Introduction 

• This is a landmark judgment where the Court held that mere allegations of fraud simplicitor may not be a ground to nullify the effect of arbitration agreement between the parties.  
• The Judgment was delivered by a 2- judge Bench of Supreme Court consisting of Justice AK Sikri and Justice DY Chandrachud.  

Facts   

• The parties involved are brothers who entered into a partnership deed on 1st April 1994, for running "Hotel Arunagiri" in Tirunelveli, Tamil Nadu. 
• The partnership originally included the five brothers and their father A. Arunagiri, each having a 1/6th share in the business. 
• After their father died on 28th April 2009, disputes arose between the brothers. 
• The appellant (A. Ayyasamy), being the eldest brother, took over the administration of the hotel with the assurance he would follow his father's management practices. 
• The respondents (the four other brothers) allege that the appellant failed to deposit daily collections into the hotel's bank account as agreed. 
• The respondents further allege that the appellant fraudulently issued a cheque for Rs.10,00,050/- dated 17th June 2010 to his son without their knowledge or consent. 
• Additional allegations include the appellant keeping hotel account books from the respondents and involvement in a CBI investigation regarding Rs.45 lakhs seized from relatives. 
• In the year 2012, the respondents filed a civil suit seeking declaration of their rights to participate in hotel administration and an injunction against the appellant. 
• The appellant filed an application under Section 8 of the Arbitration and Conciliation Act, 1996, arguing the dispute should be referred to arbitration per clause 8 of their partnership deed. 
• The trial court dismissed the appellant's application on 25th April 2014, relying on the N. Radhakrishnan case, holding that serious allegations of fraud should be tried in civil court rather than by an arbitrator. 

Issues Involved  

• Whether mere allegation of fraud by one party against the other would be sufficient to exclude the subject matter of dispute from arbitration and decision thereof necessary by the civil court? 

Observations 

• The Supreme Court held that mere allegations of fraud in pleadings cannot be grounds to avoid arbitration in favor of civil court proceedings. 
• The Court distinguished between serious allegations of fraud and "fraud simplicitor" (simple fraud), stating that only cases involving serious fraud should be decided by civil courts. 
• According to the Court, arbitration can be avoided only when fraud allegations are so serious they constitute potential criminal offenses or require extensive evidence that civil courts are better equipped to evaluate. 
• Fraud allegations that would make a case non-arbitrable include those involving forgery/fabrication of documents, fraud alleged against the arbitration provision itself, or fraud that permeates the entire contract. 
• In cases with simple allegations of fraud affecting only internal affairs between parties without public domain implications, parties should be relegated to arbitration. 
• When examining Section 8 applications under the Arbitration Act, courts should focus on whether their jurisdiction is ousted rather than whether they have jurisdiction. 
• In the specific case at hand, the Court found the allegations against the appellant (issuing a cheque to his son without partners' knowledge and not depositing daily collections) were matters of accounts that an arbitrator could resolve. 
• The Court allowed the appeal, reversed the lower courts' judgments, and directed the parties to proceed with arbitration as stipulated in their agreement. 

Conclusion 

• The Supreme Court held that there is a difference fraud simpliciter and serious allegations of fraud. 
• The Court held that mere allegations of fraud simplicitor may not be a ground to nullify the effect of arbitration agreement between the parties.