Allowing an appeal in A Ayyasamy v A Paramasivam & Ors, the Supreme Court recently held that where there are simple allegations of fraud touching upon a party’s internal affairs, and there is no implication on the public domain, an arbitration clause need not be avoided and the parties can be sent to arbitration.
In this case, five brothers and their late father had entered into a partnership deed (containing an arbitration clause) to conduct a hotel business in Tamil Nadu. When disputes arose between the parties, the respondents filed a civil suit for a declaration that the partners had the right to participate in the hotel administration.
[ihc-hide-content ihc_mb_type=”show” ihc_mb_who=”3″ ihc_mb_template=”2″ ]
After receiving the summons in the suit, Ayyasamy filed an application under section 8 of the Arbitration and Conciliation Act, 1996, and objected to the maintainability of the civil suit in view of the arbitration clause. The respondents argued that the dispute was not arbitrable as there were serious allegations of fraud against Ayyasamy, which could not be adjudicated upon by an arbitral tribunal. The trial court dismissed the section 8 application and this was upheld by Madras High Court.
The Supreme Court said “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 serious and complex and a decision on the issues should demand extensive evidence so that the civil court appears to be a more appropriate forum than the arbitral tribunal. “Otherwise, it may become a convenient mode of avoiding the process of arbitration by simply using the device of making allegations of fraud and pleading that issue of fraud needs to be decided by the civil court.”
[/ihc-hide-content]
The dispute digest is compiled by Bhasin & Co, Advocates, a corporate law firm based in New Delhi. The authors can be contacted at lbhasin@bhasinco.in or lbhasin@gmail.com. Readers should not act on the basis of this information without seeking professional legal advice.
