Summary of Sodhi v/s Singh Case : Arbitrability of Fraud.

Question of Law – Whether the Allegations of fraud can be the subject – Matter of Arbitration
Generally, the adjudication of claims arising from private civil or commercial agreements between
parties is amenable to arbitration. The underlying principle of arbitration continues to be that private
arrangements between parties give rise to a right in personam (against a particular person), exercisable
only between the parties to such an arrangement and not against the general public. Consequently,
disputes of a public nature are excluded from the scope of arbitration. Indian courts have consistently
held that disputes involving questions of public policy or arising from criminal offences, matrimonial
disputes, insolvency, or fraud are inherently non-arbitrable
In A. Ayyasamy v. A. Paramasivam & Ors., the Supreme Court of India ruled that courts may decline
to refer a matter to arbitration when the allegations are of such a serious and complex nature that they
require extensive evidence and a court trial. In light of the foregoing, the Delhi High Court, in Simran
Sodhi v. Sandeep Singh (Sodhi v. Sodhi Judgment), has established two crucial criteria for
determining the arbitrability of disputes involving serious allegations of fraud.
FACTS OF THE CASE
Simran Sodhi ("Sodhi") and Sandeep Singh ("Singh") established a partnership by signing a
partnership agreement for the purpose of manufacturing and trading electronic goods. After certain
disputes arose between the partners, both partners invoked the arbitration clause in the partnership
agreement and petitioned the Delhi High Court for the appointment of an arbitrator.
Sodhi's claim that Singh assaulted him led to the filing of a First Information Report (FIR) and the
initiation of criminal proceedings against Singh in court. In addition to violating the terms of the
partnership agreement, Sodhi alleged that Singh misappropriated the partnership's funds. Singh, on
the other hand, alleged that Sodhi had misappropriated funds and goods belonging to the partnership
firm to a shell company controlled by Sodhi's relatives by means of a forged rental agreement, and
multiple FIRs were filed against Sodhi for fraud and other criminal actions.
In light of the fact that FIRs had been filed, one of the issues before the Delhi High Court was whether
allegations of fraud and misrepresentation made by one partner against the other fall within the scope
of arbitration.
High Court’s Ruling.
After analysing a number of precedents, the Court established the following guidelines for
determining the arbitrability of claims involving criminal offences, such as fraud:
(i) A mere allegations of fraud would not preclude the arbitrability of the claims;
(ii) serious fraud allegations may also be arbitrable if they meet the following criteria:
- They have no direct impact on the claims that are being referred to arbitration;
- have no effect on the general public and only pertain to the internal affairs of the
parties; and
- It does not include a criminal aspect of fraud, forgery, or fabrication that would
result in penal consequences and criminal sanctions to be determined by a court of
law.
The High Court then established the two tests that must be applied to serious allegations of
fraud:
(i) whether the allegations are pervasive throughout the entire contract, including the
arbitration clause; or
(ii) whether the allegations involve matters with no implications for the public domain.
If the answer to both tests is affirmative, then the arbitration clause is null and void and the dispute
cannot be arbitrated.
On the basis of the aforementioned principles, the Court differentiated the claims of the partners into
three categories. Initially, it determined that claims arising directly from the non-performance of the
partnership agreement fell directly within the scope of arbitration. Second, the Court determined that
claims based on allegations involving the syphoning off of funds and assets from the partnership firm
also arose from the contractual relationship between the partners and did not pertain to the public
sphere. Therefore, such claims can be referred to arbitration even if they involve a criminal element.
Thirdly, it was determined that the allegations of fraud and forgery of the rental agreement had a
serious element of criminal wrongdoing that must be investigated by the police and decided by a court
of law. Therefore, the High Court ruled that such a claim is not arbitrable. The Delhi High Court
appointed an arbitrator and referred the disputes, insofar as they pertained to the partners' relationship,
to arbitration.