The Supreme Court recently summarised the principles governing arbitrability in cases involving allegations of serious fraud, stating that such disputes needed more clarity regarding the availability of the remedy.
The Bench of Justice PS Narasimha and Justice Manoj Misra passed the order on a batch of civil appeals challenging the Patna High Court verdict, which allowed applications under Section 11 of the Arbitration and Conciliation Act, and appointed Arbitrators in several cases.
The Apex Court observed that access to justice for enforcement of rights and obligations was assured by the usual proceedings in the ordinary tribunals. It was for this reason that Section 28 of the Indian Contract Act, 1872, while prohibiting agreements in restraint of legal proceedings, saved resolution of disputes through contract – by arbitration. The conduct of arbitration was governed by the Arbitration and Conciliation Act, 1996.
It noted that the limits of dispute resolution through arbitration were statutorily incorporated in the Arbitration Act itself. Section 2(3) provided that this part shall not affect any other law for the time being in force by virtue of which certain disputes may not be submitted to arbitration.
As per the Bench, same set of facts may lead to civil and criminal proceedings. A civil dispute could involve questions of coercion (Section 15 of Contract Act), undue influence (Section 16 of Contract Act), fraud (Section 17 of Contract Act), misrepresentation (Section 18 of Contract Act) for example, and such disputes could be adjudicated as civil proceedings for determination of civil or contractual liabilities between the parties.
The same set of facts could have their co-relatives in criminal law. The mere fact that criminal proceedings could or have been instituted in respect of the same incident(s) would not per se lead to the conclusion that the dispute which is otherwise arbitrable ceases to be so, it added.
The Apex Court said the reason for permitting submission of such disputes to arbitration was well explained in Swiss Timing. To shut out arbitration at the initial stage would destroy the very purpose for which the parties had entered into arbitration. Besides, there was no inherent risk of prejudice to any of the parties in permitting arbitration to proceed simultaneously to the criminal proceedings.
The top court of the country drew a distinction between serious fraud and fraud simpliciter to segregate and exclude disputes involving serious fraud from arbitrability, for policy consideration. Disputes involving serious fraud may not be submitted to arbitration, it pointed out.
The Bench observed that serious allegations of fraud were to be understood in the context of facts. The first test was satisfied only when it could be said that the arbitration clause or agreement itself could not be said to exist in a clear case in which the court found that the party against whom breach was alleged could not be said to have entered into the agreement relating to arbitration at all.
The second test could be said to have been met in cases in which allegations were made against the State or its instrumentalities of arbitrary, fraudulent, or mala fide conduct, thus necessitating the hearing of the case by a writ court in which questions were raised, which were not predominantly questions arising from the contract itself or breach thereof, but questions arising in the public law domain.
Disputes involving allegations of serious fraud need more clarity so that there is certainty about the availability of the remedy. At least one instance of serious fraud will be where disputes involving allegations having criminal law implications transcend inter se disputes between the contracting parties and attain public implications, where the ramifications could directly or indirectly affect non-parties and impact, integrity in governance, accountability in public service, distribution of essential commodities, safety and security of the nation for example. Consideration of such disputes have public law implications and shall “not be submitted to arbitration”.
Arbitral Tribunal will be within its jurisdiction to consider allegations of fraud even with respect to the specific terms or clauses in the contract as an arbitration agreement stands independent of the contract and continue to bind and govern the parties even if the contract is terminated or challenged and this question is no more res integra. There is however an exception, the following is its articulation.
The allegations of fraud with respect to the arbitration agreement itself, however, stand on a different footing. This position is generally recognized as a dispute which is in the realm of non-arbitrability. In such cases, the arbitral tribunal will not examine the allegation of fraud but will consider the submission only for the purpose of examining exclusion of jurisdiction.
The burden of proof was on the party raising the plea. When a plea of non-arbitrability was raised, the Court will examine it as a jurisdictional issue only to enquire if the dispute has become non-arbitrable due to one or the other reason as indicated hereinabove.
The Court kept open all the issues raised by senior counsel for the Appellants for being raised and contested before the Arbitral Tribunal.