In Radhakrishnan v Maestro Engineers & Ors the Supreme Court of India rejected an appeal to stay court proceedings in favour of arbitration, despite the existence of an arbitration agreement between the parties, on the basis that the dispute involved complicated allegations of fraud.

The appellant, Radhakrishnan, had entered into a partnership in 2003 forming Maestro Engineers. Differences arose between the partners and the appellant wrote to his partners alleging malpractices including collusion to misappropriate firm funds and forgery of the firm accounts. He also indicated that he was willing to resign from the firm upon payment of sums allegedly due to him.

The respondents initiated proceedings in the local courts seeking a declaration that the appellant was no longer a partner of Maestro Engineers and an injunction against his further disturbance of the firm. The appellant filed a petition seeking the reference of the dispute to arbitration under section 8 of Part 1 the Indian Arbitration Act 1996 on the grounds that the partnership deed contained an arbitration agreement. That application was rejected and ultimately wound up, on appeal, before the Supreme Court.

Despite finding that the subject matter of the dispute fell within the ambit of the arbitration agreement, the Supreme Court held that the matter should be heard by the courts on the grounds that an arbitrator would not be competent to deal with the complex evidential matters involved. In its view "the facts of the present case does [sic] not warrant the matter to be tried and decided by the Arbitrator, rather for the furtherance of justice, it should be tried in a court of law which would be more competent and have the means to decide such a complicated matter."

As a result of this decision, the scope for parties to an arbitration agreement to subvert the intention of that agreement seems very broad. It is conceivable that in the future parties may rely on this decision to evade their obligation to arbitrate simply by raising allegations of fraud or misconduct involving complicated factual evidence. As well as being inconsistent with the principle of competence-competence, this decision effectively undermined the parties' decision to choose arbitration as a means of dispute resolution.

Section 8 of Part 1 of the Indian Arbitration Act, in accordance with which a reference to arbitration was sought in this case, should only apply to domestic arbitrations, i.e. arbitrations with their seat in India. Part II of the Act applies to arbitrations with an off-shore seat and contains a counterpart provision in section 45 providing for Indian courts to refer a dispute to international arbitration. Section 45 is worded differently to section 8, and in the 2005 Shin-Etsu decision, the Supreme Court held that any challenge to an arbitration agreement to which section 45 applies should be determined on a prima facie basis only to avoid frustration of that agreement. However, in the controversial Bhatia International and VGE decisions of 2002 and 2008 respectively, the Supreme Court held that Part I of the Act also applies to off-shore arbitrations unless its application has been expressly excluded by the parties. The Maestro Engineer's decision is therefore likely to be of concern to parties negotiating international arbitration agreements in respect of India-related transactions and it further underscores the importance for care to be taken in excluding Part I of the Act. For more guidance on issues which arise in relation to arbitration and India, please click here and here.

(Civil Appeal No. 7019 of 2009 (Supreme Court of India, 22 October 2009))