Dispute Cannot Be Referred To Arbitration When Arbitration Agreement Itself Is Alleged To Be Forged: Supreme Court

The Supreme Court on Monday observed that disputes cannot be referred to arbitration when the very existence of the arbitration agreement is in question, particularly where the document relied upon is alleged to be forged.

A bench of Justice Pamidighantam Sri Narasimha and Justice Alok Aradhe said courts must first satisfy themselves that an arbitration agreement actually exists before sending parties to arbitration. The court clarified that challenges going to the root of the arbitration clause itself take the dispute outside the arbitral process.

It held, “Thus, in a case where plea is taken with regard to nonexistence of an arbitration clause or agreement, the same would amount to serious allegation of fraud and would render the subject matter of an agreement non-arbitrable.”

The dispute arose from a partnership firm, RDDHI Gold. Rajia Begum claimed she was inducted as a partner in 2007 through an “Admission Deed”, which also contained an arbitration clause. Barnali Mukherjee denied this and maintained that the document was forged.

For nearly a decade after the alleged induction, Rajia Begum neither participated in the business nor received profits, and appeared only as a guarantor in financial records. The admission deed surfaced for the first time in 2016, when Rajia Begum asserted a majority stake in the firm.

When Barnali Mukherjee filed a civil suit seeking a declaration that the Admission Deed was forged, Rajia Begum sought reference to arbitration. While the trial court and appellate court refused, citing serious allegations of fraud and the absence of the original document, the High Court later overturned those findings and referred the dispute to arbitration, even as it had declined to appoint an arbitrator in separate proceedings on the same issue.

Allowing the appeal, the Supreme Court said the nature of the fraud alleged was not routine. It reiterated that not every fraud allegation blocks arbitration, but courts must intervene where the allegations undermine the arbitration agreement itself.

The court explained, “Mere allegations of fraud simpliciter may not be a ground to nullify the arbitration agreement between the parties, but where the court finds that there are serious allegations of fraud which make a case of criminal offence or where the allegations of fraud are so complicated, which need to be decided on the basis of voluminous evidence, the court can sidetrack the arbitration agreement and proceed with the suit.”

The court noted that the arbitration clause in this case did not exist independently and was embedded in a document whose genuineness was under serious cloud. On that basis, it concluded that arbitral jurisdiction could not be assumed.

As the bench put it, “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.”

Holding that the High Court had exceeded its supervisory powers by overturning concurrent findings of fact, the Supreme Court set aside the order referring the dispute to arbitration and upheld the refusal to appoint an arbitrator, leaving the matter to be decided by the civil court.

For Petitioners: Senior Advocate Siddhartha Dave, Senior Advocate Shailesh Madiyal, Advocate-on-Record Aakash Sirohi, Advocate Indra Lal, Advocate Subhojit Seal, Advocate Sunando Raha, Advocate Sk Sayan Uddin, Advocate Manishitha Bhattacharjee, Advocate-on-Record Aviral Saxena;

For Respondents: Advocate Subhojit Seal, Advocate Sunando Raha, Advocate-on-Record Aviral Saxena, Senior Advocate Siddhartha Dave, Senior Advocate Shailesh Madiyal, Advocate-on-Record Aakash Sirohi, Advocate Indra Lal.