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

PART I – PART II

 

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

 

In a recent case before the High Court of Delhi (India), the Court hearing an application for an interim injunction to restrain an ICC arbitration on grounds of alleged fraud, had to consider the following issues:

 

  1. Whether Section 5 of the Indian Arbitration and Conciliation Act, 1996 (hereinafter referred to as “the Act”) read in conjunction 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]

 

  1. In a case where “fraud, forgery, manipulation, and collusion are alleged by one party, would the disputes be arbitrable; and whether the facts of the present case warrant entertaining the present suit for declaration and permanent injunction; and grant of temporary injunction during the pendency of the main suit”?[2]

 

With regard to the first issue, the Judge was of the opinion “that the scope of judicial intervention in cases where there is an arbitration clause is very limited and is envisaged under Section 34 of the Act”.[3] Accordingly, “at the initial stage, if a party has raised an objection with regard to the competence of the Arbitral Tribunal to adjudicate the dispute; then under Section 16 of Act, the Tribunal itself has jurisdiction to decide that issue”.[4] As such, a party is not permitted to also maintain proceedings in court. The Judge further observed that, “Section 5 of the Act reinforces this principle by a non-obstante clause,[5] which states that there cannot be judicial intervention”.[6] The Judge relied on the judgement in Kvaerner Cementation India Limited Vs. Bajranglal Agarwal and Another.[7]

 

The Court observed that, “notwithstanding the aforesaid principle, there have been instances where courts have entertained suits for declaration and permanent injunction where there have been allegations of fraud or forgery”.[8] The Judge relied on N. Radhakrishnan Vs. Maestro Engineers[9], Abdul Qadir Vs. Madhav Prabhakar[10] and Booz Allen and Hamilton Inc. Vs. SBI Home Finance Limited and Others[11], where it had been held that disputes containing allegations of serious fraud are not arbitrable.

 

With regard to the issue of non-arbitrable disputes, the Judge referred to the observations of the 246th Law Commission of India Report. That report has suggested amendments to Section 16 of the Act, which would include a provision clarifying “that even in cases where there are allegations of fraud, the Arbitral Tribunal will rule on its own jurisdiction and arbitrate the disputes”.[12] The Judge observed that the Law Commission of India took note of the “divergence of views between different High Courts, with one in favour of the civil court having jurisdiction in cases of serious fraud and the other arguing that even in cases of serious fraud, the Arbitral Tribunal will rule on its own jurisdiction”.[13] The Judge also observed that the Law Commission’s report has taken note of the Supreme Court’s observation in Swiss Timing Limited Vs. Organising Committee[14] that the judgment of N. Radhakrishnan’s case (which held that disputes containing allegations of serious fraud are not arbitrable) was issued per incuriam[15].

 

The Judge observed that to date “there is a grey area over the arbitrability of: a) cases of serious fraud; and b) cases of fraud simplicitor. In the Judge’s opinion, the Law Commission of India had two types of fraud in mind, one that is prima facie supported by way of evidence, and another, where fraud is merely alleged”.[16] The Judge then observed that “in the case of the former, perhaps the Arbitral Tribunal may 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 jurisdiction”.[17]

 

Whilst referring to Swiss Timing Limited (Supra), the judge relied upon a recent decision of the Supreme Court in State of West Bengal & Ors. Vs. Associated Contractors[18], and concluded that according to this judgement, the findings of the Judge in Swiss Timing Limited case “cannot be deemed to have precedential value, as it was rendered while dealing with Section 11 (6) of the Act (for appointment of Arbitrator)”.[19] The Judge held “that the view expressed in Swiss Timing Limited would not be applicable to the facts of the (instant) case and the dispute cannot be referred to the Arbitral Tribunal”.[20] While the decision in the matter of State of West Bengal & Ors. Vs. Associated Contractors (Supra) holds that the decision of the Chief Justice or his designate under Section 11 of the Act has no precedential value, being a decision of a judicial authority, which is not a Court of Record; the said decision had not expressed any views on Swiss Timing Limited.

 

On the basis of the aforesaid, the Judge expressed the view that “the jurisdiction of the civil court is barred at a pre-objection stage, except where there are egregious/ serious allegations of fraud involved”.[21] The Judge defined serious allegations of fraud as meaning, “one that is supported by documentary evidence so as to prima facie convince the court that there are real allegations of fraud which need to be investigated by the court”.[22]

 

The Judge, referring to the earlier judgements, also reiterated that wherever there are allegations of fraud levelled against a party, then a party against whom fraud is alleged should be able to select the forum where such allegations would be decided. “This option is to be exercised by such a party and not by the party levelling the allegations”.[23]

 

Conclusion:

 

The Judge observed that the first named defendant and its subsidiary had filed suits before the civil court, despite there being an agreement to arbitrate (on grounds of forgery and collusion).[24] The first named defendant had also impleaded the second named defendant as a party.[25] Accordingly, the Judge was of the opinion, that it was now not open to the first named defendant, to oppose the suit “on the ground that they were only denying the signatures and the competence of their former CFO (the second named defendant) to sign the MOU”.[26]

 

The Judge, after a conjoint reading of the two prior suits and the present one, observed that “not only were there allegations of fraud in the instant case, but there were allegations of serious fraud, forgery, manipulation, and collusion”[27] between the Plaintiff and the Second Named Defendant. As such, “it could not be treated as a simplicitor case of recovery before the Arbitral Tribunal”.[28] Accordingly, the Judge allowed the Plaintiff’s application for an interim injunction and injuncted the Arbitral Tribunal from proceeding.

 

Albeit, the correctness or otherwise of the instant judgement is now pending consideration before the Division Bench of the High Court, the judgement brings to fore the following as regards the Indian context:

 

  1. In view of the judgement of the Supreme Court in State of West Bengal Vs. Associated Contractors (Supra) holding that orders passed in matters under Section 11 of the Act have no precedential value, the observations of the Judge in Swiss Timing Limited’s Case would not have any bearing in N. Radhakrishnan’s case;

 

  1. Only in those cases of fraud that are prima facie supported by evidence, the Arbitral Tribunal may be conceived to have no jurisdiction; and the matter be investigated by the court; and

 

  1. Wherever there are allegations of fraud levelled against a party, then it should be an option for the party against whom allegations of fraud are levelled, to select the forum to decide such allegations, and not the party, which is levelling the allegations.

 

 

 

 

[1] IA No. 6426/2014 in CS (OS) No. 999 of 2014 RRB Energy Limited Vs. Vestas Wind Systems And Another., Decided on 15 April, 2015; paragraph 43.

[2] (n 1) paragraph 45.

[3] (n 1) paragraph 46.

[4] (n 1) paragraph 46.

[5] Non obstante – A phrase used in documents to preclude any interpretation contrary to the stated object or purpose, Blacks Law Dictionary 10th Edition.

[6] (n 1) paragraph 46.

[7] (2012) 5 SCC 214.

[8] (n 1) paragraph 47.

[9] (2010) 1 SCC 72.

[10] AIR 1962 SC 406.

[11] (2011) 5 SCC 532.

[12] (n 1) paragraph 49.

[13] (n 1) paragraph 50.

[14] (2014) 6 SCC 677.

[15] Per incurium – Wrongly decided, usu. Because the judge or judges were ill-informed about applicable law, Blacks Law Dictionary 10th Edition.

[16] (n 1) paragraph 52.

[17] (n 1) paragraph 52.

[18] (2015) 1 SCC 32.

[19] (n 1) paragraph 53.

[20] (n 1) paragraph 54.

[21] (n 1) paragraph 55.

[22] (n 1) paragraph 55.

[23] (n 1) paragraph 55.

[24] (n 1) paragraph 56.

[25] (n 1) paragraphs 58.

[26] (n 1) paragraph 58.

[27] (n 1) paragraph 64.

[28] (n 1) paragraph 64.

 

 

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