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Fraud: An eliminator of a authorized wrangle

Fraud: An eliminator of a legal wrangle written by Diksha Sharma student of Government Law College, Mumbai

Ayyasamy vs Paramsivam & Ors.


Ayyasamy vs Paramsivam & Ors. is a case based on Arbitration and Conciliation Act, 1996. Wherein, the discretion lied with the Supreme court and held that only in cases of a serious ground of fraud, the case is non-arbitrable. Precisely, a mere allegation of fraud cannot be considered as a ground for dispute between parties which cannot be settled through an arbitration agreement.

Facts of the case

The parties to this case were brothers, who had entered into a partnership deed agreeing to carry on a hotel business named ‘ Hotel Arunagiri ’, located in Tirunelveli, Tamil Nadu. The appellant had filed a civil suit before the court of Additional District Munsif Court, Tirunelveli, Tamil Nadu for imposing an injunction to prevent the respondents from managing the affairs of the firm. The respondents stood before the court seeking entitlement of right to participation, as partners, in the administration of the business; under the belief that since this case involved a segment of fraud, it was meant to be sorted out by the civil court.
The dispute arose when the appellant did not adhere to the partnership agreement and failed to deposit money collection into the bank account and was alleged of issuing a cheque for Rs. 10,00,050/- from the bank account in the name of the Hotel in favor of his son without informing the other partners for the same. The respondents also alleged that the appellant’s wife’s brother Dhanapalraj was reportedly enquired by CBI for a raid conducted at his living premises, where he falsely claimed that the seized amount Rs. 45,00,000/- belonged to the hotel.
The appellant, after receiving a summons from the court, moved the application under Section 8 of the Arbitration and Conciliation Act, 1996 by challenging the maintainability of the suit under the purview of the arbitration agreement as contained in clause (8) of the partnership agreement.
The respondents relied on the judgment of N. Radhakrishnan v. Maestro Engineers & Ors. and the appellant’s plea was dismissed accordingly. An appeal made to the Madras High Court was subsequently dismissed with the observations that Swiss Timing Ltd. (order relied upon by the appellant) was an order passed by a single judge of Supreme Court, whereas, in N. Radhakrishnan the decision was set out by a division bench of the Supreme Court, therefore, it was bound to follow the judicial precedent.
However, the appellant made an appeal to the Supreme Court of India for relief.


The question which arose before the court was whether the matter was arbitrable or non-arbitrable and meant to be resolved by the court considering the involvement of fraud, which makes it an exception for the arbitral tribunal to deal with.


The court began with a close observation at the Arbitration and Conciliation Act, 1926, considering that it did not make any specific provision excluding any category of disputes terming them to be non-arbitrable but several provisions have been laid down defining the scope of judicial intervention. The Act contains provisions challenging the arbitral award [Section 34 and Section 48] and it may be set aside if the court finds that the ‘subject matter of the dispute is not capable of settlement by arbitration under the law for the time being in force.’
After interpreting, the court was of the opinion that the allegation of fraud purported was not serious and could not be taken as a serious ground that it makes the arbitral tribunal incapable of solving. The matter of accounts could have been easily dealt with by the arbitrators. However, the allegation of respondents against Dhanapalraj doesn’t fall for consideration, therefore, is not to be dealt with by the arbitral tribunal. The judgment was delivered in favor of the appellant, reversing all the prior judgments of the courts below, the appeal was allowed, consequently, the application filed by the appellant under Section 8 in the suit stood affirmed.


The court upheld the decision in favor of the appellant after legitimizing every sphere of the case and its related concepts. This case has scrutinized the seriousness of the allegation of fraud which sets aside the case to be carried out by the court other than an arbitral tribunal. As aforementioned, Arbitral Tribunal does not exclude any civil or commercial matter but there a few matters which although be reserved for Courts but do not make the arbitral tribunal incapable of solving.
Section 5, Section 8, Section 11, Section16, Section 34 (2)(b), and Section 48 are primarily highlighted in this case and focused upon respectively. The principle of fraud has been taken into account clarifying the distinction between a mere and a serious allegation.

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