Materials Before Court Insufficient To Decide Fraud In Relation To Existence Of Arbitration Agreement, Arbitrator To Decide Issue: Kerala HC

The Kerala High Court on Thursday reiterated that where a plea of fraud is raised in a dispute, the civil aspect of fraud is arbitrable, unless the very arbitration agreement is found to have been vitiated by fraud. As to the forum to decide upon the arbitrability of the agreement, Justice Satish Ninan reiterated that the Courts would be bound to refer the parties for adjudication unless it was evident that there was no valid arbitration agreement, nor an arbitrable dispute.While observing so, the bench held that in the instant case, since the materials before the Court were insufficient to conclusively decide upon the plea of fraud and on the existence of the arbitration agreement, "Applying the principles of "prima facie test" and "when in doubt refer", laid down by the Apex Court, the power conferred on the Arbitral Tribunal under Section 16 of the Act, and taking cue from the judgment of the Apex Court in Praveen Electricals case, I deem it appropriate that, the Arbitrator be directed to consider the issue of existence of the Arbitration agreement as a preliminary issue and to proceed with the merits only if it is found in favour".The instant application before the Court was one for appointment of an arbitrator as per Section 11 (5) of the Arbitration and Conciliation Act 1996 (hereinafter 'Act'). It was the applicant's case that an agreement dated 17th October 2018, had been entered into between the parties regarding the manufacture and supply of sanitary wares for the applicant company, and that defective goods had been supplied by the respondent in this regard. It was further alleged that although the applicant had requested the respondent for their cooperation in appointing an Arbitrator for dispute resolution, no such measure had been taken by the latter. On the other hand, the respondent, through its counter affidavit, contended that they had not signed the Agreement and that the signature therein was a forged one. The applicants, represented by Advocates K. Shaj, Renjit George, C. Ijlal, Arun Chand, Vinayak G. Menon, Bharat Vijay P. and Majid Muhammed K., contended that the emails between the parties would make it clear that there had indeed been communication between them and that the respondent had duly signed the Agreement. It was submitted that the agreement had been duly executed and that their silence as to the email communications would itself prove its genuineness. On behalf of the respondents, it was contended by Advocates R. Bindu, Raymond George Dias, and Harshit S. Tolia, that the signature of the Managing Director assailed in the agreement is a forged one. To substantiate the same, the respondents had also produced the opinion of a handwriting expert, which had supported their contention. It was further alleged that the seal of the company found beneath the alleged signature of the Managing Director was also fabricated. Thus, a complaint had been filed by the respondent before the police alleging forgery and fabrication. It was contended in this light that an agreement that had been created by forgery, fabrication and fraud could not be the basis for initiation of an arbitration proceeding, and that fraud could not be made the subject matter of an arbitration proceeding. In order to determine the first question as to whether disputes in which plea of fraud has been raised are arbitrable or not, the Court perused the developments in case laws in this regards such as Afcons Infrastructure Ltd. v. Cherian Varkey Construction Co. (P) Ltd. (2010) and Booz Allen and Hamilton Inc. v. SBI Home Finance Ltd and Ors (2011) in which it had been held that allegations of fraud, fabrication, forgery could not be subject matters for arbitration. It also referred to A. Ayyasamy v. Paramasivam (2016), wherein the Court drew a distinction between cases where there are serious allegations of forgery or fabrication of document in support of the plea of fraud or where the fraud alleged is of such a nature that permeates the entire contract including the agreement to arbitrate, and a plea of fraud touching upon the internal affairs of the parties (simple allegations). In Rashid Raza v. Sadaf Akhtar (2019), the Apex Court reiterated the same and even formulated a twin test for considering the issue of non-arbitrability namely; (i) whether the plea permeates the entire contract and the very agreement of arbitration rendering it void, and (ii) whether the allegations of fraud relate to the internal affairs of the parties inter se, having no implication in the public domain. Subsequent cases of Avitel Post Studioz Ltd. v. HSBC PI Holdings(Mauritius) Ltd. (2021), and Vidya Drolia v. Durga Trading Corpn. (2021) also reiterated this view. In N.N.Global Mercantile Private Limited v. Indo Unique Flame Limited and Others (2021), the Court definitively ruled that "the civil aspect of fraud is arbitrable unless the very arbitration agreement itself is vitiated by fraud, and that the criminal...

Materials Before Court Insufficient To Decide Fraud In Relation To Existence Of Arbitration Agreement, Arbitrator To Decide Issue: Kerala HC

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