Arbitration Agreement | Existence Under Serious Dispute Renders Dispute Non-Arbitrable : Supreme Court

The Supreme Court has clarified the boundaries of arbitrability in disputes involving serious allegations of fraud, particularly when the arbitration agreement itself is under challenge. This judgment establishes that where the existence of an arbitration agreement is seriously disputed due to allegations of forgery, courts must first adjudicate this foundational issue before referring parties to arbitration. The decision reinforces the principle that arbitration, being consensual, cannot proceed without a valid agreement to arbitrate.

Background & Facts

The Partnership Dispute

The case originates from a partnership dispute involving M/s R DDHI Gold, a firm constituted in 2005 by Barnali Mukherjee (appellant in one appeal), Aftabuddin, and Raihan Ikbal. Rajia Begum (respondent) claimed entry into the firm in 2007 through a Deed of Admission and Retirement (Admission Deed), allegedly executed by the other partners. The appellant, however, denied the execution of this deed, alleging it to be forged and fabricated. The dispute centered on whether Rajia Begum was ever a partner and whether the arbitration clause in the Admission Deed was valid.

Procedural History

The case traversed multiple forums, with conflicting outcomes:

• 2016: Rajia Begum issued a notice claiming a 50.33% stake in the firm based on the Admission Deed. The appellant denied its validity.
• 2018: Rajia Begum filed an application under Section 9 of the Arbitration and Conciliation Act, 1996 (Act) for interim relief. The Trial Court allowed it, but the High Court set aside the order, holding that the existence of the Admission Deed was prima facie doubtful.
• 2018: The appellant filed a civil suit seeking a declaration that the Admission Deed was forged. Rajia Begum filed an application under Section 8 of the Act to refer the dispute to arbitration, which was dismissed by the Trial Court and the First Appellate Court.
• 2021: The High Court, in a revision under Article 227 of the Constitution, set aside the lower courts' orders and referred the dispute to arbitration. Parallelly, the High Court dismissed Rajia Begum’s application under Section 11 of the Act for appointment of an arbitrator, holding that the existence of the arbitration agreement was in serious doubt.

Relief Sought

The appeals before the Supreme Court sought:

• In SLP (C) No. 6013 of 2021: Challenge to the High Court’s order dismissing the Section 11 application.
• In SLP (C) No. 20262 of 2021: Challenge to the High Court’s order allowing the Section 8 application and referring the dispute to arbitration.

The Legal Issue

The central question was whether disputes could be referred to arbitration under Section 8 of the Act or an arbitrator could be appointed under Section 11 of the Act when the very existence of the arbitration agreement was seriously disputed due to allegations of forgery and fabrication.

Arguments Presented

For the Respondent (Rajia Begum)

• The observations in the Section 9 proceedings were tentative and should not prejudice subsequent proceedings.
• Allegations of fraud challenging the arbitration agreement itself are arbitrable and within the jurisdiction of the arbitrator.
• The High Court’s exercise of supervisory jurisdiction under Article 227 was justified in setting aside the lower courts’ orders.
• Relied on precedents such as A. Ayyasamy v. A. Paramasivam, Rashid Raza v. Sadaf Akhtar, and Vidya Drolia v. Durga Trading Corporation to argue that fraud does not automatically render a dispute non-arbitrable.

For the Appellant (Barnali Mukherjee)

• The Admission Deed was a forged document, and there was no privity of contract between the parties.
• The High Court had already prima facie held in the Section 9 proceedings that the Admission Deed was not genuine.
• The material on record did not support Rajia Begum’s claim of being a partner.
• The High Court erred in interfering with the concurrent findings of the Trial Court and First Appellate Court under Article 227.
• Relied on A. Ayyasamy, Vidya Drolia, and SBP & Co. v. Patel Engineering Ltd. to argue that serious allegations of fraud render a dispute non-arbitrable.

The Court's Analysis

The Supreme Court undertook a detailed examination of the arbitrability of disputes involving allegations of fraud, particularly when the arbitration agreement itself is under challenge. The Court relied on a line of precedents to delineate the legal principles governing such disputes:

1. Impact of Fraud on Arbitrability: The Court reiterated the principle that mere allegations of fraud simpliciter do not render a dispute non-arbitrable. However, where the fraud permeates the entire contract, including the arbitration agreement, or where the validity of the arbitration agreement itself is challenged, the dispute becomes non-arbitrable. This is because arbitration is founded on consent, and without a valid agreement, the arbitral process cannot proceed.

   "Where the arbitration agreement itself is alleged to be forged or fabricated, the disputes ceases to be merely contractual and strikes at the very root of arbitral jurisdiction."

2. Two Tests for Serious Allegations of Fraud: The Court adopted the two working tests laid down in Rashid Raza v. Sadaf Akhtar and Avitel Post Studioz Ltd. v. HSBC PI Holdings (Mauritius) Ltd.:

   • Test 1: Whether the plea of fraud permeates the entire contract and the arbitration agreement, rendering it void.
   • Test 2: Whether the allegations of fraud touch upon the internal affairs of the parties or have implications in the public domain.

   The Court held that Test 1 was satisfied in this case, as the existence of the arbitration agreement itself was in serious doubt.

3. Prima Facie Findings in Section 9 Proceedings: The Court noted that the High Court, in the Section 9 proceedings, had prima facie held that the Admission Deed was not genuine. This finding had attained finality as the Special Leave Petition against it was dismissed. The Court emphasized that such prima facie findings, though not conclusive, are relevant considerations in subsequent proceedings under Sections 8 and 11 of the Act.

4. Concurrent Findings of Lower Courts: The Trial Court and the First Appellate Court had concurrently held that the allegations of fraud were serious and that Rajia Begum had failed to produce the original Admission Deed or a certified copy, as required under Section 8(2) of the Act. The Supreme Court held that these findings were not perfunctory but grounded in material evidence.

5. Limits of Supervisory Jurisdiction under Article 227: The Court reiterated that the supervisory jurisdiction under Article 227 is not an appellate jurisdiction and does not permit reappreciation of evidence. The High Court had erred in dislodging the concurrent findings of the lower courts and directing the reference of the dispute to arbitration.

6. Non-Arbitrability of Disputes Involving Forged Arbitration Agreements: The Court held that where the existence of the arbitration agreement is seriously disputed, the appointment of an arbitrator under Section 11 of the Act would be premature and legally impermissible. The dispute must first be adjudicated by the courts to determine the validity of the arbitration agreement.

The Verdict

The Supreme Court allowed the appeal in SLP (C) No. 20262 of 2021 and set aside the High Court’s order dated 24.09.2021, which had referred the dispute to arbitration under Section 8 of the Act. The Court dismissed the appeal in SLP (C) No. 6013 of 2021, affirming the High Court’s order dated 11.03.2021, which had rejected the Section 11 application for appointment of an arbitrator. The Court held that the dispute involving serious allegations of forgery regarding the arbitration agreement itself was non-arbitrable and required judicial determination.

What This Means For Similar Cases

Arbitration Cannot Proceed Without a Valid Agreement

• Consent is Foundational: Arbitration is a consensual process, and its jurisdiction is derived from the arbitration agreement. Where the existence of such an agreement is seriously disputed, courts must first adjudicate this issue before referring parties to arbitration.
• Practitioners’ Takeaway: In cases involving allegations of forgery or fabrication of the arbitration agreement, argue that the dispute is non-arbitrable and must be resolved by courts. Rely on the two tests laid down in Rashid Raza and Avitel Post Studioz to demonstrate that the fraud permeates the arbitration agreement itself.

Prima Facie Findings Have Precedential Value

• Section 9 Proceedings: Prima facie findings in Section 9 proceedings, especially when they attain finality, are relevant considerations in subsequent proceedings under Sections 8 and 11 of the Act. Practitioners should highlight such findings to argue against the arbitrability of the dispute.
• Strategic Litigation: Parties should ensure that prima facie findings in interim proceedings are well-documented and supported by evidence, as these can influence the outcome of subsequent applications.

Limits of Article 227 Jurisdiction

• Supervisory, Not Appellate: The supervisory jurisdiction under Article 227 is not a substitute for appellate review. High Courts cannot reappreciate evidence or interfere with concurrent findings of lower courts unless there is a patent error of law or jurisdiction.
• Practitioners’ Caution: When challenging orders under Article 227, focus on jurisdictional errors rather than factual disputes. Avoid rearguing evidence that has already been considered and rejected by lower courts.

Documentary Evidence is Crucial

• Burden of Proof: The party relying on the arbitration agreement must prove its existence, especially when it is disputed. Failure to produce the original document or a certified copy can be fatal to the claim of arbitrability.
• Best Practices: Ensure that all contemporaneous documents support the existence of the arbitration agreement. In cases of forgery, highlight inconsistencies in the documentary trail to cast doubt on the agreement’s validity.