Guest Post: Arbitrability of Fraud in India

(The following guest post is contributed by Pulkit Sharma, Advocate, Bombay High Court)

The 246th Law Commission Report observes that “The issue of arbitrability of fraud has
arisen on numerous occasions and there exist conflicting decisions of the Apex
Court on this issue
”. The Law Commission has intended to remedy this by way
of amendments to Section 16 of the Arbitration and Conciliation Act, 1996 (“Act”).

To trace the different views taken by various courts in India, the following
recent judgments / views are of note:

(i)   Supreme Court in N. Radhakrishnan v. Maestro
Engineers
available at http://judis.nic.in/supremecourt/imgs1.aspx?filename=35604)
(discussed later in detail), has held that issues of fraud are not arbitrable.

(ii)       In Bharat
Rasiklal
v. Gautam Rasiklal (2012
(2) SCC 144), the Supreme Court observed “Existence
of a valid and enforceable arbitration agreement is a condition precedent
before an arbitrator can be appointed under Section
11 of the Act. When serious allegations of fraud and fabrication are
made, it is not possible for the Court to proceed to appoint an arbitrator
without deciding the said issue which relates to the very validity of the
arbitration agreement.

(iii)      Some of the High Courts have also tried to
distinguish between serious issues of fraud and a mere allegation of fraud. It
has been held by the courts that in cases which allegation of fraud is prima
facie supported by evidence / serious fraud, the arbitral tribunal shall have
no jurisdiction, while in cases where fraud is merely alleged, the arbitral
tribunal shall have jurisdiction (for instance – RRB Energy Limited v. Vestas
Wind System and Ors
, 219 (2015) DLT516.).

(iv)      The Supreme Court has in its judgment in Swiss Timing Ltd v. Organizing Committee, Commonwealth Games, 2010, Delhi available at http://www.judis.nic.in/supremecourt/imgs1.aspx?filename=41548)
held that the judgment of the Supreme Court in N. Radhakrishnan case (supra) is per incuriam, does not lay
down the correct law and can not be relied upon.

N. Radhakrishnan case

The N. Radhakrishnan case involved a dispute arising out of a
partnership deed, which provided for dispute resolution by arbitration. The
Supreme Court, while holding that the dispute was covered within the purview of
arbitration, proceeded to decide whether the arbitrator was competent to deal
with the dispute raised by the parties. After referring to various judgments, the
court observed that the dispute depending on the facts of the case should be
tried in a court of law, which would be more competent and have the means to
decide such a complicated matter involving various questions and issues raised
in the dispute. The court further observed that while there are provisions in
the Act and judgments which provide for stay of suits in favour of arbitration,
it only applies where the arbitrator is competent to deal with the dispute (for
instance disputes which do not involve serious questions of law or complicated
questions of fact, adjudication of which depends on detailed oral and
documentary evidence). The Supreme Court, on the issue of arbitrability of
disputes involving allegations of fraud, held that: “
since the case relates to allegations of fraud
and serious malpractices on the part of the respondents, such a situation can
only be settled in court through furtherance of detailed evidence by either
parties and such a situation can not be properly gone into by the Arbitrator
”.
  
Swiss Timing
case

Swiss Timing
case was a petition under Section 11(4) read with Section 11 (6) of the Act for
appointment of nominee arbitrator of the respondent and constituting an
arbitral tribunal by appointing the presiding arbitrator. The facts of the case
are not required to be dealt with in detail for the purposes of the present
post and can be reviewed here http://www.judis.nic.in/supremecourt/imgs1.aspx?filename=41548.
The Supreme Court, while observing that dispute in terms of the contract
between the parties had arisen and that needs to be resolved through
arbitration as per the relevant dispute resolution clause of the contract, held
that:


                   
   
(i) As a pure question
of law, it is unable to accept that wherever a contract is said to be void ab
initio, the Courts exercising jurisdiction under Section 8 and 11 of the Act
are rendered powerless to refer disputes to arbitration;
   
                      (ii) The observations of
the court in N Radhakrishnan case runs counter to the ratio of the law laid
down by the Supreme Court in Hindustan Petroleum Corporation Ltd. v. Pinkcity
Midway Petroleums
, (2003) 6 SCC 503 (this case was referred by the
Supreme Court in the N Radhkrishnan case
), wherein it was held that if an
agreement between the parties before the civil court, there is a clause for
arbitration, it is mandatory for the civil court to refer the dispute to an arbitrator.
On the issue that the reference to an arbitrator being obligatory under Section
8 of the Act once the arbitration agreement has been found to exist, the court
also relied on P. Anand Gajapathi Raju & Ors v. P.V.G.
Raju & Ors
, (2000) 4 SCC 539.

                (iii) Judgment in N
Radhakrishnan is per incuriam on two grounds: firstly, the judgment in
Hindustan Petroleum case while referred has neither been distinguished nor
followed, and also the judgment in P. Anand Gajapathi Raju case was not brought
to the notice of the court and has accordingly not been followed or considered;
and secondly, the provisions of Section 16 of the Act were also not brought to
the notice of the court;

       (iv) While drawing the distinction between what
contracts are void and voidable as contemplated under the Indian Contract Act,
the court observed that in cases where the contract itself is patently void
(such as on grounds of contract by person who has not attained the age of
maturity, or where consideration or object is forbidden by law etc.), reference
to arbitration may be declined to be made by the court, but where the contract
is challenged on the grounds which make it voidable as per the contract law,
the court has to keep view of Section 8 of the Act which provides that a
reference shall be made to an arbitration. It held that the Court ought to
decline reference to arbitration only where the Court can reach the conclusion
that the contract is void on a meaningful reading of the contract document itself
without the requirement of any further proof.

State of W.B. v. Associated Contractors

In the Associated Contractors case (discussed in detail in my previous post here https://indiacorplaw.in/2015/08/supreme-court-on-section-42-of.html), the Supreme Court has held that the decision of the Chief Justice or his designate [under Section 11 of the Act], not being the decision of the Supreme Court or the High Court, as the case may be, has no precedential value being a decision of the judicial authority which is not a Court of Record.

Concluding Remarks

It can be seen that in the Swiss Timing case the Supreme Court has
ruled for keeping the arbitration agreement sacrosanct and leaning in favour of
making a reference to arbitration unless there are clear grounds suggesting
otherwise. However, on account of the judgment in Associated Contractors case,
the Swiss Timing judgment, being a decision pursuant to a reference under
Section 11 of the Act, will not be a precedent. Also, Swiss Timing was a
judgment pronounced by a single judge bench, while N Radhakrishnan was a
division bench judgment. Accordingly, the judgment in N Radhakrishnan case
ruling that where there are allegations of fraud, the dispute shall not be
referred to arbitration, continues to be the applicable law and cannot be
treated to be per incuriam. This has been also observed in the RRB Energy Limited case.

However, given that Supreme Court has analysed in detail the issue
of arbitrability of fraud in the Swiss Timing judgment and provided detailed
reasons as to why the judgment of N. Radhakrishnan case is not good law, it
gives an opportunity to the High Courts and Supreme Court to still rule in
favour of ability of arbitral tribunals to decide disputes even when
allegations of fraud are involved and attempt to distinguish the Radhakrishnan
case. It may be noted in this context that the 246th Law Commission
has proposed amendments to Section 16 of the Act to make issues of fraud
expressly arbitrable and intends to give rest to the divergence of views on
this. However, till such time any such recommended amendments to the Act are
considered by the legislature and given any effect, or the Supreme Court gives
a comprehensive dictat on the issue, divergent views governing the issue of
arbitrability of fraud in India would continue.
 

About the author

V. Niranjan

2 comments

  • Amendments to the Arbitration and Conciliation Act

    Fraud and corruption cases may not be arbitrable in India. Please see the cabinet decision at http://pib.nic.in/newsite/PrintRelease.aspx?relid=126356

    (iv) Amendment of Section 34 relating to grounds for challenge of an arbitral award, to restrict the term 'Public Policy of India" (as a ground for challenging the award) by explaining that only where making of award was induced or affected by fraud or corruption, or it is in contravention with the fundamental policy of Indian Law or is in conflict with the most basic notions of morality or justice, the award shall be treated as against the Public Policy of India.

  • The word "fraud" can be used in the following two senses by parties. Reference to arbitration is not barred under law in both,.
    1. Contract Formation – When fraud refers to s. 17 of the Contract Act: Such a case is related to "free consent" and is therefore limited to formation of contract. It only renders the contract voidable. (Swiss timings is an example of use of fraud in this sense.) Since existence of such fraud is a matter of proof, a mere allegation of fraud by a party in a section 8,9 or 11 proceedings cannot deny reference to arbitration or grant of interim relief since such proceedings examine only the prima facie existence and validity of arbitration agreements.
    2. Contract Performance – When fraud is used generally to describe some kind of foul play in performance (not formation) of contract: (N. Radhakrishnan is an example of this use.) Even in such a case, there is nothing in the Arbitration Act or the C.P.C. to say that such allegation cannot be decided in arbitration. There is no textual basis in law for such an argument and that’s why Hindustan Petroleum makes reference to arbitration mandatory upon satisfaction of the section 8’s requirements. The only basis for excluding arbitration in such a case could be the terms of the arbitration agreement itself because parties are free to agree about the degree dispute regarding facts and level of factual proof they consider fit and unfit for arbitration. (There is no immutable rule in this regard.) But this determination of scope too will have to be done during arbitration itself, not in section 8,9 or 11 proceedings.
    And even when fraud is used in both senses above in section 8,9 or 11 proceeding, there is nothing in law to bar reference to arbitration.

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