, the
11 i,;h Court has also chosen to go by the dicta laid down in N.
iludliakrislman with the observations that Swiss Timing Ltd. is the
•. ,.. ;er passed by a single Judge of this Court under Section II of the Act
, h~reas judgment in N. Rlldlwkrislmlln is rendered by a Division
Bench of two Hon. Judges of this Court, which is binding on the High
('piJrt.

Whether the aforesaid view of the High Court in following the
dicta laid down.in the case of N. Rt11llwkrisl1mm, in the facts of this
G case. is .correct or not, is the question that needs determination in the
instant appeal.
4. Seminal facts in the context in which the issue falls for
determination have already been taken note of above. However, few
'l2UIO) t sec 12
H 't20l~)6SCr.677
A. AYYASAMY v. A. PARAMASIVAM & ORS. 531
fA. K. SIKRI, J.]

more facts need to be added to the aforesaid chronology, particularly, A
the nature of plea of fraud taken in the suit filed by the respondents.
The respondents are four in number who are brothers of the
appellant. These five brothers are the partners. Their father A. Arunagiri
was also a partner along with them who died on 28.04.2009. These six
partners had I/6th share each in the partnership business. Disputes arose B
between the brothers after the demise of their father. It is the allegation
of the respondents, as contained in the plaint, that the subject matter of
the suit 'Hotel Arunagiri' was managed and administered by their father
in a disciplined manner till his death. After his death, the appellant being
the eldest brother wanted to take the administration of 'Hotel Arunagiri'
with the assurance that he will be following the foot prints of his father. c
The respondents had no other alternative except to accept the said
proposal in good faith. It was, at that time resolved by all the brothers,
that the daily collection of money from 'Hotel Arunagiri' should be
deposited on the very next day into the hotel Current Account No.23
maintained with the Indian Overseas Bank, Tirunelveli Junction. It was D
agreed that about rupees ten to fifteen thousand may be kept as cash for
urgent expenses. The respondents reposed confidence with the appellant
and believed that his administration would never be detrimental to the
smooth running of the business. On the aforesaid understanding,
administration of the hotel was taken over by the appellant. But he did
not adhere to the said understanding and failed to deposit day to day E
collection into the bank account as promised. It is also agged that the
appellant, fraudulently, signed and issued a cheque for Rs. I 0,00,050/-
dated I 7.06.2010 from the bank account in the name of 'Hotel Arunagiri'
in favour of his son without the knowledge and consent of the other
partners and in this manner, the money was siphoned off and F
misappropriated from the common fund. It is further alleged that the
appellant kept the hotel account books with him and did not show it to
the respondents for their examination. The respondents sent legal notices
but it did not deter the appellant to continue to act in the same manner by
not depositing the day to day collections in the account. It is also alleged
that appellant's wife's younger brother one Dhanapalraj was a member G
of Bar Council of Tamil Nadu and was also a Vice-Chairman of All
India Bar Council, New Delhi. In Chennai, the Central Bureau of
Investigation (C.B.I.) raided the houses of the said Dhanapalraj and his
co-brother Chandrasekaran and seized Rs.45,00,000/- cash from them.
H
532 SUPREME COURT REPORTS [2016] II S.C.R.

A As Dhanapalraj was aware of the disputes between the appellant and
the respondents in respect of the 'Hotel Arunagiri', a false statement
has been given by him before C.B.I. to the effect that the seized money
ofRs.45 lakhs belonged to 'Hotel Arunagiri'. It is reliably learned that
the appellant had also, on receipt of summons, appeared before the C.B.I.
B in New Delhi and given a false statement as ifthe said seized money of
Rs.45 lakhs belonged to 'Hotel Arunagiri' which was taken to Chennai
to purchase a property. This led to the issuance of another notice dated
22.01.2011 by the third respondent to the appellant stating that the money
seized by the C.B.I. belong only to Dhanpahu:aj and not 'Hotel Arunagiri'.
On the basis of the aforesaid allegations, which are relevant and material
C for the purposes of this appeal, following reliefs are sought in the suit
filed by the respondents:
"(a) for a declaration that the respondents as partners of
the deed of partnership dated 01.04.1994 are entitled to
participate in the administration of the Hotel Arunagiri
D mentioned in the schedule and for consequential permanent
injunction restraining the appellant from interfering with the
same;
(b) for cost of this suit; and
(c) for such other reliefs this Honourable Court deem fit
E ··and proper in the circumstances of this case."
5. As already mentioned above, the appellant filed the application
under Section 8 of the Act for rejection of the plaint and reference of the
dispute to an arbitrator in which attemptthe appellant has not succeeded
for the reasons stated hereinabo\1e.
F
6. The two courts below have preferred to adopt the dicta laid
down in N. Rtulllilkrlslman while dismissing the application of the
appellant under Section 8 of the Act holding that as there are serious
allegations as to fraud and malpractices committed by the appellant in
respect of the finances of the partnership firm and the case does not
G warrant to be tried and decided by the arbitrator and a civil court would
be more competent which has the requisite means to decide such
complicated matter. In this backdrop, it would be appropriate to revisit
the law on this aspect before adverting to the question as to whether the
approach of the High Court was correct in following the judgment in N.
H Rad/1afcrlslman in the instant case.
A. AYYASAMYv. A. PARAMASIVAM & ORS. 533
[A. K. SIKRI, J.]

7. In this behalf, we have to begin our discussion with the pertinent · A
observation that insofar as the Arbitration and Conciliation Act, 1996 is
concerned, it does not make any specific provision excluding any category
ofdisputes terming them to be non-arbitrable. Number of pronouncements
have been rendered laying down the scope of judicial intervention, in
<;ases where there is an arbitration clause, with clear and unambiguous
B
message that in such an event judicial intervention would be very limited
and minimal. However, the Act contains provisions for challenging the
arbitral awards. These provisions are Section 34 and Section 48 of the
Act. Section 34(2)(b) and Section 48(2) of the Act, inter a/ia, provide
that an arbitral award may be set aside ifthe Court finds that the 'subject
matter of the dispute is not capable of settlement by arbitration under c
the law for the time being in force.' Even when such a provision is
interpreted, what is to be shown is that there is a law which makes
subject matter Of a dispute incapable of settlement by arbitration. The
aforesaid position in law has been culled out from the combined readings
of Sections 5, 16 and 34 of the Act. When arbitration proceedings are
triggered by one of the parties because of the existence of an arbitration D
agreement between them, Section 5 of the Act, by a 11011-obstante clause,
provides a clear message that there should not be any judicial intervention
at that stage scuttling the arbitration proceedings. Even if the other
party has objection to initiation of such arbitration proceedings 011 the
ground that there is no arbitration agreement or validity of the arbitration E
clause or the. competence of the Arbitral Tribunal is challenged, Section
16, in clear terms, stipulates that such objections are to be raised before
the Arbitral Tribunal itself which is to decide, in the first instance, whether
there is any substance in questioning the validity of the arbitration
proceedings on any of the aforesaid grounds. It follows that the party is
not allowed to rush to the Court for an adjudication. Even after the F
Arbitral Tribunal rules on its jurisdiction and decides that arbitration clause
is valid or the Arbitral Tribunal is legally constituted, the aggrieved party
has to wait till the final award is pronounced and only at that stage the
aggrieved party is allowed to raise such objection before the Court in
proceedings under Section 34 of the Act while challenging the arbitral G
award. The aforesaid scheme of the Act is succinctly brought out in the
following discussion by this Court in Kvaerner Cementatlon Intl/a Lttl.
v. B11}ra11glal Agarwal & Anr. 3 :

'<20t2J s sec 214
H
534 SUPREME COURT REPORTS r20161 11 S.C.R.

A "3. There cannot be any dispute that in the absence of any
arbitration clause in the agreement, no dispute could be
referred for arbitration to an Arbitral Tribunal. But, bearing
in mind the very object with which the Arbitration and
Conciliation Act, I 996 has been enacted and the provisions
thereof contained in Section I 6 conferring the power on
B
the Arbitral Tribunal to rule on its own jurisdiction, including
ruling on any objection with respect to existence or val id ity
of the arbitration agreement, we have no doubt in our mind
that the civil court cannot have jurisdiction to go into that
question.
c 4. A bare reading of Section I 6 makes it explicitly clear
that the Arbitral Tribunal has the power to rule on its own
jurisdiction even when any objection with respect to
existence or validity of the arbitration agreement is raised,
and a conjoint reading of sub-sections (2), (4) and (6) of
D Section I 6 would make it clear that such a decision would
be amenable to be assailed within the ambit of Section 34
of the Act.
5. In this view of the matter, we see no infirmity in the
impugned order so as to be interfered with by this Court.
E The petitioner, who is a party to the arbitral proceedings
may raise the question of jurisdiction of the arbitrator as
well as the objection on the ground of non-existence of any
arbitration agreement in the so-called dispute in question,
and on such an objection being raised, the arbitrator would
do well in disposing of the same as a preliminary issue so
F that it may not be necessary to go into the entire gamut of
arbitration proceedings."
Aforesaid is the position when Arbitral Tribunal is constituted at
the instance of one of the parties and other party takes up the position
that such proceedings are not valid in law.
G
8. What would be the position in case a suit is filed by the plaintiff
and in the said suit the defendant files an application under Section 8 of
the Act questioning the maintainability of the suit on the ground that
parties had agreed to settle the disputes through the means of arbitration
having regard to the existence of an arbitration agreement between them?
H
A. AYYASAMY v. A. PARAMASIVAM & ORS. 535
[A. K. SIKRI, J.]

Obviously, in such a case, the Court is to pronounce upon A
arbitrability or non-arbitrability of the disputes.
9. In the instant case, there is no dispute about the arbitration
agreement inasmuch as there is a specific arbitration clause in the
partnership deed. However, the question is as to whether the dispute
raised by the respondent in the suit is incapable of settlement through 8
arbitration. As pointed out above, the Act does not make any provision
excluding any category of disputes treating them as non-arbitrable.
Notwithstanding the above, the Courts have held that certain kinds of
disputes may not be capable of adjudication through the means of
arbitration. The Courts have held that certain disputes like criminal
offences of a public nature, disputes arising out of illegal agreements c
and disputes relating to status, such as divorce, cannot be referred to
arbitration. Following categories of disputes are generally treated as
non-arbitrable~:

(i) patent, trademarks and copyright;
D
(ii) anti-trust/competition laws;
(iii) insolvency/winding up;
(iv) bribery/corruption;
(v) fraud;
E
(vi) criminal matters.
Fraud is one such category spelled out by the decisions of this
Court where disputes would be considered as non-arbitrable.
10. 'Fraud' is a knowing 111isrepresentation of the truth or
concea/111ent of a 111aterial fact to induce another to act to his F
detri111ent. Fraud can be of different forms and hues. Its ingredients
are an intention to deceive, use ofunfair means, deliberate concealment
of material facts, or abuse of position of confidence. The Black's Law
Dictionary defines 'fraud' as a concealment or false representation
through a statement or conduct that injures another who relies on it 5•
G
However, the moot question here which.has to be addressed would be

. ' See-0.P. .\/alhotra on 'The Lail' & Practice ofArbitration and Conciliation'. Third
Edition, authored by Indu Malhotra. See also note 10 ibid.
' See - Ramesh Kumar & Anr. \'. F11r11 Ram & Am:, (2011) 8 SCC 613 (a decision
rendered under the Arbitration Act, 1940)
H
536 SUPREME COURT REPORTS [2016] 11 S.C.R.

A as to whether mere allegation of fraud by one party against the other
would be sufficient to exclude the subject matter of dispute from
arbitration and decision thereof necessary by the civil court.
11. In Abdul Kadir Slwmsuddin Bubere v. Madllav Prabhakar
Oak6, serious allegations of fraud were held by the Court to be a sufficient
B ground for not making a reference to arbitration. Reliance in that regard
was placed by the Court on a decision of the Chancery Division in Russell
v. Rusself. That was a case where a notice for the dissolution of a
partnership was issued by one of the partners, upon which the other
partner brought an action alleging various charges of fraud, and sought a
declaration that the notice of dissolution was void. The partner who
C was charged with fraud sought reference of the disputes to arbitration.
The Court held that in a case where fraud is charged, the Court will in
general refuse to send the dispute to arbitration. But where the objection
to arbitration is by a party charging the fraud, the Court will not necessarily
accede to it and would never do so unless a primafacie case of fraud
D isproved.
12. The aforesaid judgment was followed by this Court in N.
Rad/1akrislman while considering the matter under the present Act. In
that case, the respondent had instituted a suit against the appellant, upon
which the appellant tiled an application under Section 8 of the Act. The
E applicant made serious allegations against the respondents of having
committed malpractices in the account books, and manipulation of the
finances of the partnership firm. This Court held that such a case cannot
be properly dealt with by the arbitrator, and ought to be settled by the
Court, through detailed evidence led by both parties.
F 13. When the case involves serious allegations of fraud, the dicta
contained in the aforesaid judgments would be understandable. However,
at the same time, mere allegation of fraud in the pleadings by one party
against the other cannot be a ground to hold that the matter is incapable
of settlement by arbitration and should be decided by the civil court.
The allegations of fraud should be such that not only these allegations
G are serious that in nonrtal course these may even constitute criminal
offence, they are also complex in nature and the decision on these issues
demand extensive evidence for which civil court should appear to be
more appropriate forum than the Arbitral Tribunal. Otherwise, it may
'AIR 1962 SC 406
.H 7
(1880)14ChD471
A. AYYASAMY v. A. PARAMASIVAM & ORS. 537
[A. K. SIKRI, J.]

become a convenient mode of avoiding the process of arbitration by A
simply using the device of making allegations of fraud and pleading that
issue of fraud needs to be decided by the civil court. The judgment in N.
Radltakrislman does not touch upon this aspect and said decision is
rendered after finding that allegations of fraud were of serious nature.
14. As noted above, in Swiss Timing Lie/. case, single Judge of 8
this Court while dealing with the same issue in an application under
Section 11 of the Act treated the judgment in N. Rac//1akris/man as per
incuriam by referring to the other judgments in the case of P. Anand
Gajapatlli Raju v. P. V.G Raju8 and Himlust<m Petroleum Corpn.
Ltd. v. Pinkcity Mic/way Petro/eunrs9 • Two reasons were given in
support which can be found in para 21 of the judgment which makes the c
following reading:
"21. This judgment was not even brought to the !IOte of the
Court in N. Rad/wkrislmcm 's case. In my opinion,
judgment in N. Radlmktislman 's case is per incuriam
on two grounds; Firstly, the judgment in Hinc/ust<m D
Petroleum Corpn. Ltd., though referred has not been
distinguished but at the same time is not followed also. The
judgment in P. Anand Gajapat/1i Rclju & Ors. Was not
even brought to the notice of this Court. Therefore, the
same has neither been followed nor considered. Secondly,
the provision contained in Section 16 of the Arbitration Act, E
1996 were also not brought to the notice by this Court.
Therefore, in my opinion, the judgment in N.
Rad/1akrislma11 does not lay down the correct law and
cannot be relied upon."
1S. We shall revert to the question of per i11curia111 at a later F
stage. At th is juncture, we may point out that the issue has been revisited
by another Division Bench of this Court in BoozAl/en & llcm1ilton Inc.
v. SB/ Home Fi1u111ce Limited mid otllers' 0 • In this case, one of the
questions that had arisen for determination was, in the context of Section
8 of the Act, as to whether the subject matter of the suit was 'arbitrable'
G
i.e. capable of being adjudicated by a private forum (Arbitral Tribunal).
In this context, the Court carried out detailed discussion on the term
'arbitrability' by pointing out three facets thereof, viz.:
8
(2000> 4 sec 539
9
(2003) 6 sec 503
1
•(201J)5 sec 532 H
538 SUPREME COURT REPORTS [2016] 11 S.C.R.

A I) whether the disputes are capable of adjudication and settlement
by arbitration?
2) whether the disputes are covered by the arbitration agreement?
3) whether the parties have referred the disputes to arbitratfon?
B 16. As we are concerned with the first facet C>fthe arbitrability of
dispute, on this aspect the Court pointed out that in those cases where
the subject matter falls exclusively within the domain of public fora, viz.
the Courts, such disputes would be non-arbitrable and cannot be decided
by the Arbitral Tribunal but by the Courts alone. The justification and
rationale given for adjudicating such disputes through the process of
c Courts, Le. public fora, and not by Arbitral Tribunals, which is a private
forum, is given by the court in the following manner:
"35. The Arbitral Tribunals are private fora chosen
voluntarily by the parties to the dispute, to adjudicate their
disputes in place of courts and tribunals which are public
D fora constituted under the laws of the country. Every civil
or commercial dispute, either contractual or non-Contractual,
which can be decided by a court, is in principle capable of
being adjudicated and resolved by arbitration unless the
jurisdiction of the Arbitral Tribunals is excluded either
E expressly or by necessary implication. Adjudication of
certain categories of proceedings are reserved by the
legislature exclusively for public fora as a matter of public
policy. Certain other categories of cases, though not
expressly reserved for adjudication by public fora (courts
and tribunals), may by necessary implication stand excluded
F from the purview of private fora. Consequently, where the
cause/dispute is inarbitrable, the court where a suit is pending,
will refuse to refer the parties to arbitration, under Section
8 of the Act, even if the parties might have agreed upon
arbitration as the forum for settlement of such disputes.
G 36. The well-recognised examples ofnon-arbitrable disputes
are: (i) disputes relating to rights and liabilities which give
rise to or arise out of criminal offences; (ii) matrimonial
disputes relating to divorce, judicial separation, restitution
of conjugal rights, child custody; (iii) guardianship matters;
(iv) insolvency and winding-up matters; (v) testamentary
H
A. AYYASAMYv. A. PARAMASJVAM & ORS. 539
rA. K. SIKRI, J.l

matters (grant of probate, letters of administration and A
succession certificate); and (vi) eviction or tenancy matters
governed by special statutes where the tenant enjoys
statutory protection against eviction and only the specified
courts are conferred jurisdiction to grant eviction or decide
the disputes.
B
37. It may be noticed that the cases referred to above
relate to actions in rem. A right in rem is a right exercisable
against the world at large, as contrasted from a right in
personam which is an interest protected solely against
specific individuals. Actions in personam refer to actions
determining the rights and interests of the parties themselves c
in the subject-matter of the case, whereas actions in rem
refer to actions determining the title to property and the
rights of the parties, not merely among themselves but also
against all persons at any time claiming an interest in that
property. Correspondingly, ajudgment in personam refers D
to a judgment against a person as distinguished from a
judgment against a thing, right or status and a judgment in
rem refers to a judgment that determines the status or
condition of property which operates directly on the property
itself. (Vide Black's Law Dictionary.)
E
38. Generally and traditionally all disputes relating to rights
in personam are considered to be amenable to arbitration;
and all disputes relating to rights in rem are required to be
adjudicated by courts and public tribunals, being unsuited
for private arbitration. This is not however a rigid or inflexible
rule. Disputes relating to subordinate rights in personam F
arising from rights in rem have always been considered to
be arbitrable."
17. The Law Commission has taken note of the fact that there is
divergence of views between the different High Courts where two views
have been expressed, one is in favour of the civil courthavingjurisdiction G
in cases of serious fraud and the other view encompasses that even in
cases of serious fraud, the Arbitral Tribunal will rule on its own jurisdiction.
It may be pertinent here to reproduce the observations of the Law
Commission as contained in paragraphs 50 & 51 of the 2461h Law
Commission Report, which are as under:
H
.540 SUPREME COURT REPORTS [2016) 11 S.C.R.

A "50. The issue of arbitrability of fraud has arisen on
numerous occasions and there exist conflicting decisions
of the Apex Court on this issue. While it has been held in
Bharat Rasik/alv. Gautam Rasiklal, (2012) 2 SCC 144
that when fraud is of such a nature that it vitiates the
arbitration agreement, it is for the Court to decide on the
B
validity ofthe arbitration agreement by determining the issue
of fraud, there exists two parallel lines ofjudgments on the
issue of whether an issue of fraud is arbitrable. In this
context, a 2 judge bench of the Supreme Court, while
adjudicating on an application under section 8 of the Act, in
c Radhakrishnan v. Maestro Engineers, 2010 I SCC 72
held that an issue of28 fraud is not arbitrable. This decision
was ostensibly based on the decision of the three judge
bench of the Supreme Court in Abdul Qadir v. Madhav
Prabhakar, AIR 1962 SC 406. However, the said 3 judge
bench decision (which was based on the finding in Russel
D
v. Russel [ 1880 14 Ch.D 471]) is only an authority for the
proposition that a party against whom an al legation of fraud
is made in a public forum, has a right to defend himself in
that public forum. Yet, following Radhakrishnan, it appears
that issues of fraud are not arbitrable. ·
E 51. A distinction has also been made by certain High Courts
between a serious issue of fraud and a mere allegation of
fraud and the former has been held to be not arbitrable
(Seelvory Properties and Hotels Private Ltd v. Nusli
Neville Wadia, 2011 (2) Arb LR 4 79 (Born); CS
Ravishankar v. CK Ravishankar, 2011 (6) Kar LJ 417).
F
The Supreme Court in Meguin GMBH v. Nandan
Petrochem Ltd.,.2007 (5) R.A.J 239 (SC), in the context of
an application tiled under section 11 has gone ahead and
appointed an arbitrator even though issues of fraud were
involved. Recently, the Supreme Court in its judgment in
G Swiss Timing Ltd v. Organising Co111111ittee, Arb. Pet. No.
34/2013 dated 28.05.2014, in a similar case of exercising
jurisdiction under section 11, held that the judgment in
Radhakrishnan is per incuriam and, therefore, not good
law."
H 18. A perusal of the aforesaid two paragraphs brings into fore
A. AYYASAMYv. A. PARAMASIVAM & ORS. 541
[A. K. SIKRI, J.]

that the Law Commission has recognized that in cases of serious fraud, A
courts have entertained civil suits. Secondly, it has tried to make a
distinction in cases where there are allegations of serious fraud and
fraud simplicitor. ft, thus, follows that those cases where there are serious
allegations of fraud, they are to be treated as non-arbitrable and it is only
the civil court which should decide such matters. However, where there
B
are allegations of fraud simplicitor and such allegations are merely alleged,
we are of the opinion it may not be necessary to nullify the effect of the
arbitration agreement between the parties as such issues can be
determined by the Arbitral Tribunal.
I 9. Before we apply the aforesaid test to the facts of the present
case, a word on the observations in Swiss Timi11g Ltd. 's case to the c
effect that judgment of N. R"dlwkrisl11um was per incuriam, is
warranted. In fact, we do not have to labour on this aspect a~ this task
is already undertaken by this Court in St"te of West Beng"I & Ors. v.
Associated Contractors''. It has been clarified in the aforesaid case
that Swiss Timings Ltd. was a judgment rendered while dealing with D
Section I I (6) of the Act and Section II essentially confers power on the
Chief Judge ofindia or the Chief Justice of the High Court as a designate
to appoint an arbitrator, which power has been exercised by another
Hon'ble Judge as a delegate of the Chief Justice. This power of
appointment of an arbitrator under Section 11 by the Court,
notwithstanding the fact that it has been held Ln SBP & Co. v. P"te/ E
Enl(ineerinl( Ltd. & Anr. 11 as a judicial power, cannot be deemed to
have precedential value and, therefore, it cannot be deemed to have
overruled the proposition oflaw laid down in N.R"dlwkris/111m1.
20. In view of our aforesaid discussions, we are of the opinion
that mere allegation of fraud simplicitor may not be a ground to nullify F
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
G
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
11 (2015) 1 sec 32
12 (2005) & sec 618 H
542 SUPREME COURT REPORTS f2016l ll S.C.R.

A 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
B
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
c 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, it does not specifically exclude any category of
cases as non-arbitrable. Such categories of non-arbitrable subjects are
carved out by the Courts, keeping in mind the principle of common law
D
that certain disputes which are of public nature, etc. are not capable of
adjudication and settlement by arbitration and for resolution of such
disputes, Courts, i.e. public fora, are better suited than a private forum
ofarbitration. Therefore, the inquiry of the Court, while dealing with an
application under Section 8 of the Act, should be on the aforesaid aspect,
E viz. whether the nature of dispute is such that it cannot be referred to
arbitration, even ifthere is an arbitration agreement between the parties.
When the case of fraud is set up by one of the parties and on that basis
that party wants to wriggle out of that arbitration agreement, a strict and
meticulous inquiry into the allegations of fraud is needed and only when
the Court is satisfied that the allegations are of serious and complicated
F nature that it would be more appropriate for the Court to deal with the
subject matter rather than relegating the parties to arbitration, then alone
such an application under Section 8 should be rejected.
21. When we apply the aforesaid principles to the facts of this
case, we find that the only allegation of fraud that is levelled is that the
G appellant had signed and issued a cheque of Rs. I 0,00,050/- dated
17.06.2010 of' Hotel Arunagiri' in favour of his son without the knowledge
and consent of the other partners i.e. the respondents. It is a mere
matter of accounts which can be looked into and found out even by the
arbitrator. It does not involve any complex issue. If such a cheque is
H issued from the hotel account by the appellant in favour of his son, it is
A. AYYASAMY v. A. PARAMASIVAM & ORS. 543

easy to prove the same and then the onus is upon the appellant to show A
as to what was the reason for giving that amount from the partnership
firm to his son and he will have to account for the same. Likewise, the
allegation of the respondents that daily collections are not deposited in
the bank accounts is to be proved by the respondents which is again a
matter of accounts.
B
Other allegation, which appears to be serious, is about the C.B.I.
raid at the house of Dhanapalraj from where cash in the sum of Rs.45
lakl1s was seized. Interestingly, though the appellant has taken the position
that this cash belongs to 'Hotel Arunagiri', they are the respondents
who have themselves alleged that the money belonged to Dhanapalraj
and not to 'Hotel Arunagiri'. In view of the aforesaid stand taken by the c
respondents/plaintiffs themselves, this issue does not fall for consideration
and, therefore, is not to be gone by the Arbitral Tribunal.
22. We, therefore, are of the opinion that the allegations of
purported fraud were not so serious which cannot be taken care of by
the arbitrator. The Courts below, therefore, fell in error in rejecting the D
application of the appellant under Section 8 of the Act. Reversing these
judgments, we allow these appeals and as a consequence, application
filed by the appellant under Section 8 in the suit is allowed thereby
relegating the parties to the arbitration.
23. At the same time, in order to save the time and having regard
E
to the nature of the dispute, this Court appoints Hon'ble Ms. Justice
Prabha Sridevan, a retired Judge of the Madras High Court, as the
arbitrator. The arbitrator shall fix her own fee.
No costs.
DR. D. Y. CHANDRACHUD, J. I. I have had the benefit of
F
the lucid exposition oflaw in the judgment of my learned brother Justice
AK Sikri. I agree with the reasons contained in His Lordship'sjudgment
while adding some of my own.
2. The issue which arises in these proceedings has generated a
considerable degree of uncertainty in the law of arbitration in India.
G
This is an area of law where the intervention of this Court is needed to
ensure that a cloud on the efficacy of arbitral proceedings to resolve
issues of fraud is resolved conclusively. The litigative uncertainty which
the discourse has produced is best set at rest for nothing is as destructive
of legitimate commercial expectations than a state of unsettled legal
precept. H
544 SUPREME COURT REPORTS [2016] 11 S.C.R.

A 3. The Arbitration and Conciliation Act, 1996 does not in specific
terms exclude any category of disputes - civil or commercial - from
arbitrability. Intrinsic legislative material is in fact to the contrary. Section
8 contains a mandate that where an action is brought before a judicial
authority in a matter which is the subject of an arbitration agreement,
parties shall he referred by it to arbitration, if a party to or a person
B
claiming through a party to the arbitration agreement applies not later
than the date of submitting the first statement on the substance of the
dispute. The only exception is where the authority finds prima facie that
there is no valid arbitration agreement. Section 8 contains a positive
mandate and obligates the judicial authority to refer parties to arbitration
c in terms of the arbitration agreement. While dispensing with the element
of judicial discretion, the statute imposes an affirmative obligation on
every judicial authority to hold down parties to the terms of the agreement
entered into between them to refer disputes to arbitration. Article 8 of
the UNCITRAL Model Law enabled a court to decline to refer parties
to arbitration if it is found that the arbitration agreement is null and void,
D
inoperative or incapable of being performed. Section 8 of the Act of
1996 has made a departure which is indicative of the wide reach and
ambit of the statutory mandate. Section 8 uses the expansive expression
'judicial authority" rather than "court" and the words "unless it finds
that the agreement is null and void, inoperative and incapable of being
E performed" do not find place in Section 8.
4. Section 16 empowers the arbitral tribunal to rule upon its own
jurisdiction, including ruling on any objection with respectto the existence
or validity ofan arbitration agreement. Section 16( I )(b) stipulates that a
decision by the arbitral tribunal that a contract is nul I and void shall not
F entail ipso jure the invalidity ofthe arbitration clause. Hence, the invalidity
of the contract between the parties does not render the arbitration
agreement invalid as a consequence of law. This recognises as inhering
in the arbitrator the jurisdiction to consider whether the main contract
(other than the arbitration clause) is null and void. The arbitration
agreement survives for determining whether the contract in which the
G arbitration clause is embodied is null and void, which would include
voidability on the ground of fraud. The severability of the arbitration
agreement is a doctrinal development of crucial significance. For, it
leaves the adjudicatory power of the arbitral tribunal unaffected, over
any objection that the main contract between the parties is affected by
H fraud or undue influence.
A. AYYASAMY v. A. PARAMASIVAM & ORS. 545
[DR. D. Y. CHANDRACHUD, J.]

5. Section 34(2)(b) and Section 48(2) provide as one of the grounds A
for challenge to or in respect of the enforceability of an award that "the
subject matter of the dispute is not capable of settlement by arbitration
under the law for the time being in force". Clearly, therefore, the Act
contemplates and acknowledges that before it can be held that a particular
subject matter is not capable of settlement by arbitration, such a
B
consequence must arise under the law for the time being in force.
6. Ordinarily every civil or commercial dispute whether based on
contract or otherwise which is capable of being decided by a civil court
is in principle capable of being adjudicated upon and resolved by arbitration
"subject to the dispute being governed by the arbitration agreement"
unless the jurisdiction oftheArbitral Tribunal is excluded either expressly c
or by necessary implication. In Booz-Allen and Hamilton Inc. v. SBI
Home Finance Ltd.', this Court held that adjudication of certain
categories of proceedings is reserved by the legislature exclusively for
public fora as a matter of public policy. Certain other categories of
cases, though not exclusively reserved for adjudication by courts and D
tribunals may by necessary implication stand excluded from the purview
of private fora. This Court set down certain examples of non-arbitrable
disputes such as:
(i) Disputes relating to rights and liabilities which give rise to or
arise out of criminal offences; E
(ii) Matrimonial disputes relating to divorce,judicial separation,
restitution of conjugal rights and child custody;
(iii) Matters of guardianship;
(iv) Insolvency and winding up;
F
(v) Testamentary matters, such as the grant of probate, letters of
administration and succession certificates; and
(vi) Eviction or tenancy matters governed by special statutes where
a tenant enjoys special protection against eviction and specific
courts are conferred with the exclusive jurisdiction to deal with G
the dispute.
This Court held that this class of actions operates in rem, which is
a right exercisable against the world at large as contrasted with a right
in personam which is an interest protected against specified individuals.
'(2011J s sec 532 H
546 SUPREME COURT REPORTS r20161 11 S.C.R.

A All disputes relating to rights in personam are considered to be amenable
to arbitration while rights in rem are required to be adjudicated by courts
and public tribunals. The enforcement of a mortgage has been held to
be a right in rem for which proceedings in arbitration would not be
maintainable. In Vimal Kishore Shah v. Jayesh Dinesh Shah 2, this
Court added a seventh category of cases to the six non-arbitrable
B
categories set out in Booz Allen, namely, disputes relating to trusts,
trustees and beneficiaries arising out of a trust deed and the Trust Act.
7. In Natraj Studios (P) Ltd. v. Navrang Studios 3 , a Bench of
three judges of this Court dealt with the issue as to whether a dispute
between a landlord and a tenant falling within the exclusive domain of
c the Court of Small Causes at Mumbai, to the exclusion of the civil court,
is arbitrable. This Court held that the Bombay Rent Act is a welfare
legislation aimed at a definite social objective of protecting tenants as a
matter of public policy. The conferment of exclusive jurisdiction on
certain courts was in pursuance of a specific social objective which the
D legislation seeks to achieve. Public policy, this Court held, requires that
parties cannot be allowed to contract out of the legislative mandate which
requires certain kinds of disputes to be resolved by special courts
constituted under rent control legislation. Hence, arbitration agreements
between parties whose rights are regulated by rent control legislation
would not be recognised by a court oflaw.
E
8. In regard to disputes under the Consumer Protection Act, 1986,
this Court held in Skypak Courier Ltd. v. Tata Chemical Ltd\ that
the existence of an arbitration clause will not be a bar to the entertainment
of a complaint by a forum under the Consumer Protection Act, 1986
since the remedy provided under the law is in addition to the provisions
F of any other law for the time being in force. This was reiterated in
National Seeds Corporation Ltd. v. M. Madhusudhan Reddy\ and
Rosedale Developers Pvt. Ltd. v. A~hore Bhattacharya6 • It was
0

observed that the remedy is merely optional and is in addition to and not
in derogation of the provisions of any other law for the time being in
G force.
9. Hence, in addition to various classes of disputes which are
2 (2016) SCC OnLine SC 825
3
(1981) 2 SCR 466
'(2000J s sec 294
'(2012i2 sec 506
H 6
(2015 )I WBLR (SC) 385
A. AYYASAMY v. A. PARAMASIVAM & ORS. 547
[DR. D. Y. CHANDRACHUD, J.]

generally considered by the courts as appropriate for decision by public A
fora, there are classes of disputes which fall within the exclusive domain
of special fora under legislation which confers exclusive jurisdiction to
the exclusion of an ordinary civil cou1t. That such disputes are not
arbitrable dovetails with the general principle that a dispute which is
capable of adjudication by an ordinary civil court is also capable of being
B
resolved by arbitration. However, ifthe jurisdiction of an ordinary civil
court is excluded by the conferment of exclusive jurisdiction on a specified
court or tribunal as a matter of public policy such a dispute would not
then be capable of resolution by arbitration.
10. The judgment of a two judge Bench of this Court in N.
Radhakrishnan v. Maestro Engineers 7 , arose out of a partnership
c
dispute. A suit was instituted before the civil court for declaratory and
injunctive reliefs. An application under Section 8 of the Act of 1996 was
rejected by the trial court and the order of rejection was affirmed in
revision by the High Court. The submission of the appellant that the
dispute between the paitners ought to have been referred to arbitration D
was met with the objection that the appellant having raised issues relating
to misappropriation offunds and malpractices, these were matters which
ought to be resolved by a civil court. Affirming the judgment of the High
Court, a Bench of two judges of this Court held as follows:
"The High Court in its impugned judgment has rightly held E
that since the case relates to allegations of fraud and serious
malpractices on the part of the respondents, such a situation
can only be settled in court through furtherance of detailed
evidence by either paities and such a situation cannot be
properly gone into by the Arbitrator." (I.d. at p. 7)
F
The judgment accepted the submission of the respondent that the
appellant having raised serious matters alleging criminal wrongdoing,
such disputes ought to be adjudicated upon by the civil court:
"The learned counsel appearing on behalfofthe respondents
on the other hand contended that the appellant had made
G
serious allegations againstthe respondents alleging that they
had manipulated the accounts and defrauded the appellant
by cheating the appellant of his dues, thereby warning the
respondents with serious criminal action against them for

'(2010) 1 SCC72
H
548 SUPREME COURT REPORTS [2016] 11 S.C.R.

A the alleged commission of criminal offences. In this
connection, reliance was placed in a decision of this Court
in the case of Abdul Kadir Shamsuddin Bubere vs.
Madhav Prabhakar Oak and Another, [AIR 1962 SC 406]
in which this Court under para 17 held as under:
B "There is no doubtthat 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 .... "
c In our view and relying on the aforesaid observations of
this Court in the aforesaid decision and going by the ratio of
· the above mentioned case, the facts of the present case
does not warrant the matter to be tried and decided by the
Arbitrator, rather for the furtherance ofjustice, it should be
D tried in a court oflaw which would be more competent and
have the means to decide such a complicated matter
involving various questions and issues raised in the present
dispute."
The above extract from the judgment in N. Radhakrishnan relies
E extensively on the view propounded in Abdul Kadir (supra). The decision
in Abdul Kadir arose under the ArbitrationAct, 1940 and was in the
context of the provisions of Section 20. In Abdul Kadir, this Court
emphasized that sub-Section (4) of Section 20 of the Arbitration Act,
1940 left a wide discretion in the court. In contrast, the scheme of the
Act of 1996 has made a radical departure from the position under the
F erstwhile enactment. A marked distinction is made in Section 8 where
no option has been left to the judicial authority but to refer parties to
arbitration. Abdul Kadir explains the position under the Arbitration
Act, 1940. The present legislation on the subject embodies a conscious
departure which is intended to strengthen the efficacy of arbitration.
G 11. In P. Anand Gajapathi Raju v. P.V.G Raju (Dead)8 , this
Court held that the language of Section 8 is peremptory in nature. Hence,
where there is an arbitration agreement, it is obligatory for the court to
refer parties to arbitration and nothing remains to be decided in the original
action after such an application is made, except to refer the dispute to an
• (2000) 4 sec 539
H
A. AYYASAMY v. A. PARAMASIVAM & ORS. 549
[DR. D. Y. CHANDRACHUD, J.]

arbitrator. The judgment in Abdul Kadir came up for consideration A
before a Bench of two learned judges in Hindustan Petroleum
Corporation Ltd. v. Pinkcity Midway Petroleums•. In that case,
the appellant had appointed the respondent as a dealer for selling its
petroleum products through a retail outlet. The dealership agreement
contained an arbitration agreement. ln the course of an inspection the
B
appellant found a breach of the dealership agreement and sales of
petroleum products were suspended. The respondent instituted a suit
before the ordinary civil court seeking declaratory reliefs in which the
appellant filed an application under Section 8 of the Arbitration and
Conciliation Act, 1996. The civil court rejected the application and the
High Court in revision affirmed the view. The submission which weighed c
with the High Court was that the allegation of tampering of weights and
of measurement seals could only be adjudicated upon under the Standards
of Weights and Measures (Enforcement) Act, 1985 and hence such a
dispute was not arbitrable. This Court held that once the arbitration
agreement was admitted, irrview of the mandatory language of Section
D
8, the dispute ought to have been referred to arbitration. The judgment
of this Court dealt with the submission that since the allegations in the
case related to an element of criminal wrongdoing, the dispute was not
arbitrable. Rejecting this submission, this Court held as follows:
"19 It was argued before the courts below as also before
us that the mis-conduct, if any, pertaining to short-supply of E
petroleum products or tampering with the seals would be a
criminal offence under the 1985 Act. Therefore, the
investigation into such conduct of the dealer can only be
conducted by such offices and in a manner so specified in
the said Act, and it is not open to the appellant to arrogate . F
to itself such statutory power of search and seizure by
relying on some contractual terms in the Dealership
Agreement. It is further argued that such disputes involving
penal consequences can only be tried by a court of
competent jurisdiction and cannot be decided by an
arbitrator ..... G
20 Having considered the above arguments addressed on
behalf of the respondent as also the findings of the courts
below, we are of the opinion that the same cannot be
'(2003 l 6 sec 503
H
550 SUPREME COURT REPORTS [20161 11 S.C.R.

A accepted because the appellant is neither exercising the
power of search and seizure conferred on a competent
authority under the 1985 Act nor does the Dealership
Agreement contemplate the arbitrator to exercise the power
of a criminal court while arbitrating on a dispute which has
arisen between the contracting parties. This is clear from
B
the terms of the Dealership Agreement." (Id. at p. 19-20)
In the view of this Court, the dispute between the parties was
clearly referable to the terms of the contract and did not entrench upon
the legislative provisions contained in the Standards of Weights and
Measures (Enforcement) Act, 1985:
c "The courts below in our opinion, have committed an error
by misreading the tenns of the contract when they came to
the conclusion that the only remedy available as against a
misconduct committed by an ening dealer in regard to short-
supply and tampering with the seals lies under the provisions
D of the 1985 Act. The courts below have failed to notice
that when a dealer short-supplies or tampers with the seal,
apart from the statutory violation, he also commits a
misconduct under Clause 20 of the Agreement in regard to
which the appellant is entitled to invoke Clause 30 of the
Agreement to stop supply of petroleum products to such
E dealer. The power conferred under the Agreement does
not in any manner conflict with the statutory power under
the 1985 Act nor does the prescribed procedure under the
1985 Act in regard to search and seizure and prosecution
apply to the power of the appellant to suspend the supply of
F its petroleum products to an erring dealer. The power
exercised by the appellant in such a situation is a contractual
power under the agreement and not a statutory one under
the 1985 Act. The existence of dual procedure; one under
the criminal law and the other under the contractual law is
a well-accepted legal phenomenon in the Indian
G jurisprudence ...... .
Therefore, in our opinion, the courts below have erred in
coming to the conclusion that the appellant did not have the
. legal authority to investigate and proceed against the
respondent for its alleged misconduct under the terms of
H the Dealership Agreement. We are also of the opinion that
A. AYYASAMY v. A. PARAMASIVAM & ORS. 551
[DR. D. Y. CHANDRACHUD, J.]

ifthe appellant is satisfied that the respondent is indulging A
in short-supply or tampering with the seals, it will be entitled
to initiate such action as is contemplated under the
agreement like suspending or stopping the supply of
petroleum products to such erring dealer. Ifin that process
any dispute arises between the appellant and such dealer,
B
the same will have to be referred to arbitration as
contemplated under Clause 40 of the Dealership
Agreement." (Id. at p. 23-24)
12. Hence, allegations of criminal wrongdoing or of statutory
violation would not detract from the jurisdiction of the arbitral tribunal to
resolve a dispute arising out ofa civil or contractual relationship on the
c
basis of the jurisdiction conferred by the arbitration agreement.
13. In a more recent judgment of two judges of this Court in
Sundaram Finance Ltd. v. T. Thankam 10, the same position in regard
to the mandate of Section 8 has been reiterated. The earlier decisions in
Anand Gajapathi Raju, Pink City and in Branch Manager, Magma D
Leasing and Finance Ltd. v. Potluri Madhvilata", emphasizing the
mandate of Section 8, have been reaffirmed. This Court has held:
"Once an application in due compliance of Section 8 of the
Arbitration Act is filed, the approach of the civil court should
be not to see whether the court has jurisdiction. It should E
be to see whether its jurisdiction has been ousted. There is
a lot of difference between the two approaches. Once it is
brought to the notice of the court that its jurisdiction has
been taken away in terms of the procedure prescribed under
a special statute, the civil court should first see whether F
there is ouster ofjurisdiction in terms or compliance of the
procedure under the special statute. The general law should
yield to the special law - ge11eralia specialibus 11011
derogant. Jn such a situation, the approach shall not be to
see whether there is still jurisdiction in the civil court under
the general law. Such appn;>aches would only delay the G
resolution of disputes and complicate the redressal of
grievances and of course unnecessarily increase the
pendency in the court." (Id. at p. 15)
1
" AIR 2015 1303
11
(2009) 1o sec 1OJ H
552 SUPREME COURT REPORTS f20161 11 S.C.R.

A 14. The position that emerges both before and after the decision
in N. Radhakrishnan 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
B
arbitrati,,n 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. Radhakrislman has, however, been utilised by parties
seeking a convenient ruse to avoid arbitration to raise a defence of fraud.
c First and foremost, it is necessary to emphasise that the judgment in N.
Radhakrishnan 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
D judgment in N. Radhakrishnan. 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
E 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 al legation of fraud
will exclude arbitrability. The burden must lie heavily on a party which
F 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
G 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 may come into existence. Allegations of fraud are not
alien to ordinary civil comts. Generations ofjudges have dealt with such
allegations in the context of civil and commercial disputes. If an allegation
H
A. AYYASAMY v. A. PARAMASIVAM & ORS. 553
[DR. D. Y. CHANDRACHUD, J.]

of fraud can be adjudicated upon in the course of a trial before an ordinary A
civil court, there is no reason or justification to exclude such disputes
from the ambit and purview ofa claim in arbitration. 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. Parties in choosing arbitration
B
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. c
15. The position as it obtains in other jurisdictions which value
arbitration as an effe~tive form of alternate dispute resolution is no
different. In the UK, Section 24(2) of the Arbitration Act, 1950 provided
that the court could revoke the authority of a tribunal to deal with claims
involving issues of fraud and determine those claims itself. The English D
Act of 1979 provided for a stay of proceedings involving allegations of
fraud. However, under the English Arbitration Act, 1996, there is no
such restriction and the arbitral tribunal has jurisdiction to consider and
rule on issues of fraud. In Fiona Trust and Holding Corporation v.
Yuri Privalov 12 , the Court of Appeal emphasised the need to make a
fresh start in imparting business efficacy to arbitral agreements. The E
Court of Appeal held that:
"For our part we consider that the time has now come
for a line of some sort to be drawn and a fresh start made
at any rate for cases arising in an international commercial
context. Ordinary business men would be surprised at the F
nice distinctions drawn in the cases and the time taken up
by argument in debating whether a particular case falls
within one set of words or another very similar set of words.
If business men go to the trouble of agreeing that their
disputes be heard in the courts of a particular country or by
G
a tribunal of their choice they do not expect (at any rate
when they are making the contract in the first place) that
time and expense will be taken in lengthy argument about
the nature of particular causes of action and whether any
" (2007] I All E R (COMM) 891
H
554 SUPREME COURT REPORTS [2016] 11 S.C.R.

A particular cause of action comes within the meaning of the
particular phrase they have chosen in their arbitration
clause. If any business man did want to exclude disputes
about the validity of a contract, it would be comparatively
simple to say so ... One of the reasons given in the cases
for a liberal construction of an arbitration clause is the
B
presumption in favour of one-stop arbitration. It is not to
be expected that any commercial man would knowingly
create a system which required that the court should first
decide whether the contract should be rectified or avoided
or rescinded (as the case might be) and then, if the contract
c is held to be val id, required the arbitrator to resolve the
issues that have arisen. This is indeed a powerful reason
for a liberal construction".
Arbitration must provide a one-stop forum for resolution of
disputes. The Court of Appeal held that if arbitrators can decide whether
a contract is void for initial illegality, there is no reason why they should
D
not decide whether a contract is procured by bribery, just as much as
they can decide whether a contract has been vitiated by misrepresentation
or non-disclosure. The judgment of the Court of Appeal was affirmed
by the House of Lords in Premium Nafta Products Ltd. (20'~
Defendant) v. Fily Shipping Co. Ltd 13• The House of Lords held
E that claims of fraudulent inducement of the underlying contract (i.e. alleged
bribery of one party's officer to accept uncommercial terms) did not
impeach the arbitration clause contained within that contract. The Law
Lords reasoned that "if (as in this case) the allegation is that the agent
exceeded his authority by entering into a main agreement in terms which
were not authorized or for improper reasons, that is not necessarily an
F
attack on the arbitration agreement". They went on to conclude that,
"the principle of separability ... means that the invalidity or rescission of
the main contract does not necessarily entail the invalidity or rescission
of the arbitration agreement. The arbitration must be treated as a 'distinct
agreement' and can be void or voidable only on grounds which relate
G directly to the arbitration agreement."
16. The basic principle which must guide judicial decision making
is that arbitration is essentially a voluntary assumption of an obligation
by contracting parties to resolve their disputes through a private tribunal.
The intent of the parties is expressed in the terms of their agreement.
H 13 [2007] t;KHL 40
A. AYYASAMY v. A. PARAMASIVAM & ORS. 555
[DR. D. Y. CHANDRACHUD, J.)

Where commercial entities and persons of business enter into such A
dealings, they do so with a knowledge of the efficacy of the arbitral
process. The commercial understanding is reflected in the terms of the
agreement between the parties. The duty of the court is to impart to that
commercial understanding a sense of business efficacy.
17. Lord Hoffmann, speaking for the House of Lords in Premium B
Nafta Products, placed the matter eloquently in the following
observations:
"In approaching the question of construction, it is therefore
necessary to inquire into the purpose of the arbitration
clause. As to this, I think there can be no doubt. The parties
have eptered into a relationship, an agreement or what is c
alleged to be an agreement or what appears on its face to
be an agreement, which may give rise to disputes. They
want those disputes decided by a tribunal which they have
chosen, commonly on the grounds of such matters as its
neutrality, expertise and privacy, the availability of legal D
services at the seat of the arbitration and the unobtrusive
efficiency ofits supervisory law. Particularly in the case of
international contracts, they want a quick and efficient
adjudication and do not want to take the risks of delay and,
in too many cases, partiality, in proceedings before a national
jurisdiction". E

18. Lord Hoffmann held that if this is the purpose underlying an
agreement to arbitrate, it would be inconceivable that parties would have
intended that some, amongst their disputes should first be resolved by a
court before they proceed to arbitration:
F
"If one accepts that th is is the purpose of an arbitration
clause, its construction must be influenced by whether the
parties, as rational businessmen, were Iikely to have intended
that only some of the questions arising out of their
relationship were to be submitted to arbitration and others
were to be decided by national courts. Could they have G
intended that the question of whether the contract was
repudiated should be decided by arbitration but the question
of whether it was induced by misrepresentation should be
decided by a court? If, as appears to be generally accepted,
there is no rational basis upon which businessmen would
H
556 SUPREME COURT REPORTS f20161 11 S.C.R.

A be likely to wish to have questions of the validity or
enforceability of the contract decided by one tribunal and
questions about its performance decided by another, one
would need to find very clear language before deciding that
they must have had such an intention".
B While affirming the judgment of the Court of Appeal, the House
of Lords held:
"13 In my opinion the construction of an arbitration clause
should start from the assumption that the parties, as rational
businessmen, are likely to have intended any dispute arising
c out of the relationship into which they have entered or
purported to enter to be decided by the same tribunal. The
clause should be construed in accordance with this
presumption unless the language makes it clear that certain
questions were intended to be excluded from arbitrator's
jurisdiction. As Longmore LJ remarked, at para 17: "if any
D businessmen did want to exclude disputes about the validity
of a contract, it would be comparatively easy to say so" ....
If one adopts this approach, the language of clause 41 of
Shelltime 4 contains nothing to exclude disputes about the
validity of the contract, whether on the grounds that it as
E procured by fraud, bribery, misrepresentation or anything
else. In my opinion it therefore applies to the present
dispute".
This principle should guide the approach when a defence of fraud
is raised before a judicial authority to oppose a reference to arbitration.
F The arbitration agreement between the parties stands distinct from the
contract in which it is contained, as a matter of law and consequence.
Even the invalidity of the main agreement does not ipso jure result in the
invalidity of the arbitration agreement. Parties having agreed to refer
disputes to arbitration, the plain meaning and effect of Section 8 must
ensue.
G
19. In the United States, the Supreme Court in Buckeye Check
Cashing, Inc. v. Cardegnau, followed its earlier decisions in Prima
Paint Corp. v. Flood & Conklin Manufacturing Co.'5, and in

"546 U.S. 440 (U.S.S.Ct.2006)
H "388 US 395 (U.S. S.Ct. 1967)
A. AYYASAMY v. A. PARAMASIVAM & ORS. 557
[DR. D. Y. CHANDRACHUD, J.]

Southland Corporation .v. Keating 16 • Justice Scalia, who delivered A
the judgment of the Supreme Court, summarized the position thus:-
"Prima Paint and Southland answer the question presented
here by establishing three propositions. First, as a matter
of substantive federal arbitration law, an arbitration provision
is severable from the remainder of the contract. Second, B
unless the challenge is to the arbitration clause itself, the
issue of the contract's validity is considered by the arbitrator
in the first instance. Third, this arbitration law applies in
state as well as federal courts. The parties have not
requested, and we do not undertake, reconsideration of those
holdings. Applying them to this case, we conclude tliat c
because respondents challenge the Agreement, but not
specifically its arbitration provisions, those provi.sions are
enforceable apart from the remainder of the contract. The
challenge should therefore be considered by an arbitrator,
not a court". D
20. The Arbitration and Conciliation Act, 1996, should in my view
be interpreted so as to bring in line the principles underlying its
interpretation in a manner that is consistent with prevailing approaches
in the common law world. Jurisprudence in India must evolve towards
strengthening the institutional efficacy of arbitration. Deference to a E
forum chosen by parties as a complete remedy for resolving all their
claims is but part of that evolution. Minimising the intervention of courts
is again a recognition of the same principle.
21. AcademiC literature on the law of arbitration points in the
same direction. ln Russell onArbitration 17, the doctrine of separability F
has been s11mmarized in the following extract:
"The doctrine of separability. An arbitration agreement
specifies the means whereby some or all disputes under
the contract in which it is contained are to be resolved. It is
however separate from the underlying contract: "An
G
arbitration clause in a commercial contract ... is an
agreement inside an agreement. The parties make their
commercial bargain ... but in addition agree on a private
. tribunal to resolve any issues that may arise between them."
16
465 U.S. I (1984)
17 (24 .. Edition. 2015, para2-007) H
558 SUPREME COURT REPORTS f20161 11 S.C.R.

A This is known as the doctrine of separability and s.7 of the
Arbitration Act 1996 provides a statutory codification of
the previous case law on this subject. As the House of
Lords noted in Lesotho Highlands v Impreglio SpA:
"it is part of the very alphabet of arbitration
B law as explained in Harbour Assurance Co. (UK)
Ltd. v Kansa General International Insurance Co.
Ltd ... and spelled out ins. 7 of the Act, the arbitration
agreement is a distinct and separable agreement from
the underlying or principal contract''. ....
c The Court of Appeal has confirmed that the doctrine of
separability as it applies to arbitration agreements and
jurisdiction clauses is uncontroversial also as a matter of
European law''.
Dealing with arbitrability of matters of fraud, the treatis~ contains
D the following statement of the legal position:
"Fraud. Claims involving conduct amounting to fraud can
be the subject matter of arbitration, as s.107(2) of the
Arbitration Act makes clear. The Act expressly recognises
that an arbitral tribunal may decide an issue of fraud, and
E the courts have acknowledged that an arbitrator has
jurisdiction to decide allegations of bribery against a party
to an arbitration agreement. Even in this context, however,
an arbitral tribunal does not have jurisdiction to impose
criminal sanctions on a party, even if bribery of a public
officer is established; its power is limited to the civil
F consequences of that conduct''.
Under Section 24(2) of the Arbitration Act, 1940, the court could
revoke the authority of a tribunal to deal with claims involving issues of
fraud and determine those claims itself. This provision has been repealed
in Section I 07(2) of the Arbitration Act, 1996.
G
22. Similarly, Redfern and Hunter on International
Arbitration 18 contains the following statement of legal position in relation
to arbitrability of matters involving fraud:-
"(vi) Fraud
"(6'" Editi1;m para 2.154)
H
A. AYYASAMYv. A. PARAMASIVAM & ORS. 559
[DR. D. Y. CHANDRACHUD, J.]

Where allegations of fraud in the procurement or A
performance of a contract are alleged, there appears to be
no reason for the arbitral tribunal to decline jurisdiction.
Indeed, in the heat of battle, such allegations are frequently
made, although much less frequently proven".
23. The legal position has been succinctly summarized in B
International Commercial Arbitration by Gary B Born 19 thus:
" ..... under most national arbitration regimes, claims that the
parties' underlying contract (as distinguished from the
parties' arbitration clause) was fraudulently induced have
generally been held not to compromise the substantive c
validity of an arbitration clause included in the contract.
The fact that one party may have fraudulently
misrepresented the quality ofits goods, services, or balance
sheet generally does nothing to impeach the parties' agreed
dispute resolution mechanism. As a consequence, only fraud
or fraudulent inducement directed at the agreement to D
arbitrate will, as a substantive matter, impeach that
agreement. These circumstances seldom arise: as a
practical matter, it is relatively unusual that a party will seek
to procure an agreement to arbitrate by fraud, even in those
cases where it may have committed fraud in corihection E
with the underlying commercial contract".
(See also in this context, International Arbitration Law and
Practice by Mauro Rubino-Sammartanof0
24. For the above reasons, I agree with the eloquent judgment of
my learned brother in coming to the conclusion that a mere allegation of F
fraud in the present case was not sufficient to detract from the obligation
of the parties to submit their disputes to arbitration. I also agree with the
directions issued. A fresh line must be drawn to ensure the fulfilment of
the intent of Parliament in enacting the Act of 1996 and towards
supporting commercial understandings grounded in the faith in arbitration.
G

Kalpana K. Tripathy Appeals allowed.

19
(2'' Edition Vol. I, P.846)
20
(2'' Edition p.179)