The Supreme Court has reaffirmed that arbitration is a creature of consent, and where the very existence of an arbitration agreement is seriously challenged as forged, courts must refuse to refer disputes to arbitration. This judgment clarifies that allegations of forgery going to the root of the agreement render the dispute non-arbitrable at the threshold, irrespective of the procedural stage.
Background & Facts
The Dispute
The dispute centers on the alleged execution of a "Admission Deed" dated 17.04.2007, which purportedly admitted Rajia Begum as a 50.33% partner in the firm M/s RDDHI Gold and retired the original partners. Barnali Mukherjee, a party to the original partnership deed of 2005, vehemently denies ever executing this document, alleging it is forged and fabricated. The Admission Deed contains an arbitration clause, which the respondent seeks to enforce.
Procedural History
The litigation unfolded across multiple forums:
- 2018: Respondent filed an application under Section 9 of the Arbitration and Conciliation Act, 1996, seeking interim relief. The High Court dismissed it, finding serious doubts about the genuineness of the Admission Deed.
- 2018: Appellant filed a civil suit seeking declaration that the Admission Deed is forged. Respondent countered with an application under Section 8 to refer the suit to arbitration. The Trial Court and First Appellate Court dismissed the application, citing failure to produce the original deed and serious fraud allegations.
- 2021: The High Court, exercising Article 227 jurisdiction, set aside the lower courts’ orders and directed arbitration.
- 2021: Respondent also filed a petition under Section 11 for appointment of an arbitrator. The High Court dismissed it, holding that the existence of the arbitration agreement itself was in serious dispute.
Relief Sought
The appellant seeks to uphold the dismissal of the Section 8 application and affirm the rejection of the Section 11 petition. The respondent seeks enforcement of the arbitration clause and reversal of the High Court’s dismissal of her Section 8 and Section 11 applications.
The Legal Issue
The central question was whether a dispute can be referred to arbitration under Section 8 or an arbitrator appointed under Section 11 when the very existence of the arbitration agreement is seriously challenged as forged, and the document containing the clause lacks credibility and contemporaneous corroboration.
Arguments Presented
For the Appellant
The appellant argued that the Admission Deed is a fabricated document, unsupported by any contemporaneous record. She relied on A. Ayyasamy v. A. Paramasivam, Vidya Drolia, and Avitel Post Studioz to contend that fraud going to the root of the arbitration agreement renders it non-arbitrable. The High Court’s prior Section 9 order, which found the deed doubtful and was affirmed by this Court, established a binding prima facie assessment. The respondent’s failure to produce the original deed violated Section 8(2) of the Act.
For the Respondent
The respondent contended that allegations of fraud in the underlying contract are generally arbitrable, citing N.N. Global Mercantile and Rashid Raza. She argued that the High Court’s observations under Section 9 were tentative and could not bind subsequent proceedings. She further claimed that the Article 227 order was correct in correcting errors of law by the lower courts and that the arbitrator, not the court, should decide the validity of the agreement.
The Court's Analysis
The Court examined the evolving jurisprudence on fraud and arbitrability, reaffirming the two-pronged test from Avitel Post Studioz and Managing Director Bihar State Food: (1) whether the fraud permeates the entire contract including the arbitration clause, rendering it void; and (2) whether the fraud is so complex it requires voluminous evidence beyond the scope of arbitration.
"The arbitration clause does not exist independently but is embedded in the document whose existence is seriously disputed. Arbitration, it bears reiteration, is founded upon consent. A party may be bound by the arbitral process only if it is first shown, even at a prima facie level, that such a party had agreed to submit disputes to arbitration."
The Court emphasized that where the arbitration agreement itself is alleged to be forged, the dispute is not merely contractual - it strikes at the jurisdictional foundation of arbitration. The High Court’s Section 9 order, though prima facie, had attained finality after this Court dismissed the SLP against it. Such a finding, grounded in material evidence, could not be ignored in subsequent proceedings.
The Court further held that Section 8(2) requires production of the original arbitration agreement or a certified copy. The respondent’s failure to do so, coupled with the absence of any contemporaneous record of her partnership for nine years, rendered the claim legally unsustainable. The High Court’s interference under Article 227 was impermissible, as it reappreciated evidence - a function reserved for appellate courts, not supervisory jurisdiction.
The Verdict
The appellant prevailed. The Supreme Court held that when the arbitration agreement itself is alleged to be forged and its existence is seriously in doubt, the dispute is non-arbitrable at the threshold. The High Court’s order under Article 227 directing arbitration was quashed, and its dismissal of the Section 11 petition was affirmed.
What This Means For Similar Cases
Arbitration Agreements Cannot Be Enforced on Suspicion Alone
- Practitioners must now establish a prima facie case of consent before invoking Section 8 or Section 11.
- Courts must refuse referral if the arbitration clause is embedded in a document that is demonstrably uncorroborated or fabricated.
- Failure to produce the original arbitration agreement under Section 8(2) is fatal to the application.
Prima Facie Findings in Section 9 Proceedings Are Binding in Subsequent Proceedings
- A Section 9 order rejecting arbitration due to forged documents, if affirmed by a higher court, becomes a binding factual assessment.
- Parties cannot circumvent such findings by re-filing under Section 8 or Section 11.
- Courts must treat final prima facie findings as relevant, even if technically non-final, when no new evidence emerges.
Supervisory Jurisdiction Under Article 227 Cannot Substitute Appellate Review
- High Courts cannot use Article 227 to reappreciate evidence or overturn concurrent findings of lower courts.
- Where two courts have independently found fraud allegations credible and the document unproduced, Article 227 cannot be invoked to reverse those findings.
- This judgment curbs misuse of supervisory jurisdiction to bypass the appellate process in arbitration matters.
