Part II

Shift in the Position on the Arbitrability of Fraud

However, this position on fraud as a criminal offence and the arbitrability of such disputes saw a shift in the emerging jurisprudence of the later years, thus underlining the role of arbitration in criminal cases.

In Swiss Timing Ltd. v. Commonwealth Games 2010 Organising Committee1, the simultaneous conduct of both criminal and arbitration proceedings, in relation to an agreement, on grounds of fraud, corruption and collusion against certain members of both parties, was held to not be an absolute bar to refer disputes to arbitration. An objection was raised against reference of the disputes to arbitration because the initiation of criminal proceedings was alleged to have rendered the agreement void. It was also argued that since the arbitration clause in a contract is treated as an agreement independent of the other terms of the contract, a mere allegation that the underlying contract is null and void does not render the arbitration clause invalid.

It was held that it was mandatory for courts to refer disputes to arbitration, if the agreement provided for arbitration. The Court could decline to refer disputes to arbitration under Section 11 of the Arbitration & Conciliation Act, 1996, if the contract was found to be patently void or if the contract was found to be void on a meaningful reading of the contract document, without further proof. The Court also reminded the parties that allegations of fraud, coercion, unsoundness of mind, undue influence and misrepresentation resulted in voidable and not void contracts. It was held that the balance of convenience tilted in favour of letting the arbitration proceedings continue, while also underlining that there was no inherent risk of prejudice to any party since the findings of the Arbitral Tribunal in the award would not be binding in the criminal proceedings.

India Household and Healthcare Ltd. v. LG Household and Healthcare Ltd.2,discussed the difference between Section 8 and Section 45 of the Arbitration & Conciliation Act, 1996, where the judicial authority could not refer parties to arbitration when the entire contract containing the arbitration agreement was found to be null and void, inoperative and incapable of being performed. It is generally accepted that where the existence of an arbitration agreement is found, the Courts would construe the agreement in such a manner as to uphold the arbitration agreement. However, it would be construed differently where fraud is identified because fraud vitiates all solemn acts.

The N.N. Global Mercantile (P) Ltd. v. Indo Unique Flame Ltd.3, case held that civil aspects of fraud, coercion, undue influence, or misrepresentation as defined in Sections 15 to 19A of the Indian Contract Act, 1872 and/ or allegations of tort of deceit, in civil or commercial disputes, are arbitrable so long as the dispute(s) in question do not fall in the non-arbitrable category which are excluded expressly by statute, or by necessary implication. The same applies except when the allegation is that the arbitration agreement itself is vitiated by any of the above consent-vitiating factors, or the fraud, etc. goes to the validity of the underlying contract, and impeaches the arbitration clause itself.

Therefore, it established that the arbitrability of fraud is no longer an issue relating to the competence of the arbitrator, or in dealing with voluminous evidence. Arbitrators are competent to deal with allegations of civil fraud (as defined under Section 17 of the Indian Contract Act, 1872). However, matters of forgery and fabrication which are criminal and in the realm of the public, can only be adjudicated upon by a court. The Court thus reaffirmed the findings of Vidya Drolia4 on fraud as arbitrable subject matter.

The Court also held that disputes as to whether the arbitration clause is voidable, the substantive contract is voidable and the same impeaches the arbitration clause itself, are arbitrable. Whenever it is found that a plea is taken to avoid arbitration on the ground of the underlying contract and/ or the Online arbitration clause being void or voidable, the Court or arbitrator is required to ascertain the true nature of the defence. The Court also held that concurrent arbitration and criminal proceedings in respect of the same subject matter does not make such disputes non-arbitrable unless the nature of the allegations is such that the matter falls principally in the public domain.

Conclusion

It can be seen, in the example of fraud as a criminal offence, the difficulty of determining the limits of the Arbitral Tribunal’s powers due to the public nature of criminal offences and its interaction with the larger justice system. It is inevitable that offences of a criminal nature could seep into civil and commercial disputes and this could complicate mechanisms around discharging the burden of proof, procedural requirements around testimony and other forms of evidence when criminal offences are, by their very nature, matters within the public domain and hence, tricky to adjudicate in private fora. However, despite the challenges, the Apex Court has provided broad definitional outlines for the application of principles in the determination of fraud as an offence within the arbitral regime.