India / April 25 2024
Cyril Amarchand Mangaldas Vikash Kumar Jha and Sakshi Malhotra
Arbitrability of a dispute is a key factor in any arbitration, as it establishes the jurisdictional reach of an arbitral tribunal. In Booze Allen and Hamilton Inc. v. SBI Home Finance Ltd.,[1] the Supreme Court stated that the disputes dealing with rights in personam are arbitrable, but those pertaining to rights in rem are not as they can affect the public.
An array of judicial pronouncements over the years have added to, modified, or clarified the list of arbitrable subject matters; however, the question of arbitrability continues to evolve. The Bombay High Court, in its recent decision in Nilesh Shejwal v. Agrowon Agrotech Industries Pvt. Ltd.[2]held that the filing of criminal proceedings (pertaining to fraud) by itself will not render a dispute between the parties non-arbitrable.
Brief Facts
The Petitioner was appointed as the CEO of the Respondent Company. The employment agreement, among other things, included a clause that any disputes arising from it would be referred to arbitration. The Petitioner contended that he was restrained / barred from attending office, purportedly due to audit investigation of irregularities found in the functioning of the Company. .
Thereafter, the Respondent issued a notice of termination alleging that the audit report had found the Petitioner guilty of misappropriation of funds, wrongful use of the company brand, and breach of trust/contract. Additionally, a complaint was lodged under relevant sections of the Indian Penal Code, 1860.
Following the termination, the Petitioner sent a notice to the Respondent stating that the termination violated the principle of natural justice and that the allegations were false, frivolous, and concocted. The Petitioner claimed that the employment agreement entitled him either to complete his term of five (5) years or to a remuneration as agreed for the said term. Consequently, the Petitioner invoked arbitration, which the Respondent contested, forcing the Petitioner to approach the High Court.
Contention of the Parties
The Petitioner’s case contented that because his removal from employment was unfair and without any just cause, he was entitled to either reinstatement or payment for the entire tenure of his employment.
The Respondent countered that since the offence had been registered against the Petitioner under relevant penal provisions, the dispute raised by him was non-arbitrable. . The Respondent referred to N.N. Global Mercantile Pvt. Ltd. vs. Indo Unique Flame Ltd.(“N.N. Global”)[3] to establish that a clear distinction exists between cases with allegations of serious fraud and those with allegations of simple fraud. In situations involving serious fraud, the court may refuse arbitration and instead insist on deciding such matters through civil courts, considering complexity and voluminous evidence.
Decision of the Court
The High Court discussed various precedents and observed that it is trite position of law that certain categories of disputes which are of public nature are not capable of adjudication and settlement by arbitration, whereas the action in personem that determine the rights and interest of the parties to the disputes are arbitrable.
The High Court also observed that the ground on which the fraud was held to be non-arbitrable earlier was that it would entail voluminous and extensive evidence and would be too complicated to be decided in the arbitration. However, in contemporary arbitration practice, arbitral tribunals are required to traverse through volume of material in various kinds of disputes and therefore, the ground of fraud is not arbitrable is an archaic view, which has now become obsolete and deserves to be discarded.
The High Court rejected the Respondent’s argument and held that the Petitioner’s claims following his termination stemmed from his employment agreement and its related consequences, which makes the petition arbitrable. It also held that while the Petitioner’s likelihood of facing criminal charges may have an effect on determining whether the termination was justified, the criminal proceedings against the Petitioner do not render the dispute between the parties non-arbitrable.
Consequently, the High Court referred the matter to arbitration and appointed a sole arbitrator.
Arbitrability of Fraud Matters – Recent Judicial Trend
In A. Ayyasamy v. A. Paramasivam and Ors., (“A. Ayyasamy”)[4] the Supreme Court introduced the “seriousness of fraud” test. While the Court held that cases with “serious allegations of fraud” are non-arbitrable and must be resolved by courts, it deemed disputes involving “mere allegation of fraud simplicitor” as arbitrable. The Court clarified that only in those cases where the court finds that there are very serious allegations of fraud which make a virtual case of criminal offence or where the fraud alleged is of such nature that permeates the entire contract, including the agreement to arbitrate, can be held to be non-arbitrable.
The Supreme Court in Rashid Raza v. Sadaf Khan[5] reiterated its judgment in A. Ayyasamy and stipulated a twin test to determine what constituted a complex fraud: (i) whether the plea of fraud permeate the entire contract and above all the agreement of arbitration, rendering it void or (ii) whether the allegations of fraud touch upon the internal affairs of the parties inter se, having no implication in public domain. The Court considered the latter category of cases as arbitrable.
The Apex Court provided more clarity on the matter in Avitel Post Studioz Limited and Ors. v. HSBC PI Holdings (Mauritius) Limited and Ors.[6] The Court introduced the “public flavour test” and held that allegations of serious fraud warranting non-arbitrability could only arise in two circumstances: (i) when the arbitration clause/agreement itself is non-existent or (ii) when the allegations of arbitrary, fraudulent, or mala fide conduct are made against the state or its instrumentalities, thus necessitating the hearing of the case by the writ court. The Court clarified that false representation, diversion of funds, and impersonation are inter-parties’ disputes and have no public flavor.
The Supreme Court in Vidya Drolia v. Durga Trading Corp. (“Vidya Drolia”)[7] held that allegations of fraud are arbitrable only if they relate to a civil dispute and the fraud does not completely invalidate the arbitration clause. However, the Court categorised as non-arbitrable those cases that involve questions affecting rights in rem, as they need to be resolved in the public domain.
Recently, the decision in Vidya Drolia was re-affirmed by the Supreme Court in N.N. Global and emphasised that the arbitral tribunal can adjudicate upon the civil aspect of fraud, unless the allegation is that the arbitration agreement itself is invalidated by fraud. However, matters related to criminal fraud, such as forgery or fabrication, fall under the purview of public law and can only be adjudicated by a court.
Conclusion
The Supreme Court’s decisions is the cases discussed suggest that that even matters involving fraud are arbitrable as long as the allegations of fraud are not serious, the disputes do not pertain to rights in rem, or the allegations of fraud do not completely invalidate the underlying agreement.
The Law Commission, in its 246th Report, proposed adding a sub-section (6) to Section 16 of the Arbitration and Conciliation Act, 1996, to give arbitral tribunals the power to resolve disputes despite allegations of fraud. Parties could still raise the issue of arbitrability before the arbitral tribunal at the pre-award stage, following the Kompetenz-Kompetenz principle. If not allowed, the award could still be challenged under the provisions of 1996 Act.
The Indian Courts’ approach aligns with the fundamental tenets of arbitration. It reflects a slow but firm movement towards projecting India as a pro-arbitration jurisdiction. It also inspires parties to look at alternative dispute resolution methods with minimal courts interference.
