Court says a mere arbitration clause cannot override a plaintiff’s challenge to the very execution, consent and validity of the deed allegedly procured by fraud and conspiracy.
The Madhya Pradesh High Court at Jabalpur has dismissed a miscellaneous appeal filed by Nawab Raza and others, and upheld a lower appellate court order restoring a civil suit filed by Usman Khan over a disputed partnership deed relating to land in Bhopal.
Justice Ramkumar Choubey held that the case could not be mechanically referred to arbitration merely because the partnership deed contained an arbitration clause. The Court found that the plaintiff had specifically questioned the very execution, knowledge, consent and validity of the partnership deed dated 21 May 2019 and its amended deed dated 26 February 2024, alleging that his signatures were obtained by fraud and conspiracy.
According to the plaintiff, he is an illiterate person who does not know English, while the disputed deed was prepared in English. He claimed that he never knowingly or voluntarily executed the document and that the defendants later attempted to mutate their names in the revenue records and interfere with his possession over the property.
The trial court had earlier allowed the defendants’ application under Section 8 of the Arbitration and Conciliation Act, 1996, and referred the dispute to arbitration. However, the First Appellate Court reversed that order, holding that the suit raised a foundational challenge to the very validity of the partnership deed itself. The High Court has now affirmed that view.
The Court explained that under Section 8, a judicial authority must refer parties to arbitration unless it finds that prima facie no valid arbitration agreement exists. However, the Court said this does not mean that the presence of an arbitration clause in a disputed document automatically ousts civil court jurisdiction. Where the document containing the arbitration clause itself is under serious challenge on grounds of fraud, conspiracy, lack of consent and invalid execution, the civil court must first examine whether a valid arbitration agreement exists.
Relying on Supreme Court precedents including Abdul Kadir Shamsuddin Bubere, A. Ayyasamy, Vidya Drolia, NTPC v. SPML Infra, and Deccan Paper Mills, the High Court reiterated the distinction between ordinary allegations of fraud and serious allegations that strike at the root of the contract itself. It held that while simple disputes arising out of an admitted contract may be arbitrable, allegations that the very deed was procured by unlawful means raise a foundational issue better suited for adjudication by a civil court.
The Court observed that the plaintiff had not merely alleged breach of contract, but had challenged the partnership deed and amended deed themselves. In such circumstances, the question was not only whether the deed contained an arbitration clause, but whether there was a valid and binding agreement at all.
Finding no error in the order of the First Appellate Court, the High Court dismissed the appeal and directed that the civil suit proceed before the trial court on merits. The Court clarified that it had not expressed any opinion on the validity of the partnership deed or the merits of the dispute.
Bottom Line :
Arbitration and Conciliation Act, 1996 Section 8 Where plaintiff specifically challenges very execution, knowledge, consent and validity of partnership deed containing arbitration clause on ground of fraud and conspiracy, Court must examine prima facie existence of valid arbitration agreement - Mere presence of arbitration clause in disputed document is not sufficient - Civil Court can adjudicate foundational issue regarding validity of deed.
Statutory provision(s): Arbitration and Conciliation Act, 1996 Section 8, Code of Civil Procedure, 1908 Order VII Rule 11, Code of Civil Procedure, 1908 Order XLIII Rule 1(u), Arbitration and Conciliation Act, 1996 Section 7
Nawab Raza v. Usman Khan, (MP)(Jabalpur) : Law Finder Doc id # 2983542
