India: Nullifying The Effect Of Arbitration Agreement

Last Updated: 9 December 2016
Article by Avneet Jha

Most Read Contributor in India, July 2017

In a recent decision of the Supreme Court dated 04 October 2016 in the case of A. Ayyasamy Vs. Respondent: A. Paramasivam and Ors. answered whether allegation of fraud simpliciter would also preclude arbitrability under a contract.

In deciding the above question the Supreme Court laid down that allegations of criminal wrongdoing or of statutory violation would not detract from the jurisdiction of the arbitral tribunal to resolve a dispute arising out of a civil or contractual relationship on the basis of the jurisdiction conferred by the arbitration agreement, and held that allegation of fraud simplicitor may not be a ground to nullify the effect of arbitration agreement between the parties. It can be so done also in those cases where there are serious allegations of forgery/fabrication of documents in support of the plea of fraud or where fraud is alleged against the arbitration provision itself or is of such a nature that permeates the entire contract, including the agreement to arbitrate, meaning thereby in those cases where fraud goes to the validity of the contract itself of the entire contract which contains the arbitration Clause or the validity of the arbitration Clause itself.

In the said judgment the Supreme Court held that in each such case where an objection on the ground of fraud and criminal wrongdoing is raised, it is for the judicial authority to carefully sift through the materials for the purpose of determining whether the defence is merely a pretext to avoid arbitration. The burden must lie heavily on a party which avoids compliance with the obligation assumed by it to submit disputes to arbitration to establish the dispute is not arbitrable under the law for the time being in force.

In coming to its conclusion the Supreme Court discussed the dicta laid down by the Supreme Court in the case of N. Radhakrishnan.

Dicta in N Radhakrishnan's case was that Since the case relates to allegations of fraud and serious malpractices on the part of the Respondents, such a situation can only be settled in court through furtherance of detailed evidence by either parties and such a situation cannot be properly gone into by the Arbitrator. This arose out of a partnership dispute. A suit was instituted before the civil court for declaratory and injunctive reliefs. In the said case, an application under Section 8 of the Arbitration Act was rejected by the Trial Court and the order of rejection was affirmed in revision by the High Court. In the said case, the submission of the Appellant that the dispute between the partners ought to have been referred to arbitration was met with the objection that the Appellant having raised issues relating to misappropriation of funds and malpractices, these were matters which ought to be resolved by a civil court. The judgment of the High Court was affirmed by a Bench of two judges of the Supreme Court.

The Supreme Court held that the position that emerged both before and after the decision in N. Radhakrishnan is that successive decisions of present Court have given effect to the binding precept incorporated in Section 8 of the Arbitration Act. Once there is an arbitration agreement between the parties, a judicial authority before whom an action is brought covering the subject matter of the arbitration agreement is under a positive obligation to refer parties to arbitration by enforcing the terms of the contract. It is necessary to emphasise that as a matter of first principle, this Court has not held that a mere allegation of fraud will exclude arbitrability.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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