India: Arbitrability Of Fraud: A Missed Opportunity?

Introduction

Arbitration is one of the means to settle disputes. But all kinds of disputes cannot be entertained by arbitral tribunal¹. Thus, the matter must be arbitrable to attract the jurisdiction of arbitral tribunal.

The Arbitration & Conciliation Act, 1996 ('the Act') is silent on the issue of arbitrability and it does not provide any list of matters which can be referred to arbitration. To remove this confusion and ambiguity, Indian judiciary had given a two-fold test to determine whether the issue is fit for arbitration or not.

Two-fold test

Right in rem or right in personam

In the case of Booz Allen and Hamilton Inc. v. SBI Home Finance Ltd. and Ors.² it was held that the matters which attract right in personam are amenable to arbitration. And the matters which are right in rem in nature are not amenable to arbitration. However, the court also stipulated that the said rule is not a rigid rule.

Matter exclusively reserved for public fora

In the case of Kingfisher Airlines Limited v. Prithvi Malhotra Instructor³, the court held that the test would be whether adjudication of such disputes is reserved exclusively for public fora as a matter of public policy. Because even an action-in-personam, if reserved for public fora as a matter of public policy, would be non-arbitrable. It is submitted that the scope of this piece of writing is limited to the issue of arbitrability of fraud and we will discuss it in the following part.

Arbitrability of Fraud

The aforementioned two-fold test came into existence only after the case of Booz Allen which was decided in 2011. But the debate on arbitrability of fraud by itself, is more than half a century old. Therefore, the cases pertaining to this issue haven't been tested by the aforementioned two-fold test and the fate of arbitrability of fraud has been discussed in isolation.

It can be said that the debate started with the case of Abdul Kadir Shamsuddin Bubere v. Madhav Prabhakar Oak⁴. In this case, the apex court said that where serious allegations of fraud are made against a party; and the party who is charged with fraud desires that the matter should be tried in open court, then court will have sufficient cause under section 20 of the Arbitration Act, 1940 to refrain from referring the matter to the arbitral tribunal.

Just a few years back, a similar issue came up before the hon'ble Supreme Court in the (in)famous case of N. Radhakrishnan v. Maestro Engineers and Ors.⁵ where the court followed the lines of Abdul Kadir's case and decided that the case will be non-arbitrable if it involves allegations of fraud and serious malpractices.

It is said that the debates are hardly completed without a non - conformist approach and this one is no exception. In the case of Swiss Timing Limited v. Organising Committee, Commonwealth Games 2010⁶, the hon'ble apex court opined that the principle formulated in the case of N. Radhakrishnan is 'per incuriam'. One interesting fact about this judgment is it is delivered by a single bench whereas the judgment of N. Radhakrishna flowed from a two-judge bench.

Taking a different route i.e., foreign awards under New York Convention, the Supreme Court in the case of World Sport Group (Mauritius) Ltd. v. MSM satellite (Singapore) Pte. Ltd.⁷ held that where the arbitration agreement is null and void, inoperative or incapable of being performed, only then the court may refuse to refer the matter to arbitral tribunal. But merely because the case involves allegation of fraud doesn't empower the court to refuse to refer it for arbitration under section 45 of the Act.

Coming back to the domestic arbitration, in the controversy recently addressed by the apex court in the case of A. Ayyasamy v. A. Paramasivam and Ors.⁸, the court discussed the precedents in detail. The court finally said that the serious allegations of fraud are non-arbitrable but mere allegations of fraud fall within the jurisdiction of the arbitral tribunal. Moreover, the court held that the case of Swiss Timings can't be deemed to have overruled the judgment of N. Radhakrishnan.

Stand of Law Commission

Asunder from judiciary, the law commission has also delivered its opinion on the issue of arbitrability of fraud. In its 246th report, the law commission has said the following:-

But the present form of section 16 tells us a different picture. Section 16 of the Act remained unchanged even after the amendments brought to the Act in 2016 and the issue of arbitrability of fraud was kept open for judicial interpretation.

Conclusion

It is submitted that the apex court has missed the golden chance. As we are a witness to the growth of arbitration in today's world, the need of the hour is to make arbitration more powerful rather than keeping it as a toothless tiger. Legally speaking, it can be said that the tribunal is empowered under the Act to deal with the issue of serious allegations of fraud. Close reading of Sections 16, 17, 26, and 27 make the aforementioned statement logical and sustainable and by keeping the serious allegations of fraud outside the scope of arbitration, our judicial body has curtailed the powers of arbitral tribunal.

Footnotes

1. 60 Booz Allen and Hamilton Inc. v. SBI Home Finance Ltd. and Ors; (2011) 5 SCC 532 – (Criminal matters, Matrimonial Disputes, Guardianship matters, insolvency and winding up matters, etc)

2. 61 (2011) 5 SCC 532

3. 62 2013 (7) BomCR 738

4. 63 AIR SC 1962 406

5. 64 (2010) 1 SCC 72

6. 65 (2014) 6 SCC 677

7. 66 AIR 2014 SC 968

8. 67 AIR 2016 SC 4675

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