-Shrey Fatterpekar
Counsel, Bombay High Court
The Arbitration and Conciliation Act, 1996 (“the Act”) does not contain any provision which lays down which disputes are arbitrable. Generally speaking, every civil or commercial disputes whether based on contract or otherwise which is capable of being decided by a civil court is in principle capable of being adjudicated upon and resolved by arbitration.[i] However, Section 34(2)(b) of the Act provides that an arbitral award may be set aside if the Court finds that the subject-matter of the dispute is not capable of settlement by arbitration. Courts have accordingly over the years laid down categories of disputes which are not arbitrable. Most of these exceptions such as disputes relating to election to public offices or matrimonial disputes are clear in their meaning and do not leave room for any ambiguity. One of these exceptions however pertaining to disputes which include allegations of fraud has been subject matter of some misuse by parties in attempts to avoid arbitration. This article examines the law pertaining to arbitrability of disputes which contain allegations as to fraud resting with the the Supreme Court’s recent judgment in Deccan Paper Mills Co. Ltd. v. Regency Mahavir Properties and Ors.[ii] (“Deccan Paper”)
In N. Radhakrishnan v. Maestro Engineers and Ors.,[iii] (“N. Radhakrishnan”) a Division Bench of the Supreme Court was faced with a partnership dispute which involved various allegations in respect of fraud and serious malpractices on part of some partners. The Court after finding that the disputes between the parties were covered by the arbitration clause declined to refer the matter to arbitration inter alia on the ground that that cases which involve serious allegations of fraud should be decided by a court of law. Thereafter, in Afcons Infrastructure Ltd. v. Cherian Varkey Construction Co. (P) Ltd.,[iv] (“Afcons Infrastructure”) the Supreme Court laid down certain categories of cases which were considered to be not suitable for arbitration. Two of these categories dealt with cases involving fraud, viz. (a) Cases involving serious and specific allegations of fraud, fabrication of documents, forgery, impersonation, coercion, etc. and (b) cases involving prosecution for criminal offences. It is pertinent that the judgment in Afcons Infrastructure though subsequent in time did not consider the decision passed in N. Radhakrishnan earlier.
Similar exceptions were once again enunciated by the Supreme Court in Booz Allen and Hamilton Inc. v. SBI Home Finance Limited and Ors.[v] (“Booz Allen”) wherein inter alia it was held that disputes relating to rights and liabilities which give rise to or arise out of criminal offences are not arbitrable. Thus, the position as it emerged from these decisions was that when a dispute involved serious allegations of fraud or acts amounting to a criminal offence, the dispute was not arbitrable.
It appears that the decision of the Supreme Court in N. Radhakrishnan was used by some parties to avoid arbitration by setting up a defense of fraud.[vi] In the meantime, the correctness of the decision in N. Radhakrishnan was doubted by a Single Judge of the Supreme Court (exercising jurisdiction under Section 11 of the Act) in Swiss Timings Limited v. Commonwealth Games 2010 Organizing Committee.[vii] The Court in Swiss Timings held that the judgment in N. Radhakrishnan was per incuriam and consequentially, did not lay down the correct law. However, the decision in Swiss Timings was passed by a smaller bench than N. Radhakrishnan. In addition, it being a decision passed by a single judge of the Supreme Court under Section 11 of the Act had no precedential value (as held in State of West Bengal and Ors. v. Associated Contractors[viii]) and accordingly, could not overrule the decision in N. Radhakrishnan.
The correctness of the decision in N. Radhakrishnan came up for consideration once again before a Division Bench of the Supreme Court in A. Ayyasamy v. A. Paramasivam and Ors.[ix] The Court in A. Ayyasamy clarified that a mere allegation of fraud may not be a ground to avoid the arbitration agreement between the parties. It was further clarified that the court in N. Radhakrishnan declined to refer the parties to arbitration as it came to a finding that the dispute involved serious allegations of fraud and the judgment had to be read in that context accordingly. Accordingly, two tests were laid down by the Court to draw a distinction between mere allegations of fraud and serious allegations of fraud, viz. (i) whether the plea of fraud extends to the entire contract between the parties and to the arbitration agreement rendering it void and (ii) whether the allegations of fraud pertain to internal affairs of the parties without having any consequence in the public domain. Thus, only if the allegations of fraud rendered the entire contract between the parties or the arbitration agreement void or had implications in the public domain was a dispute held to be not arbitrable. The decision in A. Ayyasamy was affirmed by a larger bench in Rashid Raza v. Sadaf Akhtar.[x]
Thus, the Court in A. Ayyasamy dealt with the misuse of the decision in N. Radhakrishnan. However, neither A. Ayyasamy nor Rashid Raza dealt with the broad exceptions laid down earlier in Afcons Infrastructure and Booz Allen. This opportunity arose in Avitel Post Studioz Limited and Ors. v. HSBC PI Holdings (Mauritius) Limited,[xi] (“Avitel Post”). The Court in Avitel Post held that the broad exception laid down in Afcons Infrastructure, i.e. ‘Cases involving serious and specific allegations of fraud, fabrication of documents, forgery, impersonation, coercion, etc.’ has to be read in context of the observations contained in A. Ayyasamy and Rashid Raza. The Court then dealt with the exceptions as to criminal offences laid down down in Afcons Infrastructure and Booz Allen. The Court observed that while an act of fraud may amount to a criminal offence, it may at the same time also result in civil liability in the form of proceedings for fraud as defined under Section 17 of the Contract Act, 1872 or the tort of deceit. The Court thereafter surveyed the law on the point of simultaneous prosecution of both civil and criminal proceedings and arrived at a finding that merely because criminal proceedings can or have been initiated in respect of the same dispute would not by itself render a dispute incapable of being adjudicated by arbitration. The findings in Afcons Infrastructure and Booz Allen are now required to be read in this context. In Avitel Post, the Court also held that the in view of how the law has developed, the decision in N. Radhakrishnan could not be said to be the correct view. This view was reiterated by a larger bench in Deccan Paper where it was observed that N. Radhakrishnan as a precedent ‘had no legs to stand on’.
In conclusion, it can be seen that the ambiguity in the law governing arbitrability of disputes containing allegations of fraud has now been settled. The general rule that every commercial or civil dispute is capable of being adjudicated by arbitration even if it does contain allegations of fraud has been largely upheld. Only when the fraud alleged has consequences in the public domain or renders the entire contract between the parties or the arbitration agreement void will the dispute be held to be not capable of being adjudicated by arbitration.
REFERENCES:
[i] A. Ayyasamy v. A. Paramasivam and Ors. [(2016) 1 SCC 386]
[ii] 2020 SCC OnLine SC 655
[iii] (2010) 1 SCC 72
[iv] (2010) 8 SCC 24
[v] (2011) 5 SCC 532
[vi] A. Ayyasamy v. A. Paramasivam and Ors. [(2016) 1 SCC 386]
[vii] (2014) 6 SCC 677
[viii] (2015) 1 SCC 32
[ix] (2016) 1 SCC 386
[x] (2019) 8 SCC 710
[xi] 2020 SCC OnLine SC 656
