Validity Of Arbitration Agreement Needs Examination Where Partnership Deed Is Challenged: MP High Court

On 16 September, the Madhya Pradesh High Court held that where a party challenges the very execution and validity of a partnership deed containing an arbitration clause on grounds of fraud, conspiracy and lack of informed consent, the existence of a valid arbitration agreement must be examined before the dispute can be referred to arbitration.

Justice Ramkumar Choubey dismissed a miscellaneous appeal against the 23rd District Judge, Bhopal's order restoring a civil suit after setting aside the Trial Court's direction to refer the dispute to arbitration, noting that the plaintiff was challenging the partnership deed itself, including its execution and the alleged procurement of his signature through fraud and conspiracy. The Bench observed:

“At this stage, this Court is not required to finally adjudicate upon the truthfulness of the allegations of fraud and conspiracy, nor is it required to record a final finding regarding the validity of the partnership deed. Nevertheless, for the limited purpose of determining the forum in which the foundational dispute is required to be adjudicated, the allegations contained in the plaint, the nature of the disputed document and the other attending facts and circumstances cannot be brushed aside as a mere allegation of fraud simpliciter.”

Usman Khan had filed a civil suit seeking declaration and permanent injunction concerning a property at Village Kohefiza, Bhopal. He claimed that the partnership deed dated 21 May 2019 was not binding on him as it had been executed through fraud and without his informed consent. He also sought an injunction restraining the defendants from interfering with his possession.

He claimed that he did not understand English, the language in which the partnership deed was executed, and therefore had neither knowingly nor voluntarily executed or understood the document. He alleged that the original partnership deed and subsequent amended deed were brought into existence through fraud and conspiracy. According to him, the partnership deed purported to confer a 5% share upon him in the property. The defendants thereafter sought mutation of their names in the revenue records and allegedly attempted to interfere with his possession.

During the suit, the defendants sought rejection of the plaint under Order VII Rule 11 of the Code of Civil Procedure, 1908 and reference of the dispute to arbitration under Section 8 of the Arbitration and Conciliation Act, 1996.

The Trial Court allowed the application, holding that the dispute substantially arose from the partnership arrangement and that allegations of fraud, by themselves, did not bar arbitration.

The appellate court reversed the order and restored the civil suit. It found that the plaintiff was not merely challenging a dispute arising from an admitted partnership deed but was questioning the very execution and validity of the deed containing the arbitration clause. The defendants then approached the High Court under Order XLIII Rule 1(u) of the Code of Civil Procedure, 1908.

The Court noted that Section 8 requires a court to refer parties to arbitration where a valid arbitration agreement exists. It held that while the court need not finally adjudicate disputed factual allegations at this stage, it can examine whether a valid arbitration agreement prima facie exists when the document containing the arbitration clause itself is under challenge. It observed:

“If the document containing the arbitration clause itself is prima facie shown to be the result of such unlawful means, the requirement under Section 8 that there must exist a valid arbitration agreement cannot be treated as satisfied merely on the basis of the disputed document. This aspect, therefore, requires consideration before the parties can be compelled to submit their dispute to arbitration.”

Referring to the Supreme Court's decisions in Abdul Kadir Shamsuddin Bubere, A. Ayyasamy, NTPC Ltd. v. SPML Infra Ltd., Deccan Paper Mills and Avitel Post Studioz, the Bench reiterated that a mere allegation of fraud does not, by itself, make a dispute non-arbitrable. It said the nature, seriousness and effect of the allegations, along with whether the dispute is manifestly non-arbitrable, must be examined in the facts of each case. In the present case, it found that the plaintiff was challenging the partnership deed itself and not merely alleging its breach or non-performance. It held:

“In the present case, respondent No.1/plaintiff has not merely alleged non-performance of the partnership deed or breach of any term thereof. He has questioned the very partnership deed dated 21.05.2019 and the subsequent amended deed dated 26.02.2024.”

Accordingly, the High Court held that the foundational question concerning the validity and execution of the partnership deed had to be determined by the civil court rather than through arbitration. Finding no error in the appellate court's order, it dismissed the miscellaneous appeal.