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Rashid Raza v. Sadaf Akhtar

Civil Appeal · 2019 INSC 1002Decided 4 Sept 2019
Civil Appeal No. 7005 of 2019
Justice Rohinton Fali Nariman · Justice R. Subhash Reddy · Justice Surya Kant

Background

A dispute arose between business partners after one partner lodged a police complaint (FIR) alleging siphoning of funds and other improprieties by the other partner. The appellant sought appointment of an arbitrator under the arbitration clause in their partnership deed, but the High Court refused, holding, based on a misreading of the Supreme Court's earlier ruling in A. Ayyasamy v. A. Paramasivam, that the fraud allegations were too serious and complex to be resolved by arbitration and should instead go to a civil court.

Decision Breakdown

The Supreme Court clarified that the High Court had wrongly relied on paragraph 26 of Ayyasamy (a summary of facts in that case) instead of the actual legal test laid down in paragraph 25, which distinguishes "simple allegations" of fraud (arbitrable) from "serious allegations" of fraud that either (i) permeate the entire contract including the arbitration clause itself, or (ii) have implications in the public domain. Applying this test, the Court found that the allegations here, about siphoning of partnership funds and internal business improprieties, were simple allegations confined to the partners' internal affairs, with no implication for the public at large and no challenge to the arbitration clause itself. It therefore set aside the High Court's order, held the dispute arbitrable, and appointed a retired High Court judge as sole arbitrator, while clarifying that this did not affect the separate criminal investigation under the FIR.

Lesson Learnt

Not every allegation of fraud can be used to escape an arbitration agreement, only fraud serious enough to taint the arbitration clause itself or to affect the public at large takes a dispute out of arbitration; ordinary business disputes involving alleged financial wrongdoing between partners remain arbitrable.

Official source (sci.gov.in)View Judgment (PDF)

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