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Arbitrability Of Fraud: A Critique Of India's Problematic Jurisprudence

Shivam Singh
19 Sep 2019 2:30 AM GMT
Arbitrability Of Fraud: A Critique Of Indias Problematic Jurisprudence
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The issue relating to arbitrability of fraud has a chequered judicial past in Indian courts and the judicial pronouncements have not settled the controversy at rest. The decisions on this subject matter that are germane for a clear understanding are N. Radhakrishnan v. Maestro Engineers & Ors,[1] Swiss Timing Limited v. Commonwealth Games 2010 Org Committee,[2] World Sport Group Limited v. MSM Satellite,[3] Booz Allen & Hamilton Inc v. SBI Home Finance Limited & Ors,[4] National Insurance Co Ltd v. Boghara Polyfab Pvt. Ltd,[5] Arasmeta Captive Power Company Private Limited & Ors v. Lafarge India Private Limited,[6] A.Ayyasamy v. Paramasivam & Ors[7] and most recently Rashid Raza v. Sadaf Akhtar.

[8]

In N Radhakrishnan, a 2 judge bench of the Supreme Court while hearing an SLP against a decision passed in a Section 8, Arbitration & Conciliation Act, 1996 observed that matters of fraud that dealt with complex legal questions were better suited to be adjudicated upon a civil court as opposed to being decided by an arbitrator.[9] This decision was noticed by the Supreme Court in a single bench composition which heard Swiss Timing in a petition under Section 11, Arbitration and Conciliation Act, 1996. The Supreme Court in Swiss Timing took a diametrically opposite view as compared to the decision in N Radhakrishnan and held that the Arbitral Tribunal under Section 16, Arbitration and Conciliation Act, 1996 may consider the objections on its jurisdiction vis-à-vis the allegations of fraud. The Learned Single Judge did not stop at this and infact held that the two judge bench decision in N Radhakrishnan was per incuriam because it had not considered the existing case law at that point in time.[10] It is submitted that the Swiss Timing decision took a conscious decision of allowing disputes to be resolved via the pre-agreed arbitration clauses. The decision however became problematic because a Single Judge Bench adjudged a Division Bench decision to be per incuriam.

The Supreme Court has adopted a different position insofar as international commercial arbitrations under the Arbitration and Conciliation Act, 1996 are concerned. In World Sport Group while interpreting Section 45 of the Arbitration and Conciliation Act, 1996, the Supreme Court held that for foreign seated arbitrations, disputes relating to fraud are arbitrable.[11] This view in some manner also mirrors the rationale of the Supreme Court's decisions in Boghara Polyfab and Arasmeta wherein the Apex Court in 2009 and 2013 respectively categorically held that courts under Section 11 of the Arbitration and Conciliation Act, 1996 do not have the authority to rule upon the issue of arbitrability while at the stage of reference. It further held that such enquiry can be undertaken by the Arbitral Tribunal under Section 16 of the Arbitration and Conciliation Act, 1996.

The trend of these judicial decisions in Boghara Polyfab and Arasmeta had perhaps weighed with the Parliament when it decided to legislate on the subject via the 2015 Amendment. The scope of enquiry to be undertaken by courts under Section 11 of the Arbitration and Conciliation Act, 1996 had been categorically restricted after the 2015 Amendment with the introduction of Section 11 (6A)[12] which has now been specifically repealed by the 2019 Amendment. Section 11(6A) which remained on the books for an extremely brief period ensured that the courts shall only see whether a valid arbitration agreement existed or not. The power to decide on the arbitrability of a dispute was not available to the courts under this provision and this provided a large latitude to the courts in referring matters to arbitration as soon as they found out that a valid arbitration agreement existed. With the specific repeal of this section, it is conceivable that the courts may now again undertake this enquiry and this is counter-productive for the arbitration landscape in India since the courts may reject arbitration petitions by holding that the disputes are essentially non-arbitrable in their character.

So as to assess the categories of disputes which are arbitrable and those which are not arbitrable, it is apposite to consider the Supreme Court's decision in Booz Allen. The Apex Court laid down a general principle and held that those disputes which dealt with a right in rem were not arbitrable. It further held that those disputes that required adjudication of private rights and were essentially rights in personam were capable of being arbitrated.[13] The court while laying down this flexible rule also outlined certain disputes that are essentially non-arbitrable. Some examples of these non-arbitrable disputes, as outlined in the decision, are (i) disputes relating to rights and liabilities which given rise to or arise out of criminal offences; (ii) matrimonial disputes relating to divorce, judicial separation, restitution of conjugal rights, child custody; (iii) guardianship matters; (iv) insolvency and winding up matters; (v) testamentary matters (grant of probate, letters of administration and succession certificate); and (vi) eviction or tenancy matters governed by special statutes where the tenant enjoys statutory protection against eviction and only the specified courts are conferred jurisdiction to grant eviction or decide the disputes.[14]

It is thus clear that the Indian courts have relied upon public policy principles and accordingly categorized disputes as being arbitrable and non-arbitrable. The current position of law vis-à-vis arbitrability of fraud has been crystallized through two recent decisions of Ayyasamy and Rashid Raza. The ratio of a two-judge bench decision in Ayyasamy has been subsequently approved a larger bench of three judges in Rashid Raza. Therefore as things stand, frauds in domestic arbitration are classified as simple fraud/fraud simpliciter and complex fraud. Whereas the first category of fraud namely simple fraud/fraud simpliciter remains arbitrable, the second category cases i.e., complex frauds are not arbitrable and must be adjudicated by civil courts which are equipped to record voluminous evidence on complex issues of law.

For determining as to whether the dispute constitutes serious fraud or simple fraud, the Supreme Court in Ayyasamy[15] and subsequently Rashid Raza[16] conceptualized a working two part test. Firstly, whether the plea of fraud permeates the entire contract and importantly the arbitration agreement to render it void and secondly as to whether the fraud allegations merely relate to the parties' internal affair or do they have an implication upon the public domain.

It is submitted that in both Ayyasamy and Rashid Raza, the courts ultimately appointed arbitrators to adjudicate the disputes but the understanding of the Supreme Court on what constitutes a serious fraud has been largely inconsistent. In State of Bihar v. Divesh Kumar Chaudhary[17], the Supreme Court dealt with a set of 250 plus criminal cases wherein there had been wide scale embezzlement of public funds to the tune of INR 1500 Crores. The Supreme Court while considering the petitions preferred by State of Bihar and the Bihar State Food & Civil Supplies Corporation passed a detailed order and ordered for the establishment of 5 Special Courts in Bihar to try and adjudicate these financial fraud disputes. Subsequently multiple accused in these disputes invoked arbitration clauses and sought the appointment of arbitrators under Section 11 of the Arbitration and Conciliation Act, 1996. In each and every such case, the Patna High Court appointed arbitrators and chose not to be guided by the Ayyasamy rationale of delineating fraud as simple fraud and complex fraud.

Aggrieved by these decisions under Section 11, the Bihar State Food & Civil Supplies Corporation approached the Supreme Court via a SLP in the case of Bihar State Food and Civil Supplies Corporation Ltd. & Ors v. Sadhana Kumari[18] and contended that this was a direct violation of the Ayyasamy decision. It was argued that when the Supreme Court had itself noted the widespread nature of public fraud and established special criminal courts to exclusively adjudicate these cases dealing with economic offences, then there was no scope for the arbitrators to adjudicate upon these disputes. It is submitted that the Apex Court on 29.01.2018 declined to interfere with these decisions of the Patna High Court and also distanced itself from the distinction between simple fraud and complex fraud as laid down in Ayyasamy.

It is the author's contention that the Ayyasamy and Rashid Raza decisions are problematic and cause great dis-service to the Indian arbitration landscape because they confer an unimaginably large amount of discretion upon courts to adjudicate as to what is simple fraud and what is complex fraud.

It is submitted that the parties at the time of signing a commercial agreement are quite often ad-idem that their disputes should be resolved through a reference to arbitration as opposed to adjudication by civil courts. The rationale for this is that there is a large amount of party autonomy that is available under arbitration and it represents a far swifter process when compared to adjudication by civil courts.

The direct effect of Ayyasamy and now Rashid Raza is that it completely undermines party autonomy in arbitration and compels the courts to undertake a pre-reference adjudication on merits. It is also troublesome because it gives a complete go-by to Section 16 of the Arbitration and Conciliation Act, 1996 because even if the courts were to hold that a dispute is arbitrable, a party could still raise objections about an arbitrator's jurisdiction under Section 16 and perhaps successfully demonstrate that the dispute in essence was incapable of being resolved via arbitration.[19] It is submitted that this pre-emptive judicial determination by courts of a dispute as being arbitrable or not, completely dilutes the statutory mandate of Section 16 and prevents disputes from being referred to arbitration. The endorsement of Ayyasamy by a larger bench in Rashid Raza only exacerbates this problem and has a chilling effect on trade and commerce.

These decisions are problematic because of the Indian Supreme Court through the decisions of World Sport Group, Ayyasamy and Rashid Rza has now created an artificial distinction between foreign seated arbitrations and domestic seated arbitrations. Whereas the former set of arbitrations recognize that fraud is arbitrable, the latter has a classification of disputes into simple and complex fraud. It is submitted that the parties in order to ensure that there is a minimal judicial intervention in arbitration disputes may simply choose to have a foreign seated arbitration as opposed to domestic seated arbitration. It is the author's contention that the inconsistent jurisprudence of the Supreme Court is one of the reasons behind the current conundrum around arbitrability of fraud and this myopic approach may also dent the larger aim of making India a hub of international commercial arbitration.

It has already been demonstrated by the author that the approach of the Supreme Court has been inconsistent in differentiating between simple fraud and complex fraud in domestic arbitrations. This conflict is easily visible when seen through the Ayyasamy, Divesh Kumar Chaudhary, Sadhana Kumari and Rashid Raza decisions.

The decision of the Supreme Court in Ayyasamy and Rashid Raza also goes against the global trend which has now moved towards the view that the threshold to adjudge the arbitrability of a dispute is within the realm of an arbitrator and not a civil court. The unanimous decision of the US Supreme Court in Henry Schein Inc v. Archer and White Sales Co
[20] is an endorsement of the same principle. In Henry Schein Inc, a unanimous Supreme Court has held that even if a party pleads that the reference to arbitration is "wholly groundless", the decision on that specific aspect must be delivered by the arbitrator as opposed to a court. This decision of the US Supreme Court is in sync with the Arbitration principle of Kompetenz-Kompetenz which recognizes that an arbitral tribunal remains competent to rule upon its own jurisdiction.

It is submitted that there are two further flaws with the Ayyasamy and Rashid Raza decisions insofar as they do not proceed to hold all frauds to be capable of resolution via domestic arbitration. Firstly, it missed the fact that the 246th Law Commission Report at Para 52 had specifically dealt with the issue. It had recommended a specific amendment to Section 16 so as to expressly make issues of fraud as arbitrable.
[21] Secondly, the Supreme Court in Ayyasamy and Rashid Raza has also overlooked Section 27 of the Arbitration and Conciliation Act, 1996 which allows an arbitral tribunal to take assistance in recording of evidence. The mere fact that a dispute is complex and it requires recording of voluminous evidence should not be a concern when it comes to determining a dispute's arbitrability.[22]

It is the author's contention that the Supreme Court's approach in Ayyasamy and Rashid Raza does not inspire confidence and these decisions deserve a quiet burial. Till such time that these decisions hold and occupy the field, there is always going to be a lurking fear that arbitrations can be nipped in the bud through judicial intervention at the pre-reference stage. Such an approach is neither in consonance with the global trend as seen in the Henry Schein Inc case nor does it enhance India's claim as being a pro-arbitration jurisdiction.

The author is a Counsel at the Supreme Court of India. He has read law at Harvard Law School, Columbia Law School and National Law School of India University. The author is grateful for the research assistance rendered by Udian Sharma, Jaideep Khanna, Shubham Jain and Dhruva Gandhi. The author can be reached via email on [email protected] and via Twitter on @_singhshivam.

The author argued as the lead counsel in Rashid Raza and also appeared in the cases of Divesh Kumar Chaudhari and Sadhana Kumari

[The opinions expressed in this article are the personal opinions of the author. The facts and opinions appearing in the article do not reflect the views of LiveLaw and LiveLaw does not assume any responsibility or liability for the same]

[1] (2010) 1 SCC 72.

[2] (2014) 6 SCC 677.

[3] (2014) 11 SCC 639.

[4] (2011) 5 SCC 532.

[5] (2009) 1 SCC 267.

[6] (2013) 15 SCC 414.

[7] (2016) 10 SCC 386.

[12] Section 11(6A) which was introduced via the 2015 Amendment and has now been repealed via the 2019 Amendment read as under:

The Supreme Court or, as the case may be, the High Court, while considering any application under sub-section (4) or sub-section (5) or sub-section (6), shall, notwithstanding any judgment, decree or order of any Court, confine to the examination of the existence of an arbitration agreement.

[13] See Para 38 of (2011) 5 SCC 532.

[14] See Para 36 of (2011) 5 SCC 532.

[15] See Para 25 of (2016) 10 SCC 386.

[16] See Para 5 and 6 of (2019) SCC Online SC 1170.

[17] (2018) 16 SCC 817.

[18] SLP Civil No. 450/2018

[19] Parul Kumar, "Is Fraud Arbitrable? Examining the Problematic Indian Discourse", 33 (2) Arbitration International (2017), 249-274 at Page 263 and 264.

[20] 139 S. Ct. 524 (2019)

[21] Parul Kumar, "Is Fraud Arbitrable? Examining the Problematic Indian Discourse", 33 (2) Arbitration International (2017), 249-274 at Page 261

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