Introduction
In the landmark judgment (given on 4th October, 2016) in the case of the A. Ayyasamy v. A. Paramasivam & Ors., a division bench of the Honorable Supreme Court of India had to deal with this issue, – whether disputes involving allegations of fraud arising out of contracts containing an arbitration clause could be referred to arbitration under Arbitration and Conciliation Act, 1996 (“Act”)?
The Honorable Court extensively discussed on the issue and made a distinction between serious allegations of fraud amounting to criminal offence and a dispute involving mere allegations of fraud made casually in an attempt to evade and circumvent arbitration clause.
The Honorable Court held that while serious allegations of fraud were non-arbitrable, a dispute involving mere allegations of fraud would be arbitrable.
By the said judgement, the Honorable Court has not only distinguished this case from the case of N. Radhakrishnan v. Maestro Engineers, but also held that the decision given by the Single Judge of the Honorable Court in the case of Swiss Timings Ltd. v. Commonwealth Games 2010 Organizing Committee (wherein the ratio of the judgment given in Radhakrishnan’s Case (supra) was held to be per incuriam) could not be considered as a precedent, as it was given pursuant to exercise of power by the Court under Section 11 of the Act.
Legal background
The Act is silent with respect to the matters which cannot be referred to arbitration; nonetheless, from the various decisions of the Supreme Court, it is settled that certain types of matters cannot be referred to arbitration. These include criminal, matrimonial, tenancy and testamentary matters.
Fraud is one of the subjects which is not amenable to arbitration. In the Radhakrishnan’s Case (supra) the disputes revolved around serious malpractices, manipulation of accounts and cheating by the partners and the Honorable Supreme Court had hence held that,- where such allegations of fraud are involved, they cannot be referred to arbitrators. The ratio of the said judgement was however held to be per incuriam in the case of Swiss Timings Ltd. v. Commonwealth Games 2010 Organizing Committee.
Facts of the Ayyasamy ‘s Case (in brief)
The parties had entered into a partnership and the partnership deed contained an arbitration clause. The respondents (defendants) accused the plaintiffs (applicants) of manipulation of accounts and fraudulently siphoning off amounts from the partnership account.
The Respondents filed a civil suit seeking right of administration of the hotel. The Appellant sought reference of the dispute to arbitration under Section 8 of the Act. 3.3 Relying upon the earlier division bench of the Supreme Court given in the Radhakrishnan’s Case (supra), the High Court rejected the Appellant’s application on the ground that the dispute involved allegations of fraud and hence could not be referred to arbitration. A revision application filed against the said order was also dismissed by the High Court.
Aggrieved by the decision, the Appellant preferred an appeal before the Supreme Court and the Respondents took recourse to judgment of the Supreme Court in the Radhakrishnan’s Case (supra).
Issue which had be decided by the Court
Whether mere allegation of fraud by one party against the other would be sufficient to exclude the subject matter of dispute from arbitration and decision thereof necessary by the civil court?
Honorable Supreme Court’s Judgment (Relevant portions explained in unquoted form)
The underlying objective of the Act is to minimize court interference in disputes involving arbitration. Section 8 offered little discretion to courts to assume jurisdiction.
(i) When there is a serious allegation of fraud which makes it a criminal offence, or (ii) when the allegation of fraud becomes so complicated that it becomes necessary to consider complex issues wherein extensive evidence is required to be produced by the parties for the determination of the offence by the court, or (iii) 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, meaning thereby in those cases where fraud goes to the validity of the contract itself of the entire contract which contains the arbitration clause or the validity of the arbitration clause itself, then the Court can dismiss an application under section 8 of the Arbitration Act and proceed with the suits on merit.
Mere allegation of fraud in the pleadings by one party against the other cannot be a ground to hold that the matter is incapable of settlement by arbitration and should be decided by the civil court. Since the present dispute did not involve complex issues but merely matters of accounts, the Supreme Court held that the allegations could be easily ascertained by the arbitrator.
While dealing with such an issue in an application under Section 8 of the Act, the focus of the Court has to be on the question as to whether jurisdiction of the Court has been ousted instead of focusing on the issue as to whether the Court has jurisdiction or not. Once parties have agreed to refer disputes to arbitration, the court must plainly discourage and discountenance litigative strategies designed to avoid recourse to arbitration.
When the case of fraud is set up by one of the parties and on that basis that party wants to wriggle out of that arbitration agreement, a strict and meticulous inquiry into the allegations of fraud is needed and only when the Court is satisfied that the allegations are of serious and complicated nature that it would be more appropriate for the Court to deal with the subject matter rather than relegating the parties to arbitration, then alone such an application under Section 8 should be rejected.
The judgment in N. Radhakrishnan case (supra) has, however, been utilised by parties seeking a convenient ruse to avoid arbitration to raise a defence of fraud. The said judgment does not subscribe to the broad proposition that a mere allegation of fraud is ground enough not to compel parties to abide by their agreement to refer disputes to arbitration. More often than not, a bogey of fraud is set forth if only to plead that the dispute cannot be arbitrated upon.
The Supreme Court clarified that the decision in the Swiss Timing Case (supra) under Section 11(6) of the Act dealt specifically with Court’s power to appoint an arbitrator. Hence the said exercise of power and the judgment so delivered could not be deemed to have precedential value and therefore, it cannot be deemed to have overruled the proposition of law laid down in N. Radhakrishnan.
Our Brief Comments
The judgment adds to the positive reforms happening in the field of arbitration in India, given the situation that,- at several times allegations of fraud are made in order to defeat arbitration clause and the criminal trials are prolonged.
The Honorable Supreme Court has made it clear that, the Courts will have jurisdiction only when the allegations of fraud are serious enough to be considered as criminal offences with a strong prima facie case and only where serious and complex allegations of fraud necessitating extensive evaluation of evidence are involved. The jurisdictions of the courts do not arise merely because some sort of allegations of fraud are made by a party which can be easily resolved by the arbitral tribunal.
In light of the recent amendment made to the Act by which the arbitral tribunal is required to give its award within 12 months, this ruling becomes all the more important because criminal trials followed by appeals based on business allegations of fraud often takes years to be decided.
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