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Arbitrability of fraud in India

While arbitration, globally, has emerged to be a robust and proficient means of dispute resolution, its development in India has been beleaguered by hasty interference of courts and a spate of conflicting lines of authorities write VivekVashi and Shreya Ramesh.
 
 

INTRODUCTION

The arbitrability of fraud in particular, has been the subject of nuanced discussion and conflicting authorities. Parties have resorted to citing fraud, collusion or malpractice in a bid to avoid or circumvent arbitration proceedings. However, Indian jurisprudence has taken great strides in the past year towards achieving parity with the international trends in respect of the arbitrability of fraud. While courts have been hitherto disinclined to refer disputes concerning fraud to arbitration, recent developments demonstrate a departure from this conservative approach.

An assortment of judgments of the Supreme Court as well as the Bombay High Court, have mandated that a dispute shall not be precluded from a reference to arbitration on account of allegations of fraud raised therein by parties. This article analyses the evolution of the subject in Indian jurisprudence.

THE N. RADHAKRISHNAN ERA

In N. Radhakrishnan v. Maestro Engineers & Ors. [2009 (13) SCALE 403] ("N. Radhakrishnan"), the Supreme Court had held that an issue of fraud requires adducing and the elaborate examinationof evidence, which an arbitrator(s) is not competent to adequately adjudicate upon. Such questions of fraud and malpractice ought to be tried by a court of law.

The Supreme Court, in arriving at the aforesaid conclusion, relied upon its judgment in Abdul Kadir Shamshuddin Bubere v. MadhavPrabhakar Oak [AIR 1962 SC 406] ("Abdul Khadir"), which, it is pertinent to note, was decided under the Arbitration Act, 1940. The three judge bench in Abdul Khadir was pleased to hold that a court of law may decline an application for reference to arbitration, should the party against whom allegations of fraudhave been raised desire that the same be tried in open court.Further, reliance was placed on the judgment of the Madras High Court in OomorSait v. AslamSait, [2001 (3) CTC 269] ("OomorSait"). The OomorSait Case arose under the Arbitration & Conciliation Act, 1996 (the "Act") and (with respect, in a departure from the letter of the Act) the Madras High Court held that in disputes concerning allegations of fraud, which involve adducing oral and / or documentary evidence, civil courts may refuse to refer the dispute to arbitration.

RECENT DEVELOPMENTS AND A NEW LINE OF AUTHORITIES

1. HSBC PI Holdings (Mauritius) Ltd. v. Avitel Post Studioz Limited & Ors. [Bombay High Court, Arbitration Petition No. 1062 of 2012, Order dated January 22, 2014] (“HSBC v. Avitel”)

An application under Section 9 of the Act was filed to seek interim relief in respect of a dispute referred to arbitration in Singapore. Avitel argued against the application for interim relief on the ground that issues of fraud had been raised in the dispute, which cannot be subject to arbitration under Indian law. Thus, the final award would not be enforceable (See Section 48 of the Act).

The Bombay High Court ruled that the dispute was not governed by Indian law, and thus, the aforesaid issue does not arise. Further, it was held that the judgment in N. Radhakrishnan ought not to be construed to mean that merely because allegations of fraud have been raised, the dispute is barred from a reference to arbitration. On the contrary, a refusal to refer a dispute concerning allegations of fraud to arbitration would be an exception rather than a rule (See Section 8 of the Act), in light of which a court may exercise its judicious discretion to refuse a reference to arbitration.

Aggrieved by the Order in HSBC v. Avitel, Avitel took the matter taken in appeal before a Division Bench of the Bombay High Court in Appeal No. 196 of 2014 in Arbitration Petition No. 1062 of 2012 which was disposed of in terms of the Order of July 31, 2014 (“Appeal”).

In the Appeal, the Division Bench held that “making of such allegations” of fraud “does not, in our opinion, render the subject matter of dispute to be incompetent ofsettlement by arbitration under the law of India”.

2. World Sport Group (Mauritius) Ltd. v. MSM Satellite (Singapore) Pte. Ltd. [AIR 2014 SC 968] (“World Sport”)

Shortly after the decision of the Bombay High Court in HSBC v. Avitel, the Supreme Court distinguished N. Radhakrishnan and clarified that fraud remains arbitrablein proceedings under Part II of the Act.

Section 45 of the Act, with a non obstante clause, states that a judicial authority when seized of a matter, in respect of which parties have made an agreement (referred to in Section 44 of the Act viz. "an agreement in writing for arbitration to which the Convention set forth in the First Schedule applies")shall, at the request of one of the parties or any person claiming through or under him, refer the parties to arbitration, unless it finds that the said agreement is null and void, inoperative or incapable of being performed.

The words "inoperative or incapable of being performed" in Section 45 of the Act are a purposeful incorporation of the language in Article II (3) of the New York Convention, and ought to be construed in the context thereof. The text of both provisions arereproduced below.

Section 45 of the Act Article II of the New York Convention
Power of judicial authority to refer parties to arbitration.

Notwithstanding anything contained in Part I or in the Code of Civil Procedure, a judicial authority, when seized of an action in a matter in respect of which the parties have made an agreement referred to in Section 44, shall, at the request of one of the parties or any person claiming through or under him, refer the parties to arbitration, unless it finds that the said agreement is null and void, inoperative or incapable of being performed.
1. Each Contracting State shall recognize an agreement in writing under which the parties undertake to submit to arbitration all or any differences which have arisen or which may arise between them in respect of defined legal relationship, whether contractual or not, concerning a subject-matter capable of settlement by arbitration.

2. The term "agreement in writing" shall include an arbitral clause in a contract or an arbitration agreement, signed by the parties or contained in an exchange of letters or telegrams.

3. The court of a Contracting State, when seized of an action in a matter in respect of which the parties have made an agreement within the meaning of this article, shall, at the request of one of the parties, refer the parties to arbitration, unless it finds that the said agreement is null and void, inoperative or incapable of being performed.


Thus, it is apparent that merely raising allegations of fraud does not render an arbitration agreement "inoperative or incapable of being performed" and / or “null and void”; and a reference to arbitration cannot be refused on this ground under Part II of the Act.

The ruling in N. Radhakrishnanwas passed in respect of a domestic arbitration. Arbitration proceedings under Part II of the Act ought to be construed in the context of the New York Convention, under which mere allegations of fraud shall have no bearing on the reference to arbitration.

3. Rekha Agarwal v. Anil Agarwal & Ors.[Bombay High Court, Arbitration Petition Nos. 257 and 258 of 2013, Order dated April 3, 2014] (“RekhaAgarwal”)

The court had made a reference to arbitration under Section 11 of the Act, pursuant to which the arbitrator had passed an order under Section 16 of the Act inter alia stating that, in view of the complex allegations of fraud and forgery, elaborate evidence would have to be led. Accordingly, the arbitrator ruled that the dispute was not arbitrable.

In the judgment in RekhaAgarwal, the Bombay High Court considered the judgments of the Supreme Court in inter alia S. B. P. Patel & Co. v. Patel Engineering Ltd. and National Insurance Co. Ltd. v. BogharaPolyfab Pvt. Ltd. and affirmed that once the Chief Justice of India or his designate has discerned the facts of a dispute and deemed it fit for the exercise of his powers under Section 11 of the Act to appoint an arbitrator, the same forecloses the power of the arbitrator(s) to rule on his own jurisdiction under Section 16 of the Act. Particularly, the arbitrator(s) cannot, in such a case, deny his jurisdiction, including on the ground that complex allegations of fraud have been levied.

Even in cases where the dispute referred to arbitration includes instances of fraud or malpractice giving rise to criminal offences, the arbitrator cannot “simply stay his hands and refuse to exercise jurisdiction”. In fact, if the matter requires the determination of private rights, the arbitrator shall enjoy jurisdiction and ought to adjudicate upon the matter, even if an independent criminal trial is or may, in the future, be pursued before appropriate courts.While courts shall continue to retain the discretion to deny a reference to arbitration, there is no bar on a reference to arbitration on account of allegations of fraud.

4. Swiss Timing Ltd. v. Organizing Committee, Commonwealth Games, 2010 [AIR 2014 SC 3723] (“Swiss Timing”)

Swiss Timing Ltd., engaged by the Organizing Committee of the Commonwealth Games to provide timing, score and result systems for the Commonwealth Games, 2010, appointed an arbitrator in respect of a dispute with the Organizing Committee for payment of outstanding dues of approx. CHF 1.249 million. However, the Organizing Committee failed to do so on inter alia the ground that Swiss Timing Ltd. had failed to adhere to a warranty viz. that it would not engage in corrupt, fraudulent, collusive or coercive practices, which it claimed was evidenced by the criminal cases pending against the officials of both, the Organizing Committee as well as Swiss Timing Ltd. It was argued that as a result, the contract between the parties is void abinito; and in any event, in view of N. Radhakrishnan, fraud was notarbitrable under prevalent law.

While considering the issue of the arbitrability of fraud, the ruling in Swiss Timing held that N. Radhakrishnanwas decided without reference to Section 16 of the Act (which permits an arbitrator(s) to rule on objections as to his jurisdiction) and / or notice ofthe judgments of the Division Benches of the Supreme Court in Hindustan Petroleum Corporation Ltd. v. Pinkcity Midway Petroleam [(2003) 6 SCC 503](“Pinkcity Midway”) and in P. Anand GajapathiRaju&Ors. v. P. V. G. Raju (Dead) &Ors. [AIR 2000 SC 1886] (“P. A. G. Raju”). On these grounds, Swiss Timing held N. Radhakrishnan to have been passedper incuriam. Swiss Timing quotes Pinkcity Midway and P. A. G. Raju with approval; and states that in view of the mandatory and peremptory language of Section 8 of the Act, should a valid arbitration agreement exist, courts ought to refer parties to arbitration.

Swiss Timing proceeds to emphatically rule that the pendency of criminal proceedings against officials of the parties (and the inevitable questions of fraud arising in the case) would not operate as a bar on a reference to arbitration. The Supreme Court has exhorted the policy of “least interference” and declares that the function of courts is to support the arbitration process. To that end, Swiss Timing held that it would be wholly undesirable to delay arbitration proceedings and / or deny a reference to arbitration merely on account of the pendency of a criminal case as an acquittal in the latter would have caused a grave delay in the dispute resolution process.On the other hand, parties shall always be at liberty to resist enforcement of an award, on the ground of subsequent conviction in criminal proceedings. Thus, criminal and arbitration proceedings may continue simultaneously and independent of each other.

Courts ought to decline a reference to arbitration only when the court can conclude that the contract is void, by a discerning perusal of the same, without any further proof. Interestingly, Swiss Timing has also observed that “defence of the contract being void is now-a-days taken routinely along with other usual grounds, to avoid/delay reference to arbitration. In my opinion, such ground needs to be summarily rejected unless there is clear indication that the defence has a reasonable chance of success.”

ANALYSIS

Arbitration under Part I of the Act

Until recently, the issue of arbitrability of fraud has remained unresolved. Allegations of fraud have oft been raised as a bogey to delay or circumvent arbitration altogether by placing reliance on the N. Radhakrishnan line of authority.

The landmark ruling of the Single Judge in Swiss Timing has held N. Radhakrishnan, which was decided by a larger bench, to have been passed per incuriam. Swiss Timing has at the very least, challenged the reliance on N. Radhakrishnan. However, whether Swiss Timing, in the absence of a reference to a larger bench, shall have the effect of over-turning the line of authority following N. Radhakrishnan, remains to be seen. Pending a clarification / affirmation by a larger bench of the Supreme Court, Swiss Timing will likely continue to be at odds with N. Radhakrishnan.

Regardless, the reformist Swiss Timing ruling paves the way for a progressive line of authority; and it fortifies and offers a much need boost to the prospects of arbitration under Part I of the Act.

Arbitration under Part II of the Act

The above rulings mark a significant step forward for arbitration in India. World Sport, in particular, marks a watershed in the evolution of arbitration law and fortified the progressive approach of courts in India. By excluding the application of N. Radhakrishnan to foreign seated arbitrations, the Supreme Court has ensured that claims of fraud and malpractice will be dealt with in the course of the arbitration proceedings itself.Undoubtedly, World Sport will also assuage fears of parties, vis-à-vis court intervention.

A trend of minimal-interference in the arbitral process and proceedings has emerged in recent jurisprudence, which serves to achieve parity with international trends and jurisprudence. Mere allegations of fraud will no longer serve as a spoke in the institution of arbitral proceedings. However, in disputeswhere fraud vitiates the arbitration agreement itself, it appears that courts may exercise the discretion to refuse a reference to arbitration.

Further, given the sweeping and wide scope of arbitration clauses, as generally incorporated in contracts today, it is only in this specific event, and upon discerning the facts of the dispute, that courts may now decline a reference to arbitration.

Impact

The aforesaid series of rulings demonstrate yet another step forward in Indian jurisprudence toward achieving the goal of minimal interference in arbitration. These judgments have foreclosed the ground of fraud being raised by parties to delay and / or defeat arbitration proceedings. The quest to develop an independent dispute resolution mechanism under the aegis of the Act is echoed both in World Sport and in Swiss Timing.

While these judgments will impact (and likely minimalize) the extent and manner in which courts interfere in arbitration proceedings, it is pertinent that the courts continue to retain the discretion to deny a reference to arbitration inter alia under Section 8, 11 and 45 of the Act.

It appears that an ordinance to reform arbitration law has been approved by the Union Cabinet. On December 29, 2014, the Central Government put out a press release, which was later withdrawn, regarding the said arbitration ordinance, and there is some speculation about the nature of reforms proposed, including stipulations requiring an arbitrator to charge composite fees as against per-hearing charges. It is speculated that the ordinance also envisages a time bound disposal by courts of any challenge to an arbitral award. While the veracity of the aforesaid speculation and specificsof the ordinance remain unknown, it appears that the Central Government is attempting to complement the progress made by the judiciary, towards the development of an arbitration-friendly environment that is conducive to quick and cost effective dispute resolution. As the next few weeks unfold, the rumoured ordinance is likely to bring about changes whose impact will be interesting, at the very least.
 
VIVEK VASHI is a Partner and SHREYA RAMESH is an Associate with Bharucha & Partners. They may be reached at vivek.vashi@bharucha.in and shreya.ramesh@bharucha.in respectively.
 
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