Supreme Court: In a significant ruling on forged arbitration agreements, the Supreme Court held that a dispute cannot be referred to arbitration when the very document containing the arbitration clause is alleged to be fabricated. The Court held that where the arbitration clause is embedded in a document alleged to be forged, the controversy “strikes at the very root of arbitral jurisdiction” and falls squarely within the category of non-arbitrable disputes.
The present case resolved around the conflict between arbitral jurisdiction and allegations of forgery of the very document containing the arbitration clause. The appeals arose from inconsistent orders of the High Court, which on the same factual matrix declined appointment of an arbitrator under Section 11 of the Arbitration and Conciliation Act, 1996 (A&C Act), yet in separate proceedings directed reference to arbitration under Section 8, a Division Bench of P.S. Narasimha and Alok Aradhe, JJ., quashed and set aside the High Court’s order, dated 24-09-2021 and held that High Court, in exercise of jurisdiction under Article 227, was not justified in reappreciating evidence and dislodging concurrent findings led to declining reference to arbitration on the ground of serious fraud and non-production of the original agreement. The Court, however, affirmed the High Court’s order dated 11-03-2021 refusing appointment of an arbitrator under Section 11.
Factual Matrix
In the instant matter, appellant, Respondent 2 and Respondent 3 constituted a partnership firm, M/s RDDHI Gold (firm), by a deed dated 01-12-2005. Respondent 1 claimed that on 17-04-2007, respondent nos. 2 and 3 executed a power of attorney in her favour empowering her to manage the affairs of the firm, and that on the same date a deed of admission and retirement (“Admission Deed”) was executed whereby respondents 2 and 3 retired and she was inducted as a partner.
According to appellant, the business of the firm was later absorbed into RDDHI Gold Pvt. Ltd. by an absorption deed dated 27-02-2011. On 02-10-2016, Respondent 1 issued a legal notice asserting that on the basis of the Admission Deed she had acquired a 50.33% share in the firm and that Respondents 2 and 3 had retired in 2007. By reply dated 21-11-2016, appellant denied the execution of the Admission Deed and denied that respondent 1 had ever been inducted as a partner, asserting that the document was “a forged and fabricated document, concocted by the respondent no.1”.
Procedural History
Section 9 proceedings under A&C Act — The respondent 1 sought interim protection and appointment of a receiver. The Trial Court allowed the application. The High Court, by order dated 04-05-2018, reversed the order holding that “the very existence/execution of the ‘Admission Deed’ is in dispute” and that it would not be prudent to grant interim protection when the arbitration agreement itself was not shown to exist prima facie. The Special Leave Petition against this order was dismissed, and the finding attained finality.
Civil Suit and Section 8 application — The appellant filed suit seeking declaration that the Admission Deed was forged and for consequential injunctions. The respondent 1 applied for reference to arbitration under Section 8 of the A&C Act. The Trial Court dismissed the application on 06-09-2018, noting that allegations of fraud were serious and complicated and that the original Admission Deed or a certified copy had not been produced. The appellate court affirmed the order on 25-09-2020. However, in revision under Article 227, the High Court set aside both orders on 24-09-2021 and referred the dispute to arbitration.
Section 11 proceedings — Parallelly, respondent 1 filed an application under Section 11 for appointment of an arbitrator. The High Court dismissed it on 11-03-2021 holding that it would not be expedient to appoint an arbitrator until the issue of existence of the arbitration agreement was finally answered.
Aggrieved both appellant and respondent 1 challenged the respective orders before the Supreme Court.
Moot Point
Whether, when the very existence of the arbitration agreement embedded in the Admission Deed is seriously disputed on allegations of forgery and fabrication, the dispute could be referred to arbitration under Section 8 and an arbitrator appointed under Section 11 of the A&C Act?
Court’s Analysis
The Court reiterated the settled position that “mere allegation of fraud simpliciter may not be a ground to nullify the arbitration agreement between the parties”. However, the Court stated that where the court finds that there are serious allegations of fraud which either (i) make out a case of criminal offence or (ii) are so complicated that they require examination of voluminous evidence, the matter need not be relegated to arbitration. The Court further stated that the court can proceed with the suit “in cases where the fraud is alleged against the arbitration provision itself or is of such a nature which permeates the entire contract, including the agreement to arbitrate”.
Relying on A. Ayyasamy v. A Paramasivam, (2016) 10 SCC 386 and Avitel Post Studioz Ltd. v. HSBC PI Holdings (Mauritius) Ltd., (2021) 4 SCC 713, the Court reiterated that a dispute becomes non-arbitrable where the arbitration agreement itself is alleged not to exist.
“The arbitration clause or agreement itself cannot be said to exist in a clear case in which the court finds that the party against whom breach is alleged cannot be said to have entered into the agreement relating to arbitration at all”.
The Court found substantial material casting serious doubt on the genuineness of the Admission Deed such as, Respondent 2, the husband of Respondent 1, was shown as having retired in 2007, yet Respondent 1 admitted that he continued to function as partner till 2010, which was “wholly inconsistent with the recitals of the document”; the Admission Deed did not surface in any contemporaneous record for nearly nine years and appeared for the first time only in 2016; and post-2007 documents showed Respondent 1 acting only as guarantor and not as partner; banking and financial records consistently portrayed respondents 2 and 3 as continuing partners.
The Court also relied on the High Court’s earlier Section 9 order, which observed that for more than ten years Respondent 1 had not been given access to the business or profits and that the tentative finding of execution of the deed was unsustainable and noted that the said order had attained finality, therefore, could not be ignored.
The Court emphasised that “arbitration is founded upon consent” and that where the arbitration clause is embedded in a document whose existence is itself in serious dispute, the controversy strikes at the very root of arbitral jurisdiction and rendered such a dispute non-arbitrable.
“Where the arbitration agreement itself is alleged to be forged or fabricated, the disputes ceases to be merely contractual and strikes at the very root of arbitral jurisdiction. A controversy of this nature falls squarely within the category of disputes that are generally recognized as non-arbitrable.”
The Court held that the Trial Court and First Appellate Court had rightly found the allegations of fraud to be serious. The Court further held that the High Court, while exercising jurisdiction under Article 227, exceeded its limits by dislodging concurrent findings of fact, noting that supervisory jurisdiction is “not an appellate jurisdiction in disguise.”
Court’s Decision
The Court held the dispute relating to the Admission Deed dated 17-04-2007 involved serious allegations going to the root of the arbitration agreement itself and was not amenable to arbitration at that stage.
The Court quashed and set aside the High Court’s order, dated 24-09-2021. referring the suit to arbitration under Section 8. The Court affirmed the High Court’s order dated 11-03-2021 refusing appointment of an arbitrator under Section 11.
[Barnali Mukherjee v. Rajia Begum, Civil Appeal Nos. of 2026 (@ SLP (C) Nos. 6013 of 2021 and 20262 of 2021), Decided on 02-02-2026]
*Judgment by Justice Alok Aradhe