Arbitrability of Disputes Involving Allegations of Fraud

Owing to lengthy court proceedings and high costs of legal proceedings in India, alternative dispute resolution (ADR) has become a preferable choice to resolve disputes among parties. ADR provides for a means to resolve both national and international disputes through different means including arbitration, mediation, conciliation, negotiation, and others. However, ADR is fraught with its own challenges especially when it involving resolving disputes regarding corruption and fraud.

In Russel v. Russel (1880), AK Shamsuddin Bubere v. Madhav Prabhakar Oak (1962), and N. Radhakrishnan v. Maestro Engineers (2009), it was held that the cases involving serious allegations of fraud are not arbitrable. In A. Ayyasamy v. A. Paramasivam (2016), the apex court held that though issues of fraud are non-arbitrable, the allegations of simpliciter fraud can be dealt by an arbitral tribunal. However, jurisprudence over these issues becomes problematic when it comes to making a distinction between complex and simple fraud. Moreover, there appears to be no rationale for differentiating between simple and complex fraud. This is so because arbitrators also have the power to seek assistance for recording evidence under Section 27 of the Arbitration & Conciliation Act 1996 (the Act) and are therefore empowered to decide the issue of fraud on the basis of such evidence (just like the courts).

Since the inception of the Act, there seems to be no clarity on whether arbitral tribunals can decide on matters involving fraud and corruption. In Vidya Drolia v. Durga Trading Corporation (2020), the apex court held that allegations of fraud are arbitrable when it relates to a civil dispute. Only those claims are excluded from an arbitral tribunal’s purview which vitiate and render the arbitration clause invalid. Hence, as per the present settled position of law, all civil and commercial disputes which can be adjudicated by civil courts are arbitrable, unless excluded either expressly or by necessary implication. This principle infers, that the criminal aspects are non-arbitrable.

Though, Vidya Drolia (supra) is a celebrated judgment that upholds the pro-arbitration regime, the clause “those frauds which vitiate or render the arbitration clause invalid” leaves scope for courts to delve into the question of the validity of the arbitration clause, enabling judicial intervention in arbitration matters to an extent which is against the jurisprudential doctrine of, “kompetenz-kompetenz”.

Also interestingly, the Arbitration and Conciliation (Amendment) Act 2021, which was notified on March 11, 2021, ensures that all the stakeholders have an opportunity to seek an unconditional stay of enforcement of arbitral awards under Section 34 where the underlying arbitration agreement or award is induced by fraud or corruption. It intends to check misuse by “fly-by-night operators” taking advantage of the law to get favourable awards by fraud. This will surely uphold the rights of the party who is suffering because of the fraud committed by the other party to the dispute. However, it will delay the resolution of commercial disputes, thereby adding to the already distressful situation of high litigation backlog in the country and will strengthen the impression of the international community that India often fails to enforce international agreements and contracts. This may hurt India’s quest to become a hub of domestic and international arbitration.

The author, Deepanshi Gupta, is a trainee at Vaish Associates Advocates, and is pursuing an LL.B. from Campus Law Centre, Faculty of Law, University of Delhi.