Qualifying a reference to arbitrate - N. Radhakrishnan v. Maestro Engineers and Ors. reviewed

Ruchi Mahajan And Jai Mohan

May 24, 2010

Section 8 of the Indian Arbitration and Conciliation Act, 1996 (“the Act”) empowers the court to refer a matter before it to arbitration, in the event that the matter falls within the scope of an arbitration agreement between the parties. The Indian Supreme Court in a string of judgments has categorically held that this reference is mandatory and the judicial authority has no discretion in the same. As such, Section 8 was seen to echo the objectives of the Act, in that it curtailed judicial interference thereby ensuring speedier resolution of matters. On closer scrutiny, it appears that the judiciary over a period of time, has tinged Section 8 with a discretionary element to justify its interference in matters, e.g. tainted with elements of criminality or involving serious allegations of fraud. This is best illustrated by the recent Judgment in Radhakrishnan v. Maestro Engineers.

In Radhakrishnan v. Maestro Engineer, disputes arose between parties who were partners in a partnership firm. The disputes also involved allegations of fraud, collusion and financial malpractices, which allegedly resulted in the unfair retirement of N. Radhakrishnan (the Appellant) and the reconstitution of a new partnership deed. Maestro Engineers filed a suit before the District Court seeking a declaration that N. Radhakrishnan was not a partner of the firm. As a counter blast to this Suit, N. Radhakrishnan filed an Application under Section 8 seeking reference to arbitration since the Partnership Deed had an Arbitration Clause. This Application for reference to Arbitration was rejected by the Trial Court and by the Madras High Court as well on the basis that the allegations of fraud merited detailed appreciation of evidence which could only be settled in court.

The Supreme Court, despite having found that the subject matter of the suit was within the jurisdiction of the Arbitrator, concurred with the interference of the High Court on the basis that the Court, as opposed to the Arbitrator, was the more competent forum to deal with the dispute raised by the parties. In support, the Supreme Court referred to its earlier decision in Abdul Kadir and the High Court decision in Oomor Sait which observed that the court is a more appropriate forum to adjudicate matters involving scrutiny of derailed oral and documentary evidence, given that rules of procedure and evidence are not binding in arbitration.

Fraud, financial malpractice and collusion are weighty allegations having criminal repercussions. The arbitrator is a creature of the contract, and his Jurisdiction is limited to the four corners of the Contract. The courts, to the contrary, are guided by exhaustive provisions of the Evidence Act, Codes of Civil and Criminal Procedure making it more equipped to adjudicate serious and complex allegations and are competent to offer a wider range of reliefs to the parties in dispute. It is against this background that the courts have resisted the mandatory reference in fraud allegations and cloaked its interference under the armor of discretion.

Whilst the intent of the judiciary has a rationale, it remains to be seen how far in practice, will the Courts broaden the scope and extent of their interference in Arbitral proceedings, by taking aid of this view. This may well be used to strike a blow to party autonomy, which is the very root of evolution of Alternate Dispute Resolution Mechanisms, including Arbitrations.

This article was was first published in the March 2010 edition of 'In House Lawyer' and was also rated as the Most Popular Article In India for April 2010, by Mondaq Content Awards. Ruchi Mahajan is a Principal Associate and Jai Mohan is an Associate at Amarchand & Mangaldas & Suresh A. Shroff & Co.

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Comments(5)

1. "Well written! B". Akshay, Delhi
2. "judgment providing exceptions to sec 8. not a gooad precedent as everyone will approach to court and overlook aribitrator. the entire purpose for enactment of arbitation act 1996 would fail as it implies resolution of dispute outside court. what are we doing ?". Surendra Jangam, Mumbai
3. "Fraud, financial irregularities and such other allegations of criminal implications are ably decided by regular Law Courts. An arbitrator is neither empowered nor experieced in hearing and deciding criminal charges. Courts therefore must have the discretion to decide whether the issues between the parties are purely contractual or the matter for decision before it is properly the subject of arbitration agreement of the parties. Court would be justified in relegating the parties to their remedy before the Arbitrator if answer to these tests are in the affirmative. If it is not the case, i.e, if the matter before it is of criminal repercussions or involves complex questions of law, the Court should try the case itself. One should not lose sight of the fact that a person facing a charge of fraud would be keen to have the matter decided by an incompetent Arbitrator rather than by a competent Law Court and cite S.8 of the Act for that purpose. Court should always decide whether the matter is fit to be decided by an Arbitrator having regard to the nature of the allegations raised, legal competence of the Arbitrator under the Statute to try and give his finding and his limitations to provide adequate reliefs to the aggrieved. ". S.V. Pillai, Mumbai
4. "Sir,With the nimble-footed age and concomitant impatience for the expeditious hearing of the cases of civil nature inclusive of the industrial and trade disputes the gnawing need of the non-litigious practice and out of court settlement are emergently felt. Litigants to keep pace with this trend prefer to set to rest their disputes within reasonably shorter duration and inter alia saving the upgrown case expenses. These potent factors have given birth to mediative, conciliatory and arbitrational laws and advisory law firms to counsel for the remedies that can be reached without any let or hindrance. However, the contemporary curiosity lies with the question as to whether the arbitrational issues between two disputing parties should be limited to the courts or there be specific adjudicatories to resolve those both the doors being open to them. Currently, the Union Law Ministry's humble attempt of amending the Arbitration and Conciliation Act, 1996 with a view to make it easily accessible to the beneficiaries and dispel the self-contradictory elements available there within amidst the investitive power and implemental procedures. Above all, the enterprising Law Minister, Mr. Moily has lent his congenial voice about the intent there of, “Arbitration should not be continuation of the courts. The idea should be resolving the issue at the earliest.”. Amazingly, international commercial arbitration has waxed its applicability no sooner the area of Merger and Acquisition has been acted upon and Memoranda of Understanding(MOUs) amongst Multi-national Companies(MNCs) are allowed. However, the bare purpose behind the proposed amendments to the said Act is to minimize court intervention in arbitral proceedings and to institutionalize the arbitration process in India that is a verdant pasture of twenty first century commercial mercantile possibilities. But what the Supreme Court is up to causes the protagonists serious concern. In that direction broadly, the said Act spoke equally for the domestic and international commercial arbitration adopted by the United Nations Commission on International Trade Law(UNCITRAL) and stood for the effectuation of the external arbitral awards and conciliating the matters connected there with and incidental there to. On its own right and reason, section 8 of the said Act empowers the court to refer a matter before it to arbitration, in the event that the matter falls within the scope of an arbitration agreement between the parties, more explicitly where there is an arbitration clause. The SC in Radhakrishnan v Maestro Engineer case, ruled that the Court, as opposed to the Arbitrator, was the more competent forum to deal with the dispute, scrutinize oral and documentary evidence in specific, so raised by the parties which part of duties do not hold good to the former while relying on Abdul Kadir decision etc. To boot, the Arbitrator has no jurisdiction to try serious allegations such as fraud, financial malpractice and collusion that have criminal implications in respect of which provisions of the Criminal Procedure Code and the Evidence Act come into play together with that of the Code of Civil Procedure. Conversely the Arbitrator’s role is limited to the reference to the Contract Act. Although Alternative Disputes Resolution(ADR) Mechanism is the dire need of the hour to bring the disagreeing parties to terms of agreement let us conclude assuming the latest initiative as an optimistic pep to redefine the scope and ambit of ‘arbitral proceedings’ purported for quick, efficient and amicable settlement of disputes that breaches no inter-jurisdictional severability and further that incurs neither the judicial displeasure nor incites the arbitrational impunity.Pradeepta Mishra". Pradeepta Mishra, HC Of Orissa, Cuttack
5. "i think it is a very good judgement. as a arbitrator can only decide the dispute only within the four corners of the agreement and cannot go beyond that. this will help to stop the exggagerate the dispute by allegating false allegations like fraud, misappropriation, cheating etc for settling their scores and stick to the real dispute. if a real fraud or serious offence takes place it is to the both parties to have equal rights and procedures to defend and procecute, which is only available in cpc and crpc procedures. this can only be tried in the open court.". Vijay,

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