Allegations of fraud in contracts have presented a challenge for contracting parties and the courts Lately, courts in India have been faced with an increasing number of cases where either party to an arbitration agreement, challenges the arbitrability of the subject matter on the ground of fraud. In such a scenario, the courts in India have closely examined these issues and...
Allegations of fraud in contracts have presented a challenge for contracting parties and the courts
Lately, courts in India have been faced with an increasing number of cases where either party to an arbitration agreement, challenges the arbitrability of the subject matter on the ground of fraud. In such a scenario, the courts in India have closely examined these issues and to some extent, clarified the same in recent judgements as explained below:
What is fraud?
- Fraud is not defined or otherwise expressly dealt with anywhere under the Arbitration and Conciliation Act, 1996 ('Act'), which governs the law of arbitration in India.
- In Black's Legal Dictionary, 9thEd. (2009), 'fraud' is defined as a knowing misrepresentation of the truth or concealment of a material fact to induce another to act to his or her detriment.
Position of law in domestic arbitration
The position with regard to arbitrability of fraud in domestic arbitration came into highlight in the case of N. Radhakrishnan v. Maestro Engineering &Ors., (2010) 1 SCC 72, ('Maestro Case').
In an application under Section 8 (2) of the Act, the appellant had made serious allegations of fraud and malpractices against the respondent and thus, the respondent in its defence contended that the matter be referred for adjudication to the civil court. The Apex Court opined that when a dispute concerns serious allegations of fraud, such a dispute could not be referred to arbitration as it involved elaborate production of evidence in proving fraud and criminal misappropriation, which could not be properly dealt with by the arbitrator. The Apex Court also observed that in any case, the appellant had failed to annex the original partnership deed containing the arbitration clause as per the requirements of Section 8 of the Act.
In the matter of Blue Star Limited v. Farm Fresh Food Processors & Others, [(2013) 4 MhLJ 517] ('Blue Star Case'), the Bombay High Court was confronted with the issue of fraud in an application under Section 11 of the Act and required to decide whether the arbitration agreement was valid and enforceable.
In this case, the Bombay High Court held that where allegations of fraud or fabrication are made with regard to the existence of the arbitration agreement under Section 11 of the Act, the court ought to decide on the existence of a valid/enforceable arbitration agreement before proceeding to appoint an arbitrator. In other words, existence of a valid arbitration agreement is a condition precedent before appointment of an arbitrator. After considering the facts and circumstances of the case, the Bombay High Court came to the conclusion that since the arbitration agreement between the parties existed and the agreement was acted upon/performed in part, the allegations of fraud were not sustainable and hence, there was no requirement to refer the matter to the civil court.
In the case of Rekha Agarwal vs. Anil Agarwal and Others (Judgement dated April 3, 2014) ('Agarwal Case') before the Bombay High Court, the issue which arose for consideration was whether an arbitrator could refuse to exercise its jurisdiction in disputes involving fraud.
The Bombay High Court whilst dealing with this issue opined that, where it is brought to the notice of the arbitrator that there are allegations of fraud or malpractice which require leading of elaborate evidence, the arbitrator cannot simply stay his hands and refuse to exercise jurisdiction and hence, the arbitrator could not be said to lack inherent jurisdiction to decide such a dispute, more specifically in a case where his appointment was made by the court under Section 11(6) of the Act.
Position of law in foreign seated arbitration
Recently, in two landmark decisions, the Courts in India have displayed concerted efforts to align their jurisprudence with international standards and to portray India as an arbitration-friendly jurisdiction.
The judgement of the Bombay High Court in HSBC PI Holdings (Mauritius) Limited vs. Avitel Post Studioz Limited (Judgement dated January 22, 2014 in Arbitration Petition No. 1062 of 2012) ('HSBC Case') and the judgement of the Apex Court in WSG Mauritius Limited v. MSM Satellite AIR (2014) SC 968 ('WSG Case') have brought India in harmony with other jurisdictions where there is minimal interference of the courts in matters where the parties have mutually agreed to adjudication of disputes by way of arbitration.
In the HSBC Case, the respondent contended that since the dispute involved allegations of fraud, the award passed by the arbitrator was unenforceable in terms of Section 48(2) (a) of the Act and hence, the petition filed by the petitioner under Section 9 of the Act was not maintainable. The Bombay High Court observed that there was a distinction between allegations of fraud made by the parties and where the subject matter itself was incapable of arbitration. It opined that where there are serious allegations of fraud which would require examination of documentary and oral evidence, the court's powers under Section 8 of the Act to refer the matter to the civil court are discretionary, depending on the facts and circumstances of the case and such powers should be exercised only in exceptional circumstances as in the Maestro Case.
It also explained that in an application under Section 11 of the Act, the court does not probe into the arbitrability of the matter but only scrutinises the validity of the arbitration agreement, whereas in an application under Section 8 of the Act, the court is required to examine the arbitrability of the matter and aspects connected therewith. It was further opined that if at a later stage, the arbitrator is faced with a challenge to deal with evidence, the arbitrator can seek assistance of the court under Section 21 of the Act.
It was observed that where the court is required to decide whether the dispute involving fraud can be referred to arbitration or not, the court should scrutinise; (i) whether the subject matter is arbitrable or not; (ii) whether rights in personam or rights in rem require determination; (iii) whether the party is alleging fraud or charged with fraud; (iv) nature of fraud and (v) facts and circumstances of each case.
In the facts of the case, considering that the arbitrability of the matter was already decided by the Singapore courts, vested with the jurisdiction to resolve the dispute as per agreement of the parties, it was held that the court in a Section 9 Petition would not go into the issue which had attained finality and had not been challenged.
Further, it was held that only when a matter cannot be decided by the arbitrator, it can be taken up as a defence under Section 48(2) (a) of the Act. The court also opined that in any case, since the matter was only for interim measures, the court under Section 9 had no powers to grant such a relief.
In the WSG case, the Apex Court held that in view of the mandate of Section 45 of the Act, the court could not have declined to refer the matter for arbitration unless the arbitration agreement made by the parties in terms of Section 44 of the Act was found to be inoperative, void or incapable of performance. Although no test was laid down for adjudication of the arbitration agreement, it opined that the dispute involving an allegation of the voidability of the main contract, on account of fraud, should be referred to arbitration, thereby suggesting that the arbitration agreement does not become void on mere allegation of fraud and the courts will have to examine each case on its own merits before treating the arbitration agreement as void and unenforceable. It was also held that an arbitral tribunal adjudicating upon 'fraud claims' would not be against the public policy of India, since the parties themselves had agreed to refer such disputes to be adjudicated by the arbitral tribunal.
Thus, the above judgements do not alter the law relating to domestic arbitration but clarify the position under foreign seated arbitrations.
Position of law in Indian seated international commercial arbitration
Most recently, in the case of Swiss Timings Limited vs. Organizing Commonwealth Games 2010, Delhi, ('Swiss Case'), (Judgement dated May 28, 2014 in Arbitration Petition No. 34 of 2014), the Apex Court once again emphasised the policy of least interference in arbitration proceedings which recognises the principle that the function of courts in matters relating to arbitration is to support the arbitration process.
In an application under Section 11 (4) read with Section 11(6) of the Act, the respondent, by placing reliance on a criminal complaint for fraud and corruption filed against the petitioner and certain others, alleged that the petitioner had indulged in corrupt practices and thus, the contract itself stood void ab initio. On such grounds, the respondent contended that the arbitration clause could not be invoked. However, the Apex Court held that it is well settled law that the arbitration clause in an agreement is to be treated as independent from the underlying contract and merely because the contract was said to be void, the same did not take away the powers of the court under Section 8 or Section 11 of the Act to refer the matter to arbitration and the arbitral tribunal could examine the plea of fraud raised by the respondent.
Conclusion
From a conceptual analysis of the above judgements, the inescapable conclusion is that the arbitrator is vested with unhindered jurisdiction to arbitrate under the Act in disputes involving allegations of fraud, forgery, coercion and the like and thus, the arbitrator need not refer the parties to the civil court for determination of the dispute, save and except in certain cases.
It is evident that allegations of fraud in contracts have presented a challenge for the parties who opt for arbitral jurisdiction and the courts. The challenging task for the courts in India is to lay down the law on the subject with a degree of certainty and uniformity.
At this juncture, it is apt to quote the words of Justice Benjamin Cardozo of the American Supreme Court who said 'Law is a living growth, not a changeless code'.
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