The most contentious issue in arbitration is the arbitrability of fraud. This involves the questions such as what can be and cannot be submitted to arbitration. The recent judgment of the Supreme Court, in A Ayyasamy vs A Paramasivam & Ors, has settled the law and provides much-needed guidance on this subject.
Earlier, it was held by the Supreme Court, in N Radhakrishnan v. Maestro Engineers, held that where fraud and serious malpractices are alleged, the matter can only be settled by the court and such a situation cannot be referred to an arbitrator. Generally, fraud, financial malpractice and collusion are allegations with criminal repercussions, and the arbitrator has only limited jurisdiction. On the other hand, courts are more armed to adjudicate complex allegations, and can offer a wider range of relief to the parties.
However, the view taken by Supreme Court in World Sport Group (Mauritius) Ltd vs MSM Satellite (Singapore) Pte Ltd. And Swiss Timing Ltd v. Organising Committee, Commonwealth Games 2010, Delhi. It was held in these cases that allegations of fraud cannot be considered as a bar to refer the parties to a foreign-seated arbitration, and Section 45 of the Arbitration and Conciliation Act, 1996 is the only bar to refer parties to a foreign-seated arbitrations. Generally, it would involve the cases where the arbitration agreement is either (i) null and void; or (ii) inoperative; or (iii) incapable of being performed.
The Supreme Court was dealing with an application under Section 45 of the Arbitration and Conciliation Act, 1996 in World Sports. According to Section 45, a party can be referred to arbitration unless the arbitration agreement is null and void, inoperative or incapable of being performed, and is applicable only on foreign seated arbitration. Although the Supreme Court has clarified the position of law, it can only be applicable to foreign seated arbitration.
The Supreme Court dealt with an application under Section 11 of the Arbitration and Conciliation Act, 1996 in Swiss Timing, for appointment of an arbitrator in an international commercial arbitration. Though, there are many Supreme Court judgements which suggest that under Section 11 the limited scope of enquiry should be confined to existence of a valid arbitration agreement. Various criticsm raised by the Swiss Timing case is (a) decision on arbitrability in a Section 11 is a determination on the jurisdiction of the arbitral reference, which otherwise ought to be decided by the arbitral tribunal under the principle of competene-competence, (b) the ration of Radhakrishnan cannot be used here as the case was decided by a divisional bench whereas the Swiss Timing was held by the single bench, (c) the decisions made under Section 11 of the Act lacks precedentiary value, based on the view of Supreme Court in West Bengal v. Associated Contractors held that the decision of the Chief Justice or his designate in a Section 11 application, not being the decision of the Supreme Court or the High Court, as the case may be, has no precedential value, being a decision of a judicial authority which is not a court of record.
The Supreme Court has settled the debated in Ayyasamy case, it has been held that: (a) allegations of fraud which are in serious and complex nature are not; (b) the fraud alleged should be against the arbitrable agreement, if not it cannot be arbitrated; (c) the decision of Swiss timing was not overruled by Radhakrishnan. The judgement merely differentiates he simplicitor fraud and serious fraud. It was concluded that serious fraud should be left to be determined by the court and the simplicitor fraud can be decided by the arbitral tribunal.
There are lots of divergent views in differentiating between simple and serious fraud. There are a lot of judicial pronouncements which dealt with simple and serious fraud but a strict definition has not been given by the Court. There is a need for clarity on the subject. The judges are left with the construction and interpretation of the terms based on the facts and circumstances of the case.