Arbitrability of fraud in India

The following is an article taken from Herbert Smith Freehill: http://hsfnotes.com/arbitration/2015/12/02/arbitrability-of-fraud-in-india/

The decision of the Indian Supreme Court in Swiss Timing Limited v Organising Committee, 2010 Olympic Games, Delhi[1] (“Swiss Timing“) last year seemingly settled the legal position on whether claims involving allegations of fraud are arbitrable in India. The Supreme Court in Swiss Timing overruled the previous leading Supreme Court authority, N Radhakrishnan v Maestro Engineering[2] (“Radhakrishnan“), to hold that fraud allegations are capable of being adjudicated by arbitral tribunals. However, a number of recent Indian High Court decisions have taken apparently conflicting approaches to the issue and have raised questions on the authority of Swiss Timing to effectively overrule Radhakrishnan. The vexed question of arbitrability of fraud has thus been brought back to the forefront of Indian arbitration law.

Moving back to the Radhakrishnan era?

Probably the biggest challenge to the Swiss Timing decision is a single judge bench decision of the Delhi High Court in RRB Energy Limited v Vestas Wind Systems (“Vestas“)[3] which was decided earlier this year. In that case, the court granted an anti-arbitration injunction on the ground that the case involved serious allegations of fraud which are not arbitrable. The court refused to apply Swiss Timing on the basis that:

• The decision in Swiss Timing was rendered while dealing with a petition for appointment of an arbitrator under section 11 of the Arbitration and Conciliation Act, 1996 (the “Arbitration Act“) and this power of appointment of an arbitrator cannot be deemed to have precedential value, and thus, cannot be deemed to have overruledRadhakrishnan.
• Further, Swiss Timing was decided by a single judge, so it could not overruleRadhakrishnan which was a judgment by a division bench of the Supreme Court.

A similar position has been taken by a single judge of the Madras High Court (in a decision given in June of this year) who, relying on Radhakrishnan (and without any reference toSwiss Timing), refused to interfere with the finding of the lower court that claims involving allegations of fraud must be adjudicated by a civil court (and not be referred to arbitration).[4] A recent decision of the Punjab and Haryana High Court noted the controversy about Swiss Timing but declined to comment on it. Instead, the court noted that Radhakrishnan and similar authorities sought to allow a person accused of fraud to clear his name in public courts, whereas in the case before it, the party accused of fraud wished to arbitrate. It therefore granted that party’s petition to appoint an arbitrator.[5]

At the other end of the spectrum, there have also been recent High Court decisions which have squarely applied Swiss Timing to refer claims involving fraud to arbitration.[6] There is also a decision of the Delhi High Court, subsequent to the decision in Vestas, on the point where the court, without making reference to any authority, decided that the arbitral tribunal is competent to decide its own jurisdiction under section 16 of the Arbitration Act (which is in line with the ruling in Swiss Timing) but seems to have left open the possibility that, as a matter of law, “serious ” cases of fraud are not arbitrable.[7]

It should be noted that the view taken by Swiss Timing was endorsed by the Law Commission of India in its 2014 report which proposed an amendment to the Arbitration Act to make issues of fraud expressly arbitrable. Whilst some of the recommendations of that report were adopted in the recent ordinance promulgated by the Government introducing a number of amendments to the Arbitration Act (read more here), this proposal was, unfortunately, not incorporated in the ordinance.

Position in respect of offshore arbitrations

In contrast to domestic arbitrations, the legal position on arbitrability of fraud in relation to offshore arbitrations is fairly well-settled. A decision of the Supreme Court last year in World Sport Group (Mauritius) Ltd v MSM Satellite (Singapore) Pte Ltd[8] explicitly held that Radhakrishnan is applicable only in the context of domestic arbitrations and reference to arbitration (in respect of offshore arbitrations) should only be refused if the arbitration agreement is “null and void, inoperative or incapable of being performed” and not on the ground that that issues of fraud are involved.

Comment

While the above analysis suggests that Indian courts, in the context of domestic arbitrations, appear to be broadly following the line of reasoning propounded in either Radhakrishnan orSwiss Timing, some High Courts seem to be drawing a distinction between ‘a serious issue of fraud’ and ‘a mere allegation of fraud’ with the former being held not to be arbitrable. The Delhi High Court in Vestas sought to define “serious allegation of fraud” as one that is “prima facie supported by documentary evidence so as to prima facie convince the court that there are real allegations of fraud which need to be investigated by the court.” Given that the courts interchangeably use the terms “serious allegations of fraud” and “allegations of serious fraud”, it is unclear whether the key issue is the gravity of the allegations or the strength of the documentary evidence. If it is the latter, it is not immediately obvious why arbitral tribunals should be deemed competent to hear fraud allegations where the documentary evidence is weak, but not where it is strong.

In light of Government’s decision not to address the arbitrability of fraud in the recent ordinance and the conflicting views taken by High Courts on the issue, a conclusive finding by the Supreme Court would be welcome.

Article was originally posted on 2 DECEMBER, 2015.