Arbitrability Of Fraud: Is The Arbitration And Conciliation (Amendment) Ordinance, 2015 A Final Nail In The Coffin?

Businessman Examining Fraud Blocks Through Magnifying Glass

The issue of arbitrability of fraud is one which has been haunting the Indian Arbitral regime for a very long period of time. The issue mainly raises questions as to whether issues pertaining to serious allegations of fraud can be arbitrated by a Tribunal or not. There has been a catena of judgments in this regard in the High Courts as well as the Supreme Court of India but they have failed to conclusively adjudicate upon this issue. The issue pertaining to arbitrability of fraud in an offshore arbitration is settled by the judgment of World Sport Group (Mauritius) Ltd v. MSM Satellite (Singapore) Pte Ltd[1] where it was held that reference to arbitration (in respect of offshore arbitrations) should only be refused if the arbitration agreement is “null and void, inoperative or incapable of being performed” and not on the ground that that issues of fraud are involved. However, the Arbitration and Conciliation (Amendment) Ordinance, 2015 (hereinafter ‘the Ordinance’) has attempted to settle this issue by amending Sec. 8 of the Arbitration and Conciliation Act, 1996 (hereinafter ‘the Act’). First let us have a brief background as to what this controversy is all about.

The landmark judgment on this issue was given by the Supreme Court in N. Radhakrishnan v Maestro Engineers[2] (hereinafter ‘N Radhakrishnan’) which states that arbitral tribunals do not have the substantive jurisdiction to adjudicate upon complex issues of fact such as those arising out of serious allegations of fraud in the interest of justice. This decision was ostensibly based on the decision of Abdul Qadir v. Madhav Prabhakar[3] which is only an authority for the proposition that a party against whom an allegation of fraud is made in a public forum, has a right to defend himself in that public forum. Therefore, these cases conclude that issues concerning fraud are not arbitrable in India however, the Supreme Court in Swiss Timing Limited v. Organizing Committee, Commonwealth Games 2010[4] (hereinafter ‘Swiss Timing’) has ruled otherwise. It has held in Swiss Timing case that the judgment in N. Radhakrishnan is per incuriam on two grounds:

  1. Firstly, the judgment in Hindustan Petroleum Corporation Ltd. Pinkcity Midway Petroleums[5] though referred has not been distinguished but at the same time is not followed also. The judgment in P. Anand Gajapathi Raju and Ors. v. P.V.G. Raju (Dead) and Ors.[6]was not even brought to the notice of the Supreme Court. Therefore, the same was neither been followed nor considered. Both the cases, i.e., Hindustan Petroleum case as well as the P. Anand Gajapathi Raju case had observed that it was mandatory for Courts to refer parties to Arbitration in the light of a valid arbitration clause as per the language of Sec. 8 of the Act.
  2. Secondly, the provision contained in Section16 of Act was also not brought to the notice by the Court.

Therefore, in the Court opined that the judgment in N. Radhakrishnan does not lay down the correct law and cannot be relied upon.

Another case in this regard observed that when serious allegations of fraud and fabrication are made, it is not possible for the Court to proceed to appoint an arbitrator without deciding the said issue which relates to the very validity of the arbitration agreement. Therefore, the fact that the allegations of fraud, forgery and fabrication are likely to involve recording of evidence or involve some delay in disposal, are not grounds for refusing to consider the existence of a valid arbitration agreement.[7]

Therefore, the law regarding the arbitrability of fraud in domestic arbitrations was extremely confusing. The judgment which has been rendered in Swiss Timing Ltd. was a judgment rendered while dealing with Section 11(6) of the Act and Section 11 of the Act essentially confers power on the Chief Justice of India or the Chief Justice of the High Court as a designate to appoint an arbitrator which power has been exercised by another Hon’ble Judge as a delegate of the Chief Justice. This power of appointment of an arbitrator under Section 11 by the court notwithstanding the fact that it has been held in SBP & Co. v. Patel Engineering[8] as a judicial power, cannot be deemed to have precedential value and, therefore, it cannot be deemed to have overruled the proposition of law laid down in Radhakrishnan case.[9]

In addition to this, Swiss Timing Ltd. case has been rendered by Hon’ble Mr. Justice S.S. Nijjar sitting singly as a delegate of the Chief Justice of India yet the Hon’ble Judge has observed that the judgment in Radhakrishan case which was rendered by a bench of two judges as being per incuriam.[10] It is a settled proposition of law that a Bench of lesser number of judges cannot overrule the ratio laid down by the larger number of judges and more so in case where collateral points are involved.[11] As a result of this the High Courts across the country have been applying both the N. Radhakrishnan and Swiss Timing cases to adjudicate such disputes which have led to a lot of confusion. The Law Commission of India in its 246th Report also observed this issue and proposed an amendment in Sec. 16 of the Act. It suggested that a new subsection (7) to be incorporated after subsection (6) to Section 16 of the Arbitration and Conciliation Act, 1996 which would read as

The arbitral tribunal shall have the power to make an award or give a ruling notwithstanding that the dispute before it involves a serious question of law, complicated questions of fact or allegations of fraud, corruption etc.

This amendment was proposed in the light of the Supreme Court decisions which appear to denude an arbitral tribunal of the power to decide on issues of fraud etc.[12] In August, 2015, The Union Cabinet chaired by the Prime Minister, Narendra Modi, gave its approval for amendments to the Arbitration and Conciliation Bill, 2015 taking into consideration the Law Commission’s recommendations, and suggestions received from stake holders.[13] The Bill was likely to be introduced in the Winter Session of the Parliament.[14] However, the Union Cabinet on 21 October 2015 has approved the Arbitration and Conciliation (Amendment) Ordinance 2015 which was promulgated on 23 October 2015 after having received Presidential assent. This Ordinance does not amend Section 16 of the Act however it amends Section 8 and states that the judicial authority has to compulsorily refer parties to arbitration irrespective of any decision by the Supreme Court or any other court, if the judicial authority finds that a valid arbitration clause exists. The amendment essentially nullifies the judgment of the Supreme Court in N. Radhakrishnan case as the Courts are now again bound to refer every dispute with a valid arbitration agreement to arbitration irrespective of any decisions of any court to the contrary. Therefore, this Ordinance has attempted to put to rest the controversy surrounding the arbitrability of fraud however it is yet to be seen as to how the Courts would react to this amendment.

[1] (2014) 11 SCC 639.

[2] (2010) 1 SCC 72.

[3] AIR 1962 SC 406.

[4] (2014) 6 SCC 677.

[5] (2003) 6 SCC 503.

[6] (2000) 4 SCC 539.

[7] Bharat Rashiklal Ashra v. Gautam Rashiklal Ashra and Anr., AIR 2011 SC 3562.

[8] (2005) 8 SCC 618.

[9]State of West Bengal v. Associated Contractors, (2015) 1 SCC 32.

[10] RRB Energy Limited v. Vestas Wind Systems and Ors., 219 (2015) DLT 516.

[11] Bihar State Govt. Secondary School Teachers Association v. Bihar Education Service Association & Ors., (2012) 13 SCC 33.

[12] Law Commission of India, Report No. 246 on Amendments to Arbitration and Conciliation Act, 1996, August 2014, p. 50.

[13] Amendments to the Arbitration and Conciliation Bill, 2015, Press Information Bureau, Government of India, 26 August 2015 < http://pib.nic.in/newsite/PrintRelease.aspx?relid=126356> accessed on: 11 January, 2016.

[14] Apurva Vishwanath, Arbitration and Conciliation Bill an attempt to improve legal framework, says Govt., Live Mint (New Delhi, 8 September, 2015) <http://www.livemint.com/Politics/lxK9BwjCheixRC5LnngKkN/Arbitration-and-Conciliation-Bill-an-attempt-to-improve-lega.html> accessed on 11 January, 2016.

 

Author: Manas Pandey, Chanakya National Law University, Patna.

Patna, India

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