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May 19, 2014

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Can Arbitration Survive Fraud?


- Naresh Thacker, Partner [ Economic Laws Practice (ELP) ]
- Neeti Sachdeva, Senior Associate [ Economic Laws Practice (ELP) ]

Naresh Thacker & Neeti Sachdeva

If a party to arbitration alleges fraud, does that render the jurisdiction of the arbitral tribunal ineffective? Increasingly, allegations of fraud are being encountered in commercial arbitrations, both domestic and international. At times, there is a perception that international arbitration is not equipped enough to handle such allegations of fraud and that in such situations, the court of law is the appropriate forum to handle such challenges

This article traces the law in India and UK, in cases where fraud is alleged by one of the parties to arbitration. Firstly, what is Fraud? Fraud is defined as a knowing misrepresentation of the truth or concealment of a material fact to induce another to act in a manner that is detrimental to their interests.1

Legal Position In India


The important question for consideration is if complicated questions of fact or law are involved or where there is allegation of fraud, can a court refer the matter to arbitration?

In the Indian context, the answer to the above question would be dependent upon whether the seat of arbitration is in India or outside India.

The position of law with respect to domestic Arbitration, with seat in India, was laid down by the Supreme Court in N Radhakrishnan v Maestro Engineers2. The Court held that when a case involves substantial questions relating to facts where detailed material evidence (both documentary and oral) needs to be produced by either parties, and serious allegations pertaining to fraud and malpractice are raised, then the matter must be tried in court and the Arbitrator would not be competent to deal with such matters which involved an elaborate production of evidence to establish the claims relating to fraud and criminal misappropriation.

To reach the above conclusion, the Apex Court relied upon its earlier judgement in Abdul Kadir Shamsuddin Bubere v Madhav Prabhakar Oak3, wherein it was held that where serious allegations of fraud are made against a party and the party who is charged with fraud desires that the matter should be tried in open court, that would be a sufficient cause for the court not to order an arbitration agreement to be filed and not to make the reference. Reliance was also placed on the decision of the Supreme Court in Haryana Telecom Ltd v Sterlite Industries (India) Ltd4 and the decision of the Madras High Court in Oomor Sait HG v Asiam Sait5.

It is pertinent to mention that in the Maestro Engineers case, the application was made under Section 8 (1)6 of the Arbitration and Conciliation Act (hereinafter "the Act") to refer the matter to arbitration.

The judgement of the Supreme Court in Maestro Engineers is seen as diluting the prohibition against judicial intervention recognised by the Act.

The position of law with respect to arbitrations with seat outside India, involving an allegation of fraud, was recently considered by the Supreme Court in its judgement of World Sport Group (Mauritius) Ltd v MSM Satellite (Singapore) Pte Ltd7, wherein the Court referred the dispute to arbitration despite involvement of allegations of fraud.

In MSM Satellite, the Court was confronted with the issue whether it is appropriate to refer the matter to arbitration under Section 458 of the Act. The Court relied heavily on the wording of Section 45 of the Act, which provides that the court shall refer the parties to arbitration, at the request of one of the parties, unless it finds that the said agreement is "null and void, inoperative or incapable of being performed". The Court held that the reference to arbitration could be rejected under Section 45 of the Act if there was an attack on the arbitration agreement itself. Applying the principle of separability the Court held that the allegation of fraud, even if proved, did not impact the validity of the arbitration agreement, as the arbitration agreement is separable from the main contract. In the present case, the arbitration clause was not assailed as vitiated by fraud or misrepresentation and hence the parties could be refered to arbitration. The Court then referred to the decision in Maestro Engineers and held that it applied only in the context of domestic arbitration, when the matter is to be referred to arbitration under Section 8 of the Act.

Brief Analysis Of The Indian Position


The two landmark decisions in the field of fraud are distinguishable by the fact that the two arbitrations involved different seat of arbitration, one was in India and hence governed by Section 8 and the other had seat outside India and hence governed by Section 45 of the Act. The language of the two sections are different, as in Section 45 specifically provides that the Court shall refer the parties to arbitration, unless it finds the agreement is "null and void, inoperative or incapable of being performed", which qualification is not in Section 8 of the Act. Also, in the case of MSM Satellite, the Court held that the party who alleges fraud against another party cannot make a request to refer the dispute to court rather than proceeding with arbitration.

Thus the position in India as of date remains that for seat within India, the Maestro case shall be applicable and an allegation of fraud will render the arbitration agreement infructuous. However, if the seat is outside India, the court will be governed by the law laid down in the judgement of MSM Satellite and shall refer the dispute to arbitration, unless the arbitration agreement is "null and void, inoperative or incapable of being performed".

Position In England


In the landmark case of Fiona Trust & Holding Corporation v Yuri Privalov9, the House of Lords in the United Kingdom was called upon to decide whether the arbitral tribunal might rule on its own jurisdiction, including the existence of a valid arbitration agreement, even where the ship-owners alleged that the charter-party containing the arbitration agreement was procured by bribery/fraud?

The House of Lords held that an arbitration clause should be construed on the presumption that the parties intended any dispute arising out of the relationship into which they had entered or purported to enter to be decided by the same tribunal, unless the language made it clear that certain questions were intended to be excluded from the arbitrator's jurisdiction. In the instant case, the language of the arbitration clause contained nothing to exclude disputes about the validity of the contract, whether on the grounds that it was procured by fraud, bribery, misrepresentation or anything else. Hence, it was held that the tribunal would have power to rule on its own jurisdiction.

The Court then relied on the principle of separability enacted in Section 710 of the English Arbitration Act, which provides that the invalidity or non-existence of the main agreement does not render the arbitration agreement invalid or non-existent. The arbitration agreement has to be treated as a distinct agreement and could be void or voidable only on the ground which is directly related to the arbitration agreement and not merely a consequence of the main agreement. Hence in the instant case, since the allegation of fraud was on the main agreement and not on the arbitration agreement, the tribunal would have power to rule on its own jurisdiction.

Way Forward For The Issue Of Fraud In Arbitration


If the seat is outside India, the court will be governed by the law laid down in the judgement of MSM Satellite and shall refer the dispute to arbitration, unless the arbitration agreement is "null and void, inoperative or incapable of being performed"

In UK, the issue of fraud in arbitration has now proceeded to another level. In the matter of Chantiers de l’Atlantique S.A. v Gaztransport & Technigaz S.A.S.11 the English High Court was faced with a very interesting question that where material evidence tendered to an arbitral tribunal was fraudulent, would the court set aside the award. The Court came to the conclusion that the tribunal had been seriously deceived by the oral evidence of one of the witnesses and concluded that deliberately giving misleading evidence amounted to fraud for the purposes of Section 68(2)(g) of the English Arbitration Act, but refused to set aside the award. The Court concluded that even if the true position had been disclosed to the arbitrators that would not have affected the result of the arbitration, hence the award was not obtained by fraud and no substantial injustice has been caused. The Court held that in order to successfully set aside the award, it must be shown that there is a casual link between the fraud and the award itself.

In times to come, it will be interesting to observe how different jurisdictions deal with different facets of fraud affecting the world of arbitration.

Footnote:
1 Black's Law Dictionary, Ninth Edition.2 (2010) 1 SCC 72; 3 AIR 1962 SC 406; 4 AIR 1999 SC 2354; 5 2001 (3) CTC 269; 6 8. Power to refer parties to arbitration where there is an arbitration agreement. - (1) A judicial authority before which an action is brought in a matter which is subject of an arbitration agreement shall, if a party so applies not later than when submitting his first statement on the substance of dispute, refer the parties to arbitration. 7 Supreme Court decision dated 24th January 2014; 8 Section 45: Where the court is presented with a matter in respect of which parties have entered into an arbitration agreement, it shall refer the parties to arbitration at the request of one of the parties unless it finds that the arbitration agreement is null and void, inoperative or incapable of being performed. 9 [2007] EWCA Civ 20; 10 Section 7 of the Arbitration Act: Unless otherwise agreed by the parties, an arbitration agreement which forms or was intended to form part of another agreement (whether or not in writing) shall not be regarded as invalid, non-existent or ineffective because that other agreement is invalid, or did not come into existence or has become ineffective, and it shall for that purpose be treated as a distinct agreement. 11 [2011] EWHC 3383 (Comm).

 

Disclaimer - The information provided in the article is intended for informational purposes only and does not constitute legal opinion or advice. Readers are requested to seek formal legal advice prior to acting upon any of the information provided herein.

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