PIRA SCIENTIFIC (OPC) PVT. LIMITED v. MRS. JAYANTI PANDEY

(SRI PRASHANTH V.G., ADVOCATE FOR RESPONDENT No.1) THIS COMMERCIAL APPEAL IS FILED UNDER SECTION 13 (1-A) OF THE COMMERCIAL COURTS ACT, 2015 PRAYING TO SET ASIDE THE IMPUGNED ORDER DATED 29.05.2024 PASSED BY THE HONBLE LXXXII ADDITIONAL CITY CIVIL AND SESSIONS JUDGE, COMMERCIAL COURT BENGALURU IN COM. OS NO.1842 OF 2022 (CCH-83) REJECTING THE IA NO.5 FILED BY THE APPELLANTS UNDER SECTION 5 R/W SEC.8 OF ARBITRATION AND CONCILIATION ACT, 1996. THIS APPEAL, COMING ON FOR ORDERS, THIS DAY, JUDGMENT WAS DELIVERED THEREIN AS UNDER: - 3 - NC: 2025:KHC:28970-DB COMAP No. 174 of 2025 HC-KAR CORAM: HON'BLE MR. VIBHU BAKHRU, CHIEF JUSTICE HON'BLE MR. JUSTICE C M JOSHI ORAL JUDGMENT (PER: HON'BLE MR. VIBHU BAKHRU, CHIEF JUSTICE)

#1. The appellant has filed the present appeal under Section 37(1)(a) of the Arbitration and Conciliation Act, 1996 [the A&C Act] impugning an order dated 29.05.2024 [impugned order] passed by the learned City Civil and Sessions Judge [Commercial Court], whereby the application filed by the appellant under Section 8 of the A&C Act to refer the parties to arbitration, was rejected.

#2. The plain reading of the impugned order indicates that the learned Commercial Court had rejected the application on the ground that the plaint contained serious allegations of fraud against the defendants. The relevant extract of the impugned order is set out below: "21. In the case of A.Ayyasamy (Supra), Rashid Raza (Supra) and (Avitel Post Studioz Ltd. (Supra), it is held that where there are serious allegations of fraud, they are to be treated as non-arbitrable and it is only the civil court which should decide such matters. In the present case also the allegations of fraud against the defendant is serious in nature, criminal case with respect to agreement is also pending against the defendant thus it would not be proper for this Court to refer the disputes between - 4 - NC: 2025:KHC:28970-DB COMAP No. 174 of 2025 HC-KAR the parties to the arbitration. Therefore, I answer this Point in the 'Negative'."

#3. The question whether disputes involving allegations of fraud are arbitrable has been considered by the Supreme Court in various cases.

#4. In N. Radhakrishnan v. Maestro Engineers & Ors.: (2010) 1 SCC 72, the Supreme Court referred to its earlier decision in Abdul Kadir Shamsuddin Bubere v. Madhav Prabhakar Oak & Anr.: AIR 1962 SC 406 and held that disputes involving serious allegations of fraud would not be referred to arbitration. It is material to refer to the reasoning for the said view as articulated in Abdul Kadir Shamsuddin Bubere (supra) which was followed in N. Radhakrishnan (supra). Paragraph 17 of the said decision which encapsulates the reasoning is set down below: is no doubt that where serious “17. There allegations of fraud are made against a party and the party who is charged with fraud desires that the matter should be tried in open court, that would be a sufficient cause for the court not to order an arbitration agreement to be filed and not to make the reference.” - 5 - NC: 2025:KHC:28970-DB COMAP No. 174 of 2025 HC-KAR

#5. In a later decision in Swiss Timing Ltd. v. Commonwealth Games 2010 Organizing Committee: (2014) 6 SCC 677, a learned Single Judge of the Supreme Court observed that the decision rendered in N. Radhakrishnan (supra) was per incuriam as the Court had not referred to its earlier decisions in the case of P. Anand Gajapathi Raju & Ors. v. P.V.G. Raju (Dead) & Ors.: (2000) 4 SCC 539 and Hindustan Petroleum Corporation Ltd. v. Pinkcity Midway Petroleums: (2003) 6 SCC 503.

#6. It is relevant to note that the observations made in Swiss Timing Ltd. (supra) was in the context of a petition relating to appointment of an arbitrator. The question of arbitrability of disputes was again considered by the Supreme Court in Booz Allen & Hamilton Inc. v. SBI Home Finance Ltd. & Ors.: (2011) 5 SCC 532. In this context, the Supreme Court, inter alia, observed that the cases that give rise to criminal offences would not be arbitrable.

#7. Subsequently, in A. Ayyasamy v. A. Paramasivam & Ors.: (2016) 10 SCC 386, the Supreme Court explained that the simpliciter allegations of fraud would not nullify an arbitration - 6 - NC: 2025:KHC:28970-DB COMAP No. 174 of 2025 HC-KAR agreement between the parties. It is only in cases where very serious allegations of fraud that make out a virtual case of criminal offence, or cases where allegations of fraud are so complex that it is necessary to address the complicated issues by a civil court, that the court would dismiss an application under Section 8 of the A&C Act and proceed with the suit on merits. The court held that the application to refer the parties to arbitration would also be denied where the allegations of fraud permeates the entire contract including the arbitration agreement. The court explained where the allegation of fraud call in question the validity of the entire contract which contains an arbitration clause in the agreement, that the court would decline the parties to arbitration.

#8. It is relevant to refer to the concurring opinion penned by Dr.D.Y.Chandrachud, J in A. Ayyasamy v. A. Paramasivam & Ors. (supra). The relevant part of his concurring opinion is set out below, “43. Hence, the allegations of criminal wrongdoing or of statutory violation would not detract from the jurisdiction of the Arbitral Tribunal to resolve a dispute arising out of a civil or contractual relationship on the basis of the jurisdiction conferred by the arbitration agreement. - 7 - NC: 2025:KHC:28970-DB COMAP No. 174 of 2025 HC-KAR decision the subject-matter of in N. Radhakrishnan

#45. The position that emerges both before and after [N. Radhakrishnan v. Maestro Engineers, (2010) 1 SCC 72 : (2010) 1 SCC (Civ) 12] is that successive decisions of this Court have given effect to the binding precept incorporated in Section 8. Once there is an arbitration agreement between the parties, a judicial authority before whom an action is brought covering arbitration agreement is under a positive obligation to refer parties to arbitration by enforcing the terms of the contract. There is no element of discretion left in the court or judicial authority to obviate the legislative mandate of compelling parties to seek recourse in N. Radhakrishnan [N. Radhakrishnan v. Maestro Engineers, (2010) 1 SCC 72 : (2010) 1 SCC (Civ) 12] has, however, been utilised by parties seeking a convenient ruse to avoid arbitration to raise a defence of fraud: to arbitration. The judgment foremost, is necessary

45.1. First and emphasise that the judgment in N. Radhakrishnan [N. Radhakrishnan v. Maestro Engineers, (2010) 1 SCC 72 : (2010) 1 SCC (Civ) 12] does not subscribe to the broad proposition that a mere allegation of fraud is ground enough not to compel parties to abide by their agreement to refer disputes to arbitration. More often than not, a bogey of fraud is set forth if only to plead that the dispute cannot be arbitrated upon. To allow such a plea would be a plain misreading of in N. [N. Radhakrishnan v. Maestro Radhakrishnan Engineers, (2010) 1 SCC 72 : (2010) 1 SCC (Civ) 12]. As I have noted earlier, that was a case where the appellant who had filed an application under Section 8 faced with a suit on a dispute in partnership had raised serious issues of criminal wrongdoing, misappropriation of funds and malpractice on the part of the respondent. It was in judgment - 8 - NC: 2025:KHC:28970-DB COMAP No. 174 of 2025 HC-KAR is necessary this Court accepted this background submission of the respondent that the arbitrator would not be competent to deal with matters “which involved an elaborate production of evidence to establish the claims relating to fraud and criminal misappropriation”. Hence, emphasise that as a matter of first principle, this Court has not held that a mere allegation of fraud will exclude arbitrability. The burden must lie heavily on a party which avoids compliance with the obligation assumed by it to submit disputes to arbitration to establish the dispute is not arbitrable under the law for the time being in force. In each such case where an objection on the ground of fraud and criminal wrongdoing is raised, it is for the judicial authority materials for the purpose of determining whether the defence is merely a pretext to avoid arbitration. It is only where there is a serious issue of fraud involving criminal wrongdoing that the exception to arbitrability carved out in N. Radhakrishnan [N. Radhakrishnan v. Maestro Engineers, (2010) 1 SCC 72 : (2010) 1 SCC (Civ) 12] may come into existence. to carefully sift through

45.2. Allegations of fraud are not alien to ordinary civil courts. Generations of judges have dealt with such allegations the context of civil and commercial disputes. If an allegation of fraud can be adjudicated upon in the course of a trial before an ordinary civil court, there is no reason or justification to exclude such disputes from the ambit and purview of a claim in arbitration. The parties who enter into commercial dealings and agree to a resolution of disputes by an arbitral forum exercise an option and express a choice of a preferred mode for the resolution of their disputes. The parties in choosing arbitration place priority upon the speed, flexibility and expertise in arbitral adjudication. Once parties have agreed to refer inherent - 9 - NC: 2025:KHC:28970-DB COMAP No. 174 of 2025 HC-KAR to arbitration, disputes the court must plainly discourage and discountenance litigative strategies designed to avoid recourse to arbitration. Any other approach would seriously place in uncertainty the institutional efficacy of arbitration. Such a consequence must be eschewed.” [emphasis added]

#9. It is relevant to bear in mind the observation made by the Supreme Court that if an allegation can be adjudicated before a trial court in an ordinary civil court, there will be no ground to exclude such disputes from the scope of arbitration agreement. This is a vital test for determining whether the parties can be permitted to resile from the arbitration agreement on the ground that the disputes are not arbitrable.

#10. It is equally relevant to refer to the following observations of the Supreme Court in Rashid Raza v. Sadaf Akhtar: (2019) 8 SCC 710. "4. The principles of law laid down in this appeal make a distinction between serious allegations of forgery/fabrication in support of the plea of fraud as opposed to "simple allegations". Two working tests laid down in para 25 are: (1)does this plea permeate the entire contract and above all, the agreement of arbitration, rendering it void, or (2)whether the allegations of fraud touch upon the internal affairs of the parties inter se having no implication in the public domain." - 10 - NC: 2025:KHC:28970-DB COMAP No. 174 of 2025 HC-KAR

#11. It is clear from the above that only those cases where the allegations of fraud would render the arbitration agreement void, that a court could refrain from referring the parties to arbitration. The rationale for the said decision is obvious. If the allegations of fraud are so grave so as to render the entire contract, including the arbitration agreement, void, then the very existence of the arbitration agreement is called into question. In such cases, where the arbitration agreement is vitiated by fraud, the Arbitral Tribunal would have no jurisdiction to adjudicate the disputes.

#12. In Avitel Post Studioz Ltd. & Ors. v. HSBC PI Holdings (Mauritius) Ltd.: (2021) 4 SCC 713, the Supreme Court explained the test for determining whether the disputes involving fraud are arbitrable. We consider it apposite to refer to the following extract of the said decision: “35. After these judgments, it is clear that “serious allegations of fraud” arise only if either of the two tests laid down are satisfied, and not otherwise. The first test is satisfied only when it can be said that the arbitration clause or agreement itself cannot be said to exist in a clear case in which the court finds that the party against whom breach is alleged cannot be said to have entered into the agreement relating to arbitration at all. The second test can be said to have been met in cases in which allegations are made against the State or its instrumentalities of arbitrary, - 11 - NC: 2025:KHC:28970-DB COMAP No. 174 of 2025 HC-KAR fraudulent, or mala fide conduct, thus necessitating the hearing of the case by a writ court in which questions are raised which are not predominantly questions arising from the contract itself or breach thereof, but questions arising in the public law domain.”

#13. It is important to note, the Supreme Court also referred to its decision in the case of Booz Allen & Hamilton Inc. (supra) and observed as under: “43. In the light of the aforesaid judgments, para 27(vi) of Afcons [Afcons Infrastructure Ltd. v. Cherian Varkey Construction Co. (P) Ltd., (2010) 8 SCC 24 : (2010) 3 SCC (Civ) 235] and para 36(i) of Booz Allen [Booz Allen & Hamilton Inc. v. SBI Home Finance Ltd., (2011) 5 SCC 532 : (2011) 2 SCC (Civ) 781], must now be read subject to the rider that the same set of facts may lead to civil and criminal proceedings and if it is clear that a civil dispute involves questions of fraud, misrepresentation, etc. which can be the subject-matter of such proceeding under Section 17 of the Contract Act, and/or the tort of deceit, the mere fact that criminal proceedings can or have been instituted in respect of the same subject matter would not lead to the conclusion that a dispute which is otherwise arbitrable, ceases to be so.”

#14. The decision in N. Radhakrishnan (supra) was expressly overruled by the Supreme Court in Vidya Drolia & Ors. v. Durga Trading Corporation: (2021) 2 SCC 1. Further, the Supreme Court propounded a four-fold test for determining whether disputes - 12 - NC: 2025:KHC:28970-DB COMAP No. 174 of 2025 HC-KAR were arbitrable. The relevant extract of the said decision is set out below: "76. In view of the above discussion, we would like to propound a fourfold test for determining when the in an arbitration subject-matter of a dispute agreement is not arbitrable:

76.1. (1) When cause of action and subject-matter of the dispute relates to actions in rem, that do not pertain to subordinate rights in personam that arise from rights in rem.

76.2. (2) When cause of action and subject-matter of the dispute affects third-party rights; have erga omnes effect; require centralised adjudication, and mutual adjudication would not be appropriate and enforceable.

76.3. (3) When cause of action and subject-matter of the dispute relates to inalienable sovereign and public interest functions of the State and hence mutual adjudication would be unenforceable.

76.4. (4) When the subject-matter of the dispute is expressly or by necessary implication non-arbitrable as per mandatory statute(s)."

#15. In N.N. Global Mercantile Private Limited v. Indo Unique Flame Limited & Ors.: (2021) 4 SCC 379, the Supreme Court explained the above principle in the following words: “45. The civil aspect of fraud is considered to be arbitrable in contemporary arbitration jurisprudence, with the only exception being where the allegation is that the arbitration agreement itself is vitiated by - 13 - NC: 2025:KHC:28970-DB COMAP No. 174 of 2025 HC-KAR fraud or fraudulent inducement, or the fraud goes to the validity of the underlying contract, and impeaches the arbitration clause itself. Another category of cases is where the substantive contract is “expressly declared to be void” under Section 10 of the Contract Act, 1872 where the agreement is entered into by a minor (without following the procedure prescribed under the Guardians and Wards Act, 1890) or a lunatic, which would be with a party incompetent to enter into a contract.

#16. It is clear from the above, that the proposition that disputes involving complex allegations of fraud cannot be referred to arbitration, no longer holds good. The question whether the courts should refrain from referring the parties to arbitration where disputes involve allegations of fraud, is essentially confined to cases whether the allegations of fraud render the arbitration agreement void. If the allegations of serious fraud strike at the validity of the arbitration agreement, the Court may refrain from referring the parties to arbitration.

#17. It is also relevant to bear in mind that although an arbitration agreement may be embodied in one of the clauses of the agreement, it is for all, intents and purposes a separate agreement. Thus, invalidity of the agreement on the ground of fraud would not invalidate the arbitration agreement between the parties. It would - 14 - NC: 2025:KHC:28970-DB COMAP No. 174 of 2025 HC-KAR be relevant to refer to the decision of the House of Lords in Fiona Trust & Holding Corporation and others v. Privalov: (2007) UKHL 40. The following extract from the opinion penned by Lord Hoffman is of some significance: “13. In my opinion the construction of an arbitration clause should start from the assumption that the parties, as rational businessmen, are likely to have intended any dispute arising out of the relationship into which they have entered or purported to enter to be decided by the same tribunal. The clause should be construed presumption unless the language makes it clear that certain questions were intended to be excluded from the arbitrator’s jurisdiction. As Longmore LJ remarked, at [17]: ‘[i]f any businessman did want to exclude disputes about the validity of a contract, it would be comparatively easy to say so.’ in accordance with

#15. If one adopts this approach, the language of cl 41 of Shelltime 4 contains nothing to exclude the disputes about the validity of the contract, whether on the grounds that it was procured by fraud, bribery, misrepresentation or anything else. In my opinion it therefore applies to the present dispute.

#16. The next question is whether, in view of the allegation of bribery, the clause is binding upon the owners. They say that if they are right about the bribery, they were entitled to rescind the whole contract, the arbitration clause. The arbitrator therefore has no jurisdiction and the dispute should be decided by the court. including - 15 - NC: 2025:KHC:28970-DB COMAP No. 174 of 2025 HC-KAR

#17. The principle of separability enacted in section 7 means that the invalidity or rescission of the main contract does not necessarily entail the invalidity or rescission of the arbitration agreement. The arbitration agreement must be treated as a ‘distinct agreement’ and can be void or voidable only on grounds which relate directly to the arbitration agreement. Of course there may be cases in which the ground upon which the main agreement is invalid is identical with the ground upon which the arbitration agreement is invalid. For example, if the main agreement and the arbitration agreement are contained in the same document and one of the parties claims that he never agreed to anything in the document and that his signature was forged, that will be an attack on the validity of the arbitration agreement. But the ground of attack is not that the main agreement was invalid. It is that the signature ‘distinct agreement’ was forged. Similarly, if a party alleges the someone who purported to sign as agent on his behalf, that is an attack on both the main agreement and the arbitration agreement. the arbitration agreement, as a to be shown It would have

#18. On the other hand, if (as in this case) the allegation is that the agent exceeded his authority by entering into a main agreement in terms which were not authorised or for improper reasons, that is the arbitration not necessarily an attack on agreement. whatever the terms of the main agreement or the reasons for which the agent concluded it, he would have had no authority to enter into an arbitration agreement. Even if the allegation is that there was no concluded agreement (for example, that terms of the main agreement remained to be agreed) that is the arbitration not necessarily an attack on agreement. If the arbitration clause has been agreed, the parties will be presumed to have intended the question of whether there was a - 16 - NC: 2025:KHC:28970-DB COMAP No. 174 of 2025 HC-KAR concluded main agreement arbitration.” to be decided by [emphasis added]

#18. It is only in cases where the disputes involve allegations of serious fraud that impeach the validity of the arbitration agreement that the court may refrain from referring the parties to arbitration.

#19. In the present case, there is no dispute that the parties entered into Collection Agency Agreement dated 25.03.2019. Clause 8.1 of the said agreement embodies an arbitration clause and the allegations made in the plaint cannot be construed as grave allegations of fraud that void the arbitration agreement.

#20. In view of the above, the decision of the learned Commercial Court to reject the appellant's application under Section 8 of the A&C Act on the ground that the disputes involves complex question of fraud, is unsustainable.

#21. Having stated above, we note that the respondents had also raised certain other issues, including that all the defendants are not signatories to the arbitration agreement. The respondents also - 17 - NC: 2025:KHC:28970-DB COMAP No. 174 of 2025 HC-KAR contend that the action instituted is de hors the Collection Agency Agreement.

#22. We were inclined to examine these questions. However, the learned counsel for the parties submit that since these questions have not been examined by the learned Commercial Court, the impugned order may be set aside and the matter be remanded to the learned Commercial Court to decide afresh.

#23. In view of the above, the impugned order is set aside and the appellant's application [I.A No.V in Com.O.S. No.1842/2022] under Section 8 of the A&C Act is restored before the learned Commercial Court for decision afresh.

#24. Pending application also stands disposed of. Sd/- (VIBHU BAKHRU) CHIEF JUSTICE Sd/- (C M JOSHI) JUDGE AHB List No.: 1 Sl No.: 28