Fraud Being Non-Arbitrable Due To Complexity Is Archaic Position, Contemporary Arbitration Practice Has Evolved: Bombay High Court

Brief Facts:

The matter pertained to the formation and subsequent restructuring of Krushiking Agrotech Industries Pvt. Ltd., a company aimed at providing agricultural services through software and related applications. Nilesh Shejwa (“Petitioner”), along with his brother, initiated this venture, eventually leading to a Share Purchase Agreement with Mr. Abhijit Pawar of Sakal Group, renaming the company to Agrowon Agrotech Industries Private Limited (“Respondent”). Additionally, a Deed of Assignment was executed, transferring all ownership rights, trademarks, copyrights, and intellectual property to Krushiking Agrotech Industries Pvt. Ltd. Furthermore, the Petitioner was appointed as the Chief Executive Officer in 2019, with a detailed Letter of Appointment and Employee Agreement outlining his roles, responsibilities, and remuneration.

However, tensions arose when the Petitioner was abruptly restrained from office, citing alleged irregularities within the company's operations. Subsequently, he was compelled to resign but later rescinded this resignation upon the completion of an audit. In response, the Respondent issued a termination notice, citing misappropriation of funds, misuse of the company brand, and breach of trust/contract as grounds for termination. This action was accompanied by a criminal complaint filed against the Petitioner, invoking sections 409, 420, and 477A of the Indian Penal Code, leading to a request for protection from arrest.

A notice was sent by the Petitioner to the Respondent demanding revocation of the termination letter and payment of the agreed-upon remuneration for the entire tenure. In response, the Respondent denied the allegations of illegality and rejected the claim for salary and variables. Furthermore, the Respondent asserted its right to claim damages and contested the invocation of arbitration by the Petitioner. The Petitioner invoked the arbitration clause in the agreement since the dispute had arisen between the parties, in the wake of the termination notice of his services, which according to him was illegal and in breach of the terms of the Agreement.

The Respondent argued against arbitration, contending that the dispute, involving allegations of fraud and collusion resulting in financial losses for the company, was not arbitrable. Thereafter, the Petitioner approached the Bombay High Court (“High Court”) and filed a Commercial Arbitration Petition to adjudicate the disputes.

Observations by the High Court:

The High Court noted that while certain categories of disputes are unsuitable for arbitration due to their public nature, disputes falling within the private realm constituted by the consent of parties are typically arbitrable. Referring to the decision of the Supreme Court in A. Ayyasamy vs. Paramasivam & Ors., the High Court underscored a twin test to determine arbitrability: whether the plea of fraud renders the arbitration agreement void or whether the fraud allegations concern internal party affairs with no public implications.

The High Court emphasized the distinction between rights in rem, which are adjudicated by courts or statutory tribunals as they pertain to rights exercisable against the world at large, and actions in personem, which determine the rights and interests of parties to the subject matter of disputes and are arbitrable. Contrary to past views that fraud disputes involving voluminous evidence were unfit for arbitration, the High Court noted that there is an evolution of contemporary arbitration practice, wherein arbitral tribunals routinely navigate through extensive material in various dispute types. Thus, it held that the previous notion of fraud being non-arbitrable due to complexity is archaic and no longer applicable in modern arbitration practices.

Addressing the Respondent's objection to arbitration, the High Court held that the dispute primarily concerned the Petitioner's employment contract and termination, which fell within the realm of arbitrable claims. The High Court dismissed concerns about the Respondent's disclosure obligations in arbitration, highlighting that the criminal proceedings' pendency did not vitiate the arbitration agreement. Consequently, the High Court appointed Mr. Sarang Aradhye as the arbitrator.

Case Title: Nilesh Shejwal vs Agrowon Agrotech Industries Pvt. Ltd.

Case Number: Commercial Arbitration Petition No.14 OF 2022

Advocate for the Petitioner: Mr. Shavez Mukri i/b A & G Legal Associates

Advocate for the Respondent: Mr. Vishwajit Sawant, Senior Advocate and Prabhakar Jadhav for the Respondent.

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