Fraud Allegations and Arbitration Agreement: Resolving Disputes in a Partnership Case

Exploring the complexities of fraud allegations and the arbitration agreement in a partnership case, as discussed in a recent judgment by the Supreme Court of India. Delving into the implications of non-arbitrable subjects and the Court’s intervention in serious and complicated fraud allegations. Stay informed about the legal nuances surrounding disputes in partnership agreements.


  • The allegation of fraud against the appellant was that he had signed and issued a cheque of Rs.10,00,050 on 17 June, 2010 of Hotel Arunagiri in favour of his son without the knowledge and consent of the other partners.
  • The matter in question was regarding a cheque issued by the appellant, which was considered a mere account issue and could have been resolved by the arbitrator.
  • The alleged fraudulent activity did not involve any substantial legal complexities and could have been addressed within the arbitration process.
  • The Court emphasizes that certain disputes, categorized as non-arbitrable subjects, cannot be settled through arbitration due to their nature being of public interest.
  • Courts carve out non-arbitrable subjects considering that public fora are better suited for resolving disputes that are not fit for private arbitration.
  • The focus of the Court, when dealing with an application under Section 8 of the Act, should be on whether the dispute is arbitrable or falls within a category that cannot be referred to arbitration.
  • The Court refrains from commenting on the merits of allegations to avoid prejudicing the parties in subsequent proceedings before a competent court.
  • In cases involving serious allegations of fraud or complicated nature that cannot be satisfactorily resolved in arbitration, the Court can dismiss the Section 8 application to proceed with the suit on its merits.
  • Mere allegations of fraud may not be sufficient grounds to nullify an arbitration agreement, unless the allegations are serious and complicated in nature, requiring thorough examination by a civil court with the production of voluminous evidence.
  • The statutory scheme of the Act does not specifically exclude any category of cases as non-arbitrable, but the complexity and seriousness of the fraud allegations may necessitate the Court’s intervention instead of arbitration.
  • Disputes between the parties are arbitrable as per the principles of law laid down in this appeal.
  • Serious allegations of forgery/fabrication in support of the plea of fraud are distinguished from ‘simple allegations’.
  • Two working tests to determine the seriousness of fraud allegations are: (1) if it permeates the entire contract and the arbitration agreement, rendering it void, and (2) if the allegations touch upon internal affairs of the parties only.
  • The case in question falls under ‘simple allegations’ as there are no fraud allegations that would vitiate the partnership deed or the specific arbitration clause within it.
  • All allegations made by the respondent’s counsel pertain to partnership affairs and fund siphoning, without any public domain implications.

Also Read: Land-Grabbing Conspiracy Case: Supreme Court’s Landmark Judgment


  • Justice Amareshwar Sahay, Retired Judge of the Jharkhand High Court has been appointed as the sole arbitrator with the consent of the parties.
  • The Judgment under appeal has been set aside.
  • The investigation being conducted pursuant to the FIR will not be affected by this judgment.
  • The appeal has been disposed of.

Also Read: Limitation Period Clarification: B.K. Educational Services Pvt. Ltd. vs. Parag Gupta & Associates


Case Number: C.A. No.-007005-007005 / 2019

Click here to read/download original judgement

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