21 February, 2017
There is a perception that arbitration proceedings in India are plagued with delays, interventionist courts, and parties attempting to scuttle the proceedings. A mere allegation of fraud was often enough to obstruct an arbitration proceeding on the ground that the criminality underlying the fraud would render the dispute non-arbitrable. This is no longer the case.
A major factor in making arbitration proceedings efficient is minimal judicial intervention. However, parties often subvert and delay arbitral proceedings by raising the ground that the nature of the dispute is non arbitrable. For instance, when commercial relations go sour leading to disputes, parties routinely make allegations of fraud. This was then used as a ground to force the dispute out of arbitration and into the traditional court system. This relied upon the Supreme Court’s decision in N. Radhakrishnan v. Maestro Engineering[2], that disputes involving allegations of fraud are incapable of being adjudicated by an arbitral tribunal. The subsequent decision in Swiss Timing v. Organising Committee[3], took a contrary view to N. Radhakrishnan. These contradictory decisions left the issue open and continued the uncertainty around the viability of domestic arbitrations as an effective dispute resolution mechanism.
The issue now stands settled. The Supreme Court in the recent decision of A. Ayyasami v. A. Paramasivam[4] has held that a mere allegation of fraud will not render disputes non-arbitrable.
Facts in brief
A dispute arose on account of allegations of fraud and embezzlement against the Appellant in managing a hotel. The Respondents had entered into a partnership deed with the Appellant for running the hotel and filed for an injunction before a civil court for preventing the Appellant from managing the affairs of the hotel. The Appellant filed an application under Section 8 of the Arbitration and Conciliation Act, 1996 (“Act”) for referring the dispute to arbitration given the arbitration agreement between the parties. The Respondents raised fraud as a ground to argue that the civil court was an appropriate forum to adjudicate this matter. The lower court followed Radhakrishnan and dismissed the plea for referral of the dispute to an arbitral tribunal. This was upheld by the Madras High Court. In appeal, the Supreme Court considered the issue whether mere allegations of fraud render disputes non-arbitrable.
The Supreme Court acknowledged that the previous decisions had identified fraud as one of the categories for considering disputes non-arbitrable. But it distinguished between mere allegations of fraud and serious cases of fraud.[5] The Court held that disputes involving mere allegations of fraud are arbitrable, except when such allegations are of a serious, complex nature, which would warrant examination of extensive and voluminous evidence. It recognised that alleging fraud was a convenient mode for parties to avoid arbitration. The Court concluded that the allegations were not serious in nature, reversed the High Court’s decision and appointed an arbitrator.
Analysis
The crucial aspect of this decision is the Court’s recognition of the commercial interests and party autonomy in choosing arbitration as the preferred mode of dispute resolution. The Court steered the law in the direction that respects and enforces the choice of the contracting parties to resolve their disputes through a private tribunal, and where parties exercise such a choice, they do so with the knowledge of the efficacy of the arbitral process.
Ayyasamy has also aligned the law relating to the issue of mere allegations of fraud in domestic arbitrations and off-shore arbitrations. The Supreme Court has ruled that off-shore arbitrations cannot be refused on the ground that issues of fraud are involved.[6] Parties now need to be cognisant that mere allegations of fraud will not be a ground to wriggle out of arbitration proceedings, in both domestic and international arbitrations.
India ranks 178 out of 189 economies on the ease of enforcing contracts.[1] There now appears to be a concerted effort to build the legal jurisprudence and statutory law to support and promote domestic arbitrations in India.
Recently the Government of India in its efforts to promote arbitration constituted a High Level Committee (HLC) chaired by Mr. Justice B. N. Srikrishna, Retired Judge, Supreme Court. This HLC has been constituted to examine specific issues and the roadmap required to make India a robust centre for international and domestic arbitration. We can expect to see more changes in this direction.
[2] (2010) 1 SCC 72.
[3] (2014) 6 SCC 677.
[4]Civil Appeal Nos. 8245-8246 of 2016.
[5] The Court outlined the following disputes which would not fall within the purview of arbitration: patent, trademark and copyright; anti-trust/competition laws; insolvency/ winding-up; bribery/ corruption; criminal offences; matrimony; guardianship; tenancy matters; and trusts.
[6] See World Sports Group (Mauritius) Ltd v. MSM Satellite (Singapore) Ltd. (2014) 11 SCC 639.
For further information, please contact:
Amita Katragadda, Partner, Cyril Amarchand Mangaldas
amita.katragadda@cyrilshroff.com
