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By Nazaqat Lal, Advocate & Solicitor, Bombay High Court | October 25, 2022


In commercial transactions, there are often allegations of siphoning off of funds, lack of transparency in maintaining accounts and disposing of or encumbering property in a manner contrary to what was agreed upon between the parties. The circumstances surrounding such acts/omissions and the consequences of such acts/omissions may be coupled with allegations of fraud. While alleging fraud, it is important to note that such allegations may affect the arbitrability of the dispute if there is an arbitration agreement between the parties. It is therefore, imperative to understand what facets of fraud are arbitrable and what facets are not.


What is meant by ‘arbitrable’ or ‘arbitrability’?

In the case of Booz Allen & Hamilton Inc. v. SBI Home Finance Ltd.[1], the Supreme Court laid down 3 facets or tests of arbitrability. The three facets of arbitrability, relating to the jurisdiction of the Arbitral Tribunal, are as under:

(i) Whether the disputes are capable of adjudication and settlement by arbitration?

(ii) Whether the disputes are covered by the arbitration agreement?

(iii) Whether the parties have referred the disputes to arbitration?

Another important indicator given by the Supreme Court in Booz Allen’s case was to ascertain whether the disputes relate to rights in rem or rights in personam. In this regard, the Supreme Court held as follows.

“38. Generally and traditionally all disputes relating to rights in personam are considered to be amenable to arbitration; and all disputes relating to rights in rem are required to be adjudicated by courts and public tribunals, being unsuited for private arbitration. This is not however a rigid or inflexible rule. Disputes relating to subordinate rights in personam arising from rights in rem have always been considered to be arbitrable.”

It would not be out of place to mention that the Arbitration Act, 1996 (“the Act”) does not of itself set out what disputes are arbitrable. It does not exclude any category of disputes treating them as non-arbitrable either. However, Section 34(2)(b) of the Act lays down that if ‘the subject-matter of the dispute is not capable of settlement by arbitration under the law for the time being in force,’ the same will be a ground for setting aside the arbitral award. Similar language is also used in the context of Sections 48(2) and 57(1)(b) of the Act. What will then require to be shown is that there is a law which makes the subject-matter of the dispute incapable of settlement by arbitration.

The courts have held that certain kinds of disputes may are not capable of adjudication through the means of arbitration. The following categories of disputes are generally treated as non-arbitrable (a) criminal offences, (b) matrimonial disputes, (c) guardianship matters, (d) insolvency and winding up matters and (e) testamentary matters.

Meaning of fraud

“15. “Fraud” is a knowing misrepresentation of the truth or concealment of a material fact to induce another to act to his detriment. Fraud can be of different forms and hues. Its ingredients are an intention to deceive, use of unfair means, deliberate concealment of material facts, or abuse of position of confidence. The Black’s Law Dictionary defines “fraud” as a concealment or false representation through a statement of conduct that injures another who relies on it..”[2]

Is fraud an arbitrable dispute?

In the case of A. Ayyasamy v. A. Paramasivam & Ors.[3], the question of arbitrability of fraud came up before the Supreme Court. The brief facts of the case are set out hereunder to better appreciate the findings and decision of the Supreme Court. The parties to the lis were brothers who had entered into a deed of partnership for the purpose of carrying on a hotel business in partnership. The eldest brother took charge of the administration of the hotel on the assurance that he would carry on the business in a disciplined manner. It was also agreed between the brothers that the daily collection of money would be deposited the very next day in the hotel’s current account. However, the eldest brother failed to deposit the day-to-day collection into the bank account as promised. Further, the eldest brother drew a cheque on the hotel’s current account for a substantial sum in favour of his son without the knowledge and consent of the other brothers. There was also an allegation that the eldest brother would keep the hotel account books with him and not permit the other brothers to examine the same. The aggrieved brothers filed a suit seeking a declaration that as partners they were entitled to participate in the administration of the said hotel and sought a permanent injunction against the eldest brother from interfering with their right to participate in the administration of the hotel. The eldest brother challenged the maintainability of the suit on the ground that there was an arbitration agreement between the parties. The brothers resisted the challenge to maintainability on the ground that serious allegations of fraud had been alleged by them and the same could only be decided by a civil court and not an arbitral tribunal. Two courts held that considering that there were serious allegations as to fraud and malpractices committed by the eldest brother in respect of the finances of the partnership firm and the case does not warrant to be tried and decided by the arbitrator and a civil court would be more competent which has the means to decide such complicated matter.

Before coming to the decision of the Supreme Court, it is pertinent to note that the Supreme Court drew a distinction between ‘serious fraud’ and ‘fraud simpliciter’ and held the former to be non-arbitrable and the latter to be arbitrable.

“18. …However, at the same time, mere allegation of fraud in the pleadings by one party against the other cannot be a ground to hold that the matter is incapable of settlement by arbitration and should be decided by the civil court. The allegations of fraud should be such that not only these allegations are serious that in normal course these may even constitute criminal offence, they are also complex in nature and the decision on these issues demands extensive evidence for which the civil court should appear to be more appropriate forum that the Arbitral Tribunal…”[4]

“23. …It, thus, follows that those cases 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. However, where there are allegations of fraud simpliciter and such allegations are merely alleged, we are of the opinion that it may not be necessary to nullify the effect of the arbitration agreement between the parties as such issues can be determined by the Arbitral Tribunal.”

The Supreme Court finally held that the allegations of purported fraud were not so serious and could be taken care of by the arbitrator. Reversing the judgments of the two lower courts that had rejected the applications filed under Section 8 of the Act, the Supreme Court allowed the appeal.


As set out hereinabove, allegations of fraud may affect the arbitrability of the dispute depending on the seriousness of the fraud alleged. Resultantly, the nature of proceedings filed by the affected party would also be determined by the fraud alleged.

[1] (2011) 5 SCC 532

[2] A. Ayyasamy v. A. Paramasivam & Ors. (2016) 10 SCC 386

[3] Ibid

[4] Ibid