Rashid Raza v Sadaf Akhtar
In this case, it was discussed whether the cases regarding arbitral fraud would be entertained by a civil court or arbitral tribunal?
Secondly, in the case of arbitral fraud, under the arbitration clause, the parties had opted for the arbitral tribunal for solving their dispute. Are they still bound to sort their dispute in open court?
Facts of the case:-
The present case arose based on a partnership dispute in which an FIR dated 17 November 2017 was lodged by one of the partners ( Rashid Raza) alleging of siphoning of funds and various other business improprieties FIR is under investigation.
Appellant Rashid filed an application petition dated 2 Jan 2018 before the High Court. It was filed under section 11 of Arbitration and Conciliation Act, 1996. The petition was regarding the appointment of an arbitrator under the arbitration clause. It was added in the partnership deed between the parties, dated 30.1.15
The decision by the High Court
Extracting paragraph 26 from the judgment of A Ayyasamy v Signature civil appeal no. 7005,2008, the allegation of fraud that wall was leveled against the appellant was that he had signed and issued a cheque of Rs 10,00,050 on 17th June 2010 of the hotel Arungiri in the favour of his son without the knowledge and due consent of others. But in that case, it was a mere matter of account which could be looked into and resolved by the arbitrator even. But this present case is much more complex. The court said that they do not want to make any comments on the merits of allegations but it may take up in a competent court. In the end, the court said that the nature of the dispute involving serious allegations of fraud of complicated nature is not fit to be decided in an arbitration proceeding. This dispute requires serious evidence that is provided by both the parties and hence only a civil court of competent jurisdiction can take up this matter. Hence section 11 application was dismissed.
The decision by Supreme Court
In the view of further discussions, it was concluded that mere allegation of fraud may not be a ground to nullify the effort of the arbitration agreement. Only in these cases, it can be held where the court while dealing with section 8 fines that there are very serious offenses committed which shall constitute to criminal offense on where fraud is so harmful that only civil court can decide the matter based on evidence. In such a situation the court can sidetrack the agreement by dismissing the application under section 8 and proceeds with the suit. It can also be done when fraud is done against the arbitration clause itself. Though, there is no law in regard which says that arbitration shall be ruled out be it's at the discretion of the court. As the matters which involve public offense are to be treated in courts. Thus the sole focus should be on the question of how grave nature is of the offense committed.
Supreme Court used 2 tests to see the present case
- Does the plea permeate the entire contract and arbitration clause?
- Does the offense committed are in the public domain?
After applying these 2 tests it was found that this is a case that falls on the side of the simple allegation and not of the severe allegation. Hence in this, the dispute raised between the parties is arbitrable and sec 11 application under the Arbitration Act would be maintainable. The judgment under the appeal was set aside.
And this judgment applies only to the Indian seated arbitral tribunal and for the foreign seated arbitral tribunal, the arbitral tribunal has the jurisdiction to listen to any nature of arbitral fraud.