Supreme Court of India: whether reference to arbitration can be refused on the ground of allegations of fraud or it should be granted treating contract between the parties as commercial undertaking “with a sense of business efficacy”

 

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In a recent case of Ameet Lalchand Shah vs Rishabh Enterprises decided on 3 May, 2018 (Civil Appeal no. 4690 of 2018 (arising out of SLP(C) No.16789 of 2017)), the Supreme Court of India addressed the issue of whether reference of the dispute between the parties to arbitration is to be refused on the ground of allegations of fraud in the plaint or whether the agreements between the parties ought to be taken as commercial undertaking of the parties “with a sense of business efficacy”. After analyzing line of cases and recent amendment (2015 Amendment Act) in the Indian Arbitration and Conciliation Act, 1996 (the Act), the court held that it is only where serious questions of fraud are involved, the arbitration can be refused.

Factual Matrix

The parties entered into two agreements first for the purchase of power generating equipments (the first agreement) and the other for installation and commissioner of the plant. Both these agreements contained arbitration clause. Later appellant entered into Sale and Purchase Agreement with one of the Appellant for purchasing CIS Photovoltaic Products for a project. This agreement did not contain an arbitration clause. Another agreement was entered into between the parties whereby the parties agreed on the arrangements to pay lease rent for CIS Photovoltaic Products. Disputes arose between the parties and the matter referred to arbitration. After serving notice of arbitration, the appellant filed an application under Section 8 of the Act to the Delhi High Court. Section 8 of the Act is reproduced below:

8. Power to refer parties to arbitration where there is an arbitration agreement.—2 [(1) A judicial authority, before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party to the arbitration agreement or any person claiming through or under him, so applies not later than the date of submitting his first statement on the substance of the dispute, then, notwithstanding any judgment, decree or order of the Supreme Court or any Court, refer the parties to arbitration unless it finds that prima facie no valid arbitration agreement exists.] (2) The application referred to in sub-section (1) shall not be entertained unless it is accompanied by the original arbitration agreement or a duly certified copy thereof.

[Provided that where the original arbitration agreement or a certified copy thereof is not available with the party applying for reference to arbitration under sub-section (1), and the said agreement or certified copy is retained by the other party to that agreement, then, the party so applying shall file such application along with a copy of the arbitration agreement and a petition praying the Court to call upon the other party to produce the original arbitration agreement or its duly certified copy before that Court.] (3) Notwithstanding that an application has been made under subsection (1) and that the issue is pending before the judicial authority, an arbitration may be commenced or continued and an arbitral award made

Before moving any further, I would like to discuss the dicta of three important cases of the Supreme Court of India which are relevant for the discussion of the present case

Sukanya Holdings (P) Ltd. v. Jayesh H. Pandya and another (2003) 5 SCC 531

In this case the Supreme Court of India has held that if all the parties to the suit are not parties to the agreement then the matter cannot be referred to arbitration since there is no provision in the Act for partly referring the dispute to arbitration. The court also noted that the buyers were not parties to the arbitration agreement and that the non-signatories cannot be referred to arbitration.

Chloro Controls India Private Limited v. Severn Trent Water Purification Inc. and others (2013) 1 SCC 641

In this case, the Supreme Court dealt with the scope and interpretation of Section 45 of the Act – Part-II of the Act and in that context, discussed the scope of relevant principles on the basis of which a non-signatory party also could be bound by the arbitration agreement. Section 45 of the Act is reproduced below:

45. Power of judicial authority to refer parties to arbitration.— Notwithstanding anything contained in Part I or in the Code of Civil Procedure, 1908 (5 of 1908), a judicial authority, when seized of an action in a matter in respect of which the parties have made an agreement referred to in section 44, shall, at the request of one of the parties or any person claiming through or under him, refer the parties to arbitration, unless it finds that the said agreement is null and void, inoperative or incapable of being performed.

The court held that under Section 45 of the Act, an applicant seeking reference of disputes to arbitration can either be a party to the arbitration agreement or any person claiming through or under such party. Section 45 uses the expression “….at the request of one of the parties or any person claiming through or under him…..” includes non-signatory parties who can be referred to arbitration provided they satisfy the requirements of Sections 44 and 45 read with Schedule I of the Act.

Ayyasamy v. A. Paramasivam and others (2016) 10 SCC 386

In this case, the Supreme Court held that mere allegation of fraud is not a ground to nullify the effect of arbitration agreement between the parties and arbitration clause need not be avoided and parties can be relegated to arbitration where merely simple allegations of fraud touched upon internal affairs of parties is leveled. Justice A.K. Sikri observed that it is only in those cases where the Court finds that there are serious allegations of fraud which make a virtual case of criminal offence and where there are complicated allegations of fraud then it becomes necessary that such complex issues can be decided only by the civil court on the appreciation of evidence that needs to be produced.

Amendment to Section 8 of the Act by the Amendment Act, 2015

It is also worth mentioning the amendments brought about in Section 8 of the Act by the 2015 Amendment Act. As per Justice R.S. Bachawat’s Law of Arbitration and Conciliation, Sixth Edition, Vol. I (Sections 1 to 34) at page 695 published by LexisNexis, principally four amendments to Section 8(1) have been introduced by the 2015 Amendments – (i) the relevant “party” that is entitled to apply seeking reference to arbitration has been clarified/amplified to include persons claiming “through or under” such a party to the arbitration agreement; (ii) scope of examination by the judicial authority is restricted to a finding whether “no valid arbitration agreement exists” and the nature of examination by the judicial authority is clarified to be on a “prima facie” basis; (iii) the cut-off date by which an application under Section 8 is to be presented has been defined to mean “the date of” submitting the first statement on the substance of the dispute; and (iv) the amendments are expressed to apply notwithstanding any prior judicial precedent. The proviso to Section 8(2) has been added to allow a party that does not possess the original or certified copy of the arbitration agreement on account of it being retained by the other party, to nevertheless apply under Section 8 seeking reference, and call upon the other party to produce the same.”

Contentions of Parties

Appellant placed reliance upon Ayyasamy (Supra) to contend that there are no serious allegations in the plaint to decline reference of the matter to arbitration. It was further submitted that mere allegations of fraud were not sufficient to detract from the performance of the obligation of the parties in terms of the agreement and refer the matter to arbitration.

Respondents argued that the Delhi High Court rightly relied upon Sukanya Holdings (Supra) as it relates to Part-I of the Act that the parties who are not signatories to the arbitration agreement (in this case, Astonfield under the first agreement) cannot be referred to arbitration.

Respondents also contented that Chloro Controls (Supra) arises under Part-II of the Act and was rightly distinguished by the High Court and Sukanya Holdings (Supra) was not overruled by Chloro Controls (Supra) and hence, the appellants cannot rely upon Chloro Controls (Supra). Further, respondents asserted that it is not a case where “fraud is alleged merely to disable an arbitration” Respondents argued that existence of an arbitration clause in some of the agreements could not per se drag the dispute arising out of the principal agreement into arbitration when no such stipulation was agreed to by the parties.

Proceedings in High Court

The High Court observed that there is no arbitration agreement between the parties. After referring to Sukanya Holdings (Supra) and the amended Section 8 and Section 45 of the Act, the High Court pointed out the difference in language of Section 8 and Section 45 of the Act. The High Court distinguished between Sukanya Holdings (Supra) and Chloro Controls (Supra), and observed that Sukanya Holdings (Supra) was not overruled by Chloro Controls (Supra). The High Court held that the respondents levelled allegations of fraud against the appellants which raise serious triable issues of fraud and hence, the matter cannot be referred to arbitration.

Analysis

The Court observed that under the Act, an arbitration agreement means an agreement which is enforceable in law and the jurisdiction of the arbitrator is on the basis of an arbitration clause contained in the arbitration agreement. However, in a case where the parties alleged that the arbitration agreement is vitiated on account of fraud, the Court may refuse to refer the parties to arbitration.

The court cited the opinion of Justice D.Y. Chandrachud (another judge on the bench) in the case of Ayyasamy (Supra) wherein he pointed out that the duty of the Court is to impart “sense of business efficacy” to the commercial transactions pointing out that mere allegations of fraud were not sufficient to decline to refer the parties to arbitration.

Conclusion

Court held as under

  • All the four agreements are inter-connected.
  • Though the first agreement does not have any arbitration clause, by way of several clauses in the subsequent agreements, it was clearly linked with the first agreement.
  • Since all the three agreements between the parties had common purpose of commissioning project as agreed, the High Court was not right in saying that the first agreement is the main agreement. The Court dismissed the order of the High Court holding where the High Court, not keeping in view with the various clauses in all the three agreements which make them as an integral part of the principal agreement.
  • The Court concurred with the view of Justice D.Y. Chandrachud in Ayyasamy (Supra) and observed that it is the duty of the Court to impart the commercial understanding with a “sense of business efficacy” and not by the mere averments made in the plaint and held that Delhi High Court was wrong in refusing to refer the parties on the ground of the allegations of fraud levelled in the plaint.
  • The Court concluded that it is only where serious questions of fraud are involved, the arbitration can be refused.

Position of Singapore with regard to setting aside an award on the basis of allegations of fraud

In a very recent judgment of China Machine New Energy Corp v Jaguar Energy Guatemala LLC and another, [2018] SGHC 101, the Singapore High Court noted that certain “common” or “extreme” guerrilla tactics may already amount to grounds upon which an arbitral award may be set aside, under Art 34(2)(b)(ii) of the Model Law (for breach of public policy) and s 24(a) of the International Arbitration Act of Singapore, which applies where the making of the award was induced by fraud or corruption. Yet not all guerrilla tactics would fall within these two bases for setting aside an award. The court rejected the view of the party challenging the award on the ground of fraud asserting that an arbitral award may be set aside on the basis of guerrilla tactics employed by the successful party.

 

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