Subject : Arbitration

 
   Title :       Alleging Fraud Affects Ability To Enforce Arbitration Clause
   Author : Miss Kriti Tannan  
   
 

Kriti Tannan*

Supreme Court recently determined in N. Radhakrishnan v Maestro Engineers and Others1 that alleging fraud in a dispute will affect a party's ability to require that dispute to be referred to arbitration under Part I of the Arbitration and Conciliation Act, 1996 ("Act").

The Facts

In the case at hand, the parties before the Supreme Court had entered into a partnership and the partnership deed contained an arbitration clause. Disputes arose between the partners and letters were exchanged. In these letters, one partner, the appellant, alleged fraud and serious malpractices by the other partners and offered to resign from the partnership. The other partners filed a suit in the district court. They sought to obtain a declaration that the appellant was no longer a partner in the firm and an injunction restraining the appellant from interfering with the firm's affairs. Thereafter, the appellant filed an application before the same district court, under section 8(1) of the Act, i.e., requesting the district court to refer the dispute to arbitration in light of the arbitration clause in the partnership deed. The district court dismissed the appellant's application to refer the matter to arbitration. On appeal, the Madras High Court also dismissed the appellant's request for arbitration. The appellant then sought relief from the Supreme Court, but the Supreme Court also found against the appellant and dismissed his appeal to refer the matter to arbitration.

Supreme Court's Judgment

Supreme Court upheld the High Court's decision that "since the case relates to allegations of fraud and serious malpractices on the part of respondents, such a situation can only be settled in court through furtherance of detailed evidence by the parties and such a situation cannot be properly gone into by the Arbitrator."

The Supreme Court went on to add that "the facts of the present case did not warrant the matter to be tried and decided by the Arbitrator, rather for the furtherance of justice, it should be tried in a court of law which would be more competent and have the means to decide such a complicated matter involving various questions and issues raised in the present dispute."

Supreme Court has clearly laid down the law, that in the event of fraudulent allegations in a case, an arbitrator is not competent to deal with such dispute, and that a court has the power to refuse reference to arbitration.

In arriving at this view, the Supreme Court relied on two earlier judgments.

The first of these was a 1962 decision of the Supreme Court.2 In this 1962 case that arose under the earlier arbitration law applicable in India (i.e., the Arbitration Act, 1940), a three-judge bench of the Supreme Court held that "where serious allegations of fraud are made against a party and the party who is charged with fraud desires that the matter should be tried in open court, that would be a sufficient cause for the court not to order an arbitration agreement to be filed and not to make the reference [to arbitration]."

The second judgment relied on by the Supreme Court was a more recent decision of the Madras High Court.3 In this more recent decision that arose under the provisions of the current Arbitration Act, 1996, the Madras High Court held that the civil court could refuse to stay suits under certain grounds, despite the existence of an arbitration clause. After pointing out, that the nature of the enquiry before an arbitrator is summary and that rules of procedure and evidence are not binding, the Madras High Court went on to state that "wherever the dispute involves a consideration of substantial questions of law or complicated questions of fact which would depend upon detailed oral and documentary evidence, the civil court is not prevented from proceeding with the suit and [may] refuse to refer the dispute to the arbitrator."

Comments

The reasoning for these decisions are premised on deficiency pointed out in arbitration mechanism in India, which is not considered competent to handle cases that require detailed evidence. The court has held that whether or not fraud has occurred, can be decided only by leading evidence and an arbitrator does is not competent to decide such complex cases. This decision has essentially challenged the ability of arbitration mechanism under the Act, to decide 'all cases' and laid down an exception to it, i.e. in the disputes of serious fraud.

This also leads to other trouble as to determining what is a serious fraud and what is not. In Abdul Kadir Shamshuddin Bubere case4, Supreme Court had clearly made a dichotomy between cases where serious allegations of fraud are made and cases where allegations of fraud are not serious enough to deny a reference to arbitration.

Before commenting further on the Supreme Court's judgment in this case, it is useful to revisit the language of two key provisions in Part I of the Act: section 5 and section 8.

Section 5 states that "Notwithstanding anything contained in any other law for the time being in force, in matters governed by [Part I of the Act], no judicial authority shall intervene except where so provided [in Part I of the Act]."

Section 8 reads, in material part, as follows.

"(1) A judicial authority before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party so applies not later than when submitting his first statement on the substance of the dispute, refer the parties to arbitration."

The other provisions in Part I of the Act do not explicitly provide for judicial intervention where complicated questions of law or fact are in issue or where detailed evidence needs to be adduced. Therefore, there appears to be no explicit statutory exception to section 5 in cases where fraud has been alleged.

In view of the mandatory language of section 8, the Act does not recognize any discretionary power in the to decline making a reference. The Act does not give power to judicial authority under Section 8 of the Act to enquire into jurisdictional issues on basis of fraud or otherwise, the requirement under the section to refer to arbitration is mandatory in nature.

This decision of Supreme Court once again seeks to point the direction of the evolving arbitration jurisprudence and the alleged 'interventionist role' of courts in arbitration.

Also relevant in this discussion would be to revisit the S.B.P & Co. v Patel Engineering judgment5 where seven-judge bench in Supreme Court had sought to interpret section 8 of the Act. Supreme Court had observed (obiter dicta) that when there is an arbitration agreement between parties, and one of the parties ignoring it files an action before a judicial authority, and the other party raises the objection that there is arbitration clause, the judicial authority has to consider that objection, and if the objection is found sustainable to refer parties to arbitration. It said, "The judicial authority is entitled to, has to and bound to decide jurisdictional issue before it, before making or declining reference". This case through its unguarded observations on section 8 had permitted court intervention.

While the Patel Engineering case6 is criticized by many, for bringing about an entirely new interventionist role for the court not envisaged by the Act, this Supreme Court decision is definitely an ensuing judgment to it.

Conclusion

It is too early to say whether this judgment will lead to a further dilution of the prohibition against judicial intervention in Part I of the Act. In any event, parties seeking to invoke arbitration should proceed with caution when alleging fraud against other parties to the dispute.

  

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* The author is an Advocate and can reached at E-mail : ngoud@manupatra.com

1. 2009 (13) SCALE 403 

2. Abdul Kadir Shamshuddin Bubere v. Madhav Prabhakar Oak, AIR 1962 SC 406. 

3. Oomor Sait v. Aslam Sait, 2001 (3) CTC 269. 

4. Above fn 2, pg 1 

5. 2005 (9) SCALE 1 

6. Above fn 5, pg 3 1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   

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