ARBITRABILITY OF FRAUD ALLEGATIONS

Khushboo Garg | September 9, 2021

Ms. Khushboo Garg
(University Institute of Laws, Regional Centre, Ludhiana)

Arbitration is a dispute redressal mechanism for resolving disputes that arises between two private parties. The matter is referred to arbitration when it is according to the agreement between the said parties. In arbitration, an undisputed third party is appointed/ selected to judge the dispute. Generally, the disputes related to the ‘rights in personam‘ are adjudicated via arbitration. However, there can be instances where the matter of disputes related to the ‘right in rem’ that is subordinate to the ‘rights in personam’ are settled through arbitration, provided the parties to the agreement so agree.

The Indian Contract Act defines ‘fraud’ under Section 17 as an act done with an intent to deceive or induce the opposite party or its agent thereto to enter into the contract where;
the fact stated is not true or is not believed to be true,
there is active concealment of facts and the party committing fraud knows the same,
the intention to abide by the promise is absent,
the intention is to deceive the other party, or
any act declared fraudulent by the provisions of law.

CONCEPTS RELATED TO THE ARBITRABILITY OF FRAUD IN INDIA:

Before discussing the judicial precedents to determine the arbitrability of fraud in India, there are certain concepts that the Honorable Courts have considered for deciding the arbitrability of fraud in India.

The concepts are listed as follows:

The Doctrine of Public Policy: The concept of public policy is not defined in any statute but it is referred to as the policy that is equivalent to law, as the main purpose of the framers of the constitution was to ensure the welfare of the public. The fundamental policies mentioned in the Indian Laws ensure that;
there is a judicial approach to determine the rights of the natives of the country, and there is a parallel obligation that is attached with such rights as determined by the quasi-judicial authorities.

Arbitration when discussed through the doctrine of public policy elaborates on the contention that the court of law has the authority and the power to intervene in the recourse of an arbitral award that is passed based on any irregularity or any substantial injustice caused to the applicant/parties to the agreement. The public policy aims to strengthen and encourage the settlement of civil/commercial disputes by arbitration.
Principle of Severability: The principle of severability states that if there is an issue regarding the validity of the law, the Supreme Court has the power to resolve the matter. It is further stated that if any part of the law is termed unconstitutional, the court would determine whether the remaining part of the law can survive being constitutional or not.
In the arbitration agreements, the arbitrators may decide the nature of dispute arising and their validity at the initial as well as the subsequent stages of the arbitration proceedings.
In RS Jiwani v Ircon Inernational Ltd, it was held by the honorable court that if the constitutional/valid part of the arbitral award can be severed from the unconstitutional or illegal part, the constitutional part holds validity and hence, shall be duly enforced.
Matters Arbitrable as per the Act: The Arbitration and Conciliation Act, 1996 does not specifically exclude any matters that cannot be adjudicated via arbitration. However, Section 34(2)(b) and Section 48(2) of the Act relates to various ‘subject matters’ of the disputes that cannot be settled by arbitration.

The matters that are outside the purview of arbitration that is termed non-arbitrable are as follows:
issues arising from Intellectual Property Rights such as patents, copyrights, trademarks, etc.
issues related to Competition Laws;
issues related to insolvency and winding up;
issues of serious criminal liability
issues of bribery and corruption,
issues arising out of fraud
issues arising out of matrimonial causes, restitution of conjugal rights, testamentary matters, etc.

Correlation of Arbitration and Fraud

Fraud is said to possess a dualistic characteristic. The decision of fraud entails features of both rights in rem as well as right in personam. Right in personam means where one possesses a right against a specific individual (person) whereas, right in rem means where the right is available against the society at large.

There have been demystifying views regarding the adjudication of fraud via arbitration. The right in personam is considered to be amenable to arbitration. Right in rem is not included in the adjudication process through arbitration. If interpreted otherwise, the disputes relating to the subordinate right in personam that arise from right in rem can be considered for arbitration. In other words, if the matters allege for any serious allegation, adjudication through arbitration is not allowed. The fraud which is attributable to a civil aspect emerges due to the impeachment of the underlying contract, on the discretion can be adjudged via arbitration.

Competence of Courts u/s 16: Section 16 of the Act is based on the principle Kompetenz Kompetenz, where the arbitration tribunal before the adjudication of proceedings limits its jurisdiction that is then reviewed by the courts. Section 16 states that the arbitral tribunal suo moto can restrict its jurisdiction concerning either existence or validity of an arbitration agreement. In the case of Kvaerner Cementation India Ltd. v. Bajranglal Agarwal and Anr it was held that Section 34 would assess the amenability raised under Section 16(2), (4), and (6).

Provisions in other statutes:
Section 9 of the Civil Procedure Code, 1908 elaborates the jurisdiction of civil courts to try the suits unless the court is barred by any other statute. The said provision ensures the fundamental rights of the individual to file a suit and be heard in the civil courts if not arbitral tribunals.

JUDICIAL BACKING
Fraud is an intentional misrepresentation or concealment of facts that are essential to decide the validity of a contract. The major ingredient for an act to become fraud includes:
intention and knowledge,
use of unjust practices or commission of an unjust act,
deliberate intent to conceal or misrepresent a fact.

The courts have analyzed the arbitrability of fraud in India and assessed every possible contention that could arise from the same. The contentions are discussed in light of recent judgments.

Scope of Arbitrability of Fraud: Rashid Raza v Sadaf Akhtar
The court while justifying the scope of arbitrability of fraud stated that the ‘simple’ allegations of fraud that relate to the internal or private affairs of the parties to the agreement would have a bare minimum effect on the validity of the contract. The apex court conducted a twin test to streamline the views relating to the arbitrability of fraud. The two contentions were;
if the plea of fraud correlates to the entire contract, such a contract should be null and void.
If the allegations of fraud correlate to the internal affairs of the parties to the agreement, then there would be no implication towards the public domain.

A mere allegation of fraud:

The question that the courts need to address related to whether a mere allegation of fraud imposed by one party, would straight away exclude the adjudication of the dispute via arbitration.

However, it was held by the honorable Supreme Court that in the matters where the allegation of fraud is serious, such would be deemed as a reasonable ground for not referring the dispute for arbitration. It is further evaluated that where the nature of fraud is serious there is a possibility of some criminal offense attached to the allegation of fraud. In such circumstances, it is believed that the civil courts would perform better than the arbitral tribunal as the evaluation of criminal offenses requires an in-depth analysis of pieces of evidence, witness, etc. The mere allegation of fraud simpliciter cannot be held as a valid basis to nullify the agreement between the parties.

246th Law Commission Report:

The report in Para 50 and 51 analyze the arbitrability of fraud. The report considered various judgments laid down by the apex court to give its recommendations on the said matter.

In Bharat Rasiklal v. Gautam Rasiklal, it was submitted that where fraud is of a nature that harms the validity of the contract, the issue related to the arbitrability of fraud remains a parallel unanswered question. The division bench in the matter of N. Radhakrishnan v. Maestro Engineers also affirmed that disputes relating to fraud cannot be adjudged by arbitration. Contrary, to the above-mentioned judicial precedents, the Supreme Court in Meguin GMBH v. Nandan Petrochem Ltd and Swiss Timing Ltd. v. Organising Committee, appointed arbitrators under section 11 for adjudication of matters relating to fraud.

The Law Commission in its 246th Law Commission report recommended that:
In case of mere allegation of fraud: the matter can be referred to arbitration
In case of a serious allegation of fraud: the matter must be adjudicated by the civil courts.

Dispute of fraud capable of adjudication or settlement through arbitration:

The courts while considering the said condition emphasized the domain of the subject matter. Where the dispute of fraud is not within the domain of public fora, such a dispute should not be referred for arbitration. As a matter of public policy, certain matters need to be in the jurisdiction of the courts or tribunals (legislature). Further, the courts clarify that in cases where a certain matter indirectly relates to the public fora would not stand included in the private fora.

Reduction in the intervention of Civil Courts

In N. Radhakrishnan v. Maestro Engineers, the court gave weighted preference to the seriousness of fraud allegations and the detailed evaluation required for the subsequent evidence. Section 8 was further elucidated by relying on the case of Abdul Kadir Shamsuddin Bubere v. Madhav Prabhakar Oak that clarifies to offer a wider scope of jurisdiction to the arbitrators.

Further, in the matter of A. Ayyasamy v. A. Paramasivam & Ors it was stated that one of the objectives of the Arbitration and Conciliation Act, 1996 is to reduce the burden on civil courts by resolving disputes through arbitration. Section 8 of the Act further gives power to the parties who are bound by the arbitration agreement.

SUM IT UP

Section 36 of the Arbitration and Conciliation (Amendment) Ordinance, 2020 proposed an amendment concerning ‘fraud.’ The amendment states, where the court is satisfied prima facie that the final making of the award or the basis of the award on the arbitration agreement was induced by fraud or any corruption, the award will be challenged for disposal under section 34 of the Act.
Thus, it is analyzed from the discussion above that fraud is classified into two categories, viz.fraud simpliciter, andserious fraud.

The disputes arising out of allegations of fraud can be duly resolved through arbitration if the allegation does not include serious allegations. The issues of fraud will be said to hold the validity of adjudication if the fraud does not impeach the arbitration agreement.

The judiciary while considering the arbitrability of fraud emphasized that a liberal construction of arbitration agreements so that its subsequent clauses will favor the ‘one-stop’ arbitration. One-stop arbitration would not only widen the horizon and the scope of arbitration, but would also ensure speedy justice.

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