The Bombay High Court in the case of Nilesh Shejwal v Agrowon Agrotech Industries, has held that "fraud is not arbitrable" is an archaic view. Such a view has now become obsolete and deserves to be discarded.

Brief Facts:

The Petitioner was appointed as the CEO of the Respondent Company on 23 August 2019. An Employment Agreement was also executed on the same day. Clause 19 of the said Agreement provided that any disputes arising therefrom will be resolved and settled by a sole arbitrator. On 22 October 2021, the Petitioner was restrained and was not allowed to attend the office on the pretext that some irregularities were found in the functioning of the Company. The Respondent Company alleged that an audit report found the Petitioner guilty of misappropriation of funds, wrongful use of company brand and breach of trust/contract. Accordingly, notice of termination of contract dated 27 December 2021 was issued to the Petitioner and he was relieved from the employment from the same day on the ground of loss of confidence and faith.

A complaint was also lodged against the Petitioner at Chatushrangi Police Station, which resulted into registration of FIR on 19 March 2022 invoking offences punishable under Section 409, 420, 477A of the Indian Penal Code.

The Petitioner immediately responded to the notice on 6 April 2022 alleging that his termination was illegal, vague and in violation of principles of natural justice. He claimed that he is entitled either to complete his term of 5 years or to be paid remuneration for the said term as per the aforesaid Employment Agreement. He also invoked the arbitration clause vide his communication dated 10 May 2022. The Respondent did not consent to the appointment of an arbitrator on the principal ground that the issue involved is not arbitrable. Therefore, the Petitioner was constrained to approach the High Court for appointment of an arbitrator.

Contention of the Parties:

The Respondent contended that the dispute between the parties is not arbitrable since an offence is registered against the Petitioner under Section 409, 420 and 477 of IPC as the Petitioner has defrauded the Respondent by purchasing items/materials from various vendors, which were found to be of substandard quality and purchased at a higher price and thus he has made unlawful gain for himself from the fraudulent acts. Reliance was placed on paragraph 100 of the judgment in NN Global Case, wherein it was held that when allegations of fraud are so complicated, it becomes absolutely essential that such complex issues shall be decided only by Civil Courts on appreciation of voluminous evidence.


The Bombay High Court noted that the Apex Court in NN Global Case has come to the conclusion that the fraud is not arbitrable since it would entail voluminous and extensive evidence and would be too complicated to be decided in the arbitration. However, in contemporary arbitration practice, arbitral tribunals are required to traverse through volume of material in various kinds of disputes and therefore the ground of fraud is not arbitrable is an archaic view which has now become obsolete and deserves to be discarded.

Therefore, it was held that mere filing of criminal proceedings by itself will not make the dispute that has arisen between the parties, which is set out in the notice invoking arbitration, to be a non-arbitrable dispute. Accordingly, an arbitrator came to be appointed to adjudicate claim for salary/remuneration arising out of Employment Agreement raised by the Petitioner.

MHCO Comment:

The Bombay High Court has made a crucial observation consolidating mandate of the arbitrators and empowering them to adjudicate disputes where allegations of fraud are involved. The decision has rejected the blanket proposition that 'fraud is non-arbitrable', while also outlining the limitations in cases of fraud, forgery or fabrication, which may have penal consequences in the realm of public law. However, it would be interesting to see whether the same gets upheld by the Hon'ble Supreme Court upon challenge.

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