Arbitrability of 'Fraud': Journey from 'Blanket Exclusion' to 'Public Flavour'

The Author, Saumya Vanwari is pursuing BA.LLB from Institute of Law,Nirma University she is doing her internship with Niti Nyaya Law Offices.

INTRODUCTION

Arbitration is the mechanism wherein the disputes that arise between the private parties are resolved outside the court by the appointment of the arbitrators. The arbitral tribunal herein derives authority either from the statute (in case of statutory arbitration) or from the arbitration agreement entered into between them. However, despite the existence of an arbitration agreement, few matters could not be adjudicated via arbitration. It needs to be Arbitrable in nature to fall under the jurisdiction of an arbitral tribunal. Arbitrability is concerned with determining which types of dispute may be settled by arbitration and which falls exclusively under the ambit of domestic courts.[1] The concept was originated because certain types of disputes are particularly reserved for the national courts and are related to public policy. Among these disputes, the arbitrability of fraud has been the most disputatious one.

As the Arbitration and Conciliation Act, 1996 (A&C Act) did not classify the disputes which are Arbitrable and which are not, the Indian judiciary has been thereby assigned the task to determine the grounds of arbitrability. Through, this article, the author would discuss the legal jurisprudence that has been developed for the “arbitrability of fraud” through various landmark judgments and reports, and why certain matters fall under the jurisdiction of arbitration but some are court-exclusive.

LEGAL JURISPRUDENCE – ARBITRABILITY OF FRAUD

The first case concerning fraud was laid down in the landmark decision of Abdul Kadir Shamsuddin Bubere v. Madhav Prabhakar Oak[2]. In this case, the Apex Court held that where the disputes contain serious allegations of fraud, and the party who is charged with fraud wants the matter to be adjudicated before the court, then the matter should not be then referred to arbitration. This judgment was laid down during the Arbitration Act, 1940. However, even after the enactment of the A&C Act, the locus of fraud remains the same. The first case after the advent of the 1996 Act was the N. Radhakrishnan v. Maestro Engineers and Ors.[3] (2010),wherein the court upheld the ratio of Abdul Kadir’s case, and held that all the cases that contain serious allegations of frauds and malpractices could only be settled through proper judicial scrutiny and examination, and therefore are non-Arbitrable.

However, the contrasting opinion was observed in case of Swiss Timing Ltd. v. Organizing Committee, Commonwealth Games 2010, Delhi[4], where the court held the ratio of N. Radhakrishnan  case as “per incuriam” and favoured arbitration for matters involving fraud unless the contract is itself void. However, as the N. Radhakrishnan judgment was two-judge bench while the Swiss bench was single- judge bench, therefore the former was set as precedent. Another differing view was witnessed in World Sport Group (Mauritius) Ltd. v. MSM satellite Pte. Ltd.[5] that concerns foreign arbitration. In this case, the Apex Court held that until and unless the arbitration agreement is null and void, or inoperative in nature, the allegations concerning fraud could be decided by the arbitral tribunal. This created complexities within the cases of Indian and Foreign Arbitration.

Even the 246^th Law Commission Report observes the ambiguity in various Supreme Court and High Court cases that involves arbitrability of fraud. Resultantly, the Commission suggested making the cases of fraud Arbitrable and even proposed amendments. However, no changes were made through the 2015 Amendment Act.

Two-fold test of Arbitrability- Booz Allen and Kingfisher

The deciding factor was the landmark case of Booz Allen v. Hamilton[6], where the court for the first time established the test for determining the arbitrability. The cases which are in the nature of “right in personam” are considered to be amenable to arbitration against the cases falling under the domain of “right in rem”. Three grounds were laid down to determine arbitrability-

“(i) whether the matter is capable of adjudication by the arbitration?

(ii) whether the matters fall under the scope of the arbitration agreement?

(iii) whether the parties have referred the matter to the arbitration?”[7]

The court also provided examples of the cases that are “right in rem” and which could be included within the list of non-Arbitrable disputes i.e. disputes involving criminal offences, matrimonial disputes, guardianship matters, testament matters, child custody, etc. Further, another test was laid down in the case of Kingfisher Airlines Limited v. Prithvi Malhotra[8], the court held that the disputes which have been exclusively reserved for the purpose of public policy should not be arbitrated. Even the disputes falling under public forum if arises out of right in personam would not fall under the jurisdiction of the arbitral tribunal.

Fraud: Simpliciter or Serious

Moreover, it has even been settled that mere allegations of fraud could also not vitiate the arbitration agreement. The Court has laid down in the Ayyaswamy[9] and Rashid Raza[10] that the jurisdiction of the arbitral tribunal would get ousted only in cases involving serious allegations where the plea permeates the entire agreement including that of the arbitration agreement, and not only affects the internal affairs of the company but also the “right in rem”.

Impact of Avitel Post Studioz Ltd. vs. HSBC PI Holdings (Mauritius) Ltd. [11]

In this case, Avitel entered into share subscription and shareholder agreement with HSBC for the purpose of providing the $60 million to the former’s contract with British Broadcasting Corporation. However, it came to the knowledge that the money transferred was siphoned off to the company where promoters had stake as the Avitel Dubai never existed. Thereafter, the arbitration commenced before the Singapore International Arbitration Centre (“SIAC”) and the award was in the favor of respondent (HSBC). When the appellant challenged the jurisdiction of arbitral tribunal, the Bombay High Court ruled in the favour of the respondent. Thereafter, the appellant brought case in the form of appeal before the Supreme Court. The Court held that the matter concerning fraud, in the present case does not vitiate the arbitration agreement, and thereby the dispute is Arbitrable in nature. The Apex Court framed two criteria and even if either is fulfilled, it would fall under the “serious allegations of fraud” and hence, make the matter non-Arbitrable in nature- firstly, where the arbitration agreement is void because of the fraud exception; secondly, where the allegations are contested against the state instrumentalities on grounds of fraud, or mala fide conduct, or arbitrariness that hampers the public interest.

The Court in Avitel tried to conglomerate the jurisprudence of fraud that has been developed in A. Ayyaswamy and Rashid Raza case. It held that the”fraud exception” would only be applicable when the benchmark set out for the “public flavour” is satisfied. This is based on the second test provided in Rashid Raza “impact on public domain”. When the allegations of fraud that arises attracts state instrumentalities or writ proceedings, this would then be “rights in rem” that involves the public domain rather than “rights in personam” arising out of the contract between the parties. The court has held that until the matter of fraud is only between the parties under civil law and does not affect the public, it would be Arbitrable. Even the similar criminal proceedings would not vitiate arbitrability.

The three judge bench in the case of “Deccan Paper Mills Co. Ltd. v. Regency Mahavir Property & Ors.”[12], have followed the reasoning provided in Avitel Case, and held that as the disputes between the parties involves “no public overtones” and even does not satisfy the “fraud exception”, therefore the dispute would be Arbitrable in nature.

CONCLUSION

The concept behind the introduction of Arbitration was to resolve disputes in fast and efficient manner and to maintain confidentiality between the parties. However, the matters of arbitrability involving frauds have been one of the most controversial issues before the courts for ages. The legislatures neither brought amendments for matters of fraud in arbitration through the 2015 amendment nor the 2019 amendment. Even after the 246^th Law Commission Report suggested for amendment and making fraud matters Arbitrable, still no changes were brought.

The legal development concerning the matter of arbitrability has travelled a long way from the Abdul Kadir “absolute rule of fraud cases as non-arbitrable” to the Avitel Judgment where the matters involve “public flavour to be kept outside the scope of arbitration”. The issue of fraud has now to be observed from the facts of the case and then analyzed to determine whether the particular frauds are Arbitrable or not. By the inception of “fraud exception”, the court has adopted pro-arbitration approach and has set a high standard for non-arbitrability. The ratio set out in Avitel having been followed in the Deccan Paper Mills case has set out as the precedent and clearly identifiable ground for the arbitrability of fraud. The impact of this arbitration friendly judgment is yet to be observed.

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