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Arbitrability of fraud in India

The process arbitration of fraud in India has sen a tumultuous evolution over the years. An arbitrator or an arbitral tribunal,being a creatureof the arbitration clause in the agreement may or maynot have the competent jurisdiction while dealing with disputes related to fraud. An application challenging the same can be filed under section 16 of the Arbitration and Conciliation Act, 1996. This anomaly can be particularly attributed  to the silence of the Indian laws on the arbitrable  and the non - arbitrable subjects - be it the Arbitration and Conciliation Act, 1996 ( or its subsequent amendments in 2015 and 2019 ) or the erstwhile Arbitration Act, 1940. Due to this grey area, a party or parties might resist arbitration on the grounds of non existence of the arbitration agreement, invalidity of the arbitraton clause, dispute incapable of being resloved by arbitration or the incompetency of the arbitral tribunal in deciding the dispute.

The question of arbitrability of fraud arose for the first time in the case of Abdul Kadir Shamsuddin Bubere vs Madhav Prabhakar Oak at the time when the Arbitration Act, 1940 was in existence, the Supreme Court completely ruled out the possibilty of arbitrating issues of fraud on the grounds that it involved complex factula questions. In line with the Abdul Kadir case, in the case of N Radhakrishanan, the Supreme Court in the 1996 Arbitration and Conciliation Act regime adopted a similar stance, that the allegations of fraud are not arbitrable. However in a significant transition, the Supreme Court in the World Sports case clarified that in international commercial arbitration, an arbitrator was competent to decide on any allegations of fraud and that only in cases of domestic disputes or disputes in international commercial arbitration setade in India will the N Radhakrishnan ruling be applicable. There were not adequate legal justifications for this distinction regarding competence by the Supreme Court.

This highly disputed domain of arbitrability of fraud in India on was clearly addressed and settled in the case of A. Ayyasamy vs. P. Parasivam. On a stare decisis basis, relying on the N Radhakrishnan case, the trial court had held that the allegations of fraud werenot arbitrable and that the civil court was the appropriate forum for deciding such cases. On account of hierarchy of bench, the High Court clarified that the decision rendered in the N Radhakrishnan case, which as a judgement by a division bench, trumped the decison in Swiss Timing vs Organizing Committee Commomwealth Games, a single judge bench. The Apex Court, however, in the Ayyasamy case laid down in a demarcation between the complex allegations fraud, which is not arbitrable and simple allegations fraud, which is arbitrable. Stemming from this judgement, in the Rashid Raza vs. Sadaf Akhtar case, the unsettled anomaly was adresssed. A two step test was laid down by the Supreme Court to determine the degree of complexity of the fraud. It was alos held that a serious allegation of fraud would only be considered if a criminal offence could be ascertained in the process. Also, the dispute must be complex enough to demand extensive evidence thereby making a civil court a more appropriate forum for adjudication of the dispute as compared to an arbitration tribunal.

  • existence of the shady area regarding arbitration related to fraud
  • judgements of various cases related to arbitration of fraud
  • settling judgement of the Rashid Raza case

BY : Mekhla Chakraborty

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