Author - Arunima Agarwal and Anya Aranha
Arunima Agarwal is an undergraduate law student at Bennett University, India. Anya Aranha is an undergraduate law student at Gujarat National Law University, India.
Abstract
The Delhi High Court of India (“High Court”) recently ruled out the controversy on arbitrability of fraud in the case of JRA Infratech v. Engineering Projects (India) Limited [2023] (“JRA Infratech”). The court cited the judgments of Rashid Raza v. Sadaf Akhtar [2019] (“Rashid Raza”) and Avantha Holding Ltd. v. CG Power and Industrial Solutions Ltd. [2021] (“Avantha Holdings Ltd."), which further asserted that allegations of fraud should not be a reason to avoid arbitration unless the court determines the agreement to be void.
1. Introduction
To the general legal fraternity, “arbitration” and “fraud matters” appear akin to mixing oil and water. The main reason is that it would be in the public’s best interests if such matters were transparently heard to provide speedy justice. The much-needed guidance from the side of the Indian judiciary on this subject was pertinent to lowering the scope of delays and, in foreign-seated arbitration, the Indian court’s power to refuse to enforce awards. The developments in Indian jurisprudence have shaped the nature of “arbitration and fraud matters” that delivered inconsistent legal standings. In no doubt, the Indian courts have, at times, imposed power over tribunals for the imminent calling of justice. But, recently, high courts of India have highlighted their dependency on arbitration and deviated their path from the reasoning of “simple” and “mere” allegations of fraud with weighted importance on the voidability of the agreement. The archaic nature of complexity has been left behind; in this article, we highlight the archaic nature and interventionist attitude of the Indian judiciary with a sequencing of how a contingent of change emerged. The article tries much to rely on the recent JRA Infratech v. Engineering Projects (India) Limited [2023] (“JRA Infratech”) reasoning.
1.2. A Brief Judicial Timeline on Fraud and Arbitration in India
A similar issue dates to the Supreme Court’s landmark case of Abdul Kadir Shamsuddin Bubere v. Madhav Prabhakar Oak. (“Abdul Kadir"), the court relied on the principle from Russell v. Russell (“Russell”) for the analysis; the principle held that in the case of the alleging fraud, the matter shall not be arbitrable and serious grounds would be tried in open courts. The critical issue relied on the scope of judicial discretion under section 34 of the Act and on an issue of a valid agreement between the parties from which the disputes arise to be referred to arbitration. Similarly, in the case of Radhakrishna v. Maestro Engineers (“N. Radhakrishna"), where a dispute arose because of contractual obligation and unilateral appointment of arbitration, the underlying issue to be on the extension of judicial intervention. The logic of reasoning relied on the issues on rem (against the world at large) to be adjudicated in court and were non-arbitrable. This decision promulgated much incorrect reasoning and suppressed the mandatory nature of section 8 of the Arbitration Act that denotes to reduce judicial intervention.
Later, the Supreme Court of India tried to clarify a similar issue in the case of A. Ayyassamy v. A. Paramasivam (“Ayyassamy”) in 2016 (as discussed on the blog). The dispute allegation arose due to financial mismanagement and fraud in the partnership operation, whereas there was an arbitration clause in the deed to resolve disputes, but the respondent challenged it on the ground of fraud. In the context of the legal fraternity, it was signified as a missed opportunity to make fraud arbitrable; it stepped aside the issue of void and voidable contracts, but on a good side, it eroded the significance of the N. Radhakrishna decision as there was practical instability in its reasoning. Under Ayyassamy, section 8 of the Arbitration and Conciliation Act, 1996 (“The Act"), the court relied on the application for determining “serious or mere allegations of fraud” to be crucial for arbitrability in fraud matters. However, there was a vague interpretation of what constitutes “serious allegations of fraud,” with a weighted requirement of voluminous evidence and the inability to deal with it in the hands of an arbitrator. The presentiment towards arbitration as not a definitive method of dispute resolution paved the way for Ayyassamy's reasoning.
One of the pro-arbitration regimes in the Indian judicial milestone paves our way to the reasoning of the Swiss Timing Limited v. Organizing Committee, Commonwealth Games 2010 (“Swiss timing"), The same issue was on the grounds that the agreement in which the arbitration clause was was tainted by fraud and corruption. The court laid down the inaccuracy of law and non-consideration of section 16 of the Act, the act that states the power of arbitral tribunal to decide on its own jurisdiction, presented in N. Radhakrishna and denoted the case failed to consider the judgements of the Hindustan Petroleum Corp case and the Anand Gajapathi Raju case. The judgment further focused on the prima facie finding of no valid agreement. It detailed sections 8 to 11 of the arbitration act being contemporary in nature and its interpretation to be prima facie. The focus of the Supreme Court to delve into analyzing the contract being void and the independent nature of the arbitration proceedings has initiated elevated importance.
2. A Two-End Dichotomy on Rhetoric of Arbitrability of Frauds
2.1. Reference to Booze Allen Interpretation of “Forbidden Fruits of Arbitration” by JRA Infratech
The case of JRA Infratech, which was decided by the Delhi High Court last year. The case revolved around the appointment of an arbitrator under section 11 of the act as per their agreement and the respondent opposing the request of appointment on the ground of submitting a forged experience certificate. It is a recent brick in the wall of pro-arbitration Indian jurisprudence, as the disputes were deemed to be considered private and did not affect the public interest. It sets an important example for the private flavor versus public flavor debate on referring Booze Allen and Hamilton Inc. v. SBI Home Finance Ltd.’s (“Booze Allen’s“) that pronounced three-prolonged tests, explaining conditions for arbitrability, such as disputes to be under the realm of an arbitration agreement; such disputes must be referred to arbitration by the parties; and lastly, highlighting the capability of the disputes to be adjudicated by arbitration; the tests are prominently described as “forbidden fruits” to arbitration. Further, the Court in this decision reiterated the fundamental principle that “it is merely an allegation of fraud and not a proven fact,” while putting much emphasis on evidential value to prove an agreement invalid. In the context of the private flavor vs. public flavor debate, the Court also indicated that the dispute does not influence public interest. In essence, it was the exercise of a right in personam. Roscoe Pound said, “The law must be stable, but it must not stand still.” In this regard, Booze Allen’s classification of “forbidden fruits of arbitration” comprises a large, standstill part of Indian jurisprudence. Such jurisprudence is merely suggestive and not definitive. However, it was accorded tremendous value owing mainly to the lack of accommodative quality in Indian courts. As per past judicial reasoning, there were inconsistencies in the Ayyassamy case’s arbitrability test, which circumvented the Booz-Allen test.
2.2. The Depleting Nature of the “Anti-arbitration Regime” in Fraud Matters and Especially in Section 11 Applications
There were issues in principle delivered because of positive Kompetence and uneven interpretation of “serious allegations of fraud.” At the same time, the Avital decision (“Avital’’) is significant as it raised a question on an inconsistent interpretation of the Ayyassamy decision and its implications and provided two scenarios of analysis on what constitutes “serious allegations of fraud" (as discussed in this blog). The observation that “allegations of such frauds are made against the state or its instrumentalities” highlighted some possible issues because it was easy for parties to use a fraud allegation for a defense to avoid going to arbitration under a share subscription agreement and a shareholder agreement.
Lately, the precedent value of past jurisprudence has depleted. Concerning the vitiation of fraud, the Delhi High Court in Amrish Gupta v. Gurchait Singh Chima (“Amrish Gupta”, the case of property transactions and an agreement to sell by forging the agreement with a loan agreement. The case held that if a party has a purely private dispute, it cannot and should not be treated as a matter in rem and thereby cannot be rendered ‘non-arbitrable.’ While citing the case of N.N. Global Mercantile (P) Ltd. in JRA Infratech , the court initiated a limit on the court’s inference and declined arbitration in a few cases when the voidability of the contract was backed with commanding evidence. Further, as ruled in supporting decisions of JRA Infratech, namely, Rashid Raza and Avantha Holdings, mere allegations of fraud cannot label the dispute ‘non-arbitrable’ if the existence of the arbitration agreement has not been declared void by the court. Therefore, there was reliance on the disputes between the parties to be a matter of private occurrence and ought not to be considered as ‘non-arbitrable.’.
3. Ayyassamy’s Analysis and the Recommendations of the 246th Report
Concerning the mere and serious allegation of fraud, Ayyassamy's decision brought much confusion and was partly incorrect. Keeping in mind this confusion, the 246th Report of the Law Commission of India distinctly wrote that “issues of fraud must be made expressly arbitrable to set this entire controversy to rest.” Additionally, it proposed a significant amendment to Section 16 of the Act, which reads as follows: “The arbitral tribunal shall have the power to make an award or give a ruling notwithstanding that the dispute before it involves a serious question of law, complicated questions of fact, or allegations of fraud, corruption, etc.” The implied principle of negative Kompetence-Kompetence was diluted in Ayyassamy and promulgated a mix-up. The proposed recommendation to this principle by the law commission was necessary for a way out of the muddle. Further, this proposed amendment is highly inclusive and thus paves the way for fraud (both complex and simple), amongst Booz Allen’s other “forbidden fruits,” to be referred to arbitration.
3.1. The proposed changes by the 246th Report to add sub-section (6A) in Section 11 of the Act
Section 11 of the act stipulates and deals with the situation where parties to the arbitration agreement are unable to appoint an arbitrator for 30 days. As growing issues with the scope of Section 11 of the Act and the validity of the arbitration agreement, the 246th report proposed much-required changes to Section 11 and added the sub-section (6A) that defines the role of courts to confine themselves to determining the existence and validity of the arbitration agreement. The case of Vidya Drolia & Ors. v. Durga Trading Corporation brought a double end to this debate on a prima facie test determination on referencing a case to arbitration by phrasing, ‘when in doubt, do refer.’ Whereas, from an international perspective, the recommendation of the 246th Report regarding the arbitrability of fraud is in tandem with Article 177(1) of Switzerland’s Federal Act on Private International Law, which states that “any claim involving an economic interest may be submitted to arbitration.”
4. Concluding Observation:
As the fast-moving nature of Indian legal systems and the much-required pro-arbitration regime on fraud depleted the conclusive value of Ayyassamy while considering it to no longer be a good law, the controversy brought by the judgment was unnecessary. We can recourse on the assuring nature of the judiciary in ascertaining a positive outlook on this situation and advancing with arbitration-friendly reasoning. The ambiguous nature of arbitrability on fraud matters took us back to our original stance of court intervention by rigorously analyzing cases to ascertain arbitrability that involve fraud claims. There was a compromise on arbitrary concepts like kompetenz-kompetenz, which caused unnecessary delays and was contrary to the objectives of the Act. To delve deeper, we can perceive the Supreme Court’s interventionist attitude, leaving and deliberating the same cogitates by the High Courts of India. As viewed in the past, there were economic consequences of increased cost, uncertainty, discouragement in investing by foreign investors, and erosion of true value of arbitration values. We hope that informed stances on arbitration could attract more international commercial activities, as there would be ease in international arbitration and cross-border commercial engagement. We are on the race of maintaining a trust in this process and see the government working to strengthen India’s engagement with centrally funded arbitration institutions to reduce caseload.
There’s a famous line by Lord Mustill that reiterates maintaining a balance between courts and arbitration tribunals to serve the interest of the community at large. Several international jurisdictions have already codified the arbitrability of fraud in their respective legislations. The Hon’ble Court’s decision in JRA Infratech is a recent apple to the basket of cases that has advocated for a pro-arbitration stance with the Act’s non-mention of the arbitrability of cases in general. In the interest of foreign investment and international relations, the legislature would do well to adopt a pro-arbitration stance for matters of fraud.
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