Challenging Arbitrability of Fraud before a Tribunal in India

This guest post is authored by Udbhav Nanda. He is a practicing advocate at the High Court of Odisha. Udbhav is currently working at the Office of the Advocate General to the State of Odisha and frequently works on domestic arbitration and corporate litigation at the Odisha High Court and insolvency disputes at the NCLT, Cuttack.

Challenging Arbitrability of Fraud before a Tribunal in India

An arbitrator’s jurisdiction is ring-fenced by the terms of the agreement executed between the parties[1]. In other words, the arbitrator can exercise jurisdiction to the extent conferred by the arbitration clause. Some disputes, however, are not permitted to be resolved by arbitration, regardless of whether they are covered by the arbitration clause. For instance, disputes arising out of ‘rights in rem’, ie rights enforceable against and affecting the world at large, will generally not be amenable to arbitration.

While disputes involving questions of fraud arise out of rights in personam, the arbitrability of fraud has been a vexed question in India. In this post, the author has discussed the grounds of challenging arbitrability of disputes involving claims of fraud. The author has also discussed the appropriate forum and stage at which parties can raise a challenge based on arbitrability.

Statutory framework

Parties may seek to resist arbitration on grounds, among other things, that (i) there is no arbitration agreement; (ii) the arbitration clause is invalid; (iii) the dispute is not capable of being resolved by arbitration; or (iv) the tribunal is otherwise not competent to decide the dispute. Section 16 of the Arbitration and Conciliation Act 1996 (the Act) unequivocally stipulates that such objections are to be raised before the arbitral tribunal at the first instance.

An application challenging the jurisdiction of the arbitrator is required to be filed before the arbitral tribunal under Section 16. As a general principle, the arbitral tribunal has the exclusive power to determine the existence and scope of its jurisdiction.  However, over the course of several judgments, courts have observed that certain jurisdictional issues can be examined even before the arbitral tribunal is constituted.

Where a party to the arbitration agreement commences a suit or other legal proceeding before a judicial authority, the defending party can file an application under Section 8 of the Act and request the judicial authority to refer the dispute to arbitration. In Booz Allen and Hamilton Inc. v. SBI Home Finance Limited, it was observed that courts can delve into the question of arbitrability in an application under Section 8 of the Act.

In an application under Section 11, however, it was observed in Booz Allen that ‘the Chief Justice or his designate would not embark upon an examination of the issue of “arbitrability” or appropriateness of adjudication by a private forum, once he finds that there was an arbitration agreement between or among the parties, and would leave the issue of arbitrability for the decision of the Arbitral Tribunal’.[2]

After the Act was amended in 2015, Section 11(6A) provides that courts will restrict their scope of examination to existence of the arbitration agreement. As such, the scope for judicial determination of arbitrability is limited at best, and expressly curtailed in Section 11 proceedings.   Additionally, and in any case, Section 5 of the Act sends a clear message that there should not be any judicial intervention at that stage which impedes the proceedings before the Tribunal.

Arbitrability of fraud

The Act does not make any provision for excluding any category of disputes by treating them as non-arbitrable. The Supreme Court has decided, from time to time, which disputes can be arbitrated. In Booz Allen, the Supreme Court settled that matters involving testamentary issues, tenancy, guardianship, winding up, insolvency, matrimony and crimes, are non-arbitrable. In Vimal Kishore Shah v. Jayesh Dinesh Shah[3], the Supreme Court added a seventh category: disputes relating to trusts, trustees and beneficiaries.

The legal position regarding arbitrability of fraud was settled in by the Supreme Court in A. Ayyasamy v. P. Paramasivam (Ayyasamy). In this case, the appellant and respondent were brothers who had entered into a partnership deed for carrying on a hotel business in Tamil Nadu. The partnership deed contained an arbitration clause.

After facing allegations of fraud pertaining to handling of accounts, the respondent approached sought an injunction from a civil court to prevent the appellant from managing the hotel. The appellant filed an application under Section 8 of the Act and sought a reference of the dispute to arbitration.

The trial court dismissed the application. Relying on N. Radhakrishnan v. Maestro Engineers[4], the trial court observed that allegations of fraud could not be adjudicated by an arbitral tribunal. The civil court was the appropriate forum to adjudicate the such disputes. In appeal, the Madras High Court confirmed the trial court’s findings. The High Court further clarified that the decision rendered in N. Radhakrishnan (Division Bench) case trumped the decision rendered in Swiss Timing v. Organizing Committee, Commonwealth Games 2010[5] (Single Bench) on account of hierarchy in bench.

The Apex Court decided, however, that simple allegations – touching upon the internal affairs of the parties – are not sufficient to detract from the obligation of the parties to submit their disputes to arbitration. That said, it was observed that disputes cannot be arbitrated when they involve serious and complex claims of fraud, which can be decided only by civil courts on appreciation of voluminous evidence produced before it. It was also observed that a dispute is not amenable to arbitration where fraud is alleged against the arbitration provision itself or is of such a nature that permeates the entire contract, including the agreement to arbitrate.  

Any remaining uncertainty regarding arbitrability of fraud was laid to rest in Rashid Raza v. Sadaf Akhtar[6] (Rashid Raza) by a 3-judge bench of the Supreme Court. The dispute arose out of a partnership deed. It was alleged that one of the partners had siphoned funds and committed other business improprieties indulged. The Apex Court held that the allegations of fraud would be serious only if a criminal offence could be made out in the ordinary course. Additionally, the nature of the dispute must be deemed complex enough so as to compel extensive evidence for which the Civil Court becomes a more appropriate forum for adjudication, as opposed to an arbitral tribunal.

The Supreme Court has cautioned that if a party tries to set-up a case of fraud in order to eschew arbitration, it will be met with a strict and meticulous inquiry. The court can decline a reference to arbitration only when it’s satisfied that the allegations are of a serious and complicated nature. Therefore, the burden will lie heavily on the respondent to establish that the dispute is not arbitrable.

Appropriate stage for filing jurisdictional objections

All objections to the jurisdiction of the Tribunal must be taken post-haste at the stage of submission of the statement of defense during the preliminary stage.[7] Any challenge to the jurisdiction raised after the submission of the statement of defense is only acceptable so far as the delay is considered justified.[8] This statutory scheme has been employed so as to quell the use of dilatory tactics in arbitration proceedings.

Moreover, one cannot directly file an appeal under Section 37 of the Act against an order rejecting the jurisdictional challenge. Appeals under Section 37 lie only from orders passed under Section 16(2) of the Act, ruling that the arbitral tribunal does not have the jurisdiction. Where the tribunal rejects a jurisdictional challenge, the only remedy available is to challenge the award in proceedings under Section 34(2) of the Act.

Conclusion

In view of the aforesaid position of law, it may be said that an application challenging the tribunal’s jurisdiction on arbitrability of the dispute will most likely fail if the allegation of fraud is:-

(a) simple in nature and touches upon the internal affairs between the parties in their private domain;

(b) does not permeate the contract itself rendering it void; and

(c) does not allege fraud against the arbitration agreement itself.

The tests described in Ayyasamy, as recently followed in Rashid Raza, make it clear that matters involving “mere allegations” which do not vitiate the arbitration clause shall be referred to arbitration. Moreover, the allegations pertaining to the internal affairs of the Company which are not in the public domain are also amenable to arbitration.

However, it must be pressed upon that the objections will need to be filed before or along with the submission of statement of defense. In the event that the statement of defense has been already filed, the party claiming jurisdictional defect will have to wait till the final award is made so as to set aside the arbitral award under Section 34 of the Act.

[1]S.P. Singla Constructions Pvt. Ltd. v. Government of NCT of Delhi, 2015 (1) Arb. LR 33 (Delhi), http://164.100.68.118:8080/jsearch/

[2]Booz Allen, para. 32.

[3](2016) 8 SCC 788

[4](2010) 1 SCC 72

[5](2014) 6 SCC 677

[6] (2019) 8 SCC 710

[7] Section 16(2), Arbitration and Conciliation Act, 1996.

[8] Section 16(4), Arbitration and Conciliation Act, 1996.

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