A. AYYASAMY versus A. PARAMASIVAM & ORS.
[2016] 11 S.C.R. 521, Supreme Court of India, 2016
Outcome: Appeal(s) allowed (Granted)
Segment: Ratio
(2016] 11 S.C.R. 521 
A. AYYASAMY 
v. 
A. PARAMASIVAM & ORS. 
(Civil Appeal Nos. 8245-8246 of 2016) 
OCTOBER 04, 2016 
(A.K. SIKRI AND DR. D.Y. CHANDRACHUD, JJ.] 
Arbitration and Conciliation Act, 1996: 
s. 8 - Application under - Qziestioning the maintainability of 
the suit on the ground that the parties had agreed to settle the dispute 
through arbitration - Application dismissed holding that suit was 
maintainable as the case involved serious allegations as to fraud 
and malpractices - The order affirmed by High Court - On appeal, 
held: The cases where there are serious allegations of fraud that in 
normal course constitute criminal offence, and are complex in nature 
demanding extensive evidence, are to be treated as non-arbitrable 
and civil court should decide the matter - However, mere allegation 
of fraud simplicitor may not nullify the effect of arbitration 
agreement - Jn the present case, the allegations of fraud were not 
so serious which could not be decided by the arbitrator -
Application u/s. 8 was wrongly rejected. 
Words and Phrases: 
"Fraud" - Meaning of 
Allowing the appeals, the Court 
HELD: 
Per A.K. Sikri, J. 
1. The Arbitration and Conciliation Act, 1996 does not 
make any provision excluding any category of disputes treating 
them as non-arbitrable. Notwithstanding the above, the Courts 
have held that certain kinds of disputes may not be capable of 
adjudication through the means of arbitration. The Courts have 
held that certain disputes like
criminal offences of a public nature, 
disputes arising out of illegal agreements and disputes relating 
to status, such as divorce, cannot be referred to arbitration. 
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[2016111 S.C.R. 
A Patent, trademarks and copyright; anti-trust/competition laws; 
insolvency/winding up; bribery/corruption; fraud; criminal 
matters are the categories of disputes which are generally treated 
as non-arbitrable. Thus, fraud is one such category spelled out 
by the decisions of this Court where disputes would be considered 
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as non-arbitrable. [Para 9) (535-B-E) 
2. 'Fraud' is a knowing misrepresentation of the truth or 
concealment of a material fact to induce another to act to his 
detriment. Fraud can be of different forms and hues. Its 
ingredients are an intention to deceive, use of unfair means, 
deliberate concealment of material facts, or abuse of position 
of confidence. [Para 10) [535-F] 
The _Black's Law Dictionary - referred to. 
3. However, mere allegation of fraud in the pleadings by 
one party against the other, cannot be a ground to hold that the 
matter is incapable of settlement by arbitration and should be 
decided by the civil court. The allegations of fraud should be 
such that not only these allegations are serious that in normal 
course these may even constitute criminal offence, they are also 
complex in nature and the decision on these issues demand 
extensive evidence for which civil court should appear to be more 
appropriate forum than the Arbitral Tribunal. Otherwise, it may 
become a convenient mode of avoiding the process of arbitration 
by simply using the devi':!e of making
allegations of fraud and 
pleading that issue of fraud needs to be decided by the civil court. 
The Law Commission has recognized that in cases of serious 
fraud, courts have entertained civil suits. It has tried to make a 
distinction in cases where there are allegations of serious fraud 
and fraud simplicitor. [Paras 13 and 18) [536-F-G; 537-A; 541-A] 
Boaz Allen & Hamilton Inc. v. SB! Home Finance Limited 
and others 2011 (7) SCR 310 : (2011) 5 SCC 532; 
State of West Bengal & Ors. v. Associated Contractors 
2014 (10) SCR 426 : (2015) 1 SCC 32 - relied on. 
N. Radhakrishnan v. Maestro Engineers and Others 
2009 (15) SCR 371 : (2010) 1 SCC 72; Abdul Kadir 
Shamsuddin Bubere v. Madhav Prabhakar Oak AIR 
1962 SC 406 : 1962 Suppl. SCR 702 - distinguished.
A. AYYASAMY v. A. PARAMASIVAM & ORS. 
Ramesh Kumar & Am: v. Furu Ram & Anr. (2011) 8 
SCC 613 : 2011 (10) SCR 453; P. Anand Gajapathi 
Raju v. P. V.G Raju 2000 (2) SCR 684 : (2000) 4 SCC 
539; Hindustan Petroleum Corpn. Ltd. v. Pinkcity 
Midway Petroleums (2003) 6 SCC 503 - referred to. 
Russell v. Russell (1880) 14 Ch D 471 - referred to. 
4. Thus, mere allegation of fraud simplicitor may not be a 
ground to nullify the effect of arbitration agreement between the 
parties. It is only in those cases where the Court, while dealing 
with Section 8 of the Act, finds that there are very serious 
allegations of fraud which make a virtual case of criminal offence 
or where allegations of fraud are so complicated that it becomes 
absolutely essential that such complex issues can be decided only 
by civil court on the appreciation of the voluminous evidence 
that needs to be produced, the Court can sidetrack the agreement 
by dismissing application under Section 8 and proceed with the 
suit on merits. It can be so done also in those cases where there 
are serious allegations of forgery/fabrication of documents in 
support of the plea of fraud or where fraud is alleged against the 
arbitration provision itself or is of such a nature that permeates 
the entire contract, including the agreement to arbitrate, meaning 
thereby in those cases where fraud goes to the validity of the 
contract itself of the entire contract which contains the arbitration 
clause or the validity of the
arbitration clause itself. Reverse 
position thereof would be that where there are simple allegations 
of fraud touching upon the internal affairs of the party inter se 
and it has no implication in the public domain, the arbitration 
clause need not be avoided and the parties can be relegated to 
arbitration. While dealing with such an issue in an application 
under Section 8 of the Act, the focus of the Court has to be on 
the question as to whether jurisdiction of the Court has been 
ousted instead of focusing on the issue as to whether the Court 
has jurisdiction or not. [Para 20) (541-F-H; 542-A-C] 
5. It has to be kept in mind that insofar as the statutory 
scheme of the Act is concerned, it does not specifically exclude 
any category of cases as non-arbitrable. Such categories of non-
arbitrable subjects are carved out by the Courts, keeping in 
mind the principle of common law that certain disputes which 
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(2016) 11 S.C.R. 
A are of public nature, etc. are not capable of adjudication and 
settlement by arbitration and for resolution of such disputes, 
Courts, i.e. public fora are better suited than a private forum of 
arbitration. Therefore, the inquiry of the Court, while dealing 
with an application under Section 8 of the Act, should be on the 
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aforesaid aspect, viz. whether the nature of dispute is such that 
it cannot be referred to arbitration, even if there is an arbitration 
agreement between the parties. When the case of fraud is set up 
by one of the parties and on that basis that party wants to 
wriggle out of that arbitration agreement, a strict and meticulous 
inquiry into the allegations of fraud is needed and only when 
the Court is satisfied that the allegations are of serious and 
complicated nature that it would be more appropriate for the Court 
to deal with the subject matter rather than relegating the 
parties to arbitration, then alone such an application under Section 
8 s~ould be rejected. [Para 20) [542-C-F) 
6. In the present case, the only allegation of fraud that is 
levelled is that the appellant had signed and issued a cheque of 
Rs. 10,00,050/- dated 17.06.2010 of the hotel in favour of his son 
without the knowledge and consent of the other partners of the 
hotel i.e. the respondents . .It is a mere matter of accounts which 
can be looked into and found out even by the arbitrator. It does 
not
involve any complex issue. If such a cheque is issued from 
the hotel accpunt by the appellant in favour of his son, it is. easy 
to prove the same and then the onus is upon the appellant to 
show as to what was the reason for giving that amount from the 
partnership firm to his son and he will have to account for the 
same. Likewise, the allegation of the respondents that daily 
collections were not deposited in the bank accounts is to be 
proved by the respondents which is again a matter of accounts. 
Other allegation, which appears to be serious, is about the 
C.B.I. raid at the house of brother-in-law of the appellant, from 
where cash in the sum of Rs.45 lakhs was seized. The 
respondents have themselves alleged that the money did not 
belong to the hotel. In view of the aforesaid stand taken by the 
respondents/plaintiffs themselves, this issue does not fall for 
consideration and, therefore, is not to be gone into by the 
Arbitral Tribunal. Thus, the allegations of purported fraud
A. AYYASAMYv. A. PARAMASIVAM & ORS. 
were not so serious which cannot be taken care of by the 
arbitrator. The Courts below, therefore, fell in error in rejecting 
the application of the appellant under Section 8 of the Act. [Paras 
21 and 22] [542-G-H; 543-A-D] 
Swiss Timing Ltd. v. Commonwealth Games 2010 
Organising Committee 2014 (6) SCR 514 : (2014) 6 
SCC 677; Kvaerner Cementation India Ltd. v. 
Bajranglal Agarwal & Anr. (2012) 5 SCC 214; SBP & . 
Co. v. Patel Engineering Ltd & Anr. 2005 (4) Suppl. 
SCR 688 : (2005) 8 SCC 618 - referred to. 
Per Dr. D. Y; Chandrachud. J. (Concurring): 
1. The Arbitration and Conciliation Act, 1996 does not in 
specific terms exclude any category of disputes - civil or 
commercial - from arbitrability. The Act contemplates and 
acknowledges that before it can be held that a particular subject 
matter is not capable of settlement by arbitration, such a 
consequence must arise under the law for the time being in force. 
[Paras 3 and 5) [544-A; 545-A-B) 
2. Ordinarily every civil or commercial dispute whether 
based on contract or otherwise which is capable of being decided 
by a civil court is in principle capable of being adjudicated upon 
and resolved by arbitration "subject to the dispute being 
governed by the arbitration agreement" unless the jurisdiction 
of the Arbitral Tribunal is excluded either expressly or by 
necessary implication; [Para 6) [545-B-C] 
3. In addition to various classes of disputes which are 
generally
considered by the courts as appropriate for decision by 
public fora, there are classes of disputes which fall within the 
exclusive domain of special fora under legislation which confers 
exclusive jurisdiclion to the exclusion of an ordinary civil court. 
That such disputes are not arbitrable dovetails with the general 
principle that a dispute which is capable of adjudication by an 
ordinary civil court is also capable of being resolved by arbitration. 
If the jurisdiction of an ordinary civil court is excluded by the 
conferment of exclusive jurisdiction on a specified court or 
tribunal as a matter of public policy such a dispute would not then 
be capable of resolution by arbitration. (Para 9)[546-G; 547-A-B) 
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SUPREME COURT REPORTS 
f2016l 1 l S.C.R. 
Boaz-Allen and Hamilton Inc. 
v. SB/ Home Finance 
Ltd. (2011) 5 sec 532 : 2011 (7) SCR 310; Vimal 
Kishore Shah v. Jayesh Dinesh Shah (2016) SCC 
OnLine SC 825; Natraj Studios (P) Ltd. v. Navrang 
Studios (1981) 2 SCR 466; Skypak Courier Ltd. v. 
Tata Chemical Ltd. (2000) 5 SCC 294; National 
Seeds Corporation Ltd. v. M. Madhusudhan Reddy 
(2012) 2 SCC 506; Rosedale Developers Pvt. Ltd. v. 
Aghore Bhattacharya (2015) 1 WBLR (SC) 385; 
N. Radhakrishnan v. Maestro Engineers (2010) 1 SCC 
72; P. Anand Gajapathi Raju v. P. V.G Raju (Dead) 
(2000) 4 SCC 539 : 2000 (2) SCR 684; Hindustan 
Petroleum Corporation Ltd. v. Pinkcity Midway 
Petroleums (2003) 6 SCC 503; Sundaram Finance Ltd. 
v. T. Thankam AIR 2015 1303 : 2015 (2) SCR 228; 
Anand Gajapathi Raju, Pink City and in Branch 
Manager, Magma Leasing and Finance Ltd. v. Potluri 
Madhvilata (2009) 10 SCC 103 : 2009 (14) SCR 815 
- referred to. 
4. Once there is an arbitration agreement between the 
parties, a judicial authority before whom an action is brought 
covering the subject matter of the arbitration agreement is under 
a positive obligation to refer parties to arbitration by enforcing 
the terms of the contract. There is no element of discretion left 
in the court or judicial authority to obviate the legislative mandate 
of compelling parties to seek recourse to arbitration. (Para 14) 
[552-A-B] 
F 
5. The basic principle which must guide judicial decision-
making is that arbitration is essentially a voluntary assumption 
of an obligation by contracting parties to resolve their disputes 
through a private tribunal. The intent of the parties is expressed 
in the terms of their agreement. Where commercial entities 
G and persons of business enter into such dealings, they do so 
with a knowledge of the efficacy of the arbitral process. The 
commercial understanding is reflected in the terms of the 
agreement between the parties. The duty of the court is to 
impart to that commercial understanding a sense of business 
efficacy. The arbitration agreement between the parties stands 
H distinct from the contract in which it is contained, as a matter of
A. AYYASAMY v. A. PARAMASIVAM & ORS. 
law and consequence. Even the invalidity of the main ngreement 
does not ipso jure result in the invalidity of the arbitration 
agreement. Parties having agreed to refer disputes to arbitration, 
the plain meaning and effect of Section 8 must ensue. [Paras 16 
and 18) (554-G-H; 555-A-B; 556-F-G) 
Fiona Trust and Holding Corporation v. Yuri Privalov 
(2007) 1 All E R (COMM) 891; Premium Na/ta 
Products Ltd. (20th Defendant) v. Fily Shipping Co. 
Ltd [2007] UKHL 40- referred to. 
6. The Arbitration and Conciliation Act, 1996, should be 
interpreted so as to bring in line the principles underlying its 
interpretatfon in a manner that is consistent with prevailing 
approaches in the common law world. Jurisprudence in India 
must evolve towards strengthening the institutional efficacy of 
arbitration. 
Deference to a forum chosen by. parties as a 
complete remedy for resolving all their claims is but part of that 
evolution. Minimising the intervention of courts is again a 
recognition of the same principle. [Para 20) (557-D-E] 
Buckeye Check Cashing, Inc. v. Cardegna 546 U.S. 440 
(U.S.S.Ct.2006); Prima Paint Corp. v. Flood & Conklin 
Manufacturing Co. 388 US 395 (U.S. S.Ct. 1967); 
Southland Corporation v. Keating 465 U.S. 1 (1984) 
- referred to. 
7. Under.Section 24(2) of the Arbitration Act, 1940, the 
court could revoke the authority of a tribunal to deal with claims 
involving issues of fraud and determine those Claims itself. 
This
provision has b'een repealed in Section 107(2) of the 
Arbitration and Conciliation Act, 1996. [Para 21) (558-F-GJ 
Russell on Arbitration (24th Edition, 2015, para 2007) 
- referred to. 
8. A mere allegation of fraud, in the present case, was not 
sufficient to detract from the obligation of the parties to submit 
their disputes to arbitration. A fresh line must be drawn to ensure 
the fulfilment of the intent of Parliament in enacting the Act of 
1996 and towards supporting commercial understandings 
grounded in the faith in arbitration. [Para 24) (559-F-G] · 
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SUPREME COURT REPORTS 
f2016l 11 S.C.R. 
A 
International Arbitration by Redfern and Hunter (6th 
Edition para 2.154); Internatio11al Co111111ercial 
Arbitration by Gary B Born (2nd Edition Vol. I, P. 846); 
International Arbitration Law and Practice by Mauro 
Rubino-Sammartano (2•d Edition p. 179) - referred to. 
B 
Case Law Reference 
In the Judi:ment of A. K. Sikri1 J: 
2009 (15) SCR 371 
distinguished 
Para2 
2014 (6) SCR 514 
referred to 
Para2 
c (201Zl 5 sec 214 
referred to 
Para7 
2011 (10) SCR 453 
referred to 
Para 10 
1962 Suppl. SCR 702 
distinguished 
Para 11 
(1880) 14 Ch D 471 
referred to 
Para 11 
D 2900 (2) SCR 684 
referred to 
Para 14 
c2003) 6 sec 503 
referred to 
Para 14 
2011 (7) SCR 310 
relied on 
Para 15 
2014 (10) SCR 426 
relied on 
Para 19 
E 2005 (4) Suppl. SCR 6SS 
referred to 
Para 19 
In the Jud11.ment of Dr. D.Y. Chandrachud1 J: 
2011 (~) SCR 310 
referred to 
Para6 
(2016) SCC OnLine SC S25 referred to 
Para6 
F 
(19Sl) 2 SCR 466 
referred to 
Para7 
c2000) 5 sec 294 
referred to 
Paras 
c2oq> 2 sec 506 
referred to 
Paras 
G (2015 )l WBLR (SC) 3S5 
referred to 
Paras 
(2010) 1 sec 12 
referred to 
Para 10 
2000 (Z) SCR 6S4 
referred to 
Para 11 
(200~> 6 sec 503 
referred to 
Para 11 
H 2015 (2) SCR 22S 
referred to 
Para 13
A. AYYASAMY v. A. PARAMASIVAM & ORS. 
529 
2009 (14) SCR 815 
referred to 
Para 13 
A 
(2007) 1 All E R (COMM) 891 referred to 
Para 15 
(2007) UKHL 40 
referred to 
Para 15 
546 U.S. 440 (U.S.S.Ct.2006) 
referred to 
Para 19 
388 US 395 (U.S. S.Ct. 1967) 
referred to 
Para 19 
B 
46~ u.s .. 1 (1984) 
referred to 
Para 19 
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 8245-
8246 of2016. 
. 
From the Judgment and Order dated 11.12.2014 ofthe High Court 
C 
of Madras at Madurai in CRPMD No. 1687 of2014 & 1688 of2014. 
T. R. B. Sivakumar and K.V. Vijayakumar, Advocates for the 
Appellant. 
Y. Aruna Giri, Rahul Joshi and P. Ramesh, Advocates for the 
Respondents. 
The Judgment of the Court was delivered by 
A • .f{. SIKRI, J, 1. The parties to this /is, who are brothers, had 
entered into a deed of partnership dated 01.04.1994 for carrying on hotel 
business and this partnership firm has been running a hotel with the 
name' Hotel Arunagiri' located at Tirunelveli, Tamil Nadu. Some disputes . 
arose out of the said partnership deed between the parties. Partnership 
Deed contains an arbitration clause i.e. Clause (8) which stipulates 
resolution of disputes by means of arbitration. 
2. Notwithstanding the same, the respondents herein have filed a 
civil suit before the Court of 1st Additional District Munsif Court, 
Tirunelveli, Madurai (Tamil Nadu) seeking a declaration that as partners 
they are entitled to participate in the administration of the said hotel. 
Reliefofpermanent
injunction restraining the defendant (appellant herein) 
from interfering with their right to participate in the administration of the 
hotel has also been sought. This suit was filed in the year 2012. The 
appellant, after receiving the summons in the said suit, moved the 
application under Section 8 of the Arbitration and Conciliation Act, 1996 
(hereinafter referred to as the 'Act') raising an objection to the 
'maintainability of the suit in view of arbitration agreement between the 
parties as contained in clause (8) of the Partnership Deed dated 
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SUPREME COURT REPORTS 
[2016] II S.C.R. 
01.04.1994 and submitted that as per the provisions of Section 8 of the 
Act, it is mandatory for the Court to refer the dispute to the arbitrator. 
This application was resisted by the respondents with the submission 
that since acts offraud were attributed to the appellant by the plaintiffs/ 
respondents, such serious allegations of fraud could not be adjudicated 
upon by the Arbitral Tribunal and the appropriate remedy was to approach 
the civil court by filing a suit, and that was exactly done by the 
respondents. For this purpose, the respondents had relied upon the 
judgment of this Court in the case of N. Rtullwkrislman v. Mllestro 
Engineers llnd Otl1ers1• This plea of the respondents was sought to be 
controverted by the appellant by arguing that aforesaid judgment was 
found to be per incuriam by this Court in Swiss Timing Ltd. v. 
Commonwealth Gllmes 2010 Orgllnising Committee=, wherein the 
application under Section II of the Act was allowed holding that such a 
plea of fraud can be adequately taken care of even by the arbitrator. It 
was, thus, argued that the parties were bound by the arbitration agreement 
and there was no reason to file the civil suit. The trial court, however, 
dismissed the application of the appellant herein by its order dated 
25.04.2014, relying upon the judgment in N. R{l(//U1krisl11wn. 
3. Feeling aggrieved by this order, the appellant preferred revision 
petition before the
High Court repeating his contention that judgment in 
N. Radltakrislman was held to be per incuriam and, therefore, trial 
court had committed jurisdictional error in rejecting the application of 
tk appellant under Section 8 of the Act. Brushing aside this plea, the 
11 i,;h Court has also chosen to go by the dicta laid down in N. 
iludliakrislman with the observations that Swiss Timing Ltd. is the 
•. , .. ;er passed by a single Judge of this Court under Section II of the Act 
, h~reas judgment in N. Rlldlwkrislmlln is rendered by a Division 
Bench of two Hon. Judges of this Court, which is binding on the High 
('piJrt. 
Whether the aforesaid view of the High Court in following the 
dicta laid down.in the case of N. Rt11llwkrisl1mm, in the facts of this 
G case. is .correct or not, is the question that needs determination in the 
instant appeal. 
4. Seminal facts in the context in which the issue falls for 
determination have already been taken note of above. However, few 
'l2UIO) t sec 12 
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't20l~)6SCr.677
A. AYYASAMY v. A. PARAMASIVAM & ORS. 
fA. K. SIKRI, J.] 
more facts need to be added to the aforesaid chronology, particularly, 
the nature of plea of fraud taken in the suit filed by the respondents. 
The respondents are four in number who are brothers of the 
appellant. These five brothers are the partners. Their father A. Arunagiri 
was also a partner along with them who died on 28.04.2009. These six 
partners had I /6th share each in the partnership business. Disputes arose 
between the brothers after the demise of their father. It is the allegation 
of the respondents, as contained in the plaint, that the subject matter of 
the suit 'Hotel Arunagiri' was managed and administered by their father 
in a disciplined manner till his death. After his death, the appellant being 
the eldest brother wanted to take the administration of 'Hotel Arunagiri' 
with the assurance that he will be following the foot prints of his father. 
The respondents had no other alternative except to accept the said 
proposal in good faith. It was, at that time resolved by all the brothers, 
that the daily collection of money from 'Hotel Arunagiri' should be 
deposited on the very next day into the hotel Current Account No.23 
maintained with the Indian Overseas Bank, Tirunelveli Junction. It was 
agreed that about rupees ten to fifteen thousand may be kept as cash for 
urgent expenses. The respondents reposed confidence with the appellant 
and believed that his administration would never be
detrimental to the 
smooth running of the business. On the aforesaid understanding, 
administration of the hotel was taken over by the appellant. But he did 
not adhere to the said understanding and failed to deposit day to day 
collection into the bank account as promised. It is also agged that the 
appellant, fraudulently, signed and issued a cheque for Rs. I 0,00,050/-
dated I 7.06.2010 from the bank account in the name of 'Hotel Arunagiri' 
in favour of his son without the knowledge and consent of the other 
partners and in this manner, the money was siphoned off and 
misappropriated from the common fund. It is further alleged that the 
appellant kept the hotel account books with him and did not show it to 
the respondents for their examination. The respondents sent legal notices 
but it did not deter the appellant to continue to act in the same manner by 
not depositing the day to day collections in the account. It is also alleged 
that appellant's wife's younger brother one Dhanapalraj was a member 
of Bar Council of Tamil Nadu and was also a Vice-Chairman of All 
India Bar Council, New Delhi. In Chennai, the Central Bureau of 
Investigation (C.B.I.) raided the houses of the said Dhanapalraj and his 
co-brother Chandrasekaran and seized Rs.45,00,000/- cash from them. 
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SUPREME COURT REPORTS 
[2016] II S.C.R. 
A As Dhanapalraj was aware of the disputes between the appellant and 
the respondents in respect of the 'Hotel Arunagiri', a false statement 
has been given by him before C.B.I. to the effect that the seized money 
ofRs.45 lakhs belonged to 'Hotel Arunagiri'. It is reliably learned that 
the appellant had also, on receipt of summons, appeared before the C.B.I. 
B in New Delhi and given a false statement as ifthe said seized money of 
Rs.45 lakhs belonged to 'Hotel Arunagiri' which was taken to Chennai 
to purchase a property. This led to the issuance of another notice dated 
22.01.2011 by the third respondent to the appellant stating that the money 
seized by the C.B.I. belong only to Dhanpahu:aj and not 'Hotel Arunagiri'. 
On the basis of the aforesaid allegations, which are relevant and material 
C for the purposes of this appeal, following reliefs are sought in the suit 
filed by the respondents: 
"(a) for a declaration that the respondents as partners of 
the deed of partnership dated 01.04.1994 are entitled to 
participate in the administration of the Hotel Arunagiri 
D 
mentioned in the schedule and for consequential permanent 
injunction restraining the appellant from interfering with the 
same; 
E 
F 
(b) for cost of this suit; and 
(c) for such other reliefs this Honourable Court deem fit 
··and proper in the circumstances of this case." 
5. As already mentioned above, the appellant filed the application 
under Section 8
of the Act for rejection of the plaint and reference of the 
dispute to an arbitrator in which attemptthe appellant has not succeeded 
for the reasons stated hereinabo\1e. 
6. The two courts below have preferred to adopt the dicta laid 
down in N. Rtulllilkrlslman while dismissing the application of the 
appellant under Section 8 of the Act holding that as there are serious 
allegations as to fraud and malpractices committed by the appellant in 
respect of the finances of the partnership firm and the case does not 
G warrant to be tried and decided by the arbitrator and a civil court would 
be more competent which has the requisite means to decide such 
complicated matter. In this backdrop, it would be appropriate to revisit 
the law on this aspect before adverting to the question as to whether the 
approach of the High Court was correct in following the judgment in N. 
H Rad/1afcrlslman in the instant case.
A. AYYASAMYv. A. PARAMASIVAM & ORS. 
533 
[A. K. SIKRI, J.] 
7. In this behalf, we have to begin our discussion with the pertinent · A 
observation that insofar as the Arbitration and Conciliation Act, 1996 is 
concerned, it does not make any specific provision excluding any category 
of disputes terming them to be non-arbitrable. Number of pronouncements 
have been rendered laying down the scope of judicial intervention, in 
<;ases where there is an arbitration clause, with clear and unambiguous 
message that in such an event judicial intervention would be very limited 
and minimal. However, the Act contains provisions for challenging the 
arbitral awards. These provisions are Section 34 and Section 48 of the 
Act. Section 34(2)(b) and Section 48(2) of the Act, inter a/ia, provide 
that an arbitral award may be set aside ifthe Court finds that the 'subject 
matter of the dispute is not capable of settlement by arbitration under 
the law for the time being in force.' Even when such a provision is 
interpreted, what is to be shown is that there is a law which makes 
subject matter Of a dispute incapable of settlement by arbitration. The 
aforesaid position in law has been culled out from the combined readings 
of Sections 5, 16 and 34 of the Act. When arbitration proceedings are 
triggered by one of the parties because of the existence of an arbitration 
agreement between them, Section 5 of the Act, by a 11011-obstante clause, 
provides a clear message that there should not
be any judicial intervention 
at that stage scuttling the arbitration proceedings. Even if the other 
party has objection to initiation of such arbitration proceedings 011 the 
ground that there is no arbitration agreement or validity of the arbitration 
clause or the. competence of the Arbitral Tribunal is challenged, Section 
16, in clear terms, stipulates that such objections are to be raised before 
the Arbitral Tribunal itself which is to decide, in the first instance, whether 
there is any substance in questioning the validity of the arbitration 
proceedings on any of the aforesaid grounds. It follows that the party is 
not allowed to rush to the Court for an adjudication. Even after the 
Arbitral Tribunal rules on its jurisdiction and decides that arbitration clause 
is valid or the Arbitral Tribunal is legally constituted, the aggrieved party 
has to wait till the final award is pronounced and only at that stage the 
aggrieved party is allowed to raise such objection before the Court in 
proceedings under Section 34 of the Act while challenging the arbitral 
award. The aforesaid scheme of the Act is succinctly brought out in the 
following discussion by this Court in Kvaerner Cementatlon Intl/a Lttl. 
v. B11}ra11glal Agarwal & Anr.3: 
'<20t2J s sec 214 
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"3. There cannot be any dispute that in the absence of any 
arbitration clause in the agreement, no dispute could be 
referred for arbitration to an Arbitral Tribunal. But, bearing 
in mind the very object with which the Arbitration and 
Conciliation Act, I 996 has been enacted and the provisions 
thereof contained in Section I 6 conferring the power on 
the Arbitral Tribunal to rule on its own jurisdiction, including 
ruling on any objection with respect to existence or val id ity 
of the arbitration agreement, we have no doubt in our mind 
that the civil court cannot have jurisdiction to go into that 
question. 
4. A bare reading of Section I 6 makes it explicitly clear 
that the Arbitral Tribunal has the power to rule on its own 
jurisdiction even when any objection with respect to 
existence or validity of the arbitration agreement is raised, 
and a conjoint reading of sub-sections (2), (4) and (6) of 
Section I 6 would make it clear that such a decision would 
be amenable to be assailed within the ambit of Section 34 
of the Act. 
5. In this view of the matter, we see no infirmity in the 
impugned order so as to be interfered with by this Court. 
The petitioner, who is a party to the arbitral proceedings 
may raise the question of jurisdiction of the arbitrator as 
well as the objection on the ground of non-existence of any 
arbitration agreement in the so-called dispute in question, 
and on such an
objection being raised, the arbitrator would 
do well in disposing of the same as a preliminary issue so 
that it may not be necessary to go into the entire gamut of 
arbitration proceedings." 
Aforesaid is the position when Arbitral Tribunal is constituted at 
the instance of one of the parties and other party takes up the position 
that such proceedings are not valid in law. 
8. What would be the position in case a suit is filed by the plaintiff 
and in the said suit the defendant files an application under Section 8 of 
the Act questioning the maintainability of the suit on the ground that 
parties had agreed to settle the disputes through the means of arbitration 
having regard to the existence of an arbitration agreement between them?
A. AYYASAMY v. A. PARAMASIVAM & ORS. 
[A. K. SIKRI, J.] 
Obviously, in such a case, the Court is to pronounce upon 
arbitrability or non-arbitrability of the disputes. 
9. In the instant case, there is no dispute about the arbitration 
agreement inasmuch as there is a specific arbitration clause in the 
partnership deed. However, the question is as to whether the dispute 
raised by the respondent in the suit is incapable of settlement through 
arbitration. As pointed out above, the Act does not make any provision 
excluding any category of disputes treating them as non-arbitrable. 
Notwithstanding the above, the Courts have held that certain kinds of 
disputes may not be capable of adjudication through the means of 
arbitration. The Courts have held that certain disputes like criminal 
offences of a public nature, disputes arising out of illegal agreements 
and disputes relating to status, such as divorce, cannot be referred to 
arbitration. Following categories of disputes are generally treated as 
non-arbitrable~: 
(i) patent, trademarks and copyright; 
(ii) anti-trust/competition laws; 
(iii) insolvency/winding up; 
(iv) bribery/corruption; 
(v) fraud; 
(vi) criminal matters. 
Fraud is one such category spelled out by the decisions of this 
Court where disputes would be considered as non-arbitrable. 
10. 'Fraud' is a knowing 111isrepresentation of the truth or 
concea/111ent of a 111aterial fact to induce another to act to his 
detri111ent. Fraud can be of different forms
and hues. Its ingredients 
are an intention to deceive, use ofunfair means, deliberate concealment 
of material facts, or abuse of position of confidence. The Black's Law 
Dictionary defines 'fraud' as a concealment or false representation 
through a statement or conduct that injures another who relies on it5• 
However, the moot question here which.has to be addressed would be 
. ' See-0.P. .\/alhotra on 'The Lail' & Practice of Arbitration and Conciliation'. Third 
Edition, authored by Indu Malhotra. See also note 10 ibid. 
' See - Ramesh Kumar & Anr. \'. F11r11 Ram & Am:, (2011) 8 SCC 613 (a decision 
rendered under the Arbitration Act, 1940) 
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A as to whether mere allegation of fraud by one party against the other 
would be sufficient to exclude the subject matter of dispute from 
arbitration and decision thereof necessary by the civil court. 
11. In Abdul Kadir Slwmsuddin Bubere v. Madllav Prabhakar 
Oak6, serious allegations of fraud were held by the Court to be a sufficient 
B ground for not making a reference to arbitration. Reliance in that regard 
was placed by the Court on a decision of the Chancery Division in Russell 
v. Rusself. That was a case where a notice for the dissolution of a 
partnership was issued by one of the partners, upon which the other 
partner brought an action alleging various charges of fraud, and sought a 
declaration that the notice of dissolution was void. The partner who 
C was charged with fraud sought reference of the disputes to arbitration. 
The Court held that in a case where fraud is charged, the Court will in 
general refuse to send the dispute to arbitration. But where the objection 
to arbitration is by a party charging the fraud, the Court will not necessarily 
accede to it and would never do so unless a primafacie case of fraud 
D isproved. 
12. The aforesaid judgment was followed by this Court in N. 
Rad/1akrislman while considering the matter under the present Act. In 
that case, the respondent had instituted a suit against the appellant, upon 
which the appellant tiled an application under Section 8 of the Act. The 
E
applicant made serious allegations against the respondents of having 
committed malpractices in the account books, and manipulation of the 
finances of the partnership firm. This Court held that such a case cannot 
be properly dealt with by the arbitrator, and ought to be settled by the 
Court, through detailed evidence led by both parties. 
F 
13. When the case involves serious allegations of fraud, the dicta 
contained in the aforesaid judgments would be understandable. However, 
at the same time, mere allegation of fraud in the pleadings by one party 
against the other cannot be a ground to hold that the matter is incapable 
of settlement by arbitration and should be decided by the civil court. 
The allegations of fraud should be such that not only these allegations 
G are serious that in nonrtal course these may even constitute criminal 
offence, they are also complex in nature and the decision on these issues 
demand extensive evidence for which civil court should appear to be 
more appropriate forum than the Arbitral Tribunal. Otherwise, it may 
'AIR 1962 SC 406 
.H 
7(1880)14ChD471
A. AYYASAMY v. A. PARAMASIVAM & ORS. 
[A. K. SIKRI, J.] 
become a convenient mode of avoiding the process of arbitration by 
simply using the device of making allegations of fraud and pleading that 
issue of fraud needs to be decided by the civil court. The judgment in N. 
Radltakrislman does not touch upon this aspect and said decision is 
rendered after finding that allegations of fraud were of serious nature. 
14. As noted above, in Swiss Timing Lie/. case, single Judge of 
this Court while dealing with the same issue in an application under 
Section 11 of the Act treated the judgment in N. Rac//1akris/man as per 
incuriam by referring to the other judgments in the case of P. Anand 
Gajapatlli Raju v. P. V.G Raju8 and Himlust<m Petroleum Corpn. 
Ltd. v. Pinkcity Mic/way Petro/eunrs9• Two reasons were given in 
support which can be found in para 21 of the judgment which makes the 
following reading: 
"21. This judgment was not even brought to the !IOte of the 
Court in N. Rad/wkrislmcm 's case. In my opinion, 
judgment in N. Radlmktislman 's case is per incuriam 
on two grounds; Firstly, the judgment in Hinc/ust<m 
Petroleum Corpn. Ltd., though referred has not been 
distinguished but at the same time is not followed also. The 
judgment in P. Anand Gajapat/1i Rclju & Ors. Was not 
even brought to the notice of this Court. Therefore, the 
same has neither been followed nor considered. Secondly, 
the provision contained in Section 16 of the Arbitration Act, 
1996 were also
not brought to the notice by this Court. 
Therefore, in my opinion, the judgment in N. 
Rad/1akrislma11 does not lay down the correct law and 
cannot be relied upon." 
1 S. We shall revert to the question of per i11curia111 at a later 
stage. At th is juncture, we may point out that the issue has been revisited 
by another Division Bench of this Court in BoozAl/en & llcm1ilton Inc. 
v. SB/ Home Fi1u111ce Limited mid otllers'0• In this case, one of the 
questions that had arisen for determination was, in the context of Section 
8 of the Act, as to whether the subject matter of the suit was 'arbitrable' 
i.e. capable of being adjudicated by a private forum (Arbitral Tribunal). 
In this context, the Court carried out detailed discussion on the term 
'arbitrability' by pointing out three facets thereof, viz.: 
8(2000> 4 sec 539 
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1•(201J)5 sec 532 
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by arbitration? 
2) whether the disputes are covered by the arbitration agreement? 
3) whether the parties have referred the disputes to arbitratfon? 
16. As we are concerned with the first facet C>fthe arbitrability of 
dispute, on this aspect the Court pointed out that in those cases where 
the subject matter falls exclusively within the domain of public fora, viz. 
the Courts, such disputes would be non-arbitrable and cannot be decided 
by the Arbitral Tribunal but by the Courts alone. The justification and 
rationale given for adjudicating such disputes through the process of 
Courts, Le. public fora, and not by Arbitral Tribunals, which is a private 
forum, is given by the court in the following manner: 
"35. The Arbitral Tribunals are private fora chosen 
voluntarily by the parties to the dispute, to adjudicate their 
disputes in place of courts and tribunals which are public 
fora constituted under the laws of the country. Every civil 
or commercial dispute, either contractual or non-Contractual, 
which can be decided by a court, is in principle capable of 
being adjudicated and resolved by arbitration unless the 
jurisdiction of the Arbitral Tribunals is excluded either 
expressly or by necessary implication. Adjudication of 
certain categories of proceedings are reserved by the 
legislature exclusively for public fora as a matter
of public 
policy. Certain other categories of cases, though not 
expressly reserved for adjudication by public fora (courts 
and tribunals), may by necessary implication stand excluded 
from the purview of private fora. Consequently, where the 
cause/dispute is inarbitrable, the court where a suit is pending, 
will refuse to refer the parties to arbitration, under Section 
8 of the Act, even if the parties might have agreed upon 
arbitration as the forum for settlement of such disputes. 
36. The well-recognised examples ofnon-arbitrable disputes 
are: (i) disputes relating to rights and liabilities which give 
rise to or arise out of criminal offences; (ii) matrimonial 
disputes relating to divorce, judicial separation, restitution 
of conjugal rights, child custody; (iii) guardianship matters; 
(iv) insolvency and winding-up matters; (v) testamentary
A. AYYASAMYv. A. PARAMASJVAM & ORS. 
rA. K. SIKRI, J.l 
matters (grant of probate, letters of administration and 
succession certificate); and (vi) eviction or tenancy matters 
governed by special statutes where the tenant enjoys 
statutory protection against eviction and only the specified 
courts are conferred jurisdiction to grant eviction or decide 
the disputes. 
37. It may be noticed that the cases referred to above 
relate to actions in rem. A right in rem is a right exercisable 
against the world at large, as contrasted from a right in 
personam which is an interest protected solely against 
specific individuals. Actions in personam refer to actions 
determining the rights and interests of the parties themselves 
in the subject-matter of the case, whereas actions in rem 
refer to actions determining the title to property and the 
rights of the parties, not merely among themselves but also 
against all persons at any time claiming an interest in that 
property. Correspondingly, ajudgment in personam refers 
to a judgment against a person as distinguished from a 
judgment against a thing, right or status and a judgment in 
rem refers to a judgment that determines the status or 
condition of property which operates directly on the property 
itself. (Vide Black's Law Dictionary.) 
38. Generally and traditionally all disputes relating to rights 
in personam are considered to be amenable to arbitration; 
and all disputes relating to rights in rem are required to be
adjudicated by courts and public tribunals, being unsuited 
for private arbitration. This is not however a rigid or inflexible 
rule. Disputes relating to subordinate rights in personam 
arising from rights in rem have always been considered to 
be arbitrable." 
17. The Law Commission has taken note of the fact that there is 
divergence of views between the different High Courts where two views 
have been expressed, one is in favour of the civil courthavingjurisdiction 
in cases of serious fraud and the other view encompasses that even in 
cases of serious fraud, the Arbitral Tribunal will rule on its own jurisdiction. 
It may be pertinent here to reproduce the observations of the Law 
Commission as contained in paragraphs 50 & 51 of the 2461h Law 
Commission Report, which are as under: 
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"50. The issue of arbitrability of fraud has arisen on 
numerous occasions and there exist conflicting decisions 
of the Apex Court on this issue. While it has been held in 
Bharat Rasik/alv. Gautam Rasiklal, (2012) 2 SCC 144 
that when fraud is of such a nature that it vitiates the 
arbitration agreement, it is for the Court to decide on the 
validity of the arbitration agreement by determining the issue 
of fraud, there exists two parallel lines of judgments on the 
issue of whether an issue of fraud is arbitrable. In this 
context, a 2 judge bench of the Supreme Court, while 
adjudicating on an application under section 8 of the Act, in 
Radhakrishnan v. Maestro Engineers, 2010 I SCC 72 
held that an issue of28 fraud is not arbitrable. This decision 
was ostensibly based on the decision of the three judge 
bench of the Supreme Court in Abdul Qadir v. Madhav 
Prabhakar, AIR 1962 SC 406. However, the said 3 judge 
bench decision (which was based on the finding in Russel 
v. Russel [ 1880 14 Ch.D 4 71]) is only an authority for the 
proposition that a party against whom an al legation of fraud 
is made in a public forum, has a right to defend himself in 
that public forum. Yet, following Radhakrishnan, it appears 
that issues of fraud are not arbitrable. 
· 
51. A distinction has also been made by certain High Courts 
between a serious issue of fraud and a mere allegation of 
fraud and the former has been
held to be not arbitrable 
(Seelvory Properties and Hotels Private Ltd v. Nusli 
Neville Wadia, 2011 (2) Arb LR 4 79 (Born); CS 
Ravishankar v. CK Ravishankar, 2011 (6) Kar LJ 417). 
The Supreme Court in Meguin GMBH v. Nandan 
Petrochem Ltd.,.2007 (5) R.A.J 239 (SC), in the context of 
an application tiled under section 11 has gone ahead and 
appointed an arbitrator even though issues of fraud were 
involved. Recently, the Supreme Court in its judgment in 
Swiss Timing Ltd v. Organising Co111111ittee, Arb. Pet. No. 
34/2013 dated 28.05.2014, in a similar case of exercising 
jurisdiction under section 11, held that the judgment in 
Radhakrishnan is per incuriam and, therefore, not good 
law." 
18. A perusal of the aforesaid two paragraphs brings into fore
A. AYYASAMYv. A. PARAMASIVAM & ORS. 
[A. K. SIKRI, J.] 
that the Law Commission has recognized that in cases of serious fraud, 
courts have entertained civil suits. Secondly, it has tried to make a 
distinction in cases where there are allegations of serious fraud and 
fraud simplicitor. ft, thus, follows that those cases where there are serious 
allegations of fraud, they are to be treated as non-arbitrable and it is only 
the civil court which should decide such matters. However, where there 
are allegations of fraud simplicitor and such allegations are merely alleged, 
we are of the opinion it may not be necessary to nullify the effect of the 
arbitration agreement between the parties as such issues can be 
determined by the Arbitral Tribunal. 
I 9. Before we apply the aforesaid test to the facts of the present 
case, a word on the observations in Swiss Timi11g Ltd. 's case to the 
effect that judgment of N. R"dlwkrisl11um was per incuriam, is 
warranted. In fact, we do not have to labour on this aspect a~ this task 
is already undertaken by this Court in St"te of West Beng"I & Ors. v. 
Associated Contractors''. It has been clarified in the aforesaid case 
that Swiss Timings Ltd. was a judgment rendered while dealing with 
Section I I (6) of the Act and Section II essentially confers power on the 
Chief Judge ofindia or the Chief Justice of the High Court as a designate 
to appoint an arbitrator, which power has been exercised by another 
Hon'ble Judge as a delegate of
the Chief Justice. This power of 
appointment of an arbitrator under Section 11 by the Court, 
notwithstanding the fact that it has been held Ln SBP & Co. v. P"te/ 
Enl(ineerinl( Ltd. & Anr. 11 as a judicial power, cannot be deemed to 
have precedential value and, therefore, it cannot be deemed to have 
overruled the proposition oflaw laid down in N.R"dlwkris/111m1. 
20. In view of our aforesaid discussions, we are of the opinion 
that mere allegation of fraud simplicitor may not be a ground to nullify 
the effect of arbitration agreement between the parties. It is only in 
those cases where the Court, while dealing with Section 8 of the Act, 
finds that there are very serious allegations of fraud which make a virtual 
case of criminal offence or where allegations of fraud are so complicated 
that it becomes absolutely essential that such complex issues can be 
decided only by civil court on the appreciation of the voluminous evidence 
that needs to be produced, the Court can sidetrack the agreement by 
dismissing application under Section 8 and proceed with the suit on merits. 
It can be so done also in those cases where there are serious allegations 
11 (2015) 1 sec 32 
12 (2005) & sec 618 
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of forgery/fabrication of documents in support of the plea of fraud or 
where fraud is alleged against the arbitration provision itself or is of such 
a nature that permeates the entire contract, including the agreement to 
arbitrate, meaning thereby in those cases where fraud goes to the validity 
of the contract itself of the entire contract which contains the arbitration 
clause or the validity of the arbitration clause itself. Reverse position 
thereof would be that where there are simple allegations of fraud touching 
upon the internal affairs of the party inter se and it has no implication in 
the public domain, the arbitration clause need not be avoided and the 
parties can be relegated to arbitration. While dealing with such an issue 
in an application under Section 8 of the Act, the focus of the Court has to 
be on the question as to whether jurisdiction of the Court has been ousted 
instead of focusing on the issue as to whether the Court has jurisdiction 
or not. It has to be kept in mind that insofar as the statutory scheme of 
the Act is concerned, it does not specifically exclude any category of 
cases as non-arbitrable. Such categories of non-arbitrable subjects are 
carved out by the Courts, keeping in mind the principle of common law 
that certain disputes which are of public nature, etc. are not capable of 
adjudication and settlement by arbitration and for resolution of such 
disputes,
Courts, i.e. public fora, are better suited than a private forum 
ofarbitration. Therefore, the inquiry of the Court, while dealing with an 
application under Section 8 of the Act, should be on the aforesaid aspect, 
viz. whether the nature of dispute is such that it cannot be referred to 
arbitration, even ifthere is an arbitration agreement between the parties. 
When the case of fraud is set up by one of the parties and on that basis 
that party wants to wriggle out of that arbitration agreement, a strict and 
meticulous inquiry into the allegations of fraud is needed and only when 
the Court is satisfied that the allegations are of serious and complicated 
nature that it would be more appropriate for the Court to deal with the 
subject matter rather than relegating the parties to arbitration, then alone 
such an application under Section 8 should be rejected. 
21. When we apply the aforesaid principles to the facts of this 
case, we find that the only allegation of fraud that is levelled is that the 
appellant had signed and issued a cheque of Rs. I 0,00,050/- dated 
17.06.2010 of' Hotel Arunagiri' in favour of his son without the knowledge 
and consent of the other partners i.e. the respondents. It is a mere 
matter of accounts which can be looked into and found out even by the 
arbitrator. It does not involve any complex issue. If such a cheque is 
issued from the hotel account by the appellant in favour of his son, it is
A. AYYASAMY v. A. PARAMASIVAM & ORS. 
easy to prove the same and then the onus is upon the appellant to show 
as to what was the reason for giving that amount from the partnership 
firm to his son and he will have to account for the same. Likewise, the 
allegation of the respondents that daily collections are not deposited in 
the bank accounts is to be proved by the respondents which is again a 
matter of accounts. 
Other allegation, which appears to be serious, is about the C.B.I. 
raid at the house of Dhanapalraj from where cash in the sum of Rs.45 
lakl1s was seized. Interestingly, though the appellant has taken the position 
that this cash belongs to 'Hotel Arunagiri', they are the respondents 
who have themselves alleged that the money belonged to Dhanapalraj 
and not to 'Hotel Arunagiri'. In view of the aforesaid stand taken by the 
respondents/plaintiffs themselves, this issue does not fall for consideration 
and, therefore, is not to be gone by the Arbitral Tribunal. 
22. We, therefore, are of the opinion that the allegations of 
purported fraud were not so serious which cannot be taken care of by 
the arbitrator. The Courts below, therefore, fell in error in rejecting the 
application of the appellant under Section 8 of the Act. Reversing these 
judgments, we allow these appeals and as a consequence, application 
filed by the appellant under Section 8 in the suit is allowed thereby 
relegating the parties to the arbitration. 
23. At the same time, in order to save
the time and having regard 
to the nature of the dispute, this Court appoints Hon'ble Ms. Justice 
Prabha Sridevan, a retired Judge of the Madras High Court, as the 
arbitrator. The arbitrator shall fix her own fee. 
No costs. 
DR. D. Y. CHANDRACHUD, J. I. I have had the benefit of 
the lucid exposition oflaw in the judgment of my learned brother Justice 
AK Sikri. I agree with the reasons contained in His Lordship'sjudgment 
while adding some of my own. 
2. The issue which arises in these proceedings has generated a 
considerable degree of uncertainty in the law of arbitration in India. 
This is an area of law where the intervention of this Court is needed to 
ensure that a cloud on the efficacy of arbitral proceedings to resolve 
issues of fraud is resolved conclusively. The litigative uncertainty which 
the discourse has produced is best set at rest for nothing is as destructive 
of legitimate commercial expectations than a state of unsettled legal 
precept. 
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3. The Arbitration and Conciliation Act, 1996 does not in specific 
terms exclude any category of disputes - civil or commercial - from 
arbitrability. Intrinsic legislative material is in fact to the contrary. Section 
8 contains a mandate that where an action is brought before a judicial 
authority in a matter which is the subject of an arbitration agreement, 
parties shall he referred by it to arbitration, if a party to or a person 
claiming through a party to the arbitration agreement applies not later 
than the date of submitting the first statement on the substance of the 
dispute. The only exception is where the authority finds prima facie that 
there is no valid arbitration agreement. 
Section 8 contains a positive 
mandate and obligates the judicial authority to refer parties to arbitration 
in terms of the arbitration agreement. While dispensing with the element 
of judicial discretion, the statute imposes an affirmative obligation on 
every judicial authority to hold down parties to the terms of the agreement 
entered into between them to refer disputes to arbitration. Article 8 of 
the UNCITRAL Model Law enabled a court to decline to refer parties 
to arbitration if it is found that the arbitration agreement is null and void, 
inoperative or incapable of being performed. Section 8 of the Act of 
1996 has made a departure which is indicative of the wide reach and 
ambit of the statutory mandate.
Section 8 uses the expansive expression 
'judicial authority" rather than "court" and the words "unless it finds 
that the agreement is null and void, inoperative and incapable of being 
performed" do not find place in 
Section 8. 
4. Section 16 empowers the arbitral tribunal to rule upon its own 
jurisdiction, including ruling on any objection with respectto the existence 
or validity ofan arbitration agreement. Section 16( I )(b) stipulates that a 
decision by the arbitral tribunal that a contract is nul I and void shall not 
entail ipso jure the invalidity of the arbitration clause. Hence, the invalidity 
of the contract between the parties does not render the arbitration 
agreement invalid as a consequence of law. This recognises as inhering 
in the arbitrator the jurisdiction to consider whether the main contract 
(other than the arbitration clause) is null and void. The arbitration 
agreement survives for determining whether the contract in which the 
arbitration clause is embodied is null and void, which would include 
voidability on the ground of fraud. The severability of the arbitration 
agreement is a doctrinal development of crucial significance. For, it 
leaves the adjudicatory power of the arbitral tribunal unaffected, over 
any objection that the main contract between the parties is affected by 
fraud or undue influence.
A. AYYASAMY v. A. PARAMASIVAM & ORS. 
[DR. D. Y. CHANDRACHUD, J.] 
5. Section 34(2)(b) and Section 48(2) provide as one of the grounds 
for challenge to or in respect of the enforceability of an award that "the 
subject matter of the dispute is not capable of settlement by arbitration 
under the law for the time being in force". Clearly, therefore, the Act 
contemplates and acknowledges that before it can be held that a particular 
subject matter is not capable of settlement by arbitration, such a 
consequence must arise under the law for the time being in force. 
6. Ordinarily every civil or commercial dispute whether based on 
contract or otherwise which is capable of being decided by a civil court 
is in principle capable of being adjudicated upon and resolved by arbitration 
"subject to the dispute being governed by the arbitration agreement" 
unless the jurisdiction oftheArbitral Tribunal is excluded either expressly 
or by necessary implication. In Booz-Allen and Hamilton Inc. v. SBI 
Home Finance Ltd.', this Court held that adjudication of certain 
categories of proceedings is reserved by the legislature exclusively for 
public fora as a matter of public policy. Certain other categories of 
cases, though not exclusively reserved for adjudication by courts and 
tribunals may by necessary implication stand excluded from the purview 
of private fora. This Court set down certain examples of non-arbitrable 
disputes such as: 
(i) Disputes relating to rights and liabilities
which give rise to or 
arise out of criminal offences; 
(ii) Matrimonial disputes relating to divorce,judicial separation, 
restitution of conjugal rights and child custody; 
(iii) Matters of guardianship; 
(iv) Insolvency and winding up; 
(v) Testamentary matters, such as the grant of probate, letters of 
administration and succession certificates; and 
(vi) Eviction or tenancy matters governed by special statutes where 
a tenant enjoys special protection against eviction and specific 
545 
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courts are conferred with the exclusive jurisdiction to deal with 
G 
the dispute. 
This Court held that this class of actions operates in rem, which is 
a right exercisable against the world at large as contrasted with a right 
in personam which is an interest protected against specified individuals. 
'(2011J s sec 532 
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All disputes relating to rights in personam are considered to be amenable 
to arbitration while rights in rem are required to be adjudicated by courts 
and public tribunals. The enforcement of a mortgage has been held to 
be a right in rem for which proceedings in arbitration would not be 
maintainable. In Vimal Kishore Shah v. Jayesh Dinesh Shah2, this 
Court added a seventh category of cases to the six non-arbitrable 
categories set out in Booz Allen, namely, disputes relating to trusts, 
trustees and beneficiaries arising out of a trust deed and the Trust Act. 
7. In Natraj Studios (P) Ltd. v. Navrang Studios3, a Bench of 
three judges of this Court dealt with the issue as to whether a dispute 
between a landlord and a tenant falling within the exclusive domain of 
the Court of Small Causes at Mumbai, to the exclusion of the civil court, 
is arbitrable. This Court held that the Bombay Rent Act is a welfare 
legislation aimed at a definite social objective of protecting tenants as a 
matter of public policy. The conferment of exclusive jurisdiction on 
certain courts was in pursuance of a specific social objective which the 
legislation seeks to achieve. Public policy, this Court held, requires that 
parties cannot be allowed to contract out of the legislative mandate which 
requires certain kinds of disputes to be resolved by special courts 
constituted under rent control legislation. Hence, arbitration
agreements 
between parties whose rights are regulated by rent control legislation 
would not be recognised by a court oflaw. 
8. In regard to disputes under the Consumer Protection Act, 1986, 
this Court held in Skypak Courier Ltd. v. Tata Chemical Ltd\ that 
the existence of an arbitration clause will not be a bar to the entertainment 
of a complaint by a forum under the Consumer Protection Act, 1986 
since the remedy provided under the law is in addition to the provisions 
of any other law for the time being in force. This was reiterated in 
National Seeds Corporation Ltd. v. M. Madhusudhan Reddy\ and 
Rosedale Developers Pvt. Ltd.
0 v. A~hore Bhattacharya6• It was 
observed that the remedy is merely optional and is in addition to and not 
in derogation of the provisions of any other law for the time being in 
force. 
9. Hence, in addition to various classes of disputes which are 
2(2016) SCC OnLine SC 825 
3 (1981) 2 SCR 466 
'(2000J s sec 294 
'(2012i2 sec 506 
H 
6 (2015 )I WBLR (SC) 385
A. AYYASAMY v. A. PARAMASIVAM & ORS. 
[DR. D. Y. CHANDRACHUD, J.] 
generally considered by the courts as appropriate for decision by public 
fora, there are classes of disputes which fall within the exclusive domain 
of special fora under legislation which confers exclusive jurisdiction to 
the exclusion of an ordinary civil cou1t. That such disputes are not 
arbitrable dovetails with the general principle that a dispute which is 
capable of adjudication by an ordinary civil court is also capable of being 
resolved by arbitration. However, ifthe jurisdiction of an ordinary civil 
court is excluded by the conferment of exclusive jurisdiction on a specified 
court or tribunal as a matter of public policy such a dispute would not 
then be capable of resolution by arbitration. 
10. The judgment of a two judge Bench of this Court in N. 
Radhakrishnan v. Maestro Engineers7, arose out of a partnership 
dispute. A suit was instituted before the civil court for declaratory and 
injunctive reliefs. An application under Section 8 of the Act of 1996 was 
rejected by the trial court and the order of rejection was affirmed in 
revision by the High Court. The submission of the appellant that the 
dispute between the paitners ought to have been referred to arbitration 
was met with the objection that the appellant having raised issues relating 
to misappropriation offunds and malpractices, these were matters which 
ought to be resolved by a civil court. Affirming the judgment of the High
Court, a Bench of two judges of this Court held as follows: 
"The High Court in its impugned judgment has rightly held 
that since the case relates to allegations of fraud and serious 
malpractices on the part of the respondents, such a situation 
can only be settled in court through furtherance of detailed 
evidence by either paities and such a situation cannot be 
properly gone into by the Arbitrator." 
(I.d. at p. 7) 
The judgment accepted the submission of the respondent that the 
appellant having raised serious matters alleging criminal wrongdoing, 
such disputes ought to be adjudicated upon by the civil court: 
"The learned counsel appearing on behalfofthe respondents 
on the other hand contended that the appellant had made 
serious allegations againstthe respondents alleging that they 
had manipulated the accounts and defrauded the appellant 
by cheating the appellant of his dues, thereby warning the 
respondents with serious criminal action against them for 
'(2010) 1 SCC72 
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the alleged commission of criminal offences. In this 
connection, reliance was placed in a decision of this Court 
in the case of Abdul Kadir Shamsuddin Bubere vs. 
Madhav Prabhakar Oak and Another, [AIR 1962 SC 406] 
in which this Court under para 17 held as under: 
"There is no doubtthat 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 .... " 
In our view and relying on the aforesaid observations of 
this Court in the aforesaid decision and going by the ratio of 
· the above mentioned case, the facts of the present case 
does not warrant the matter to be tried and decided by the 
Arbitrator, rather for the furtherance of justice, it should be 
tried in a court oflaw which would be more competent and 
have the means to decide such a complicated matter 
involving various questions and issues raised in the present 
dispute." 
The above extract from the judgment in N. Radhakrishnan relies 
extensively on the view propounded in Abdul Kadir (supra). The decision 
in Abdul Kadir arose under the ArbitrationAct, 1940 and was in the 
context of the provisions of Section 20. In Abdul Kadir, this Court 
emphasized that sub-Section (4) of Section 20 of the Arbitration Act, 
1940 left
a wide discretion in the court. In contrast, the scheme of the 
Act of 1996 has made a radical departure from the position under the 
erstwhile enactment. A marked distinction is made in Section 8 where 
no option has been left to the judicial authority but to refer parties to 
arbitration. Abdul Kadir explains the position under the Arbitration 
Act, 1940. The present legislation on the subject embodies a conscious 
departure which is intended to strengthen the efficacy of arbitration. 
11. In P. Anand Gajapathi Raju v. P.V.G Raju (Dead)8, this 
Court held that the language of Section 8 is peremptory in nature. Hence, 
where there is an arbitration agreement, it is obligatory for the court to 
refer parties to arbitration and nothing remains to be decided in the original 
action after such an application is made, except to refer the dispute to an 
• (2000) 4 sec 539
A. AYYASAMY v. A. PARAMASIVAM & ORS. 
[DR. D. Y. CHANDRACHUD, J.] 
arbitrator. The judgment in Abdul Kadir came up for consideration 
before a Bench of two learned judges in Hindustan Petroleum 
Corporation Ltd. v. Pinkcity Midway Petroleums•. 
In that case, 
the appellant had appointed the respondent as a dealer for selling its 
petroleum products through a retail outlet. The dealership agreement 
contained an arbitration agreement. ln the course of an inspection the 
appellant found a breach of the dealership agreement and sales of 
petroleum products were suspended. The respondent instituted a suit 
before the ordinary civil court seeking declaratory reliefs in which the 
appellant filed an application under Section 8 of the Arbitration and 
Conciliation Act, 1996. The civil court rejected the application and the 
High Court in revision affirmed the view. The submission which weighed 
with the High Court was that the allegation of tampering of weights and 
of measurement seals could only be adjudicated upon under the Standards 
of Weights and Measures (Enforcement) Act, 1985 and hence such a 
dispute was not arbitrable. This Court held that once the arbitration 
agreement was admitted, irrview of the mandatory language of Section 
8, the dispute ought to have been referred to arbitration. The judgment 
of this Court dealt with the submission that since the allegations in the 
case related to an element of criminal wrongdoing, the dispute was not 
arbitrable. Rejecting
this submission, this Court held as follows: 
"19 It was argued before the courts below as also before 
us that the mis-conduct, if any, pertaining to short-supply of 
petroleum products or tampering with the seals would be a 
criminal offence under the 1985 Act. Therefore, the 
investigation into such conduct of the dealer can only be 
conducted by such offices and in a manner so specified in 
the said Act, and it is not open to the appellant to arrogate 
to itself such statutory power of search and seizure by 
relying on some contractual terms in the Dealership 
Agreement. It is further argued that such disputes involving 
penal consequences can only be tried by a court of 
competent jurisdiction and cannot be decided by an 
arbitrator ..... 
20 Having considered the above arguments addressed on 
behalf of the respondent as also the findings of the courts 
below, we are of the opinion that the same cannot be 
'(2003 l 6 sec 503 
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accepted because the appellant is neither exercising the 
power of search and seizure conferred on a competent 
authority under the 1985 Act nor does the Dealership 
Agreement contemplate the arbitrator to exercise the power 
of a criminal court while arbitrating on a dispute which has 
arisen between the contracting parties. This is clear from 
the terms of the Dealership Agreement." (Id. at p. 19-20) 
In the view of this Court, the dispute between the parties was 
clearly referable to the terms of the contract and did not entrench upon 
the legislative provisions contained in the Standards of Weights and 
Measures (Enforcement) Act, 1985: 
"The courts below in our opinion, have committed an error 
by misreading the tenns of the contract when they came to 
the conclusion that the only remedy available as against a 
misconduct committed by an ening dealer in regard to short-
supply and tampering with the seals lies under the provisions 
of the 1985 Act. The courts below have failed to notice 
that when a dealer short-supplies or tampers with the seal, 
apart from the statutory violation, he also commits a 
misconduct under Clause 20 of the Agreement in regard to 
which the appellant is entitled to invoke Clause 30 of the 
Agreement to stop supply of petroleum products to such 
dealer. The power conferred under the Agreement does 
not in any manner conflict with the statutory power under 
the 1985 Act nor
does the prescribed procedure under the 
1985 Act in regard to search and seizure and prosecution 
apply to the power of the appellant to suspend the supply of 
its petroleum products to an erring dealer. The power 
exercised by the appellant in such a situation is a contractual 
power under the agreement and not a statutory one under 
the 1985 Act. The existence of dual procedure; one under 
the criminal law and the other under the contractual law is 
a well-accepted legal phenomenon in the Indian 
jurisprudence ...... . 
Therefore, in our opinion, the courts below have erred in 
coming to the conclusion that the appellant did not have the 
. legal authority to investigate and proceed against the 
respondent for its alleged misconduct under the terms of 
the Dealership Agreement. We are also of the opinion that
A. AYYASAMY v. A. PARAMASIVAM & ORS. 
[DR. D. Y. CHANDRACHUD, J.] 
ifthe appellant is satisfied that the respondent is indulging 
in short-supply or tampering with the seals, it will be entitled 
to initiate such action as is contemplated under the 
agreement like suspending or stopping the supply of 
petroleum products to such erring dealer. I fin that process 
any dispute arises between the appellant and such dealer, 
the same will have to be referred to arbitration as 
contemplated under Clause 40 of the Dealership 
Agreement." (Id. at p. 23-24) 
12. Hence, allegations of criminal wrongdoing or of statutory 
violation would not detract from the jurisdiction of the arbitral tribunal to 
resolve a dispute arising out ofa civil or contractual relationship on the 
basis of the jurisdiction conferred by the arbitration agreement. 
13. In a more recent judgment of two judges of this Court in 
Sundaram Finance Ltd. v. T. Thankam10, the same position in regard 
to the mandate of Section 8 has been reiterated. The earlier decisions in 
Anand Gajapathi Raju, Pink City and in Branch Manager, Magma 
Leasing and Finance Ltd. v. Potluri Madhvilata", emphasizing the 
mandate of Section 8, have been reaffirmed. This Court has held: 
"Once an application in due compliance of Section 8 of the 
Arbitration Act is filed, the approach of the civil court should 
be not to see whether the court has jurisdiction. It should 
be to see whether its jurisdiction has been ousted. There is 
a lot of
difference between the two approaches. Once it is 
brought to the notice of the court that its jurisdiction has 
been taken away in terms of the procedure prescribed under 
a special statute, the civil court should first see whether 
there is ouster of jurisdiction in terms or compliance of the 
procedure under the special statute. The general law should 
yield to the special law - ge11eralia specialibus 11011 
derogant. Jn such a situation, the approach shall not be to 
see whether there is still jurisdiction in the civil court under 
the general law. Such appn;>aches would only delay the 
resolution of disputes and complicate the redressal of 
grievances and of course unnecessarily increase the 
pendency in the court." (Id. at p. 15) 
1" AIR 2015 1303 
11 (2009) 1 o sec 1 OJ 
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14. The position that emerges both before and after the decision 
in N. Radhakrishnan is that successive decisions of this Court have 
given effect to the binding precept incorporated in Section 8. Once 
there is an arbitration agreement between the parties, a judicial authority 
before whom an action is brought covering the subject matter of the 
arbitration agreement is under a positive obligation to refer parties to 
arbitrati,,n by enforcing the terms of the contract. There is no element 
of discretion left in the court or judicial authority to obviate the legislative 
mandate of compelling parties to seek recourse to arbitration. The 
judgment in N. Radhakrislman has, however, been utilised by parties 
seeking a convenient ruse to avoid arbitration to raise a defence of fraud. 
First and foremost, it is necessary to emphasise that the judgment in N. 
Radhakrishnan does not subscribe to the broad proposition that a mere 
allegation of fraud is ground enough not to compel parties to abide by 
their agreement to refer disputes to arbitration. More often than not, a 
bogey of fraud is set forth if only to plead that the dispute cannot be 
arbitrated upon. To allow such a plea would be a plain misreading of the 
judgment in N. Radhakrishnan. As I have noted earlier, that was a 
case where the appellant who had filed an application under Section 8 
faced with a suit on a dispute in partnership had raised
serious issues of 
criminal wrongdoing, misappropriation of funds and malpractice on the 
part of the respondent. It was in this background that this Court accepted 
the submission of the respondent that the arbitrator would not be 
competent to deal with matters "which involved an elaborate production 
of evidence to establish the claims relating to fraud and criminal 
misappropriation". Hence, it is necessary to emphasise that as a matter 
of first principle, this Court has not held that a mere al legation of fraud 
will exclude arbitrability. The burden must lie heavily on a party which 
avoids compliance with the obligation assumed by it to submit disputes 
to arbitration to establish the dispute is not arbitrable under the law for 
the time being in force. In each such case where an objection on the 
ground of fraud and criminal wrongdoing is raised, it is for the judicial 
authority to carefully sift through the materials for the purpose of 
determining whether the defence is merely a pretext to avoid arbitration. 
It is only where there is a serious issue of fraud involving criminal 
wrongdoing that the exception to arbitrability carved out in N. 
Radhakrishnan may come into existence. Allegations of fraud are not 
alien to ordinary civil comts. Generations of judges have dealt with such 
allegations in the context of civil and commercial disputes. If an allegation
A. AYYASAMY v. A. PARAMASIVAM & ORS. 
[DR. D. Y. CHANDRACHUD, J.] 
of fraud can be adjudicated upon in the course of a trial before an ordinary 
civil court, there is no reason or justification to exclude such disputes 
from the ambit and purview ofa claim in arbitration. Parties who enter 
into commercial dealings and agree to a resolution of disputes by an 
arbitral forum exercise an option and express a choice of a preferred 
mode for the resolution of their disputes. Parties in choosing arbitration 
place priority upon the speed, flexibility and expertise inherent in arbitral 
adjudication. Once parties have agreed to refer disputes to arbitration, 
the court must plainly discourage and discountenance litigative strategies 
designed to avoid recourse to arbitration. Any other approach would 
seriously place in uncertainty the institutional efficacy of arbitration. Such 
a consequence must be eschewed. 
15. The position as it obtains in other jurisdictions which value 
arbitration as an effe~tive form of alternate dispute resolution is no 
different. In the UK, Section 24(2) of the Arbitration Act, 1950 provided 
that the court could revoke the authority of a tribunal to deal with claims 
involving issues of fraud and determine those claims itself. The English 
Act of 1979 provided for a stay of proceedings involving allegations of 
fraud. However, under the English Arbitration Act, 1996, there is no 
such restriction and the arbitral tribunal has jurisdiction to consider
and 
rule on issues of fraud. In Fiona Trust and Holding Corporation v. 
Yuri Privalov12, the Court of Appeal emphasised the need to make a 
fresh start in imparting business efficacy to arbitral agreements. The 
Court of Appeal held that: 
"For our part we consider that the time has now come 
for a line of some sort to be drawn and a fresh start made 
at any rate for cases arising in an international commercial 
context. Ordinary business men would be surprised at the 
nice distinctions drawn in the cases and the time taken up 
by argument in debating whether a particular case falls 
within one set of words or another very similar set of words. 
If business men go to the trouble of agreeing that their 
disputes be heard in the courts of a particular country or by 
a tribunal of their choice they do not expect (at any rate 
when they are making the contract in the first place) that 
time and expense will be taken in lengthy argument about 
the nature of particular causes of action and whether any 
" (2007] I All E R (COMM) 891 
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particular cause of action comes within the meaning of the 
particular phrase they have chosen in their arbitration 
clause. If any business man did want to exclude disputes 
about the validity of a contract, it would be comparatively 
simple to say so ... One of the reasons given in the cases 
for a liberal construction of an arbitration clause is the 
presumption in favour of one-stop arbitration. It is not to 
be expected that any commercial man would knowingly 
create a system which required that the court should first 
decide whether the contract should be rectified or avoided 
or rescinded (as the case might be) and then, if the contract 
is held to be val id, required the arbitrator to resolve the 
issues that have arisen. This is indeed a powerful reason 
for a liberal construction". 
Arbitration must provide a one-stop forum for resolution of 
disputes. The Court of Appeal held that if arbitrators can decide whether 
a contract is void for initial illegality, there is no reason why they should 
not decide whether a contract is procured by bribery, just as much as 
they can decide whether a contract has been vitiated by misrepresentation 
or non-disclosure. The judgment of the Court of Appeal was affirmed 
by the House of Lords in Premium Nafta Products Ltd. (20'~ 
Defendant) v. Fily Shipping Co. Ltd 13• The House of Lords held 
that claims of fraudulent inducement of the underlying contract (i.e.
alleged 
bribery of one party's officer to accept uncommercial terms) did not 
impeach the arbitration clause contained within that contract. The Law 
Lords reasoned that "if (as in this case) the allegation is that the agent 
exceeded his authority by entering into a main agreement in terms which 
were not authorized or for improper reasons, that is not necessarily an 
attack on the arbitration agreement". They went on to conclude that, 
"the principle of separability ... means that the invalidity or rescission of 
the main contract does not necessarily entail the invalidity or rescission 
of the arbitration agreement. The arbitration must be treated as a 'distinct 
agreement' and can be void or voidable only on grounds which relate 
directly to the arbitration agreement." 
16. The basic principle which must guide judicial decision making 
is that arbitration is essentially a voluntary assumption of an obligation 
by contracting parties to resolve their disputes through a private tribunal. 
The intent of the parties is expressed in the terms of their agreement. 
13 [2007] t;KHL 40
A. AYYASAMY v. A. PARAMASIVAM & ORS. 
[DR. D. Y. CHANDRACHUD, J.) 
Where commercial entities and persons of business enter into such 
dealings, they do so with a knowledge of the efficacy of the arbitral 
process. The commercial understanding is reflected in the terms of the 
agreement between the parties. The duty of the court is to impart to that 
commercial understanding a sense of business efficacy. 
17. Lord Hoffmann, speaking for the House of Lords in Premium 
Nafta Products, placed the matter eloquently in the following 
observations: 
"In approaching the question of construction, it is therefore 
necessary to inquire into the purpose of the arbitration 
clause. As to this, I think there can be no doubt. The parties 
have eptered into a relationship, an agreement or what is 
alleged to be an agreement or what appears on its face to 
be an agreement, which may give rise to disputes. They 
want those disputes decided by a tribunal which they have 
chosen, commonly on the grounds of such matters as its 
neutrality, expertise and privacy, the availability of legal 
services at the seat of the arbitration and the unobtrusive 
efficiency ofits supervisory law. Particularly in the case of 
international contracts, they want a quick and efficient 
adjudication and do not want to take the risks of delay and, 
in too many cases, partiality, in proceedings before a national 
jurisdiction". 
18. Lord Hoffmann held that if this is the purpose underlying an 
agreement to arbitrate,
it would be inconceivable that parties would have 
intended that some, amongst their disputes should first be resolved by a 
court before they proceed to arbitration: 
"If one accepts that th is is the purpose of an arbitration 
clause, its construction must be influenced by whether the 
parties, as rational businessmen, were I ikely to have intended 
that only some of the questions arising out of their 
relationship were to be submitted to arbitration and others 
were to be decided by national courts. Could they have 
intended that the question of whether the contract was 
repudiated should be decided by arbitration but the question 
of whether it was induced by misrepresentation should be 
decided by a court? If, as appears to be generally accepted, 
there is no rational basis upon which businessmen would 
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be likely to wish to have questions of the validity or 
enforceability of the contract decided by one tribunal and 
questions about its performance decided by another, one 
would need to find very clear language before deciding that 
they must have had such an intention". 
While affirming the judgment of the Court of Appeal, the House 
of Lords held: 
"13 In my opinion the construction of an arbitration clause 
should start from the assumption that the parties, as rational 
businessmen, are likely to have intended any dispute arising 
out of the relationship into which they have entered or 
purported to enter to be decided by the same tribunal. The 
clause should be construed in accordance with this 
presumption unless the language makes it clear that certain 
questions were intended to be excluded from arbitrator's 
jurisdiction. As Longmore LJ remarked, at para 17: "if any 
businessmen did want to exclude disputes about the validity 
of a contract, it would be comparatively easy to say so" .... 
If one adopts this approach, the language of clause 41 of 
Shelltime 4 contains nothing to exclude disputes about the 
validity of the contract, whether on the grounds that it as 
procured by fraud, bribery, misrepresentation or anything 
else. In my opinion it therefore applies to the present 
dispute". 
This principle should guide the approach when a defence of fraud 
is raised before a judicial authority to
oppose a reference to arbitration. 
The arbitration agreement between the parties stands distinct from the 
contract in which it is contained, as a matter of law and consequence. 
Even the invalidity of the main agreement does not ipso jure result in the 
invalidity of the arbitration agreement. Parties having agreed to refer 
disputes to arbitration, the plain meaning and effect of Section 8 must 
ensue. 
19. In the United States, the Supreme Court in Buckeye Check 
Cashing, Inc. v. Cardegnau, followed its earlier decisions in Prima 
Paint Corp. v. Flood & Conklin Manufacturing Co.'5, and in 
"546 U.S. 440 (U.S.S.Ct.2006) 
H 
"388 US 395 (U.S. S.Ct. 1967)
A. AYYASAMY v. A. PARAMASIVAM & ORS. 
[DR. D. Y. CHANDRACHUD, J.] 
Southland Corporation .v. Keating16• Justice Scalia, who delivered 
the judgment of the Supreme Court, summarized the position thus:-
"Prima Paint and Southland answer the question presented 
here by establishing three propositions. First, as a matter 
of substantive federal arbitration law, an arbitration provision 
is severable from the remainder of the contract. Second, 
unless the challenge is to the arbitration clause itself, the 
issue of the contract's validity is considered by the arbitrator 
in the first instance. Third, this arbitration law applies in 
state as well as federal courts. The parties have not 
requested, and we do not undertake, reconsideration of those 
holdings. Applying them to this case, we conclude tliat 
because respondents challenge the Agreement, but not 
specifically its arbitration provisions, those provi.sions are 
enforceable apart from the remainder of the contract. The 
challenge should therefore be considered by an arbitrator, 
not a court". 
20. The Arbitration and Conciliation Act, 1996, should in my view 
be interpreted so as to bring in line the principles underlying its 
interpretation in a manner that is consistent with prevailing approaches 
in the common law world. Jurisprudence in India must evolve towards 
strengthening the institutional efficacy of arbitration. Deference to a 
forum chosen by parties as a complete remedy for resolving all their 
claims is but
part of that evolution. Minimising the intervention of courts 
is again a recognition of the same principle. 
21. AcademiC literature on the law of arbitration points in the 
same direction. ln Russell onArbitration17, the doctrine of separability 
has been s11mmarized in the following extract: 
"The doctrine of separability. An arbitration agreement 
specifies the means whereby some or all disputes under 
the contract in which it is contained are to be resolved. It is 
however separate from the underlying contract: "An 
arbitration clause in a commercial contract ... is an 
agreement inside an agreement. The parties make their 
commercial bargain ... but in addition agree on a private 
. tribunal to resolve any issues that may arise between them." 
16 465 U.S. I (1984) 
17(24 .. Edition. 2015, para2-007) 
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A 
This is known as the doctrine of separability and s.7 of the 
Arbitration Act 1996 provides a statutory codification of 
the previous case law on this subject. As the House of 
Lords noted in Lesotho Highlands v Impreglio SpA: 
"it is part of the very alphabet of arbitration 
B 
law as explained in Harbour Assurance Co. (UK) 
Ltd. v Kansa General International Insurance Co. 
Ltd ... and spelled out ins. 7 of the Act, the arbitration 
agreement is a distinct and separable agreement from 
the underlying or principal contract''. .... 
c 
The Court of Appeal has confirmed that the doctrine of 
separability as it applies to arbitration agreements and 
jurisdiction clauses is uncontroversial also as a matter of 
European law''. 
Dealing with arbitrability of matters of fraud, the treatis~ contains 
D 
the following statement of the legal position: 
"Fraud. Claims involving conduct amounting to fraud can 
be the subject matter of arbitration, as s.107(2) of the 
Arbitration Act makes clear. The Act expressly recognises 
that an arbitral tribunal may decide an issue of fraud, and 
E 
the courts have acknowledged that an arbitrator has 
jurisdiction to decide allegations of bribery against a party 
to an arbitration agreement. Even in this context, however, 
an arbitral tribunal does not have jurisdiction to impose 
criminal sanctions on a party, even if bribery of a public 
officer is established; its power is limited to the civil 
F
consequences of that conduct''. 
G 
H 
Under Section 24(2) of the Arbitration Act, 1940, the court could 
revoke the authority of a tribunal to deal with claims involving issues of 
fraud and determine those claims itself. This provision has been repealed 
in Section I 07(2) of the Arbitration Act, 1996. 
22. Similarly, Redfern and Hunter on International 
Arbitration 18 contains the following statement of legal position in relation 
to arbitrability of matters involving fraud:-
"(vi) Fraud 
"(6'" Editi1;m para 2.154)
A. AYYASAMYv. A. PARAMASIVAM & ORS. 
[DR. D. Y. CHANDRACHUD, J.] 
Where allegations of fraud in the procurement or 
performance of a contract are alleged, there appears to be 
no reason for the arbitral tribunal to decline jurisdiction. 
Indeed, in the heat of battle, such allegations are frequently 
made, although much less frequently proven". 
23. The legal position has been succinctly summarized in 
International Commercial Arbitration by Gary B Born 19 thus: 
" ..... under most national arbitration regimes, claims that the 
parties' underlying contract (as distinguished from the 
parties' arbitration clause) was fraudulently induced have 
generally been held not to compromise the substantive 
validity of an arbitration clause included in the contract. 
The fact that one party may have fraudulently 
misrepresented the quality ofits goods, services, or balance 
sheet generally does nothing to impeach the parties' agreed 
dispute resolution mechanism. As a consequence, only fraud 
or fraudulent inducement directed at the agreement to 
arbitrate will, as a substantive matter, impeach that 
agreement. These circumstances seldom arise: as a 
practical matter, it is relatively unusual that a party will seek 
to procure an agreement to arbitrate by fraud, even in those 
cases where it may have committed fraud in corihection 
with the underlying commercial contract". 
(See also in this context, International Arbitration Law and 
Practice by Mauro Rubino-Sammartanof0 
24. For the
above reasons, I agree with the eloquent judgment of 
my learned brother in coming to the conclusion that a mere allegation of 
fraud in the present case was not sufficient to detract from the obligation 
of the parties to submit their disputes to arbitration. I also agree with the 
directions issued. A fresh line must be drawn to ensure the fulfilment of 
the intent of Parliament in enacting the Act of 1996 and towards 
supporting commercial understandings grounded in the faith in arbitration. 
Kalpana K. Tripathy 
19 (2'' Edition Vol. I, P.846) 
20 (2'' Edition p.179) 
Appeals allowed. 
559 
A 
B 
c 
D 
E 
F 
G