Fraud and its effect on arbitral awards in India: Have the legal developments of 2020 given us a clear path?

The Arbitration and Conciliation (Amendment) Ordinance, which received Presidential assent on November 4, 2020, allows parties to seek an unconditional stay on the enforcement of an arbitration award where the court finds that the underlying agreement or the making of the award was induced by fraud or corruption.

The Ordinance has added a proviso to section 36 of the Act, and solidifies the recent stance taken by the Supreme Court while dealing with the concept of arbitrability of fraud.

The proviso more or less emphasizes on the importance of prima facie evidence in cases where an allegation of inducement of corruption has been made against the inherent arbitration agreement. Where such evidence has been established, the arbitration award shall be stayed unconditionally, pending disposal of the challenge to the award under Section 34.

The Ordinance further confirms that the application of the proviso shall be ubiquitous to all arbitration cases, regardless of the fact that proceedings in such cases commenced before the Arbitration and Conciliation (Amendment) Act, 2015 was enacted. While the Ordinance has omitted the Eighth Schedule, it has also replaced Section 43J of the Act, and now states that the accreditation for arbitration shall be done as according to the qualifications, experience and norms specified by the regulations.

While the Ordinance is the latest legal development that deals with concept of fraud and its arbitrability in India, it is not the only one. The Indian Supreme Court in Avitel Post Studioz Ltd. & Ors. v. HSBC PI Holdings (Mauritius) Ltd and Deccan Paper Mills Co. Ltd. v. Regency Mahavir Properties had substantially laid out the law in this regard earlier this year.

In Avitel, the Supreme Court decided whether arbitration can be referred in cases where there is a serious allegation of fraud in relation to the arbitration agreement. The Bench of Justices Rohinton Nariman and Navin Sinha reiterated the following tests laid out in Rashid Raza v. Sadaf Akhtar:

i. Whether the plea of fraud percolates the entire contract and above all, the agreement of arbitration, rendering it void? or

ii. Whether the allegations of fraud touch upon the internal affairs of the parties inter se having no implication in the public domain?

The Bench then held that serious allegations of fraud can only arise in cases where either of the aforementioned two tests were satisfied, and not otherwise. It observed that in civil disputes, where a clear conclusion can be drawn that the issues involve questions of fraud or misrepresentation and the same can be decided within the ambit of Section 17 of the Contract Act, the fact that a party has initiated criminal proceedings with regard to the same subject matter would not impede a reference to arbitration. The same shall also be applicable in cases where a civil dispute involves an issue of deceit and the same vitiates the performance of an arbitration agreement.

In Deccan Paper Mills, the Supreme Court followed Avitel on the same issue and held that in cases where a party alleges fraud in the performance of a contract or if the allegation lies within the contours of Section 17 of the Indian Contract Act, the dispute shall still be arbitrable.

While the Courts has been expanding the concept of arbitrability of fraud, the Ordinance answers certain concerns which emanated from the Supreme Court’s decision in Venture Global Engg. LLC. v. Tech Mahindra Ltd. The case related to the impact of fraud on the enforcement of the arbitral award. The two-judge Bench in that case had different opinions before the case was referred to a larger bench of the Supreme Court.

Justice J Chelameswar essentially questioned the effect of disclosure of new facts - forming the basis of an allegation of a fraud - on the validity of an award and how the non-disclosure of the same would amount to fraud. Justice AM Sapre held that the entire arbitral process can be declared void ab initio in case the allegation of fraud and corruption is proved by a party. He went on to set aside the arbitral award on the rationale that it violated the principles of public policy embedded under Section 34(b)(ii) of the 1996 Act.

An issue that emerged from the ruling was whether it would be cogent for a court to consider setting aside an arbitral award at the enforcement stage. In this regard, the Ordinance brings much needed clarity on this issue and allows for a party to seek an unconditional stay on the enforcement of an award provided it is able to prove the allegation of fraud or corruption. Parties can clearly rely on the test and principles laid out in Rashid Raza and Avitel in order to prove their allegations in this regard and seek a stay on the enforcement of an award.

The Indian Arbitration regime, while dealing with the mechanism of arbitral referral amidst allegations of fraud, has had a rough path. There is skepticism that the Ordinance may pose a threat to the smooth enforcement of awards, as it provides the non-enforcing party with an option to seek an unconditional stay, and therefore may be subject to the hyper-partisan overuse of the proviso.

Despite the Ordinance having been promulgated, it would be premature to state that a clear path on the issue of arbitrability of fraud and its effect on the enforcement of arbitration awards is within sight. However, in a year marred by deep incertitude, finding new solutions should be the need of the hour.

Samaksh Goyal is an Advocate practicing at the Delhi High Court. He has a Masters from Northwestern Law School and a minor in Contract Law from Harvard Law School. Nubee Naved is an Associate working in his office and has a Masters from Canada. The authors' views are personal.