Fraud Allegations Do Not Automatically Bar Arbitration In Civil Disputes: Madhya Pradesh High Court

The Madhya Pradesh High Court on 23 October held that allegations of fraud and forgery do not automatically render a dispute non-arbitrable when they arise from a civil dispute under an arbitration agreement and can be examined by the arbitral tribunal.

Justice Vinay Saraf made the observation while allowing an application by SAM Industries Ltd. under Section 11 of the Arbitration and Conciliation Act, 1996, to appoint an arbitrator for its dispute with Mahesh, and proposed to appoint former Supreme Court Judge Justice J.K. Maheshwari as the arbitrator and directed the Principal Registrar to obtain his consent and declaration. The Bench observed:

“…Clause 14 of the agreement provides an arbitration clause and despite levelling the allegation of fraud and forgery, the matter is referrable to the arbitration in so far it relates to the dispute between applicant and non applicant No. 1, as the allegation of fraud and forgery is connected with the civil dispute and not having any larger impact on the society. The execution of agreement and the allegation of fraud and forgery can be examined by the Arbitrator on the basis of pleadings of the parties and therefore, in view of this Court the dispute between applicant and non applicant No. 1 is referable arbitration as per the terms of the agreement.”

The dispute arose from a development agreement concerning 2.358 hectares of land at Tillor Bujurg, Indore, forming part of a larger 5.67-hectare parcel jointly owned by three brothers.

SAM Industries claimed that it had entered into the agreement with Mahesh. Mahesh denied executing the agreement and alleged that the document had been forged. His two brothers also opposed the application, contending that they had not signed the agreement.

Relying on Vidya Drolia v. Durga Trading Corporation, (2021) 2 SCC 1, the Court held that the allegations of fraud and forgery arose from the civil dispute concerning the development agreement and could be examined by the arbitral tribunal. The allegations did not, by themselves, bar reference to arbitration. It separately examined whether Mahesh's two brothers, who had not signed the agreement, could also be referred to arbitration.

Further, the Bench relied on Cox and Kings Ltd. v. SAP India Pvt. Ltd., (2024) 4 SCC 1, ASF Buildtech Pvt. Ltd. v. Shapoorji Pallonji and Company Pvt. Ltd., and Hindustan Petroleum Corporation Ltd. v. BCL Secure Premises Pvt. Ltd., to clarified that a non-signatory cannot be referred to arbitration merely because of a relationship with a signatory or an interest in the disputed property. The referral court must prima facie assess whether material connects the non-signatory to the arbitration agreement.

Accordingly, the High Court referred the dispute between SAM Industries and Mahesh to arbitration, without extending the reference to his two brothers.