Court emphasizes arbitrability of fraud allegations in private contracts, appoints sole arbitrator for resolution.
In a significant judgment, the Bombay High Court has directed that disputes between Shashisumeet Production Pvt. Ltd. and Kuresh R. Kushesh be referred to arbitration, emphasizing the arbitrability of fraud allegations in private contractual relationships. The judgment, delivered by Justice Somasekhar Sundaresan, elucidates the legal position on whether allegations of fraud render disputes non-arbitrable, especially in cases involving private contracts with arbitration clauses.
The dispute arose from a Memorandum of Understanding (MOU) and a Share Subscription cum Shareholder Agreement entered into between the parties, which included an arbitration clause. Shashisumeet Production Pvt. Ltd., along with other plaintiffs, contended that the agreements were void due to fraud and misrepresentation. They sought a declaration from the court to nullify the agreements and claimed monetary damages. The defendant, Kuresh R. Kushesh, countered by filing an application under Section 8 of the Arbitration and Conciliation Act, 1996, seeking referral of the dispute to arbitration as per the arbitration clause in the agreements.
Justice Sundaresan noted that mere allegations of fraud do not make disputes non-arbitrable unless the fraud has significant public implications or involves rights in rem. The court referred to several Supreme Court judgments, including Ayyasamy v. Paramasivam and Deccan Paper Mills Co. Ltd. v. Regency Mahavir Properties, to underline that fraud in bilateral contracts, which do not have public overtones, remains within the purview of arbitration.
The court also addressed the issue of whether the defendant’s filing of a civil suit constituted an abandonment of arbitration rights. It held that filing a civil suit does not automatically result in abandoning arbitration rights if the party actively pursues arbitration, aligning with the precedent set in Ministry of Sound International Ltd. v. Indus Renaissance Partners Entertainment Pvt. Ltd.
In a decisive move, Justice Sundaresan appointed Ms. Karishma Rao as the sole arbitrator to adjudicate the disputes, emphasizing that the arbitration process should proceed according to the agreement. The court directed both parties to cooperate with the arbitrator in setting a schedule for the arbitration proceedings and to bear the costs equally.
This judgment reinforces the principle that arbitration remains a viable mechanism for resolving disputes involving allegations of fraud in private contracts, as long as the fraud does not affect public rights or interests.
Bottom line:-
Allegations of fraud in a contract containing an arbitration clause do not inherently render disputes non-arbitrable unless the fraud has public implications or involves rights in rem.
Statutory provision(s): Arbitration and Conciliation Act, 1996 Sections 8, 11
