This article has been written by Lalit Chhatria.
A party’s allegations of fraud have proven to be a vexatious problem in India for arbitration. Judicial pronouncements have led to a circumstance where even a hint of any criminal conduct could exempt conflicts from the jurisdiction of an arbitrator. This update explores the law in relation to the effect of fraud claims on India-related arbitration proceedings, with a focus on:
- the statutory framework under the Arbitration and Conciliation Act 1996;
- international judicial practice; and
- the position with regard to domestic and international arbitrations under the act, with a particular emphasis on the change in law resulting from the recent Supreme Court decision in WSG( World Sports Group (Mauritius) Ltd) and Bombay High Court decision in Avitel.
On 31-7-2014, the Bombay High Court held that ‘fraud’ and ‘misrepresentation’ as specified in Sections 17 and 18 of the Contract Act are well-established grounds that would vitiate ‘free consent’ and therefore the contract itself and, as a general rule, it can not be said that once fraud and misrepresentation are claimed in the sense of a contract, the subject-matter of the dispute would be rendered incapable of resolution by arbitration.
Arbitration proceedings against the petitioner (Avitel Post Studioz Ltd.) were launched by the respondent seeking relief in relation to the Share Subscription Agreement (SSA) claimed to be vitiated because of the petitioner’s fraud and misrepresentation. Holding that if the subject-matter of the dispute has an eminently civil profile, it may not be sufficient to conclude that the subject-matter of the dispute is incapable of resolution by arbitration merely because the parties have launched criminal proceedings for fraud or misrepresentation, the court observed that the parties were unable to show that there was a general or peremptory rule that charges had been brought. Submission by the complainant of non-enforceability of any award that might ultimately be rendered by the Arbitral Tribunal in Singapore, upholding the respondent’s (HSBC PI Holdings (Mauritius) Ltd.) accusation of fraud and misrepresentation against the appellant (HSBC PI Holdings (Mauritius) Ltd.)
While deciding the relevant law regulating arbitration proceedings, the court also held that the parties, either explicitly or in any event by implication, intended to remove the applicability of Part I of the Act of India (with the exception of Section 9 of the Law on Arbitration and Conciliation, 1996), noting different clauses of agreements. It was held that the concept as laid down in the cases of the National Thermal Power Corporation and Sumitomo Heavy Industries would apply even if the entire decision in the case of Bharat Aluminium were to be regarded as having only a prospective impact.
The settlement of disputes involving claims of fraud is not prevented by any particular provisions of the Arbitration Act; the law on that point has been drawn up in India by judicial decisions.
In general, these claims come to the notice of the courts at two stages in the arbitration proceedings. The first of these is when the arbitration agreement is invoked and a party wants to refer the dispute to arbitration, or when the terms of the agreement designate an arbitrator. The court can then proceed in compliance with either Section 8 (in the case of domestic arbitration) or Section 45 (in the case of international arbitration) of the proceeding. A party can also ask the court for the appointment of an arbitrator in domestic arbitration pursuant to Section 11 of the Act.
The Supreme Court has held in various judgments that the referral of the parties to arbitration and the appointment of an arbitrator are not automatic; rather, these are judicial decisions on the part of the chief justice and/or his / her appointee. Furthermore, it has also been formed that when a question of arbitrability is posed before a court in an application pursuant to Section 8, it must be the same.
The second stage at which a court will accept claims of misconduct is at the conclusion of the arbitration proceedings. In the case of domestic arbitration, this could be for the purpose of setting aside an arbitration award under Section 34 of the Act at the time of the trial, or for compliance under Section 36. In the case of international arbitration, the subject of fraud can be taken up in compliance with Section 48 of the Act at the time of enforcement proceedings. When questions of fraud are posed at the end of arbitration proceedings, the incidence of fraud during actual arbitral proceedings can also be covered. In addition, national public policy may also be discussed at this point, and its effect on the enforceability of the award in question.
It is useful to consider the major international developments with regard to the arbitrability of fraud allegations before discussing Indian procedure. Early constitutional legislation in the United Kingdom restricted the settlement of lawsuits for fraud. The UK Arbitration Act 1996, however, abolished this constraint and there is now no public policy restriction on the arbitrability of such claims. (5) Where one party alleges contractual fraud in relation to an arrangement between the parties, UK law now deals with the issue under the separability doctrine-the arrangement comprising the arbitration agreement is distinct from the arbitration agreement.
In the United States, a similar policy was implemented by the Federal Arbitration Act, following the US Supreme Court’s decision in Prima Paint Corporation v Flood & Conklin Manufacturing Co. State laws can, however, differ.
With respect to compliance, the compliance of awards that could have been won through deception is explicitly forbidden by many national laws. The UK Commercial Court clarified in a 2007 decision that, in this sense, fraud must be strictly construed and that there must be a causative relation between the perpetration of the fraud and the award obtained.
An early Supreme Court decision established that in cases where there are ‘serious’ allegations of fraud, the party against which the allegations are made can successfully resist reference to arbitration proceedings, in favour of a trial in open court. This decision was affirmed in N Radhakrishnan v Maestro Engineers, where it was held that in cases of serious allegations of fraud and malpractice, the dispute can be settled only by a court, after taking detailed evidence. Hence, the parties can not be referred to arbitration by a court operating under Section 8 of the Arbitration Act. The Supreme Court subsequently held in a similar manner that disputes relating to rights and obligations that give rise to or result from criminal offences” are non arbitrable.
This argument was further expanded by the Bombay High Court in Ivory Properties and Hotels Pvt Ltd v Nusli Neville Wadia, holding that even when the court is approached to appoint an arbitrator under Section 11 of the Act, it can refuse to appoint an arbitrator if one of the parties makes serious allegations of fraud and malpractice.
As a consequence, a party attempting to resist arbitration proceedings can do so by initially claiming fraud, criminal breach of confidence or other similar criminal offences. The courts would refrain from sending the parties to arbitration if the claims thus posed are sufficiently severe. If the award has been pronounced, even though the parties proceed to arbitration, it will remain susceptible to being set aside on various grounds available under Section 34 of the Act.
Nevertheless, with the recent pro-arbitration approach adopted by the Indian judiciary, the parties can take some comfort from the judgement of the Bombay High Court Division Bench on proceedings brought pursuant to Section 34 of the Arbitration Act, in which it held that a mere accusation of fraud or malpractice that is ambiguous and devoid of material details is insufficient to divest the arbitral tribunal of jurisdiction.
Section 45 (which provides for a referral to arbitration in non-domestic proceedings) includes, in comparison to Section 8 of the Arbitration Act, more detailed guidelines with regard to the circumstances in which a court may refuse to refer parties to arbitration. It clearly states that, unless the arbitration agreement is “null and void, inoperative or incapable of being carried out,” the parties are referred to arbitration.
Given the Indian courts’ propensity to view the two sections of the Arbitration Act in tandem, there was some apprehension that the policy on non-arbitrability of fraud claims would also impact international arbitrations that came before the Indian courts. However, some judicial pronouncements have eased concerns in this respect over the past few months.
WSG is the leading opinion of the Supreme Court on the subject, in which the respondent claims that a facilitation deed containing an arbitration provision was invalid as a result of the appellant’s misrepresentation and fraud. The respondent was trying to resist the reference to arbitration on this ground.
In the light of the New York Convention, the Supreme Court has entered into a thorough review of the terms of Section 45 of the Act and of its interpretation. It also noted the separability doctrine and stated that, even though the facilitation deed were fraudulent, it does not imply that the arbitration agreement found therein would therefore be vitiated by the same fraud.
However, the most relevant finding of the Supreme Court was that, in the light of Part II of the Arbitration Act, the various decisions relating to domestic arbitration in India would have no applicability. It expressly limited any court’s power to refuse to refer arbitration parties to the limited circumstances set out in Section 45 of the Act (i.e. that the arbitration arrangement was null and void or incapable of being carried out). It further held that the fact that the allegations of fraud had to be investigated was not a justification for refusing to appeal to arbitration in the case of international arbitration.
A similar line of reasoning in Avitel was followed by the Bombay High Court. In this instance, the parties were engaged in arbitration proceedings in which Singapore was the seat and Indian law was the governing law. Part I of the Arbitration Act was expressly removed from the arrangement between the parties (entered into before BALCO (Bharat Aluminium Co
), with the exception of Section 9. According to Section 9 of the act requesting some temporary relief in respect of the arbitration taking place in Singapore, the petitioner addressed the Bombay High Court.
The respondent charged, inter alia, that the complainant had made numerous charges of fraud and misappropriation against the respondent, which were the subject-matter of the Economic Crimes Wing criminal investigation; thus, it was not necessary to determine the differences between the parties by arbitration.
Since the seat of the arbitration was Singapore, the sole judge of the Bombay High Court held that the arbitration arrangement was controlled by the law of Singapore and the arbitrability of the dispute would be determined under that law. Since the law of Singapore allowed claims relating to fraud to be arbitrated, the Indian courts would not have denied interim relief pursuant to Section 9 of the Act supporting the arbitration.
Another positive step, albeit with only a tangential relationship to the issue of fraud, is the judgement of the Supreme Court in Shri Lal Mahal Ltd v Progetto Grano Spa. In this case, in Section 34 of the Arbitration Act (available as a ground for setting aside domestic awards) the court expressly delinked the domain of ‘public policy of India’ from the same term in Section 48 of the a The court found that the concept is narrower in Section 48 of the Act and applies only to the basic policy of Indian law, to the interests of India and to justice or morality. It therefore held that, as in the case of domestic awards, the patent unlawfulness of the award was not a consideration to be weighed. It would seem, as a normal extension of this principle, that even if an overseas award addresses fraud problems, it would still be enforceable in India, unless it breaches the above principles.
Recent decisions seem to have guided the legal stance towards international law with respect to international arbitration related to India. A party claiming fraud to resist arbitration must now determine, in accordance with the doctrine of separability, that fraud directly vitiates the arbitration agreement itself, not just the parent contract. In order to succeed, even at the stage of compliance, the group opposing the award would have to demonstrate significant flaws in the award.
On the other hand, as far as India’s domestic arbitrations are concerned, claims of bribery remain a minefield that can endanger the entire arbitration process, from the reference to arbitration to the award’s compliance. Because of the judicially established standards banning referral to arbitration of such disputes, parties must be extremely vigilant not only in their pleadings but also in any communication and actions before the arbitration to prevent casual charges of fraud. It is hoped that the current state of the law, in which a stray accusation of fraud has the power to scupper an entire arbitration, will be reviewed with more judicial consideration.