The Supreme Court has held that a dispute is not amenable to arbitration when there are serious allegations of forgery and fabrication that strike at the very root of the arbitration agreement itself.
The Division Bench comprising Justice Pamidighantam Sri Narasimha and Justice Alok Aradhe set aside a Calcutta High Court order that had referred a partnership dispute to arbitration despite the existence of the underlying “Deed of Admission” being under a “grave cloud of doubt.” The Court affirmed the principle that while mere allegations of fraud are arbitrable, fraud directed against the arbitration provision itself renders the dispute non-arbitrable.
Background of the Dispute
The case stems from a partnership dispute involving a firm named ‘M/s RDDHI Gold,’ originally constituted on December 1, 2005, by Barnali Mukherjee (Appellant), Aftabuddin, and Raihan Ikbal.
Rajia Begum (Respondent No. 1) claimed that the original partners executed a power of attorney in 2007, empowering her to manage the firm, followed by a “Deed of Admission and Retirement” (Admission Deed) dated April 17, 2007. She alleged that under this deed, the original partners retired, and she entered the firm.
The dispute crystalized in 2016 when Rajia Begum issued a notice asserting a 50.33% interest in the firm based on the 2007 deed. Barnali Mukherjee categorically denied the execution of the Admission Deed, terming it a forged and fabricated document concocted by Rajia Begum. Mukherjee contended that the firm had already been absorbed by a company, ‘RDDHI Gold Pvt. Ltd.,’ in 2011.
Procedural History
The litigation involved conflicting outcomes in the High Court regarding the same document:
- Section 9 Proceedings: Rajia Begum sought interim protection under Section 9 of the Arbitration and Conciliation Act, 1996. The High Court rejected this on May 4, 2018, observing that the existence of the Admission Deed was doubtful. This order attained finality after the Supreme Court dismissed the subsequent appeal.
- Section 8 Proceedings: Barnali Mukherjee filed a civil suit seeking a declaration that the Admission Deed was forged. Rajia Begum applied under Section 8 of the Act to refer the suit to arbitration. The Trial Court and First Appellate Court dismissed her application citing serious fraud allegations. However, the High Court, exercising jurisdiction under Article 227, set aside these orders on September 24, 2021, and referred the dispute to arbitration.
- Section 11 Proceedings: Parallelly, Rajia Begum filed a petition under Section 11 for the appointment of an arbitrator. The High Court dismissed this on March 11, 2021, holding it inexpedient to appoint an arbitrator while the existence of the agreement was in question.
Arguments Before the Supreme Court
Counsel for Rajia Begum argued that allegations of fraud are arbitrable and within the jurisdiction of the arbitrator. It was submitted that the High Court’s observations in the Section 9 proceedings were merely tentative and should not prejudice the Section 11 jurisdiction. Reliance was placed on A. Ayyasamy v. A. Paramasivam and Vidya Drolia v. Durga Trading Corporation.
Conversely, Senior Counsel for Barnali Mukherjee argued that the Admission Deed was a manufactured document. It was highlighted that there was no privity of contract and that the High Court had already recorded a finding in 2018 that the document was not genuine. The Appellant contended that the High Court erred in interfering with the Trial Court’s concurrent findings under Article 227.
The Court’s Analysis
Impact of Fraud on Arbitrability: The Supreme Court examined the legal position regarding fraud, referring to precedents including A. Ayyasamy, Avitel Post Studioz Ltd., and the recent decision in Managing Director Bihar State Food and Civil Supply Corporation Limited.
The Court reiterated the “two working tests” to determine serious allegations of fraud:
- Does the plea permeate the entire contract and, above all, the arbitration agreement, rendering it void?
- Do the allegations touch upon the internal affairs of the parties having no implication in the public domain?
Justice Aradhe, writing for the Bench, observed:
“Thus, it is evident that when an allegation of fraud is made with regard to arbitration agreement itself, such a dispute is generally recognised as a dispute, which is in the realm of non-arbitrability and the court will examine it, as a jurisdictional issue only to enquire whether the dispute has become non-arbitrable due to one or the other reason.”
Factual Findings: The Court found “substantial and cogent material” casting serious doubt on the genuineness of the Admission Deed:
- Inconsistency: Rajia Begum’s husband (Respondent No. 2) allegedly retired in 2007 per the deed, yet Rajia admitted he functioned as a partner until 2010.
- Absence from Record: The deed did not appear in any contemporaneous record for nearly nine years, surfacing only in the 2016 legal notice.
- Role of Guarantor: Banking documents between 2009 and 2010 portrayed Rajia Begum as a guarantor, while the original partners were shown as continuing partners.
The Court held that the prima facie findings in the Section 9 proceedings, which had attained finality, were relevant considerations.
“Where the arbitration agreement itself is alleged to be forged or fabricated, the disputes ceases to be merely contractual and strikes at the very root of arbitral jurisdiction. A controversy of this nature falls squarely within the category of disputes that are generally recognized as non-arbitrable,” the Court stated.
Decision
The Supreme Court concluded that the dispute relating to the Admission Deed dated April 17, 2007, involves serious allegations going to the root of the arbitration agreement and is “not amenable to arbitration at this stage.”
The Court ruled:
- Section 8 Application: The High Court’s order dated September 24, 2021, which allowed the Section 8 application and referred the suit to arbitration, was quashed and set aside. The Court noted that the High Court was unjustified in dislodging concurrent findings of the lower courts under Article 227 when the agreement’s existence was doubtful.
- Section 11 Application: The High Court’s order dated March 11, 2021, rejecting the appointment of an arbitrator, was affirmed. The Supreme Court held that appointing an arbitrator would be “premature and legally impermissible” when the agreement’s existence requires adjudication.
Consequently, the appeal filed by Barnali Mukherjee was allowed, and the appeal filed by Rajia Begum was dismissed.
Case Details:
- Case Title: Rajia Begum v. Barnali Mukherjee (with connected appeal)
- Citation: 2026 INSC 106
- Coram: Justice Pamidighantam Sri Narasimha and Justice Alok Aradhe
