22 January 2021
In Part I of this post, we discussed the findings of the Court on the issue of separability of arbitration agreements from the underlying contract and the corresponding validity of arbitration agreements in unstamped agreements. In this part, we will analyse the findings of the Court with respect to arbitrability of disputes involving fraud; and issue of maintainability of writ petitions against orders passed under the Arbitration Act and provide our views on the Judgment.
Arbitrability of disputes involving fraud
Whilst discussing the development of law on arbitrability of disputes in general and disputes involving fraud in particular, the Court recognised that in all jurisdictions across the globe, certain categories of disputes were reserved by the legislature, as a matter of public policy, to be adjudicated by a court of law, as they were in the realm of public law. In this regard, the Court noted that traditionally, disputes relating to rights in rem (i.e. rights exercisable against the world at large such as citizenship, divorce, testamentary and probate issues, etc.) are required to be adjudicated by Courts and/ or statutory tribunals and not by private tribunals constituted by the consent of parties. On the other hand, actions in personam (i.e. actions that determine the rights and interests of parties to the subject matter of the dispute) are arbitrable.
The Court observed that in the Indian context, the broad categories of disputes which are considered to be non-arbitrable[1] are penal offences which are visited with criminal sanction; offences pertaining to bribery / corruption; matrimonial disputes relating to divorce, judicial separation, restitution of conjugal rights, child custody and guardianship matters, which pertain to the status of a person; testamentary matters which pertain to disputes relating to the validity of a will, grant of probate, letters of administration, succession, which pertain to the status of a person, are adjudicated by civil courts. Further, certain categories of disputes such as consumer disputes[2]; insolvency and bankruptcy proceedings; oppression and mismanagement or winding up of a company; disputes relating to trusts, trustees and beneficiaries of a trust[3] are governed by special enactments.
On the other hand, all civil or commercial disputes, either contractual or non-contractual, which could be adjudicated by a civil court, in principle could be adjudicated and resolved through arbitration, unless it was excluded either expressly by statute, or by necessary implication. It highlighted that even though the Arbitration Act did not exclude any category of disputes as being non arbitrable, Section 2(3)[4] of the said Act specifically recognised that certain categories of disputes, by law, may not be submitted to arbitration. With respect to the arbitrability of voidable agreements, whilst explaining the meaning[5] of voidable agreements in this context, the Court observed that such disputes would be arbitrable. The Court reasoned that since the issue of consent, whether procured by coercion, fraud, or misrepresentation requires to be adjudicated upon by leading cogent evidence, and could very well be decided through arbitration, the same was arbitrable.
In the context of arbitrability of disputes involving fraud[6], the Court observed that the view taken by a two-judge bench earlier in N. Radhakrishnan v. Maestro Engineers[7] that allegations of fraud were not arbitrable on the basis that the issues involved detailed investigation into the allegations and production of elaborate evidence, was a “wholly archaic view, which has now become obsolete, and deserves to be discarded”. It recognised that, to the contrary, in contemporary arbitration practice, arbitral tribunals are required to traverse through volumes of material in various kinds of disputes such as oil, natural gas, construction industry, etc.
Reiterating Avitel Post Studioz Ltd. & Ors. v. HSBC PI Holdings (Mauritius Limited)[8], the Court observed that the civil aspect of fraud[9] is considered to be arbitrable in contemporary arbitration jurisprudence, with the only exception being the allegation that the arbitration agreement itself is vitiated by fraud or fraudulent inducement, or the fraud goes to the validity of the underlying contract, and impeaches the arbitration clause itself. Another category of cases is where the substantive contract is “expressly declared to be void” under Section 10 of the Contract Act where the agreement is entered into by a minor (without following the procedure prescribed under the Guardian and Wards Act, 1890) or a lunatic, which would be with a party incompetent to enter into a contract.
The Court noted that the criminal aspect of fraud, forgery, or fabrication, (which would be visited with penal consequences and criminal sanctions) can be adjudicated only by a court of law, since it may result in a conviction, which fell in the realm of public law. In this regard however, the Court reiterated the view taken by it in Avitel (supra) that in cases where it was clear that a civil dispute involved questions of fraud, misrepresentation, etc. which could be the subject matter of a proceeding under Section 17 of the Contract Act and/or the tort of deceit, the mere fact that criminal proceedings can or have been instituted in respect of the same subject matter, would not lead to the conclusion that a dispute which is otherwise arbitrable, ceased to be so.
Applying the aforesaid principles to the facts of the present case, the Court found that the allegations of fraud with respect to the invocation of the bank guarantee are arbitrable as they arose out of disputes between parties inter se, and were not in the realm of public law. Further, it directed the Appellant to seek interim relief under Section 9 of the Arbitration Act with regards to the invocation of the bank guarantee.
Maintainability of writ petition
The Court observed that since the judgment and order of the Commercial Court refusing to refer the parties to arbitration was an appealable order under Section 37(1)(a)[10] of the Arbitration Act, the writ petition was not maintainable. Accordingly, it set aside the writ petition decided by the Bombay High Court.
CONCLUSION
The Supreme Court has succinctly summarised the law on arbitrability of disputes involving fraud and the doctrine of separability of arbitration agreements. Whilst tracing the development of law in India in these aspects, the Court has also discussed the concurrent position of law in other jurisdictions such as United Kingdom, France, and United States of America. The instant judgment is a welcome addition to the ever-evolving arbitration jurisprudence in India as it reaffirms the pro-arbitration mindset of the judiciary, thus paving the way for ease of doing business in India.
For further information, please contact:
Aditya Mehta, Partner, Cyril Amarchand Mangaldas
aditya.mehta@cyrilshroff.com
The Supreme Court in Booz Allen & Hamilton Inc. v. SBI Home Finance Ltd. ((2011) 5 SCC 532) has recognized some examples of disputes which are not arbitrable
[2] Emaar MGF Land Limited v. Aftab Singh, (2019) 12 SCC 751
[3] Vimal Kishor Shah & Others v. Jayesh Dinesh Shah & Others. (2016) 8 SCC 788
[4] Section 2(3) This Part shall not affect any other law for the time being in force by virtue of which certain disputes may not be submitted to arbitration.
[5] Voidable agreements are defined by Section 19 of the Contract Act as:
Section 19: Voidability of agreements without free consent — When consent to an agreement is caused by coercion, fraud or misrepresentation, the agreement is a contract voidable at the option of the party whose consent was so caused.
A party to a contract, whose consent was caused by fraud or misrepresentation, may, if he thinks fit, insist that the contract shall be performed, and that he shall be put in the position in which he would have been if the representation made had been true.
Exception.—If such consent was caused by misrepresentation or by silence, fraudulent within the meaning of Section 17, the contract, nevertheless, is not voidable, if the party whose consent was so caused had the means of discovering the truth with ordinary diligence.
Explanation — A fraud or misrepresentation which did not cause the consent to a contract of the party of whom such fraud was practised, or to whom such misrepresentation was made, does not render a contract voidable.”
[6] N. Radhakrishnan v. Maestro Engineers, Abdul Kadir v. Madhav Prabhakar (2010) 1 SCC 72 , A. Ayyasamy v. A. Paramasivam & Ors. (2016) 10 SCC 386; Rashid Raza v. Sadaf Akhtar (2019) 8 SCC 710 ; Avitel Post Studioz Ltd. & Ors. v. HSBC PI Holdings (Mauritius Limited) (2020) SCCOnLine SC 656. ; Deccan Paper Mills v. Regency Mahavir (2020) SCCOnLine SC 655 and Vidya Drolia & Others v. Durga Trading Corporation Civil Appeal No.2402 of 2019 decided vide Judgment dated 14.12.2020 .
[7] (2010) 1 SCC 72
[8] This view has been affirmed by a co-ordinate bench in Deccan Paper Mills v. Regency Mahavir (Supra) and Vidya Drolia & Others v. Durga Trading Corporation (Supra
9The civil aspect of fraud is defined by Section 17 of the Indian Contract Act, 1872 as follows :
Section 17. Fraud defined. – Fraud means and includes any of the following acts committed by a party to a contract, or with his connivance, or by his agent, with intent to deceive another party thereto or his [agent], or to induce him to enter into the contract:
(1) the suggestion, as a fact, of that which is not true, by one who does not believe it to be true;
(2) the active concealment of a fact by one having knowledge or belief of the fact;
(3) a promise made without any intention of performing it;
(4) any other act fitted to deceive;
(5) any such act or omission as the law specially declares to be fraudulent.
[10] 37 Appealable orders.—(1) Notwithstanding anything contained in any other law for the time being in force, an appeal] shall lie from the following orders (and from no others) to the Court authorised by law to hear appeals from original decrees of the Court passing the order, namely:—
(a) refusing to refer the parties to arbitration under section 8…
