The LexGaze Weekly - WE THE PEOPLE

Dealing with allegations of fraud: Arbitrate or Litigate?

Saksham Grover

Issue 13 | September 13, 2020

Section 5 of the Arbitration and Conciliation Act, 1996 lays downthe “extent of judicial intervention”. The provisionexplicitly prohibits the interference of any judicial authority, except where provided by the Act. Moreover, the settled law in this regard states that disputes involving rights in personam (rights against an individual) are arbitrable disputes. However, the disputes involving rights in rem (rights against the whole world) are not arbitrable and, thus, arerequired to be decided by courts or tribunals.This is one of the major factors that makes the arbitration proceedings efficient. Nevertheless, there are often instances where the parties disrupt and delay proceedings on the ground that the nature of the dispute is “non-arbitrable”.While arbitration has been booming all around the world, its progress in India has been sluggish due tothe conflicting judicial authorities.

Arbitrability of fraud has been a key issue in the field of Alternative Dispute Resolution (ADR). Many a time when commercial disputes arise, parties tend to make allegations of fraud. In Afcons infrastructure and Ors. v. Cherian Verkay Construction and Ors [2010 (8) SCC 24], the Supreme Court of India, while interpreting Section 89 of the Code of Civil Procedure, 1908 settled the position and laid down the nature of disputes that are “not suitable for ADR”. In that category, the court also included cases “involving serious and specific allegations of fraud, fabrication of documents, forgery, impersonation, coercion, etc.”Arbitrability of fraud was initiallyexamined by the Supreme Court in Abdul Kadir Shamsuddin Bubere v. Madhav Prabhakar Oak [AIR 1962 SC 406], wherein the Court held, “serious allegations of fraud should be tried in open court and a court would be justified in refusing to make a reference to arbitration.”Although the judgment was given under the 1940 Act, the verdict was later upheld in N. Radhakrishnan v. Maestro Engineering [2010) 1 SCC 72]. Subsequently, in 2014, the Supreme Court took a contrary view in Swiss Timing v. Organising Committee [(2014) 6 SCC 677]. Such conflicting observations and decisions left the debate open and uncertain.


After much ambiguity, the issue was finally settled by a division bench of the Supreme Court in A Ayyasamy v A Paramasivam & Ors. [Civil Appeal Nos. 8245-8246 of 2016]. While overruling the decision given in N. Radhakrishnan, the court upheld the position laid down in theSwiss Timing case. It was held that a “mere allegation of fraud will not render the dispute non-arbitrable.”In furtherance of this principle, it was held that a court must differentiate between ‘fraud simpliciter’ (simple allegations of fraud) and serious allegations of fraud. Consequently, the former shall be arbitrable and the latter shall be decided by civil courts.

The ruling in the Ayyasamy case has further been affirmed recently. Athree-judge bench of the Supreme Court in Rashid Raza v. Sadaf Akhtar [Civil Appeal no. 7005 of 2019]relied upon the decisions in former cases and clarified the scope of arbitrability of fraud. Justice Nariman set out the tests laid down in the Ayyasamy case and held, “this is a case which falls on the side of “simple allegations” as there is no allegation of fraud which would vitiate the partnership deed as a whole or, in particular, the arbitration clause concerned in the said deed.”This recent ruling by the three-judge bench has given a new direction to determine ‘simple’ and ‘complex’ fraud. The two working tests culled out by the Supreme Court to make a distinction are based on two terms:

[1] Does this plea permeate the entire contract and above all, the agreement of arbitration, rendering it void, or

[2] Whether the allegations of fraud touch upon the internal affairs of the parties inter se having no implication in the public domain.

Upon examining the tests laid down, it is certain that the Supreme Court has narrowed down on the scope of ‘fraud’ and has provided much-needed clarity on the subject. However, what remains debatable is the role of judicial intervention in interpreting the seriousness of fraud, when contrasting applications are filed under Section 8 and Section 11 of the Act.

India continues to struggle with contract enforcement and was ranked 163rd under this head by the World Bank’s Ease of Doing Business Report. As we try to shift supply chains from China, it is significant that we improve contract enforcement and judicial lags in commercial matters. India has tried to integrate ADR for commercial disputes by way of several statutes such as compulsory pre-institution mediation under the Commercial Courts Act, etc.Nevertheless, the Supreme Court’s precedents are a step in the right direction to ensure minimum judicial interference, thus, giving greater independence to ADR mechanisms.