Arbitrability of Fraud Under the Indian Regime: A New Turn

Payal Chandra and Rhythm Buaria*

ARBITRABILITY OF FRAUD PRE-AVITEL AND DECCAN PAPER JUDGMENTS

It does not need saying that the Arbitration and Conciliation Act, 1996 does not exclude any category of disputes for being non-arbitrable. Judicial pronouncements have however carved out certain exceptions on the grounds that certain categories of disputes are in the public domain and therefore, not suited for adjudication by a privately chosen forum. One such category, is disputes which involve fraud.

The answer to the question of whether and the extent to which fraud is arbitrable in India has never been straightforward, and was mired in uncertainty till 2016 (see N. Radhakrishnan v. M/s Maestro Engineers and Swiss Timing Limited v. Organizing Committee, Commonwealth Games, 2010, Delhi), when the Supreme Court  laid down two working tests in A. Ayyasamay v. A. Paramasivam. These tests were later succinctly described in Rashid Raza v. Sadaf Akhtar.

The Court held in Ayyasamay that allegations of fraud simpliciter will not take the dispute out of the domain of arbitrability, but “very serious allegations of fraud” which either make a virtual case of criminal offence, or are complicated so as to merit a determination by a civil court would be required. Rashid Raza followed Ayyasamy and evolved two working tests as follows: (a) does the plea of fraud permeate the entire contract and above all, the agreement of arbitration, rendering it void (and thereby making the dispute non-arbitrable) or; (b) do the allegations of fraud touch upon the internal affairs of the parties inter se having no implication in the public domain (and keeping the dispute as arbitrable).

However, the recent decisions of Supreme Court in Avitel Post Studioz Limited v. HSBC PI Holdings (Mauritius) Limited and Deccan Paper Mills Co. Ltd. v. Regency Mahavir Properties, both delivered on 19 August 2020 (which theoretically followed Ayyasamy and Rashid Raza), appear to have expanded the scope of arbitrability of fraud to an extent which was likely not contemplated in Ayyasamy and may lead to confusion in their implementation.

TESTS ENUMERATED IN AVITEL

In Avitel, HSBC had alleged that it was induced into executing the contract in question by Avitel’s misrepresentations regarding certain non-existent facts. The arbitral proceedings (governed by Singapore law) had culminated by the time the Court rendered this judgment, and the arbitral tribunal had conclusively found that the fraud alleged had been established by HSBC. In this fact situation, the Supreme Court held that this was not a case which rendered the dispute non-arbitrable. In the process of reaching its decision (and having referred to earlier precedents in this regard, including Ayyasamy and Rashid Raza), the Court laid down substantially different, narrower tests which must be satisfied to bring the dispute within the purview of “serious allegations of fraud”. These are: (a) when it can be said that the arbitration agreement or the agreement itself cannot be said to exist and the court finds that the party against whom the breach is alleged cannot be said to have entered into the agreement relation to the arbitration at all (while this recognises the principle of severability of the arbitration agreement, the authors submit that there may be instances where the allegations of fraud pertaining to the entire agreement may also relate to the arbitration agreement, even if not explicitly so and even if the existence of the agreement itself is not questioned); and (b) in cases in which allegations are made against the State or its instrumentalities of arbitrary, fraudulent, or mala fide conduct, thus necessitating the hearing of the case by a writ court in which the questions raised are predominantly questions arising in the public law domain (while this test recognises the principle that disputes of a public nature ought not to be arbitrable, the authors’ view is that the test considerably narrows down the meaning of “public nature”, and also ignores that writ courts do not examine complicated questions of fact).

CONFIRMATION OF AVITEL TESTS

The Avitel tests (which the authors submit are a material departure from Ayyasamy and Rashid Raza) were affirmed by a three-judge bench of the Court in Deccan Paper, and now hold the field in this aspect. In Deccan Paper, like Avitel, the Court was seized of a situation where the execution of the contract was alleged to have been induced by fraud. With this, it was argued that the arbitration agreement was therefore also not enforceable. The Supreme Court noted that there was no plea that the agreement was not entered into, and that the dispute was purely inter parties with no public overtones and was therefore arbitrable. In this manner, the Supreme Court has now made it clear that the scope of rendering a dispute non-arbitrable on the grounds of fraud is extremely narrow, and almost all disputes involving fraud (except to the extent excluded in Avitel) are arbitrable.

PERCEIVED DIFFICULTIES IN THE IMPLEMENTATION OF THE AVITEL TESTS

The authors argue that both the premises in Avitel, though commendable steps towards making India a more arbitration-friendly jurisdiction in line with international standards, suffer from impracticalities which are likely to cause confusion than resolve. These are:

Existence of the arbitration agreement

In Ayyasamy,the Court had provided certain instances of cases which would fall within the “very serious allegations of fraud” test, such as allegations of forgery / fabrication, where fraud is alleged against the arbitration agreement itself, or where the fraud is of such a nature that it permeates the entire agreement (including the agreement to arbitrate). In doing so, the Court was clearly mindful of the fact that there would be instances where, even though the nature of fraud alleged may not pertain to forgery or the existence of the agreement itself, the allegations may still be egregious enough to justify a bypassing of the private remedy agreed upon by the parties. Avitel overlooks this.

As an example, where one party alleges that the underlying contract (which would likely also include the arbitration agreement) was induced by fraud and that it would never have entered into any commercial arrangement with the party but for this fraud, the allegations of fraud would be such that they permeate the entire contract. Ayyasamy’s ratio would then recognise this as a very serious allegation of fraud and render the dispute non-arbitrable. On the other hand, Avitel and Deccan Paper expressly hold that such an allegation continues to remain arbitrable.

The Court’s interpretation in Avitel, namely that only an allegation that the agreement itself does not exist can take the dispute out of an arbitrator’s jurisdiction, compels a party to continue with arbitration with the other party despite the fact that it would not even have agreed to contract (and an a logical extension, arbitrate) with the other party if it had known the true facts.

The authors opine that, in all probability, Avitel and Deccan Paper were decided in the manner that they were (i.e. to restrict the instances which can entitle a person to avoid its agreement to arbitrate) to bring Indian jurisprudence in line with other jurisdictions, such as the United Kingdom (see Fili Shipping Co. Ltd. v. Premium Nafta Products Ltd.) and the United States (see Buckeye Check Cashing Inc. v. Cardegna), where all allegations of fraud are arbitrable. In fact, Section 16 of the Act statutorily recognises the arbitrator’s jurisdiction to rule on the existence of the arbitration agreement itself.

Therefore, the only way in which India will become a truly arbitration-friendly nation is by removing the first test (as laid down in Avitel) altogether, which is a step that has consciously not been taken by the Court as yet. Further, Deccan Paper does not overrule Ayyasamy or Rashid Raza, and in fact, statedly follows the pronouncements there. Given this, there is uncertainty on how this issue will be dealt with in the future.

In the authors’ view however, till such time that serious allegations of fraud continue to render the dispute as non-arbitrable, the tests as laid down in Ayyasamy should continue to hold the field and Avitel and Deccan Paper may be read only in the context of the facts there –this would be a more holistic and pragmatic view of serious allegations of fraud especially in circumstances that this article discusses, and may avoid dichotomous and confusing outcomes.  

Public nature of the fraud

Following Ayyasamy, the Court in Rashid Raza explained the second test to be that if the allegations of fraud do not have an implication in public domain, the dispute would continue to be arbitrable. Unfortunately, Avitel has not only watered down this test but also constricted it to disputes against the State or its instrumentalities where allegations of arbitrariness, fraud or mala fide conduct have been made. Further, Avitel goes on to say that non-arbitrable disputes are required to be heard by writ courts as the questions raised are not mainly in the domain of the contracts but questions arising in the public law domain.

The authors submit that application of the second test in the above terms is flawed for three reasons: (i) it effectively extinguishes a private person’s right to pursue ordinary civil remedies, such as by filing a suit; (ii) forcibly relegates a private person to pursue claims before a writ court only which generally does not entertain complicated questions of facts; and (iii) ignores that public domain need not be restricted only to the State and its instrumentalities.

Avitel ignores that the Code of Civil Procedure, 1908 prescribes a special procedure to institute a suit against the State instrumentalities and does not restrict a private person’s right to institute a suit including for a commercial claim. Further, it is settled law that writ courts do not get into questions of facts and especially into complicated questions of facts (see Punjab National Bank v. Atmanand Singh). Therefore, writ courts, it is submitted, would be wholly inappropriate forums to determine issues which require trial, and the test therefore, becomes difficult to implement. The Court in Avitel, the authors submit, has proceeded on an incorrect presumption that in disputes against the State or its instrumentalities, private parties would not generally take pleas in relation to the contract and its breach, or that all private parties (when contracting with the government), would choose the remedy before a writ court in allegations of arbitrariness, fraud or mala fides against the State (when importantly, contracts with the State are also matters of contract law and not public law, depending on the specific facts).

CONCLUSION

Avitel and Deccan Paper, unfortunately have therefore unsettled a settled position taken by the Court in Ayyasamy and Rashid Raza. While the Court has narrowly defined the extent to which fraud may be rendered as non-arbitrable, the law may now once again be mired in uncertainty although the objective sought to achieve was to make India a more arbitration-friendly jurisdiction.


* Ms. Payal Chandra and Mr. Rhythm Buaria are practicing advocates before courts and tribunals in Delhi.


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