"The authors are advocates . practicing before the Hon'ble High Court of Delhi. Ms. Simran Brar is a Partner and Ms. Deveshi Mishra and Ms. Anjali Dwivedi are Associates at Karanjawala & Co."
In every society with a modern judicial system; fraud is perceived to be a 'criminal' rather than a civil offence, albeit it could have both criminal and civil consequences, which then leads the remedy to be two-fold – initiation of criminal as well as civil remedies/litigations.
Disputes arising on account of criminal offences remain outside the ambit of the Arbitration and Conciliation Act, 1996. In this backdrop, we examine as to how the scope of an Arbitral Tribunal has expanded or contracted over the years with specific reference to law/statutes and jurisprudence when an allegation of fraud is being made by either party in civil and commercial arbitration cases.
Defending allegations of fraud in arbitration proceedings has been a subject of discussion even under the Arbitration Act, 1940.
The earliest case rendered by the Supreme Court on the issue of maintainability of arbitration wherein fraud has been pleaded as a defence is Abdul Kadir Shamsuddin Bubere v. Madhhav Prabhakar Oak and Anr.1 in which the court observed that not every allegation imputing some kind of dishonesty would tantamount to fraud and only serious allegations of fraud would be beyond the purview of arbitration proceedings.
DEVELOPMENT OF THE 'FRAUD' ISSUE BY THE COURTS :
The plea of non-arbitrability of disputes is adjudicated at the stage of appointment of an arbitrator itself, which is governed by Section 11 of the Arbitration and Conciliation Act, 1996 (1996 Act). Under this section; if the issue of simple or serious fraud is raised before the Courts, the courts decide whether or not to refer the case to arbitration where there exists a valid arbitration agreement.
In Afcons Infrastructure Ltd.& Anr. v. Cherian Varkey Construction Co. (p) Ltd& others2(2010) the Supreme Court inter-alia observed that cases involving serious allegations of fraud, fabrication of documents, forgery, impersonation, coercion, rights and liabilities arising out of criminal offences and prosecution thereof were normally considered to be not suitable for arbitration.
The said position was reiterated by the Supreme Court in Booz Allen & Hamilton Inc. v. SBI Home Finance Ltd & Others3 ("Booz Alan") (2011)wherein it was observed that disputes relating to rights and liabilities which give rise to or arise out of criminal offences; were not arbitrable.
In N. Radhakrishnan v. Maestro Engineers and Others4 (2010), a two judge bench of the Supreme Court observed that when the case relates to allegations of fraud and serious malpractices, such a situation can only be settled in court through detailed evidence by either parties and not by an Arbitral Tribunal.
In Bharat Rasiklal Ashra v. Gautam Rasiklal Ashra&Anr.5(2012), the Supreme Court allowed the appeal and set aside the order of the High Court appointing the arbitrator and remanded the matter to the High Court to decide as to whether the document containing the arbitration clause was forged or fabricated or whether it had a valid arbitration agreement. The Supreme Court observed that when serious allegations of fraud and fabrication are made, it is not possible for the court to proceed to appoint an arbitrator without deciding the said issue, which relates to the very validity of the arbitration agreement. Importantly, it was also held; that just because the allegations of fraud, forgery and fabrication are likely to involve recording of evidence or involve some delay in disposal, they are not grounds for refusing to consider the existence of a valid arbitration agreement.
The conundrum of arbitrability of 'serious fraud' versus 'fraud simpliciter', wherein a serious fraud is a one which permeates the contract or has implications in the public domain; and a fraud simpliciter is a one that relates to inter-se disputes between private parties which have agreed to relegate themselves to arbitration, has also been observed by the Law Commission of India in its 246th Report dated August 5, 20146. In the said report the commission had proposed that an amendment be made to Section 16 of the Arbitration & Conciliation Act, 1996, making issues of fraud expressly arbitrable in order to put the entire controversy to an end. However, no such amendment was brought about; and the perplexity in fraud related issues continues to be decided on a case-to-case basis while applying the principle of "serious fraud vs fraud simplicitor'.
CHANGE IN VIEW TAKEN BY COURTS:
Finally, in A. Ayyasamy v. A. Paramasivam&Ors.7(2016) ("Ayyasamy"), the Supreme Court while considering the gravity of allegations of fraud raised by the plaintiff in a suit while hearing a Civil Appeal arising out of adjudication of an application under section 8 of the 1996 Act, observed that only when the allegations of fraud are of a serious or complicated nature involving criminal wrongdoing, that the exception to arbitrability would come into existence and the parties will be relegated to civil court. It was also laid down that the court has to firstly ascertain whether the plea of fraud permeates the entire contract containing the arbitration clause, thereby, vitiating the arbitration clause at its very root and secondly, the court has to determine if the allegations of fraud have any implications in the public domain, if so then the court is of the view that there are no implications in the public domain, the parties shall be relegated to arbitration.
Thereafter, in the case of Avitel Post Studioz Limited &Ors. v. HSBC PI Holdings (Mauritius) Ltd.8the Supreme Court extensively dealt with the substantive law in India qua arbitrability when allegations of fraud are raised by one of the parties to the arbitration agreement. In the instant case, an award was made by the Singapore International Arbitration Centre ("SIAC") in favour of the respondent, the enforcement proceeding of which were pending in an Indian Court. After analysing several case law on the subject, the Supreme Court observed that the issues raised and answered in the foreign final award were the subject matter of civil as opposed to criminal proceedings.
The Court carved out a distinction between "serious allegations of fraud" and "simple allegations" and for that the party alleging fraud has to satisfy twin tests.
The first test is satisfied where fraud permeates the contract in a manner that the arbitration clause or agreement itself cannot be said to exist or; the court finds that the party against whom breach is alleged would not have in any circumstance entered into the agreement containing the arbitration clause.
The second test can be said to have been met in cases where the fraud alleged has implications in the public domain such as allegations made against the state or its instrumentalities of arbitrary, fraudulent, or malafide conduct which are not predominantly questions arising from the contract itself or breach thereof, but questions arising in the public law domain.
In Deccan Paper Mills Co. Ltd. v. Regency Mahavir Properties and Ors.9(2020) the Supreme Court while adopting and following the principles laid down in Avitel held that N. Radhakrishnan (supra), as a precedent, has no legs to stand on. If the subject matter of an agreement between parties falls within section 17 of the Indian Contract Act, 1872, or involves fraud in the performance of the contract, as has been held in the aforesaid judgment, which would amount to deceit, being a civil wrong, the subject matter of such agreement would certainly be arbitrable.
In Vidya Drolia and ors. v. Durga Trading Corporation10 (2021), a three-judge bench of the Supreme Court while overruling the ratio in N. Radhakrishnan (supra) inter alia observed that allegations of fraud can be made a subject matter of arbitration when they relate to a civil dispute. This being subject to the caveat that such fraud that would vitiate and invalidate the arbitration clause, would result in non-arbitrability. The court further observed that it would be grossly irrational and completely wrong to mistrust and treat arbitration; as a flawed and inferior adjudication procedure unfit to deal with the public policy aspects of a legislation. Arbitrators, like the courts, are equally bound to resolve and decide disputes in accordance with the public policy of the law.
Another three-judge bench of the Supreme Court in N.N. Global Mercantile Pvt. Ltd v. Indo Unique Flame Ltd. and Others11, reiterated that the civil aspect of fraud is arbitrable except in those cases, where fraud strikes the very root of the Agreement and impeaches the arbitration clause itself.
The Delhi High Court has; in its very recent judgment dated 04.06.2021 titled as M/s IMZ Corporate Pvt. Ltd. versus MSD Telematics Pvt. Ltd12, while relying upon Vidya Drolia (supra) and N.N. Global (supra) has observed that mere allegation of fraud is not enough and the Court will embark on a judicial enquiry only when ex-facie, the document containing the arbitration clause appears to be fabricated.
Recent amendment - Are we taking a step backwards ?
While the statutes and jurisprudence have been making progress to enlarge the scope and power of Arbitral Tribunals, a recent statutory amendment dated March 11, 2021, to the Arbitration Act, which is effective retrospectively from November 4, 2020, seems to be a chink in the armour of enforcement of awards as it provides "the execution of an arbitral award may be stayed unconditionally provided that, there is prima facie proof that the arbitration agreement or contract or making of award was induced or effected by fraud or corruption".13 The said amendment to Section 36 of the Act has been made applicable retrospectively from October 23, 2015 and there is reasonable fear that this will dilute the enforcement of arbitral awards in India.
The amendment in itself is curious to say the least for several reasons while being unclear as to why the same has been passed given that an award, on a conjoint reading of Section34(2)(b)(ii) (Explanation 1) and Section 36(2) of the Act, could be sought to be set aside on the ground of fraud even under the 2015 Amendment.
Further, even with respect to the first part of the amendment relating to 'the arbitration agreement being induced by fraud', the same was in any event open to adjudication in arbitration itself even under the 2015 amendment as has been discussed in this article.
Explanation 2 to Section 34 of the Act, states that contravention of public policy of law shall not entail a review on the merits of the dispute. The issue that is likely to arise with the insertion of this amendment is that any decision by a tribunal on the aspect of 'fraud in agreement or award' will be vulnerable to being appealed on merits, thus rendering the entire arbitration proceeding as otiose. The consequences of this amendment shall come to light over time when it goes through the usual tests before the courts.
The legislative intent behind the amendment seems to be to carve out a category of cases wherein the court is satisfied that there is a prima facie case that the arbitration agreement or contract which is the basis of the award or the making of the award; was induced or effected by fraud or corruption. It has to be seen, if the jurisprudence that evolves in future, regarding this amendment, adopts a strict or liberal interpretation of the word, "fraud" used in this amendment. However, the applicability of this clause by the courts in granting an unconditional stay in favour of the party challenging the award, would save such party from the clutches of the principles of Order 41 Rule 5 of the Code of Civil Procedure, 1908 as well as the proviso to Section 36 of the Act; thereby rendering the award un-enforceable.
With this amendment, it is likely that the party seeking to assail the award shall make every attempt to contend that their contract or the award is vitiated by fraud or corruption, which will possibly result in passage of considerable time before the award attains finality thereby increasing the time spent by parties in dispute resolution. This once again begs the question that we constantly ask – with an additional impediment to execution of an award, are we truly intent on making India arbitration friendly?
1. (1962) 3 SCR 702
2. (2010) 8 SCC 24
3. (2011) 5 SCC 532
4. (2010) 1 SCC 72
5. (2012) 2 SCC 144
6.Report No. 246, Law Commission of India, Government of India
7. (2016) 10 SCC 386
8.2020 SCC Online SC 656
9. 2020 SCC OnLine SC 655
10. (2021) 2 SCC 1
11. 2021 SCC OnLine SC 13
13. Act 3 of 2021
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