Referral Court Can Reject Arbitration Only In Exceptional Cases Where Plea Of Fraud Appears To Be Ex Facie Devoid Of Merit: Calcutta HC

The Calcutta High Court bench of Justice Shampa Sarkar observed that unless the arbitration agreement prima facie appeared to be inoperative on account of fraud, the referral Court should not indulge in a roving inquiry as such an inquiry is within the domain of the arbitrator. The fact whether the agreement was induced by fraud would entail a detailed consideration of the evidence lead by the parties and these issues cannot be decided by the referral court. Background The loan agreement dated July 1, 2019 between the parties contained an arbitration clause which provided that the lender will appoint the sole arbitrator to arbitrate upon the disputes between the parties. However, in view of the change of law and decisions of the Apex Court, this mechanism failed and the lender could not appoint the arbitrator unilaterally. In the notice invoking arbitrator dated July 5, 2023, the Petitioner nominated an arbitrator, however the Respondents did not agree to the nomination. Consequently, the Petitioner approached the Court for the appointment of arbitrator. Contentions The Counsel for the Petitioner submitted that the contentions and objections raised by the Respondents are triable issues while the scope of the referral court is restricted to examination of existence of an arbitration clause and invocation thereof. The Counsel for Respondent submitted that the agreement was induced by fraud. In fact, the Reserve Bank of India, in its application before the learned National Company Law Tribunal, Kolkata Bench had indicated that the transaction between the Petitioner and the Respondents was a fraudulent one. It was further argued that since fraud involves elaborate appreciation of evidence, the case should be adjudged by the Civil Court and not an arbitrator. It was submitted that if the referral court upon, prima facie, appreciation of the documents arrives at a conclusion that the allegation of fraud is serious and issues are triable under the criminal laws, the prayer for reference should be rejected. It was further argued that not only were the transactions between the parties fraudulent, but the execution of the document was also an act of fraud. The Respondents' signature was induced by fraud and misrepresentation. The Respondent placed reliance on the judgment of the Apex Court in A Ayyasamy v. A Paramasivam and Ors. (2016) 10 SCC 386 (“A Ayyasamy”) where the Court categorised fraud into two categories- (i) whether the plea of fraud permeates the entire contract or (b) whether the allegation of fraud touches upon the internal affairs of the parties inter se, having no implication in the public domain. It was argued that the very fact that the Reserve Bank of India approached the NCLT, Kolkata Bench with the allegations that fraudulent activities were being indulged in by the Petitioner was indicative of the adverse effect on the public exchequer and thus fell in the latter category. Observations At the outset, the Court observed that it is a referral court and in view of the settled position of law, the jurisdiction of referral courts is restricted to the satisfaction of existence of an arbitration agreement and whether the arbitration clause had been invoked or not. However, if the arguments raised by the Respondents are entertained then it would require a detailed enquiry and consideration of the evidence to be led by the parties which are issues that the referral court cannot decide. The Court referred to the decision in A Ayyasamy, where the Apex Court had held that an application under Section 8 of the Arbitration and Conciliation Act can be rejected only when the allegation of forgery and fabrication of documents in support of the plea of fraud permeated through the entire contract, including the arbitration agreement, thereby raising a serious question with regard to the validity of the contract itself. Such issues required elaborate evidence to be adduced by the parties and the civil court should reject such application and proceed with the suit. However, the reverse position was also discussed in the said decision which stated that where there were simple allegations of fraud touching upon the internal affairs of the parties, inter se and it had no implication in the public domain, the arbitration clause need not be avoided and the parties should be relegated to arbitration. The Court also relied upon the case of SBI General Insurance Co. Ltd. v Krish Spinning 2024 SCC Online SC 1754 wherein it was observed that, “a mere bald plea of fraud or coercion was not sufficient for a party to seek reference to arbitration and prima facie evidence for the same was required to be provided, even at the stage of Section 11 petition.” As far as the contention of the Respondent regarding the suitability of civil court to try the case at hand was concerned, the Court observed that if an allegation of ...

Referral Court Can Reject Arbitration Only In Exceptional Cases Where Plea Of Fraud Appears To Be Ex Facie Devoid Of Merit: Calcutta HC

Arpita Pande

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