Arbitrability of Fraud in India

Arbitration is a process of resolving disputes without knocking the doors of courts, rather by appointing an independent and impartial person by mutual consent of both the disputants. This process is much easier, time and cost effective than the traditional litigation system. Moreover since the parties themselves have consented to the procedure of arbitration and appointment of arbitrable, hence it is easier to enforce the awards.

The only essential conditions for the process are: first, the existence of arbitration agreement and second, the arbitrability of disputes concerned. In cases these conditions are fulfilled, the court is under obligation to send the parties for arbitration. However there are several disputes that can’t be resolved through arbitration even if the conditioned are fulfilled. Such disputes are specifically those which affects rights in rem. Fraud is one issue which can affect both: right in personam as well as rights in rem, depending on the facts of cases. The question of arbitrability of fraud in India is quite a complex one.

Fraud is In-arbitrable/ Arbitrable?

The supreme court tried to clear the legal position regarding arbitrability of fraud in A. Ayyasamy vs A. Paramasivam & Ors. The court in this case distinguished between “mere allegations of fraud simpliciter” and “serious allegations of fraud”, holding the former to be arbitrable and whereas the latter as non-arbitrable. However, the apex court left the decision of how to determine that certain matter is fraud simpliciter or serious on the circumstances of the case which again led to a great deal of confusion.

Indian Courts have cited a number of reasons to decline the reference of questions of fraud to arbitration. These include the incapability of arbitral tribunals to handle ‘a strict and meticulous inquiry into the allegations of fraud[1]. The Arbitral Tribunals are private for the reason that they are chosen voluntarily by the parties to the dispute, to adjudicate their disputes in place of Courts and tribunals which are public forum constituted under the laws of the country. Those cases where the subject matter falls exclusively within public domain, viz. the Courts, such disputes would be non-arbitrable and cannot be decided by the Arbitral Tribunal but by the Courts alone. The justification and rationale given for adjudicating such disputes through the process of Courts, i.e. public fora, and not by Arbitral Tribunals, which is a private forum, is given by the Court in the following manner.[2]

The Supreme Court was also influenced by the judgment of the Madras High Court in H.G. Oomor Sait v. O. Aslam Sait[3] , which held that even under the 1996 Act, ‘wherever the dispute involves consideration of substantial questions of law or complicated questions of fact which would depend upon detailed oral and documentary evidence, the Civil Court is not prevented from proceeding with the suit and to refuse to refer the dispute to the Arbitrator’.

Rashid Raza[4] has given a new test for determining presence of ‘complex fraud’ where the very foundational basis of the arbitration agreement is under challenge due to a fraudulent act[5].The principles of law laid down in this appeal make a distinction between serious allegations of forgery/fabrication in support of the plea of fraud as opposed to “simple allegations”. Two working tests laid down in paragraph 25 are:

(1) does this plea permeate the entire contract and above all, the agreement of arbitration, rendering it void, or

(2) whether the allegations of fraud touch upon the internal affairs of the parties inter se having no implication in the public domain.

The phrase “serious allegations of fraud” can be traced back to one of the earliest cases on arbitrability of fraud claims in India, In Abdul Kadir[6]. The Court held that when there are “serious allegations of fraud” leveled at a party, if the party so desires, the Court shall refuse to refer the matter to arbitration.

The Supreme Court discussed at length the underlying objectives of the Act, observing that the doctrine of separability and competence (embodied in S. 16 of the Act) helped the arbitral tribunal retain powers to adjudicate upon matters without Court intervention. Matters that involved allegations of “serious fraud” would not be arbitrable , since it involves complicated issues of fact which require reviewing voluminous evidence. The Court also opined that ordinary civil Courts are better equipped to handle such cases as “Generations of judges have dealt with such allegations in the context of civil and commercial disputes.”[7]

The court in World Sport Group Ltd. v. MSM Satellite[8] (‘World Sport’) has concluded that disputes involving fraud are arbitrable. Swiss Timing v. Organizing Committee, Commonwealth Games 2010[9] (“Swiss Timing”) disregarded the rationale of the Radhakrishnan case by holding that allegations of fraud may be considered by the Arbitral Tribunal, in accordance with the powers vested in it under Section 16 of the Act.

Where the objection to arbitration is by the party charging fraud, the court will not necessarily accede to it and will never do so unless a prima facie case of fraud is proved[10] .

If the challenge is not against the arbitration agreement itself, the court should not determine questions relating to the validity of the arbitration agreement before referring the matter to the arbitrators, even if the matrix agreement is challenged on the grounds of fraud[11].

In a recent judgement of  Avitel Post Studioz Ltd. v. HSBC PI Holdings [2020], the supreme court have led down the test to determine “serious allegations of fraud”, which are not arbitrable. The court held that  “serious allegations of fraud” would arise only when either of the following two scenarios arise:

  1. In matters where the fraud is directed toward the arbitration agreement itself, or is of such nature that if proved successfully would vitiate the arbitration clause along with the agreement. According to Section 16(1) even when the contract is claimed to be fraudulently induced, the substantive validity of the arbitration clause is not compromised. This test along with s.16 of the Act reduces the scope of judicial intervention in cases of fraud. Therefore  this test reflects an internationally accepted approach and stance which endorses minimal intervention by the courts.
  2. Where allegations of arbitrariness, fraud or malafide conduct are made against the “state or its instrumentalities”. Such cases would not be arbitrable as the questions raised would concern matters of public law, thereby attracting implications not only on the parties but concerning the public domain as well.

Conclusion

Arbitration agreements executed between two parties are binding upon them. They are obliged to submit their dispute to the arbitration tribunal and to enforce their awards. Fraud if proved, renders the contract voidable at the choice of party defrauded. However even if the contract id declared void, arbitration agreement still has operation by applying the principle of severability. There have been debates that the arbitration clause is a result of fraud, whether the agreement will be arbitrable or not. The courts have attempted to resolve the dispute about arbitrability of fraud at several occasions and have laid down several tests of determining the same. 

Author: Puhumi Aditya. She can be followed in LinkedIn.
The views expressed by the author are personal.


[1] A. Ayyasamy v. A. Paramasivam (‘Ayyasamy’), (2016) 10 SCC 386.

[2] Imc Limited v. Board of Trustees of Deendayal Port, 2019 (3) GLR 1798.

[3] (2001) 2 MLJ 672.

[4] Rashid Raza v. Sadaf Akhtar, (2019) 8 SCC 710

[5] Fiona Trust & Holding Corp v. Privalov, [2007] UKHL 40.

[6] Abdul Kadir Shamsuddin Bubere v. Madhav Prabhakar Oak, AIR (1962) SC 406.

[7] A. Ayyasamy v. A. Paramasivam (‘Ayyasamy’), 2016 10 SCC 386

[8] (2014) 11 SCC 639 (India).

[9] (2014) 6 SCC 677 (India).

[10] India Household and Healthcare Ltd. v. LGHousehold and Healthcare Ltd., (2007) 5 SCC 510.

[11]Premium Nafta Products Ltd. v. Fili Shipping Co. Ltd., [2007] UKHL 40.

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