Introduction

Arbitration emerged as an alternate means of resolving differences in a fair and timely manner. By means of an “arbitration clause” in an agreement parties mutually agree to refer specific or all disputes arising out of the contractual relationship to an arbitrator or an arbitral tribunal. Till recently, courts refused to interfere in a matter where the parties had agreed to arbitrate and referred the matter for arbitration.

However, on October 22, 2009, the Supreme Court in its judgment N. Radhakrishnan vs. Maestro Engineers and Ors., provided parties with a way out of arbitration despite the existence of an arbitral clause. In other words, as per this decision if the court is of the opinion that the matter in dispute involves detailed investigations and of elaborate evidence to prove or refute “serious allegations” the court can reject an application to refer the matter in dispute to an arbitrator.

This bulletin analyses the decision of the Supreme Court, its impact on future arbitrations and the sanctity of arbitration clauses and agreements.

1. Facts of the case

The appellant entered into a partnership with the respondents to carry on business in the name of “Maestro Engineers”. Certain differences arose between the parties pursuant to which the appellant sent a notice to the respondents alleging malpractice, collusion between the respondents as well as forging of the firm’s accounts. In this notice, he also offered his retirement from the firm if his salary and share in the profits were given to him. The respondents accepted the factum of the partnership but disagreed on the quantum claimed by the appellant. In response, the appellant sent a further notice reiterating his stand with regard to his investment in the firm, and another notice holding the respondents responsible for the problems that had arisen, and alleging collusion between the respondents to siphon of money for personal gain. He also called upon the respondents to settle the arrears of the amount payable to him within 15 (fifteen) days and to make arrangements for his retirement.

Subsequently, the respondents reconstituted the partnership and filed a suit in a lower court in Coimbatore for a declaration that the appellant was no longer a partner in Maestro Engineers (“the firm”). As the original partnership deed contained an “arbitration clause”, the appellant filed an application before the lower court to refer the dispute to arbitration. Both the lower court and the High Court of Madras (“the High Court”) rejected the application, compelling the appellant to approach the Supreme Court (“the Court”).

2. Issues involved

The main issues discussed and decided by the Court in this case were (a) whether the dispute was within the jurisdiction of the arbitrator, and (b) if an arbitrator was competent to decide disputes involving “serious allegations” requiring “substantial evidence”?

3. Contentions raised by the parties

3.1 Contentions of the Appellant

The appellant was of the view that the dispute was related to his retirement. As his offer to retire was contingent upon settlement of his dues, the respondents could not treat his offer to retire as final and reconstitute the firm. He further questioned the validity of the reconstituted partnership and took the stand that the clauses contained in the original partnership deed would continue to apply, thereby rendering the dispute within the domain of arbitration.

The appellant also relied upon precedents to emphasize that where there is an express provision for arbitration, the civil courts are bound to refer the matter to an arbitrator. Further, where parties have clearly entered into an agreement, agreeing to refer a dispute to arbitration, keeping in line with the provisions of section 8¹ of the Arbitration and Conciliation Act, 1996 (“the Act”), the courts ought to refer the dispute to arbitration.²

3.2 Contentions of the Respondent

The respondents were of the opinion that the appellant’s offer to retire was unequivocal which was accepted by them and, hence, the reconstitution of the firm was valid. As the matter in dispute in the suit instituted by them was wholly unrelated to the original partnership deed (signed between the appellant and respondents), particularly in light of the fact that such deed had ceased to exist after reconstitution of the firm, the arbitration clause contained in the original partnership deed had no application to the dispute. Thus, in their opinion the dispute was clearly outside the purview of arbitration.

The respondents further contended that as the allegations of fraud and malpractice made by the appellants were “serious” involving “substantial questions of law” which required “detailed evidence” from both parties for which, the arbitrator would not be competent to adjudicate upon, and, therefore, the matter must be tried in court.³ The respondent cited several judicial precedents in support of this contention whereby, the courts had considered “serious allegations” of fraud against a party, or a case involving a complicated question or fact of law to be sufficient ground to deny or refuse an application to refer a matter to arbitration.⁴

4. Decision of the Court

Although the Court agreed with the appellant that the “dispute” was regarding the reconstitution of the firm and, therefore, within the jurisdiction of the arbitrator, it went on to examine whether or not the arbitrator was competent to deal with the dispute.

The Court agreed with the contention of the respondent regarding the competency of the arbitrator, and upheld the decision of the High Court. The High Court had clearly laid down that in cases where allegations were related to “fraud” and “serious malpractices”, the situation must be settled only in court by means of detailed evidence. Thus, in this case the Court expressed its clear opinion that the matter could not be tried by the arbitrator and justice demanded it to be tried in a court of law, as it was better equipped to decide such “complicated matters.”

Conclusion

The decision of the apex court in this matter has effectively established that where a dispute involves a “serious allegation” or a “complex question” requiring “detailed evidence”, an arbitrator is not “competent” to adjudicate the dispute and, thus, to further the cause of justice such a dispute must be decided by a court of law.

But, the Court has not defined or amplified upon the words “serious allegations” apart from using them in the context of allegations of fraud, manipulation of accounts and malpractice. This implies (a) that an arbitrator is not competent to decide disputes wherein such allegations have been made, and (b) by making such “serious allegations” a party will now be able to avoid arbitration despite a contractual agreement.

Parties seeking to protract and prolong proceedings will be free to use this power of the court as a tactic to deny the very object that “arbitration” had set out to achieve. In this particular case the application for reference to an arbitrator was filed by the appellant in 2006 and a decision after various appeals was finally given by the Court on October 22, 2009. This clearly shows that a mere decision with regard to jurisdiction took almost 3 years and the dispute continues to remain unresolved.

The effect of this judgment is that despite the express agreement to arbitrate, the court has the power to ignore such an agreement and direct the parties to litigate. By giving the courts such widespread power to disregard a mutual agreement between two parties, the Court has effectively nullified the sanctity of the agreement to arbitrate. It is indeed a rather unfortunate judgment with wide ramifications – time will demonstrate how parties will use it to stall and abuse the already much maligned Indian judicial system with its inherent delays.

1 Section 8 (1) A judicial authority before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party so applies not later than when submitting his first statement on the substance of the dispute, refer the parties to arbitration.

• The application referred to in sub-section (1) shall not be entertained unless it is accompanied by the original arbitration agreement or a duly certified copy thereof.
• Notwithstanding that an application has been made under sub-section (1) and that the issue is pending before the judicial authority, an arbitration may be commenced or continued and an arbitral award made.

2 Hindustan Petroleum Corporation vs. Pinkcity Midway Petroleums 2003(6) SCC503.

3 Abdul Kadir Shamsuddin Bubere vs. Madhav Prabhakar Oak and Anr AIR 1962 SC 406 and Oomor Sait HG vs. Asiam Sait 2001 (3) CTC 269.

4 Ibid.

As this judgment has been delivered by a Division Bench, it is our opinion that in light of the seriousness of its implications, the case should be reconsidered by a Full Bench of the Court.

Authored by:
Tanya Mehta