In the recent years there has been a huge rise in commercial disputes between the parties in India and they prefer to resolve them via an effective alternative dispute resolution (ADR) mechanism like arbitration. It is worth noting that arbitrability of certain disputes has always been a conflicting affair. Even though arbitration deals with right in personam, a question is raised whether the issue of fraud, which falls within the ambit of right in rem, can be adjudicated under arbitration proceedings. The issue of adjudication of frauds during arbitration proceedings has been resolved recently by the Hon’ble Supreme Court by laying down certain tests. Before moving ahead, it is important to understand that the term ‘arbitrability’. It can mean the following things: (i) whether there is an arbitration agreement, (ii) whether the dispute is beyond the scope of the arbitration agreement, and, (iii) whether the subject matter of the dispute is arbitrable. We shall be discussing only the third issue with respect to the jurisdictional issues.
LAWS REGARDING ARBITRABILITY OF DISPUTES
It is worth noting that whether an issue is arbitrable or not is determined in accordance to the case laws and not by any statute in India. This is because in section 2(3) of the Arbitration and Conciliation Act, 1996, (“Arbitration Act”) it has been vaguely stated that “certain disputes may not be submitted to arbitration”. Thus, the Hon’ble Courts have been empowered to determine whether a dispute was arbitrable or not. The same has been highlighted in section 34(2)(a)(ii), 34(2)(a)(iv), 34(2)(b)(i) and section 48(2) of the Arbitration Act that if after the passing of an award it is realized that the dispute was not an arbitrable matter or the award passed is against the public policy of India, then the courts have the power to set aside such award. Even though the issue of arbitrability and public policy are completely different concepts but they do get mixed eventually because there are certain issues which may not possibly be resolved via arbitration as they might affect sovereignty, national security, social objectives, law and order etc. So, it needs to be understood how the issue of arbitrability of frauds have been dealt by the Hon’ble Courts in India and how its jurisprudence has changed over a period.
CASES ON ARBITRABILITY OF FRAUD
The issue regarding the arbitrability of fraud can be traced back to the old Arbitration Act of 1940. The first case which dealt with the issue was Abdul Kadir v. Madhav Prabhakar Oak, wherein it was ruled by the court that all the serious allegations of fraud require a public inquiry, therefore serious allegations of fraud are not arbitrable. Additionally, it was also stated by the bench that mere allegations of fraud do not reach a threshold where court shall agree to try the case, until and unless a prima facie case of fraud is proved by the alleging party. Later, the Hon’ble Supreme Court changed its stance in the cases of P Anand Gajapathi Raju v. PVG Raju and Hindustan Petroleum Corporation Ltd. Pinkcity Midway Petroleums, wherein it was ruled that when a dispute arises between the parties and there is an arbitration agreement, then in accordance to Section 8 of the Arbitration Act, such disputes must be mandatorily resolved via arbitration. But these two judgments were not at all referred in the case of N. Radhakrishnan v. Maestro Engineers, wherein it was ruled that when serious allegations of fraud arise, they cannot be expected to be properly adjudicated by an arbitrator. Therefore, in the interest of justice, only a court of law can decide such complex matters.
The Hon’ble Supreme Court gave a different view regarding the arbitrability of dispute by looking into the nature of rights involved i.e. right in rem and right in personam, in the cases of Afcons Infrastructure Ltd. v. Cherian Varkey Construction Co. (P) Ltd. and Booz Allen & Hamilton Inc. v. SBI Home Finance Ltd. In these two cases, the court tried to categorize the non-arbitrable disputes into right in personam and right in rem which also includes the cases which involved specific as well as special allegations of fraud and prosecution of criminal offences. The reasoning behind such classification was that disputes which are classified as right in rem cannot be subjected to a private forum such as arbitration for adjudication of disputes.
In the judgement of Swiss Timing Ltd. v. Commonwealth Games 2010 Organising Committee, it was ruled that the case of N. Radhakrishnan, did not lay down the correct law and it was held to be per incuriam. The bench also followed the law laid down in the case of P. Anand and Hindustan Petroleum, that when there exists an arbitration clause in an agreement, then judicial authority should mandatorily refer the parties to resolve their disputes via arbitration. Similar judgement was passed in the case of World Sport Group (Mauritius) Ltd. v. MSM Satellite (Singapore) Pte Ltd., which was for foreign seated arbitration proceedings.
246th LAW COMMISSION REPORT RECOMMENDATIONS
In August 2014, the 246th Law Commission of India was setup under chairmanship of Hon’ble Justice A.P. Shah to prepare a report on ‘Amendment to the Arbitration and Conciliation Act, 1996. The committee highlighted 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 Commission believes that it is important to set this entire controversy to a rest and make issues of fraud expressly arbitrable and to this end has proposed amendments to section 16.” In other words, the Committee believed in resolving this issue by amending section 16 of the Arbitration Act and giving a pro – arbitration approach. The following amendment was suggested by the committee: “In section 16, After sub-section (6), insert sub-section “(7) The arbitral tribunal shall have the power to make an award or give a ruling notwithstanding that the dispute before it involves a serious question of law, complicated questions of fact or allegations of fraud, corruption etc.” But this amendment was never brought into effect by our lawmakers.
CURRENT POSITION OF LAW REGARDING ARBITRABILITY OF FRAUD
The Hon’ble Supreme Court enhanced its stance taken regarding arbitrability of fraud by looking into the threshold for “seriousness” in the case of A. Ayyasamy vs. A. Paramasivam & Ors, In this case it was emphasized by the bench that “a mere allegation of fraud in the pleading by one party against the other cannot be a ground to hold that the matter is incapable of settlement by arbitration. The allegations of fraud should not only be serious but also, such that might taint the material validity of the main contract to the extent affecting the arbitration clause, which by the application of doctrine of separability is separate and distinct from the main contract and nullity of latter does not ipso jure nullify the former.” Though this bench did not overrule the judgement passed in N.Radhakrishnan, it laid down a three-fold test to determine when the allegation regarding fraud cannot be adjudicated through arbitration. The three tests are: i) whether there is a requirement of appreciation of voluminous evidence, or ii) the allegations of fraud permeate the entire contract including the otherwise severable agreement to arbitrate, or iii) if there is an implication in the public domain. Thus, it can be observed that the bench laid down criteria to distinguish between simpliciter and serious allegations of fraud, wherein the latter cannot be adjudicated via arbitration.
To further explain the concept of distinction between ‘simple’ and ‘serious’ allegations of fraud, the bench in the case of Rashid Raza v. Sadaf Akhtar, laid down a twin tests which were : “ i) does this (fraud) plea permeate the entire contract and above all, the agreement of arbitration, rendering it void, or ii) whether the allegations of fraud touch upon the internal affairs of the parties inter se having no implication in the public domain.”
The most recent case to deal with the arbitrability of fraud is Avitel Post Studioz Ltd. v. HSBC PI Holdings (Mauritius) Ltd., wherein more clarity was provided by the bench. In this case, firstly it is worth noting that the bench overruled the judgement passed in the case of N. Radhakrishnan. It was ruled by the bench that if either of the two tests laid down in the case of Rashid Raza, are satisfied then it can be said that there is a ‘serious’ allegation of fraud. The bench also clarified that irrespective of the fact that the same set of facts may give rise to both criminal as well as civil proceedings for fraud (section 17 of the Indian Contract Act or tortious reliefs), then the mere fact that criminal proceedings have or can be instituted is not a ground to conclude that the dispute cannot be arbitrated. In the end, it was also stated by the bench that as the fraud alleged in this case did not have any ‘public flavour’ it did not make the dispute non-arbitrable. On the very same day, the bench in the case of Deccan Paper Mills Co. Ltd. v. Regency Mahavir Properties & Ors., followed the same line of reasoning as laid down in Avitel.
Arbitrability, jurisdiction and competency are the core principles of arbitration. But in Indian context the concept of arbitrability of disputes is very subjective and totally differs from case to case. It can be said that the Indian courts in the past few years have adopted a pragmatic, efficient, and pro-arbitration interpretation of arbitration clauses so as to be in line with the legislative intent that has been reflected in amendments. This approach can also be observed in the recent judgements referred above where the threshold for a dispute to qualify under the "fraud exception" for non-arbitrability has been set quite high by the Hon’ble Supreme Court. But the judgements also leave several questions unanswered which need a lot of clarity. The bench in the case of Avitel has inserted the new ground of “public domain” or “public flavor”. Now the question arises whether limiting this ground only for allegations of fraud against state or its instrumentalities a correct interpretation altogether. There might be situation wherein a private player may be disposing of a public function which also gives a “public flavour” to the issue. Also, until and unless, the recommendations of 246th law commission report are not implemented, the courts have been left with the responsibility of determining what amounts to simpler or serious allegations of fraud. Thus, to encourage arbitration as an alternative dispute resolution mechanism in India, our lawmakers should implement these suggestions as soon as possible. Till then it is believed that Indian courts shall be uniformly applying the law laid down in Avitel and avoid any confusion or ambiguities in the future.