Court’s Decision
The Bombay High Court allowed an application under Section 11 of the Arbitration and Conciliation Act, 1996, appointing a former Chief Justice of the Court as sole arbitrator in a dispute arising out of mortgage deeds. The Court held that once an arbitration agreement exists, allegations of fraud, forgery, or criminality cannot prevent reference to arbitration at this stage. The Court emphasized that disputes about the validity of documents or allegations of fraud are questions of fact that fall within the jurisdiction of the arbitrator under Section 16 of the Act. Accordingly, the parties were referred to arbitration .
Facts
A Non-Banking Financial Company (NBFC) sanctioned loans amounting to ₹3.44 crores to the respondent against a bungalow property. Mortgage deeds executed in December 2020 and February 2022 contained arbitration clauses.
The NBFC issued a notice of arbitration in January 2023, invoking the clause after the borrower allegedly defaulted. The respondent denied execution of the deeds, alleging forgery and fraud, and even lodged an FIR in October 2023. On this basis, the respondent opposed the application under Section 11, contending that serious allegations of fraud and criminal proceedings disentitled the applicant from invoking arbitration.
The applicant argued that existence of arbitration agreements was not disputed, and questions of fraud or forgery could be decided by the arbitral tribunal itself.
Issues
- Whether allegations of fraud and criminality bar reference to arbitration under Section 11 of the Arbitration and Conciliation Act.
- Whether disputes relating to the validity of mortgage deeds fall within the jurisdiction of the arbitral tribunal.
- Whether the Court at the Section 11 stage can go into disputed questions of fact and forgery.
Petitioner’s Arguments (Applicant NBFC)
The applicant argued that the borrower had availed substantial loans by executing mortgage deeds containing valid arbitration clauses. Upon default, arbitration was lawfully invoked.
It was contended that under the scheme of the Arbitration Act, particularly Section 16, all questions relating to the validity of agreements or documents are within the jurisdiction of the arbitral tribunal. Reliance was placed on recent Supreme Court judgments which held that allegations of fraud, unless they render the arbitration agreement itself void, cannot oust arbitration.
The applicant submitted that the FIR filed by the respondent was an afterthought to avoid liability, and that mere pendency of criminal proceedings does not affect the civil remedy of arbitration.
Respondent’s Arguments (Borrower)
The respondent opposed the application on the ground that the mortgage deeds were forged and fraudulent, and therefore no valid arbitration agreement existed. It was argued that serious allegations of fraud involving criminal offences cannot be decided by arbitrators and require judicial determination.
The respondent contended that since an FIR had already been registered, allowing arbitration would prejudice the pending criminal proceedings. It was urged that fraud vitiates all agreements, including arbitration clauses, and thus the matter was not arbitrable.
Analysis of the Law
The Court analyzed the scope of Section 11 of the Arbitration Act, noting that at this stage the Court is only required to see whether an arbitration agreement exists. Questions of validity, forgery, or fraud are left to the arbitral tribunal under Section 16 (principle of kompetenz-kompetenz).
The Court noted that only in cases where fraud “goes to the root of the agreement itself” and renders the arbitration clause non-existent would reference to arbitration be barred. Otherwise, disputes involving fraud, forgery, or even parallel criminal proceedings are arbitrable.
The Court emphasized that the legislative intent of the 2015 and 2019 amendments to the Arbitration Act was to minimize judicial interference and ensure speedy resolution of disputes through arbitration.
Precedent Analysis
- Avitel Post Studioz Ltd. v. HSBC PI Holdings (2020) 4 SCC 1 – Supreme Court held that only cases of fraud vitiating the arbitration agreement itself are non-arbitrable; all other fraud allegations can be decided by arbitrators.
- A. Ayyasamy v. A. Paramasivam (2016) 10 SCC 386 – Distinguished between serious fraud affecting public domain (non-arbitrable) and simple fraud between parties (arbitrable).
- N.N. Global Mercantile Pvt. Ltd. v. Indo Unique Flame Ltd. (2021) – Reaffirmed kompetenz-kompetenz and arbitrability of fraud disputes.
- Vidya Drolia v. Durga Trading (2021) 2 SCC 1 – Clarified that courts at Section 11 stage should only examine existence of arbitration agreement, leaving other issues to tribunal.
These precedents were relied upon by the Court to hold that allegations of fraud in mortgage deeds did not oust arbitration.
Court’s Reasoning
The Court found that arbitration clauses existed in both mortgage deeds, which was not denied. The respondent’s defence was limited to allegations of fraud and forgery, which were disputed questions of fact.
It held that such issues fall squarely within the arbitral tribunal’s jurisdiction under Section 16. The pendency of an FIR does not prevent arbitration proceedings. The Court observed:
“Once an arbitration agreement exists, the matter must end there. Allegations of fraud or forgery are questions of fact for the arbitrator, not grounds to deny arbitration at the Section 11 stage.”
Conclusion
The High Court appointed a former Chief Justice of the Court as sole arbitrator, allowing the application under Section 11. It ruled that allegations of fraud or parallel criminal proceedings do not bar arbitration, and that the arbitral tribunal has the jurisdiction to decide questions of fact relating to mortgage deeds.
Implications
- Reinforces principle of kompetenz-kompetenz, strengthening arbitration as the preferred dispute resolution mechanism.
- Clarifies that fraud disputes between parties are arbitrable, except in rare cases where the arbitration agreement itself is void.
- Signals courts’ pro-arbitration approach post-2015 and 2019 amendments.
- Protects financial institutions by ensuring borrowers cannot evade liability through allegations of fraud alone.
FAQs
1. Do allegations of fraud bar arbitration?
No. Only if the fraud vitiates the arbitration agreement itself. Otherwise, arbitrators can decide disputes even involving allegations of fraud.
2. Can arbitration proceed if a criminal case is pending on the same facts?
Yes. Pendency of criminal proceedings does not affect the civil remedy of arbitration.
3. What is the Court’s role under Section 11 of the Arbitration Act?
The Court only examines whether an arbitration agreement exists. Questions of validity, fraud, or forgery fall within the arbitrator’s jurisdiction.
