The question of arbitrability determines whether a particular dispute can be submitted to arbitration for its resolution, or whether it must mandatorily be judicially adjudicated by a court of law. This concern finds its legal force under Section 34(2)(b)(i) of the Arbitration and Conciliation Act, 1996 (“1996 Act”) which reads as follows:
“(2) An arbitral award may be set aside by the Court only if— (b) the Court finds that— (i) the subject-matter of the dispute is not capable of settlement by arbitration under the law for the time being in force.” However, the Act itself does not provide a list of disputes which cannot be arbitrated.
While non-arbitrability of certain disputes is settled in law through pronouncements by the apex court [Booz Allen & Hamilton Inc. v. SBI Home Finance Limited & Ors., (2011) 5 SCC 532], the question of arbitrability of disputes containing an element of fraud (in India) still lacks clarity. The case of A. Ayyasamy v. A. Paramasivam & Ors., delivered on 4th October, 2016 presented the Supreme Court of India with an opportunity to dispel the ambiguity surrounding the said question. Unfortunately, the judgment left more uncertainty in its trail than the much required clarity. The judgment was delivered by a division bench comprising of Justice A.K. Sikri and Justice D.Y. Chandrachud.
Before proceeding to the case at hand, it is important to understand the dynamics at play in a dispute concerning allegations of fraud. Instances of fraud can be neatly categorized into two forms, fraud affecting rights in rem and fraud affecting rights in personam. While the former entails criminal aspects of fraud as defined under the Indian Penal Code, 1860, the latter concerns fraud as a civil wrong arising out of contractual disputes. It remains settled that adjudication of rights in rem cannot be done by a private fora, such as an arbitral tribunal, and hence, must be submitted to a court of law [Booz Allen & Hamilton Inc. v. SBI Home Finance Limited & Ors., (2011) 5 SCC 532]. Therefore, by necessary implication, disputes concerning rights in personam can be submitted for resolution by an arbitral tribunal. However, the case at hand attempts to lay down a futile categorization in disputes concerning rights in personam while hinging the question of arbitrability of fraud on serious and not so serious allegations of fraud.
The present case concerns allegations of fraud arising out of a Partnership Deed signed between the parties for carrying on business of running a hotel in the State of Tamil Nadu. The said deed contained an arbitration clause for resolution of any dispute arising out of the deed. Irrespective of the said clause, the Respondents filed a civil suit before the Court of 1st Additional District Munsif Court, Tirunelveli, Tamil Nadu for adjudication of the dispute between the parties. Repelling the suit, the Appellant moved an Application under Section 8 of the Act before the High Court, contending that the dispute must be referred to arbitration in accordance with the arbitration clause contained in the Partnership Deed. In response to the said contention, the Respondents submitted that the matter requires adjudication upon serious allegations of fraud which cannot be decided by an arbitral tribunal, and therefore, must be decided by a civil court. The trial court and the High Court, while relying upon the case of N. Radhakrishnan v. Maestro Engineers & Ors., (2010) 1 SCC 72 (“N. Radhakrishnan”), ruled in favour of the Respondents while holding that disputes concerning fraud are non-arbitrable. Aggrieved by the positions taken by the subordinate courts, the Appellant filed a civil appeal before the apex court for determination of the question of arbitrability of fraud.
Proceeding to examine the observations made by Justice A.K. Sikri, the judgment appears to lay down a reasonable approach in determining arbitrability of fraud while stating that “..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” [para 13]. However, the judgment immediately diverts to a rather irrelevant concern to hinge the question of arbitrability of fraud on apparent complexity of such disputes and the bulk of evidence that might be submitted in such disputes. The judgment, in that regard, reads that:
“The allegations of fraud should be such that not only these allegations are serious that in normal course these may even constitute criminal offence, they are also complex in nature and the decision on these issues demand extensive evidence for which civil court should appear to be more appropriate forum than the Arbitral Tribunal” [para 13].
While continuing its basis on the abovementioned criteria, the judgment rendered by Justice A.K. Sikri loses sight of several concerns which would render the said criteria as flawed. Firstly, the judgment fails to differentiate between criminal and civil aspects of fraud while incorrectly smudging the line between the two. As it remains legally settled that criminal matters are non-arbitrable, it was wholly unnecessary to venture into the question of arbitrability of criminal liability arising out of fraud under the Indian Penal Code, 1860. Moreover, the case at hand only concerned civil liability arising out of fraud, i.e. disputes arising out of a contract between the parties. Secondly, the judgment rendered by Justice Sikri fails to appreciate that certain actions may invite both, criminal and civil liability, and that parallel proceedings for the adjudication upon each can be legally sustained [Hindustan Petroleum Corporation Ltd. v. Pinkcity Midway Petroleums, (2003) 6 SCC 503]. Therefore, while criminal liability arising out of fraud may be adjudicated upon by a criminal court, civil liability arising out of fraud (being a contractual liability) should understandably be considered arbitrable as any other contractual dispute.
Thirdly, basing the question of arbitrability of fraud upon the complexity of evidence that might require examination is wholly flawed. Arbitral tribunals have time and again dealt with complex evidence while arbitrating disputes of varied kinds, such as State-State disputes, Investor-State disputes and private commercial disputes, and their competence to deal with such complexities remains undisputed in the international community. Fourthly, the judgment rendered by Justice Sikri attempts to contemplate a situation where fraud “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” [para 20]. At this point, the judgment defies the fundamental aspect of severability of the contract from the arbitration agreement in the jurisprudence of the law of arbitration, a doctrine which protects an arbitration agreement from any distortions or challenges raised against a contract while regarding an arbitration agreement as “autonomous and juridically independent from the main contract in which it is contained” [Final Award in ICC Case No. 8938, XXIVa Y.B. Comm. Arb. 174, 176 (1999); Gary Born, International Commercial Arbitration, 2nd ed., 2014].
Fifthly, the judgment fails to take into account the 246th Report of the Law Commission of India which suggested amendments to the 1996 Act. The said report also suggested an amendment to Section 16 of the 1996 Act in order to make fraud expressly arbitrable to bring an end to the long standing controversy surrounding the issue [http://lawcommissionofindia.nic.in/reports/Report246.pdf]. Interestingly enough, Justice Sikri observed that the allegations of fraud made in the present case “were not so serious which cannot be taken care of by the arbitrator” [para 22].
While observations of Justice Sikri add to the existing obscurity on the question of arbitrability of fraud, the judgment rendered by Justice Chandrachud comes to the rescue to provide some clarity on the said matter. Observations made by Justice Chandrachud can be best understood in contrast to those made by Justice Sikri. Firstly, the judgment rendered by Justice Chandrachud expressly recognizes the doctrine of severability of observe that invalidity of the main contract containing an arbitration clause would not “entail ipso jure the invalidity of the arbitration clause” [para 4]. This observation rebuts the observation made by Justice Sikri wherein he contemplates a situation of an arbitration agreement being rendered invalid due to allegations of fraud as regards the main contract containing such an arbitration agreement. Secondly, the judgment makes a clear distinction between rights in rem and rights in personam, while stating that the latter are clearly amenable to arbitration [para 6]. Thirdly, the judgment clarified that the case of N. Radhakrishnan extensively relied upon the case of Abdul Kadir Shamsuddin Bubere vs. Madhav Prabhakar Oak & Anr., AIR 1962 SC 406, which was a case concerning Section 20 of the Arbitration Act, 1940 (“1940 Act”). While distinguishing between the 1940 Act and the 1996 Act, the judgment states that the former granted wider discretion to a court in contrast to Section 8 of the latter leaving no discretion with the court in cases where an arbitration agreement exists [para 10, p. 35].
Fourthly, the judgment rendered by Justice Chandrachud clarified that “allegations of criminal wrongdoing or of statutory violation would not detract from the jurisdiction of the arbitral tribunal to resolve a dispute arising out of a civil or contractual relationship on the basis of the jurisdiction conferred by the arbitration agreement” [para 12]. In the said context, it was further observed that “Allegations of fraud are not alien to ordinary civil courts. Generations of judges have dealt with such allegations in the context of civil and commercial disputes. If an allegation of fraud can be adjudicated upon in the course of a trial before an ordinary civil court, there is no reason or justification to exclude such disputes from the ambit and purview of a claim in arbitration” [para 14, p. 41]. Justice Chandrachud also referred to foreign jurisprudence on the point while relying upon the cases of Fiona Trust and Holding Corporation v. Yuri Privalov,  1 All ER (Comm) 891 and Premium Nafta Products Ltd. (20th Defendant) v. Fily Shipping Co. Ltd.,  UKHL 40 to lend support to arbitrability of contractual disputes concerning fraud [para 15]. The judgment also relied upon various treatises to support the notion that allegations of fraud would not divest an arbitral tribunal of jurisdiction to decide the dispute since criminal liability of fraud can be legally differentiated from civil liability arising out of fraud [paras 21-23].
While Justice Chandrachud aptly reached the conclusion of the dispute at hand being arbitrable despite allegations of fraud, the ratio of the judgment rendered by Justice Chandrachud conflicts with ratio of the judgment delivered by Justice Sikri. This raises a cause for concern as the present case might thus require a clearer determination of the issue by a larger bench of the Supreme Court. If that were to happen in the near future, the apex court must seize the opportunity to render a judgment in line with the observations made by Justice Chandrachud in the present case. Over and above the reasons mentioned above in favour of arbitrability of fraud, one must also take into account that Part I of the 1996 Act also applies to all international arbitrations seated in India. In the struggle to make India an arbitration friendly destination, arbitrability of civil liability arising out of fraud must be allowed to bring Indian law of arbitration in line with some of the leading jurisdictions of international arbitration in the world.