Edited by – Gaurav Rai[3]
I. INTRODUCTION
The question which arises, often in arbitration jurisprudence is, can all disputes be resolved by arbitration, and whether the presence of arbitral clauses or agreements between such parties automatically exclude the jurisdiction of all judicial forums other than arbitral tribunals? The question has been answered to some extent by the Supreme Court in the case of Booz Allen Hamilton vs SBI Home Finance Pvt Ltd (2011) 5 SCC 532[4]. In this case the Supreme Court of India devised a 3-prong test to define arbitrability.
1. Whether the dispute is capable of being resolved by arbitration?
2. Whether the dispute is covered by the arbitration agreement?
3. Whether parties have referred dispute to arbitration?
The Supreme Court classified disputes into arbitrable and non-arbitrable on the basis whether these disputes deal with rights in rem or rights in personam. It is pertinent to note that rights in rem deal with rights which are available or can be enforced against the public at large while rights in personam deal with rights which are available against specific individuals. The Apex Court went on to hold that that rights in personam were capable of being resolved through the mechanism of arbitration as they deal with issues which do not affect the public and society at large while rights in rem cannot be resolved through arbitration. A few examples of right in rem matters would be: -
1. Matrimonial and Guardianship matters
2. Tenancy Disputes
3. Insolvency and Winding up matters.
4. Testamentary matters.
In Vimal Kishore Shah vs Jayesh Dinesh Shah and Ors (2016) 8 SCC 788.[5]the Supreme Court said that disputes which arise out of Trust Deeds under The Indian Trusts Act, 1882 also cannot be resolved by arbitration.
The Indian Courts have till now have not declared fraud to be non-arbitrable, and divergent opinions have come forth on this aspect. This article will endeavour to explain in what manner the Courts have grappled with this issue. This article will also deal with the latest amendment brought by way of ordinance in November 2020 by which awards in which allegations of fraud have been made will be automatically stayed until the disposal of the Section 34 application challenging such awards.
II. HISTORICAL BACKGROUND
The Legislations that preceded the Act of 1996 was the Act of 1899 and that of 1940. Both these legislations specifically dealt with the question of arbitrability of fraud. Section 19 of the 1899 Act is of prime importance as it gave power to the Court to grant stay of legal proceedings. The stay could be granted when parties had submitted their disputes to arbitration. The jurisprudence of that time pertaining to arbitrability of fraud was influenced by the decision of Russel vs Russel [1880] 14 Ch D 471 (Eng.).[6] , a decision of the English High Court. In this case the English High Court considered a question whether “allegations of fraud, would exclude the operation of an arbitration clause”? The Court opined that an allegation of fraud would prima-facie exclude the jurisdiction of the arbitral tribunal. In Narsingh Prasad Bubna and Others v. Dhanraj Mills AIR 1943 Pat. 53.[7] the Patna High Court opined that allegations of fraud should not be dealt by arbitral tribunals and were better suited to be tried by the National Courts.
In the case of Abdul Kadir Shamsuddin Bubere v. Madhav Prabhakar Oak AIR 1962 SC 406[8] the Indian Supreme Court held that “when there are serious allegations of fraud, then the party against whom these serious allegations are made, may desire that the case be tried in the Civil Courts”. The decision of the Supreme Court in Abdul Kadir has been the basis for subsequent decisions of various High Courts and the Supreme Court on the issue of arbitrability of fraud.
III. QUADRET OF DECISIONS ON THE ARBITRABILITY OF FRAUD UNDER THE ARBITRATION ACT OF 1996
The 1996 Arbitration Act was heavily influenced by the economic liberalization of 1991 and the enactment of the UNCITRAL Model Law on International Commercial Arbitration in 1985. These two factors necessitated a new Legislation which was in sync with global best practises on arbitration. A series of decisions has shaped the jurisprudence related to arbitrability of fraud under the 1996 Act. Let us examine these decisions.
The first of these decisions was of N. Radhakrishnan vs Maestro Engineers (2010) 1 SCC 72[9] in which the Supreme Court dealt with a case which emanated from Section 8 of the Arbitration & Conciliation Act, 1996. Section 8 unequivocally provides for reference to arbitration, if there is an arbitration agreement or a clause between parties to the dispute. The Supreme Court despite the unequivocal language of Section 8 chose not to refer the parties to arbitration as it felt that the case involved serious allegations of fraud, which should be dealt by the Civil Courts.
The above-mentioned decision resulted in a setback to the jurisprudence on the arbitrability of fraud under the new Act as it displayed a lack of trust in in arbitral tribunals to adjudicate on the issue of fraud and it also showed that lack of willingness of Courts to refer parties to arbitration, despite the unequivocal language of Section 8.
In 2014 the Supreme Court of India in the case of Swiss Timing Ltd vs Commonwealth Organizing Committee[10] made a departure from the ratio of N. Radhakrishnan. The Supreme Court upheld the appointment of a sole arbitrator expressly remarking that” allegations of fraud do not lead to ouster of jurisdiction of an arbitral tribunal”. It also said that continuation of criminal proceedings against one of the parties to the dispute will not result in ouster of jurisdiction.
In 2016 the Supreme Court again dealt with a case A. Ayyasamy v. Paramasivam and Ors (2016) 10 SCC 386. [11]that emanated from Section 8 of The Arbitration & Conciliation Act, `1996. The Apex Court envisioned a dual paradigm to assess the arbitrability of fraud. The Apex Court said that issues of complex fraud are not capable of being resolved by arbitration, while cases of simple fraud can be adjudicated by an arbitral tribunal. The Apex Court appointed an arbitrator as the case dealt with an issue of simple fraud. The ratio of the Supreme Court has now been reaffirmed by a larger bench of the Supreme Court in the case of Rashid Raza vs Sadaf Akhtar (2019) 8 SCC 710.[12]
The Supreme Court extensively looked into the issue of arbitrability of fraud in Avitel Post Studioz Ltd Vs HSBC Holdings Pvt Ltd.[13]In this case the 2 parties entered into a “Share-Holders Agreement” by virtue of which HSBC made investments to the tune of 600 Million USD in Avitel. Avitel had falsely misrepresented to HSBC that they had a contract with the British Broadcasting Corporation and the funds were required for that purpose. An independent audit revealed that the funds were being diverted elsewhere; HSBC lodged a FIR with the Economic Offenses Wing and also preferred an interim application for injunction before the Bombay High Court to secure the amount in dispute. The High Court granted the application. The Supreme Court was approached by way of special leave. Avitel submitted before the Supreme Court that the disputes were related to allegations of serious fraud, and hence were non-arbitrable, and should be left for adjudication to the Civil Court. The Supreme Court reiterated the test laid down in Ayyasamy and concluded that” When there are allegations of fraud-simpliciter and they are merely alleged, it is not necessary to nullify the arbitration agreement”. In this case the Supreme Court said that the nature of allegations do not prima-facie disclose a case of serious fraud, and hence arbitration will be allowed.
IV. CONCLUSION
It can be thus concluded with a degree of certainty that only in cases of “egregious fraud” will the arbitration proceedings be stymied, in cases of fraud simpliciter arbitration proceedings will not halt, the arbitral Tribunal may have to deal with issues under Section 17 and 19 of the Indian Contract Act, 1872. However, what is interesting to note is that the President of India gave his ascent to the Arbitration and Conciliation (Amendment) Ordinance 2020[14] by which Section 36 of the Act was amended. By virtue of this amendment any arbitration agreement or contract which is the basis of the award or if the making of the award was induced by corruption or fraud, the award shall be unconditionally stayed, while the award is pending challenge under Section 34. The Authors firmly believe that by virtue of this amendment the legislature has tried to impliedly make fraud not capable of arbitration. The parties will now have to take a conscious decision as to whether they can pursue an arbitration if allegations of fraud are made by the other side or even by themselves. Another grey area is the fact that the party which will try to move for a civil court resolution might not be able to do so if the other party alleges the existence of an arbitration agreement as the civil court will then not want to interfere with the matter. Whether there is a serious allegation of fraud or not, will then have to be decided only during the challenge to the arbitration award and during the stay of the enforcement proceedings, which might then make the arbitration proceedings a waste of time and money. Even if the legislature intended to the check arbitrations in case of serious fraud, the amendment should have been brought to Section 8 and 11 which deals with reference to arbitration and appointment of arbitrators and not in a provision of the Act which deals with post award enforcement and stay. It will be interesting to see how the dichotomy between the provisions of section 8 and 11 and the long list of judgments of the Supreme Court on the issue of arbitrability of fraud plays out against the Ordinance and the amendment to Section 36 which stops automatic enforcement of arbitral awards if there is an allegation of fraud regarding the formation of the underlying agreement.
[1] Advait is an Advocate working in the litigation team at Kesar Dass Batra. He deals in matter related to Arbitration, Civil Suits and Criminal. He has argued matters before the District Courts of Delhi and the Delhi High Court. He can be reached at advaitgh@gmail.com.
[2] Akash is a practicing advocate in various Courts and Tribunals of Delhi and has keen interest in issues pertaining to law and legal system in India. I deal with matter relating to Insolvency laws, Arbitration laws, Civil and Criminal matters. He can be reached at akashyadav940@gmail.com.
[3] Gaurav Rai is an Advocate practicing in the field of Arbitration and is the Editor of the Arbitration Workshop Blog. He can be contacted at raigaurav.legal@gmail.com.
[4] (2011) 5 SCC 532
[5] (2016) 8 SCC 788.
[6] [1880] 14 Ch D 471 (Eng.).
[7] AIR 1943 Pat. 53.
[8] AIR 1962 SC 406.
[9] (2010) 1 SCC 72
[10] (2014) 6 SCC 677
[11] (2016) 10 SCC 386.
[12] (2019) 8 SCC 710
[13] In the Supreme Court of India - CIVIL APPEAL NO. 5145 OF 2016
[14] THE ARBITRATION AND CONCILIATION (AMENDMENT) ORDINANCE, 2020 (No. 14 of 2020) Available at https://legalaffairs.gov.in/sites/default/files/The%20Arbitration%20and%20Conciliation%20%28Amendment%29%20Ordinance%202020.pdf