Fraud allegation not a ground to nullify an arbitration agreement: SC

The Supreme Court of India recently held that disputes involving allegations of fraud arising out of contracts bearing an arbitration clause shall be referred to arbitration.

The Court, however, said that serious allegations of fraud arising out of contracts cannot be referred to arbitration.

“We are of the opinion that mere allegation of fraud simplicitor may not be a ground to nullify the effect of arbitration agreement between the parties. It is only in those cases where the Court, while dealing with Section 8 of the Act, finds that there are very serious allegations of fraud which make a virtual case of criminal offence or where allegations of fraud are so complicated that it becomes absolutely essential that such complex issues can be decided only by civil court on the appreciation of the voluminous evidence that needs to be produced. The Court can sidetrack the agreement by dismissing application under Section 8 and proceed with the suit on merits”, the Court said.

The Court further said that “It can be so done also in those cases where there are serious allegations of forgery/fabrication of documents in support of the plea of fraud or where fraud is alleged against the arbitration provision itself or is of such a nature that permeates the entire contract, including the agreement to arbitrate, meaning thereby in those cases where fraud goes to the validity of the contract itself of the entire contract which contains the arbitration clause or the validity of the arbitration clause itself. Reverse position thereof would be that where there are simple allegations of fraud touching upon the internal affairs of the party inter se and it has no implication in the public domain, the arbitration clause need not be avoided and the parties can be relegated to arbitration.”

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