Arbitration And Allegations Of Criminality

The intersection of arbitration and allegations of criminality has long posed a conceptual and practical challenge in Indian law. While arbitration is premised on party autonomy, efficiency, and minimal judicial intervention, criminal law operates within a public law framework driven by state interest, coercive enforcement and penal consequences. When disputes arising out of commercial contracts attract allegations of fraud, cheating, forgery or other criminal offences, courts are often called upon to decide whether such disputes may be resolved through arbitration or must necessarily be excluded from the arbitral domain.

Indian jurisprudence on this question has undergone a marked evolution. From an early position of categorical exclusion of disputes involving serious fraud from arbitration, the law has gradually shifted towards a more nuanced approach that distinguishes between arbitrable civil disputes with incidental criminal elements and disputes that are fundamentally non-arbitrable due to their public law character. This evolution reflects India's broader pro-arbitration policy and its alignment with international arbitration norms while attempting to preserve the integrity of criminal justice administration.

Early Judicial Approach: Fraud as a Bar to Arbitration

The initial judicial response in India leaned towards excluding disputes involving serious allegations of fraud from arbitration. This approach is seen in N. Radhakrishnan v. Maestro Engineers¹ where the Supreme Court held that allegations of fraud and malpractices were not suitable for adjudication by an arbitral tribunal and ought to be tried by a civil court. The Court reasoned that issues involving serious fraud required detailed evidence and were better suited for judicial determination.

This decision had a chilling effect on arbitration. It encouraged parties resisting arbitration to raise allegations of fraud as a tactical device, thereby inviting judicial intervention at the pre-reference stage. The decision was criticised for undermining party autonomy and for conflating civil fraud with criminality without articulating a principled distinction. Subsequent High Court decisions applied this case expansively, often refusing reference to arbitration whenever fraud was pleaded, irrespective of whether the allegations were incidental or went to the root of the contract.

Shift Towards a Pro-Arbitration Stance

The Supreme Court began recalibrating its position in Swiss Timing Ltd. v. Commonwealth Games 2010 Organising Committee². While the decision was rendered by a single judge, it categorically held that allegations of fraud are not per se a bar to arbitration. The Court emphasised that civil disputes involving fraud could be resolved through arbitration unless the arbitration agreement itself was vitiated.

This shift gained authoritative endorsement in A. Ayyasamy v. A. Paramasivam³. The Supreme Court drew a distinction between 'mere allegations of fraud' and 'serious allegations of fraud' that permeate the entire contract and arbitration agreement. It held that while the former are arbitrable, the latter may justify refusal to refer the dispute to arbitration. Importantly, the Court clarified that fraud simpliciter relating to contractual performance does not oust arbitral jurisdiction. Justice D.Y. Chandrachud's concurring opinion is particularly significant. He warned against allowing vague allegations of fraud to derail arbitration and underscored the need for courts to exercise restraint, noting that arbitration would become illusory if every allegation of dishonesty were treated as a jurisdictional bar.

Rashid Raza and the Two-Pronged Test

The jurisprudential refinement continued in Rashid Raza v. Sadaf Akhtar⁴ where the Supreme Court articulated a clear two-pronged test for determining when fraud would render a dispute non-arbitrable. First, whether the allegations of fraud permeate the entire contract and the arbitration clause rendering them void. Second, whether the allegations are so serious as to involve complex questions of law and fact requiring extensive evidence that cannot be adjudicated by an arbitral tribunal. Applying this test the Court held that allegations of siphoning of funds and breach of fiduciary duties in a partnership dispute were arbitrable. The decision marked a decisive move away from the broad exclusionary approach held before and aligned Indian law with international practice where arbitral tribunals routinely adjudicate civil fraud claims.

Criminal Proceedings and Parallel Arbitration

A recurring argument against arbitration in such cases is the pendency or initiation of criminal proceedings based on the same facts. Indian courts have consistently rejected the proposition that the existence of criminal proceedings automatically bars arbitration. In P. Swaroopa Rani v. M. Hari Narayana⁵, the Supreme Court held that civil proceedings and criminal proceedings can coexist as they operate in distinct spheres. Similarly in Kishore Lal v. Chairman, ESI Corporation⁶, the Court observed that remedies under different legal regimes are not mutually exclusive unless expressly barred. The Supreme Court reaffirmed this principle in Bihar State Food & Civil Supplies Corporation Ltd. v. Sanjay Kumar⁷, where it held that the presence of criminal allegations or proceedings does not detract from the arbitrability of civil disputes arising from contractual obligations. The Court emphasised that arbitration addresses civil consequences whereas criminal law addresses penal liability and the two can proceed independently.

This position is consistent with Section 8 of the Act which mandates reference to arbitration notwithstanding the pendency of a suit, unless the arbitration agreement is null and void, inoperative or incapable of being performed.

The Continuing Tension and Practical Challenges

Despite doctrinal clarity, practical challenges persist. Parties continue to invoke criminal allegations strategically to resist arbitration, particularly in high-value commercial disputes. Lower courts occasionally revert to pre-Ayyasamy reasoning, leading to inconsistent outcomes. Additionally, the increasing overlap between economic offences statutes and commercial disputes such as cases involving money laundering or regulatory violations adds complexity. While civil claims arising from such disputes may be arbitrable courts remain cautious where adjudication may interfere with statutory enforcement mechanisms.

Conclusion

The Indian legal position on arbitration and allegations of criminality has evolved from scepticism to nuanced acceptance. The current jurisprudence recognises that commercial disputes do not become non-arbitrable merely because they involve allegations of fraud or give rise to parallel criminal proceedings. The decisive consideration is whether the dispute concerns civil rights in personam and whether the arbitration agreement remains valid and operative. This evolution reflects India's commitment to fostering an arbitration-friendly environment while safeguarding the public interest embedded in criminal law. Yet, the balance remains delicate. Courts must continue to resist the temptation to conduct mini-trials at the referral stage while remaining vigilant against attempts to use arbitration as a shield against legitimate criminal prosecution. As Indian arbitration law matures, the challenge lies not in choosing between arbitration and criminal law but in ensuring that each operates within its proper domain without undermining the other.

Footnotes

1 (2010) 1 SCC 72

2 (2014) 6 SCC 677

3 (2016) 10 SCC 386

4 (2019) 8 SCC 710

5 (2008) 5 SCC 765

6 (2007) 4 SCC 579

7 (2019) 16 SCC 195

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