[The following
guest post is contributed by Bhushan
Shah & Jogan Punjabi from Mansukhlal Hiralal & Company. The views
expressed in the post are personal]
guest post is contributed by Bhushan
Shah & Jogan Punjabi from Mansukhlal Hiralal & Company. The views
expressed in the post are personal]
Arbitrability of fraud has been a
highly contested issue in the field of alternative dispute resolution. The
Supreme Court in N Radhakrishnan v Maestro Engineers
and Ors (“Radhakrishnan
Case“) held that cases where fraud and serious malpractices are
alleged can only be settled by judicial proceedings and cannot be subject to arbitration.
However, recently the apex court in A
Ayyasamy vs A Paramasivam & Ors (“Ayyasamy Case“) held that simple fraud
is subject to arbitration, provided an arbitration agreement exists between the
parties. However, serious frauds such as criminal offences will continue to be
adjudicated by courts.
highly contested issue in the field of alternative dispute resolution. The
Supreme Court in N Radhakrishnan v Maestro Engineers
and Ors (“Radhakrishnan
Case“) held that cases where fraud and serious malpractices are
alleged can only be settled by judicial proceedings and cannot be subject to arbitration.
However, recently the apex court in A
Ayyasamy vs A Paramasivam & Ors (“Ayyasamy Case“) held that simple fraud
is subject to arbitration, provided an arbitration agreement exists between the
parties. However, serious frauds such as criminal offences will continue to be
adjudicated by courts.
The Ayyasamy Case
Five brothers and their father
entered into a partnership deed for running a hotel in Tamil Nadu. The
partnership deed contained an arbitration clause. The business was being
managed and administered by the father and, after his death, the same was
entrusted to the eldest brother, i.e. Mr Ayyasamy. Disputes arose between the
parties, and Ayyasamy fraudulently signed a cheque to transfer money to his son
from the hotel account, without the knowledge and consent of the remaining
brothers, instead of depositing the same into the common bank account of the
partnership firm. He also refused to show the account books of the hotel to his
brothers.
entered into a partnership deed for running a hotel in Tamil Nadu. The
partnership deed contained an arbitration clause. The business was being
managed and administered by the father and, after his death, the same was
entrusted to the eldest brother, i.e. Mr Ayyasamy. Disputes arose between the
parties, and Ayyasamy fraudulently signed a cheque to transfer money to his son
from the hotel account, without the knowledge and consent of the remaining
brothers, instead of depositing the same into the common bank account of the
partnership firm. He also refused to show the account books of the hotel to his
brothers.
The brothers were therefore forced
to file a declaratory suit seeking a declaration that they were entitled to
participate in the administration of the hotel, and for a permanent injunction
restraining Ayyasamy from interfering with the same. Ayyasamy meanwhile filed
an application under section 8 of the Arbitration and Conciliation Act, 1996
(“Arbitration Act“) to refer the dispute to arbitration. The
Trial Court, however, dismissed the aforesaid application, relying on the
Radhakrishnan Case wherein the Supreme Court laid down that serious offences
such as allegations of criminal acts, malpractices and serious allegation of
fraud are required to be determined by the Courts. Thereafter, the High Court
upheld the decision of the trial court and Ayyasamy, being aggrieved by the
said order, filed an appeal before the Supreme Court.
to file a declaratory suit seeking a declaration that they were entitled to
participate in the administration of the hotel, and for a permanent injunction
restraining Ayyasamy from interfering with the same. Ayyasamy meanwhile filed
an application under section 8 of the Arbitration and Conciliation Act, 1996
(“Arbitration Act“) to refer the dispute to arbitration. The
Trial Court, however, dismissed the aforesaid application, relying on the
Radhakrishnan Case wherein the Supreme Court laid down that serious offences
such as allegations of criminal acts, malpractices and serious allegation of
fraud are required to be determined by the Courts. Thereafter, the High Court
upheld the decision of the trial court and Ayyasamy, being aggrieved by the
said order, filed an appeal before the Supreme Court.
The Supreme Court has clearly stated
in this judgment that the Arbitration Act does not make a provision excluding
any category of disputes by treating them as non-arbitrable. When an agreement
has an arbitration clause, in such cases judicial intervention would be
minimal. Under the Arbitration Act, an Arbitral Tribunal has the power to rule on
its own jurisdiction. The Supreme Court has held where there are mere
allegations of fraud simpliciter, such issues can be determined by the Arbitral
Tribunal.
in this judgment that the Arbitration Act does not make a provision excluding
any category of disputes by treating them as non-arbitrable. When an agreement
has an arbitration clause, in such cases judicial intervention would be
minimal. Under the Arbitration Act, an Arbitral Tribunal has the power to rule on
its own jurisdiction. The Supreme Court has held where there are mere
allegations of fraud simpliciter, such issues can be determined by the Arbitral
Tribunal.
In the Ayyasamy Case, the Supreme Court also laid down well-recognised examples
of non-arbitrable disputes, which are:
– disputes relating to rights and
liabilities which give rise to or arise out of criminal offences;
liabilities which give rise to or arise out of criminal offences;
– matrimonial disputes relating to
divorce, judicial separation, restitution of conjugal rights, child custody;
divorce, judicial separation, restitution of conjugal rights, child custody;
– guardianship matters;
– insolvency and winding-up matters;
– testamentary matters (grant of
probate, letters of administration and succession certificate); and
probate, letters of administration and succession certificate); and
– eviction or tenancy matters governed
by special statutes where the tenant enjoys statutory protection against
eviction and only the specified courts are conferred jurisdiction to grant
eviction or decide the disputes.
by special statutes where the tenant enjoys statutory protection against
eviction and only the specified courts are conferred jurisdiction to grant
eviction or decide the disputes.
Fraud is one such category spelled
out by the decisions of this Court where disputes would be considered as
non-arbitrable.
out by the decisions of this Court where disputes would be considered as
non-arbitrable.
The Supreme Court has further held
that rights in personam (right exercisable against specific individuals) are
considered to be amenable to arbitration; and all disputes relating to rights
in rem (rights exercisable against the world) are required to be adjudicated by
courts and public tribunals.
that rights in personam (right exercisable against specific individuals) are
considered to be amenable to arbitration; and all disputes relating to rights
in rem (rights exercisable against the world) are required to be adjudicated by
courts and public tribunals.
The Supreme Court has held that (i) when there is a serious allegation of fraud
which makes it a criminal offence, or (ii) when the allegation of fraud becomes
so complicated that it becomes necessary to consider complex issues wherein
extensive evidence is required to be produced by the parties for the
determination of the offence by the court, or (iii) where fraud is alleged
against the arbitration provision itself or is of such a nature that permeates
the entire contract, including the agreement to arbitrate, meaning thereby in those
cases where fraud goes to the validity of the contract itself of the entire
contract which contains the arbitration clause or the validity of the
arbitration clause itself, then the Court can dismiss an application under section
8 of the Arbitration Act and proceed with the suits on merit.
Therefore, the Supreme Court has
made it clear that simple fraud is arbitrable, whereas instances of serious
fraud are to be determined by courts. However, the Supreme Court has not
provided any definition of `serious fraud` and interpretation of the same shall
be interpreted on a case-to-case basis. The Arbitral Tribunal may not be competent
to deal with such matters which involve an elaborate production of evidence to
establish the claims relating to fraud and criminal misappropriation. Also, Supreme
Court laid down in the Ayyasamy case that disputes which give rise to or arise
out of criminal offences are non-arbitrable; therefore, serious frauds need to
be determined by the Courts.
made it clear that simple fraud is arbitrable, whereas instances of serious
fraud are to be determined by courts. However, the Supreme Court has not
provided any definition of `serious fraud` and interpretation of the same shall
be interpreted on a case-to-case basis. The Arbitral Tribunal may not be competent
to deal with such matters which involve an elaborate production of evidence to
establish the claims relating to fraud and criminal misappropriation. Also, Supreme
Court laid down in the Ayyasamy case that disputes which give rise to or arise
out of criminal offences are non-arbitrable; therefore, serious frauds need to
be determined by the Courts.
Impact of the Decision
In our
view, the Ayyasamy Case will
prevent parties from delaying arbitral proceedings on the grounds that fraud is
not arbitrable. This is also in line with the recent amendments to the
Arbitration Act. The basic principle of the Arbitration Act is that arbitration
is essentially a voluntary assumption of an obligation by contracting parties
to resolve their disputes through a private tribunal. The intent of the parties
is expressed in the terms of their agreement. Where commercial entities and
persons of business enter into such dealings, they do so with knowledge of the
efficacy of the arbitral process. In view of the aforesaid, the parties are
bound to submit the dispute to arbitration unless it involves serious issues
which are non-arbitrable.
view, the Ayyasamy Case will
prevent parties from delaying arbitral proceedings on the grounds that fraud is
not arbitrable. This is also in line with the recent amendments to the
Arbitration Act. The basic principle of the Arbitration Act is that arbitration
is essentially a voluntary assumption of an obligation by contracting parties
to resolve their disputes through a private tribunal. The intent of the parties
is expressed in the terms of their agreement. Where commercial entities and
persons of business enter into such dealings, they do so with knowledge of the
efficacy of the arbitral process. In view of the aforesaid, the parties are
bound to submit the dispute to arbitration unless it involves serious issues
which are non-arbitrable.
– Bhushan Shah & Jogan
Punjabi
Punjabi
