Impact of Allegations of Fraud on an Arbitration Clause in Commercial Contracts
The Bench comprising of Justice Rohinton
Fali Nariman, Justice R. Subhash Reddy and Justice Surya Kant of Hon’ble
Supreme Court of India in judgement dated September 4, 2019 in the case of Rashid Raza Vs. Sadaf Akhtar[1],
set aside the judgment under the appeal by stating that the dispute between the
parties are arbitrable and hence, application of Section 11 under Arbitration
and Conciliation Act, 1996 (hereinafter referred to as the “Act”) would
be maintainable.
Facts:
The present case arises out of a
partnership dispute between the partners of a company. A FIR was lodged by one of
the partners alleging the siphoning of funds and various other business
improprieties that were committed. An arbitration petition was filed by Sadaf
Akhtar (hereinafter “Appellant”) before the Ld. High Court under Section
11 of the Act seeking appointment of an Arbitrator under the Arbitration Clause
forming part of the partnership deed between the partners. The Ld. High Court,
by the impugned order dated December 6, 2018, cited the judgement of A. Ayyasamy vs. A. Paramasivan and others[2],
wherein, the distinction between serious allegations of forgery/fabrication and
simple allegations was laid down.
Procedural History:
The High Court, by the impugned order
dated 06.12.2018, cited the judgement of A.
Ayyasamy, wherein, the distinction between serious allegations of
forgery/fabrication and simple allegations were laid down. The parties to the
dispute relied on para 26 of the supra order passed by the Ld. High Court. Para 26 of the order states that “the nature
of the dispute involving serious allegations of fraud of complicated nature are
not fit to be decided in an arbitration proceeding. The dispute may require
voluminous evidence on part of both the parties to come to a finding which can
be only properly undertaken by a Civil Court of competent jurisdiction”.
Ruling By The High Court:
The High Court while dismissing the
application under Section 11 of the Act gave the verdict that “the facts of the
instant case are much more complex as per the material on records disclosed.
The Court, however, did not intend to make any comments on merits of the
allegations lest it may prejudice the case of parties in an appropriate
proceeding before the competent Court”. However, considered in totality, the Court
was of the firm opinion that the nature of the dispute involves serious
allegations of fraud which are of complicated nature which cannot be decided in
an arbitration proceeding “as it may require voluminous evidence on part of
both the parties to come to a finding which can be only properly undertaken by
a Civil Court of competent jurisdiction”.
Submission Before The Hon’ble Supreme Court:
Counsel for both the parties made their
submissions before the Hon’ble Supreme Court, stating that the law laid down in
A. Ayyasamy’s case is in para 25 and
not in para 26 of the judgement and while dealing with an issue for application
under Section 8 of the Act, the focus of the Court has to be on the question as
to “whether jurisdiction of the Court has been ousted instead of focusing on
the issue or not. It has to be kept in mind that insofar as the statutory
scheme of the Act is concerned, it does not specifically exclude any category
of cases as non-arbitrable. Such categories of non-arbitrable subjects are
carved out by the Courts, keeping in mind the principle of common law that
certain disputes which are of public nature, etc. are not capable of
adjudication and settlement by arbitration and for resolution of such disputes,
Courts, i.e. public fora, are better suited than a private forum of arbitration”.
Therefore, the inquiry of the Court,
while dealing with an application under Section 8 of the Act, should be on the
aforesaid aspect, viz. “whether the nature of the dispute is such that it
cannot be referred to arbitration, even if there is an arbitration agreement
between the parties. When the case of fraud is set up by one of the parties and
on that basis that party wants to wriggle out that arbitration agreement, a
strict and meticulous inquiry into the allegations of fraud is needed and only
when the Court is satisfied that the allegations are of serious and complicated
nature that it would be more appropriate for the Court to deal with the subject
matter rather than relegating the parties to arbitration, then alone such an
application under Section 8 should be rejected”.
The Court relied on the two tests laid
down in para 25 of the judgement in order to differentiate between “serious
allegations” of forgery/fabrication in support of the plea of fraud as opposed
to “simple allegation”
- Does this plea permeate the entire
contract and above all, the agreement on arbitration, rendering it void, or; - Whether the allegations of fraud touch
upon the internal affairs of the parties inter se having no implication in the
public domain.
Upon implementing the above tests, it
is clear that this is a case that falls on the side of “simple allegation” as
there is no allegation of fraud which would vitiate the partnership deed as a
whole or, in particular, the arbitration clause concerned in the said deed.
Secondly, all the allegations made which have been relied upon by the learned
counsel appearing on behalf of the respondent, pertain to the affairs of the
partnership and siphoning of funds therefrom and not to any matter in the
public domain.
This being the case, the judges were of
the view that the disputes raised between the parties are arbitral and hence, Section
11 application under the Act would be maintainable.
Ruling By The Supreme Court:
The Hon’ble Court was of the opinion
that mere allegations of fraud simplicitor may not be a ground to nullify the
effect of arbitration agreement between the parties, it is only in those cases
where fraud goes to the validity of the contract itself, or of the entire
contract which contains the arbitration clause or the validity of the
arbitration clause itself. “Reverse position thereof would be that where there
are simple allegations of fraud touching upon the internal affairs of the party
inter se and it has no implication in
the public domain, the arbitration clause need not be avoided and the parties
can be relegated to arbitration”.
Conclusion:
The Supreme Court adopted an efficient
and pragmatic view in the present case in order to ensure that the very purpose
and objective of the Act should not get defeated. The tests as laid down under
para 25 of the A. Ayyasamy’s case were upheld which also clarifies the law on
the subject that Court should over look arbitration agreement only if:
- There are very serious allegations of
fraud; - Such
complex allegations can only be adjudicated by Civil Court; - The allegation is of such nature that
it covers the entire contract including the provisions of the arbitration
clause as well.
Contributed By – Abhishek Bagga
Designation – Associate
King Stubb & Kasiva,
Advocates & Attorneys
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