Unless Serious Allegations Of Fraud Are Established, Parties Cannot Be Denied Reference To Arbitration U/S 8 Of A&C Act: Bombay HC

The Bombay High Court bench of Justice N. J. Jamadar has held that the dispute cannot be refused referral to arbitration under Section 8 of the Arbitration and Conciliation Act, 1996 (Arbitration Act) based solely on mere allegations of fraud simpliciter, unless serious allegations of fraud that go to the root of the partnership deed containing the arbitration clause are established. Brief Facts: The Petitioner-Defendant No.2, Respondent No.3-Defendant No.3 and Narayan Tiwari, the predecessor-in-tile of Respondent Nos. 1 and 2 Plaintiffs, had entered into a partnership under the name and style of M/s Tiwari Enterprises. They had agreed to share the profits in the ratio of 50%, 25% and 25%, respectively. The partnership was at will. The partnership firm-Defendant No.1 did develop certain properties. After Narayan Tiwari's demise, the Plaintiffs requested Defendant No.2 to determine his share in the firm. Defendant No.2, however, colluded with his son, Yogesh Tiwari, and allegedly forged documents to show Yogesh as a partner. The Plaintiffs filed a suit for rendition of accounts and determination of Narayan Tiwari's share. Defendant No.2, citing an arbitration clause in the 2003 partnership deed held by the Plaintiffs, filed an application under Section 8 of the Arbitration Act seeking reference to arbitration. By order dated 19th December 2023, the Civil Judge, Senior Division, Kalyan, rejected reference to arbitration, citing allegations of fraud and forged documents raised by the Plaintiffs, which were beyond the Arbitrator's scope. Aggrieved, Defendant No.2 filed an appeal under Section 37 of the Arbitration Act. The District Judge dismissed the appeal on a different ground that Defendant No.2 denied the existence or enforceability of the original Partnership Deed containing the arbitration clause, having instead relied on a Reconstitution Deed alleging retirement of Narayan and Rakesh Tiwari and induction of Yogesh Tiwari. Contentions: The Petitioner submitted that the Trial Court declined to refer the parties to Arbitration on the ground that allegations of fraud were made. With the development in law, where party autonomy is to be respected, mere allegations of fraud cannot be used as a refuge to decline to refer the parties to Arbitration as that would defeat the very object of the Arbitration Act. It was further submitted that the contention that the firm's constitution changed wherein Narayan Tiwari and Rakesh Tiwari retired and Yogesh Tiwari was inducted as a partner does not amount to a denial by Defendant No.2 of the existence of the partnership or the Partnership Agreement. Per contra, the Respondent submitted that the Plaintiffs, as legal representatives of the deceased partner Narayan Tiwari, cannot be bound by the Arbitration Agreement in the Partnership Deed. Emphasizing the distinction between “party” in Section 2(1)(h) and “parties” in Section 7(1) of the Act, it was further submitted that “party” refers strictly to a signatory to the Arbitration Agreement and does not include those claiming through or under such a party. Therefore, under Section 8 of the Arbitration Act only actual parties to the Arbitration Agreement can be referred to arbitration. Observations: The court at the outset noted that there is a dispute regarding the Deed of Reconstitution dated 2nd March 2015, which the Plaintiff claims is forged. As per the Deed, Yogesh Tiwari, son of Defendant No.2, was inducted as a partner, while Narayan Tiwari (deceased) and Rakesh Tiwari (Defendant No.3) were shown as retired. Clause 7 of the Deed states that the original Partnership Deed of 31.01.2003 remains valid unless modified. It further noted that due to the fraud and forgery allegations, the Civil Judge declined arbitration. However, in light of the law, this was erroneous, as the Court's jurisdiction under Section 8 of the Arbitration Act is limited. The Supreme Court in Afcons Infrastructure Ltd. V/s. Cherian Varkey Construction Co. (P) Ltd (2011) held that the following categories of cases are generally considered unsuitable for the ADR process due to their nature.Cases involving serious and specific allegations of fraud, fabrication of documents, forgery, impersonation, or coercion and cases involving prosecution for criminal offences. Similarly, the Apex Court in N. Radhakrishnan V. Maestro Engineers (2010) held that there is no doubt that where serious allegations of fraud are made against a party, and the party who is charged with fraud desires that the matter should be tried in open court, that would be a sufficient cause for the court not to order an arbitration agreement to be filed and not to make the reference. The court also noted that the Supreme Court in A. Ayyasamy V. A. Paramasivam (2016) held that It follows that cases involving serious allegations of fraud—especially those resembling ...

Unless Serious Allegations Of Fraud Are Established, Parties Cannot Be Denied Reference To Arbitration U/S 8 Of A&C Act: Bombay HC

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Unless Serious Allegations Of Fraud Are Established, Parties Cannot Be Denied Reference To Arbitration U/S 8 Of A&C Act: Bombay HC

Mohd Malik Chauhan

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