FRAUD: The Demon of Arbitration in India – Part I of a II Part Series

PART I – PART II

 

By Samiron Borkataky (I. G. & Associates, New Delhi)

 

Generally speaking, in India the word “Fraud” has long been a source of anxiety to both Arbitration Practitioners and Arbitral Tribunals. The frequent commencement of civil suits seeking to divest the Arbitral Tribunal of jurisdiction on the grounds of alleged fraud have raised concerns for parties invoking arbitration agreements. The fact that this apprehension is not unfounded is also obvious from the 246th Report of the Law Commission of India, recommending that issues of fraud be made arbitrable. However, such recommendations are yet to be enacted. In a situation such as the above, is the purpose of having an agreement to resolve a dispute by arbitration, at all attainable or can the parties’ intent be rendered otiose by a mere allegation of fraud? The Delhi High Court recently found itself in such a position when hearing an application for an interim stay of an ICC Arbitration, in a suit, seeking a declaration regarding the validity of a document; and a permanent injunction.[1]

 

The facts of the said suit that may be culled from the judgement in the matter of RRB Energy Limited Vs. Vestas Wind Systems And Another, and those which are relevant to the issue at hand may be noted. The Plaintiff and the first named Defendant were erstwhile joint venture partners. During the existence of the aforesaid joint venture agreement, certain disputes arose between the two parties (the Plaintiff and the first named Defendant), leading to the signing of a settlement agreement.

 

Following the settlement agreement, the Plaintiff and the first named Defendant continued their commercial relationship and subsequently entered into two more Memorandums of Understanding (hereinafter referred to as ‘MOU’) in late 2011 and early 2012, which were signed by the second named Defendant, the then-Chief Financial Officer (hereinafter referred to as ‘CFO’) of the first named Defendant. A third MOU was also entered into between a subsidiary of the first Named defendant, and an associate company of the Plaintiff in late 2011. That MOU was also signed by the second named Defendant for and on behalf of the subsidiary of the first named Defendant.[2] Disputes and differences arose between the Plaintiff and the first named Defendant and their subsidiary/ associate companies, wherein the First Named Defendant questioned the veracity of the aforementioned three MOUs purported to have been signed between them.[3] The MOUs dated 18th September 2011 and 23rd January 2012 are the subject matter of a civil suit filed by the first named Defendant, while the MOU dated 30 September 2011 is the subject matter of another civil suit filed by the subsidiary of the first named Defendant.[4] Both the suits are pending before the High Court at New Delhi.

 

In both of the aforementioned suits, the first named Defendant (and its subsidiary) had prayed for a grant of declaration to the effect that the MOUs were void. They also argued that the MOUs should be cancelled on the ground that the second named Defendant was not authorised to sign the 3 MOUs and that the MOUs have been executed fraudulently, without any legal authority and in collusion with the Plaintiff. The aforementioned two suits were filed by the first named Defendant and its subsidiary, despite there being an arbitration clause in the three MOUs.[5]

 

The instant suit, however, concerned another MOU dated 23rd January 2012 entered into between the Plaintiff and the first named Defendant. This MOU was signed by the second named Defendant on behalf of the first named Defendant.[6] According to the Plaintiff, the first named Defendant suppressed the said MOU dated 23rd January 2012 and invoked the Arbitration Agreement contained in the Settlement Agreement. The first named defendant sent a request for arbitration to the International Chamber of Commerce (hereinafter the ‘ICC’) on 20th June 2013 claiming that the Plaintiff was in breach of its obligations under the settlement agreement and claimed for payment of all outstanding dues.[7] In response, the Plaintiff objected to the request for arbitration, and stated, without prejudice, that the request for arbitration was in breach of the terms of the said MOU dated 23rd January 2012. As such there was no reason for the first named Defendant to make any monetary claim beyond the terms of the said MOU which provided for a reprieve in payment of outstanding dues. Nevertheless, the ICC decided that the arbitration should continue and the Plaintiff and the first named Defendant have submitted their respective substantive pleadings.[8]

 

The Plaintiff thereafter instituted the instant suit before the High Court and sought a declaration, that the MOU dated 23rd January 2012 was a legal, valid and binding agreement between the Plaintiff and the first named Defendant and further sought a permanent injunction restraining the first named Defendant from proceeding before the Arbitral Tribunal.[9] According to the Plaintiff, the first named Defendant, by denying the signatures of the second named Defendant, in effect had alleged fabrication and forgery of the document by the Plaintiff and the second named Defendant.[10] The Plaintiff averred that, in view of the aforesaid allegation, the Arbitral Tribunal did not have the requisite jurisdiction to adjudicate upon the issue of genuineness and validity of the MOU dated 23rd January 2012.

 

In the backdrop of the aforesaid facts, the Court framed the following issues concerning whether a suit was maintainable[11]:

 

  1. Whether Section 5 of the Indian Arbitration and Conciliation Act, 1996 read with Section 16 of the said Act confers an absolute bar on the judicial authority to entertain a suit in a case where there is an arbitration clause between the parties?

 

  1. In a case where there are allegations of fraud, forgery, manipulation, and collusion alleged by one party, would the disputes be arbitrable; and whether, the facts of the present case warrant entertainment of the present suit for declaration and grant of permanent injunction; as well as grant of temporary injunction during the pendency of the main suit?

 

 

While the Judge observed that institution of suits in breach of arbitration agreements are barred, per se, such a bar may not be applicable in every case as a matter of rule. Relying on earlier precedents, the Judge observed that the courts have entertained suits for declaration and permanent injunction where there have been allegations of fraud or forgery. The Judge went on to distinguish between two types of fraud, serious fraud and fraud simplicitor. While in the case of the former, the Judge observed that the Arbitral Tribunal may be conceived to have no jurisdiction, however, in the latter case, where there are simple allegations of fraud without there being any prima facie proof (only to forestall the proceedings before the Arbitral Tribunal), the Arbitral Tribunal ought to have the jurisdiction.

 

>> read more… PART II

 

[1] Interim Application No. 6426/2014 in Civil Suit (Original Side) No. 999 of 2014 RRB Energy Limited Vs. Vestas Wind Systems And Another., Decided on 15 April, 2015.

[2] (n 1) Paragraph 7

[3] (n 1) Paragraph 8

[4] (n 1) Paragraph 9

[5] (n 1) Paragraph 58

[6] (n 1) Paragraph 16

[7] (n 1) Paragraph 21

[8] (n 1) Paragraph 22

[9] (n 1) Paragraph 23

[10] (n 1) Paragraph 24

[11] (n 1) Paragraphs 43 and 45

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