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Resolving the anomaly : The Rashid Raza case in light of the Ayyasamy case

The Rashid Raza case was the final of the various building blocks that were used in deciding the contentious issue of the arbitrability of fraud in India. It the landmark case that carved out the niche for the diputes involving allegations of fraud or forgery or fabrication of documents etc. 

The case was initiated after an FIR was lodged by one of the parners aleging the appelant of having indulged in siphoning of funds and of commiting othr business improprieties. A petiton was filedby the appelant in the High Cort on 02/01/2018 seeking the appointment of an arbitrator under section 11 of the Arbitration and Concilciation Act, 1996 as was duly mentioned in the partnership agreement. 

The High Court in the light of the judgement deliverd in the case of A. Ayyasamu vs. R Natarajan dismissed the petition of the appelant on the grounds that unlike the A. Ayyasamy case the present case involved complex allegations of fraud and it could not be decidede by an arbitrator. Not an arbitrator but a civil court of competent jurisdiction can authorise and properly undertake the rigorous investigations that are rquired  to fetch the voluminous and omplex evidences needed to be admitted in the present case. Thus, the High Court on the grounds of incompetency of the arbitrator to decide on the complex questions of fraud dismissed the petition for the appontment of an arbitrator under section 11 of the Arbitration and Conciliation Act, 1996. The questions of fraud simpliciter and complex fraud were alos raised in the case. A civil suit shall be proceeded with in case of frauds which involves serious allegations of forgery/ fabrication of documents supporting the plea of fraud or in cases where the fraud is alleged against the arbitration provisions or if the allegations permeate the nature of the entire contract. In other ords where the nature of the fraud is such that it defeats the purpose of the arbitration clause in the contract or the contract in its entirity, including the agreemnt of arbitration, then the case must be referred to for a civil suit. On the other hand, fraud simpliciter which affects only the internal affairs of the parties inter se and has no effects on the public domain, in such cases the arbitration clause in maintenable and the parties can resort to arbitration. Neither the Arbitration Act, 1940 nor the Arbitrationa and Concicliation Act, 1996 comment on the nature of the cases that can and cannot be setlled by arbitration. Such boundaries have only been created by the courts to lay down a demarcation between the cases that can be settled by a private forum and thosethat can be settled by a public forum. Only after such consideration  shall the court accept or reject a petition under section 8 of the Arbitration and Conciliation Act, 1996. 

The ascertainig factor in case of a fraud as to whether it is a simple fraud or a complex fraud lies in the following two tests :

  1. does the plea permeate the entire contract and most importantly, the agreement of arbitration, rendering it void, or
  2. whether the allegations of fraud touches upon the internal affairs of the parties inter se and have no implications in the public domain

Going by these two tests, it was held that in the present case, the alleations of fraud were that of fraud simpliciter since neiher does it vititate the entire contract not does it enter into the public domain. Thus, the disputes between the parties are arbitrable and an arbitrator can be appointed under section 11 of the Arbitration and Conciliation Act, 1996.

  • an overview of the Rashid Raza case
  • precedents taken from the Ayyasamy case
  • tests laid down for the arbitrability of fraud in India

BY : Mekhla Chakraborty

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