The Ground That Allegations Of Fraud Are Not Arbitrable Is A Wholly Archaic View, Deserves To Be Discarded: Supreme Court

The ground that allegations of fraud are not arbitrable is a wholly archaic view, which has become obsolete, and deserves to be discarded, the Supreme Court observed in a judgment delivered yesterday (11 Jan 2021).

The bench observed thus while holding that the allegations of fraud with respect to the invocation of the Bank Guarantee are arbitrable, since it arises out of disputes between parties inter se, and is not in the realm of public law.

One of the issues considered by the bench in this appeal was whether allegations of fraudulent invocation of the bank guarantee furnished under the substantive contract, would be an arbitrable dispute. The High court, in this case, had held that the allegations of fraud did not constitute a criminal offence which would entail recording of voluminous evidence and therefore the disputes could be resolved through arbitration. It was observed that the allegations of fraud made in this case are simple, which do not in the normal course constitute any criminal offence, nor are the allegations so complex in nature which would entail extensive evidence being led, hence the disputes could be resolved through arbitration.

Allegations Of Fraud Arbitrable When They Relate To Civil Dispute: Supreme Court Overrules 'N Radhakrishnan' Judgment

If it is clear that a civil dispute involves questions of fraud, misrepresentation, etc. which can be the subject matter of a proceeding under Section 17 of the Indian Contract, 1872, and/or the tort of deceit, the mere fact that criminal proceedings can or have been instituted in respect of the same subject matter, would not lead to the conclusion that a dispute which is otherwise arbitrable, ceases to be so, the Court noted the legal position as held in many judgments including in the recent judgment in Vidya Drolia & Others v. Durga Trading Corporation. The court said: 

The ground on which fraud was held to be non arbitrable earlier was that it would entail voluminous and extensive evidence, and would be too complicated to be decided in arbitration. In contemporary arbitration practice, arbitral tribunals are required to traverse through volumes of material in various kinds of disputes such as oil, natural gas, construction industry, etc. The ground that allegations of fraud are not arbitrable is a wholly archaic view, which has become obsolete, and deserves to be discarded. However, the criminal aspect of fraud, forgery, or fabrication, which would be visited with penal consequences and criminal sanctions can be adjudicated only by a court of law, since it may result in a conviction, which is in the realm of public law. 

On the issue whether voidable agreements are arbitrable, the court said that such disputes would be arbitrable, since the issue whether the consent was procured by coercion, fraud, or misrepresentation requires to be adjudicated upon by leading cogent evidence, which can very well be decided through arbitration. Until it so proved and upheld as per Sections 2(i) and (j) of the Indian Contract Act, 1872 such an agreement would remain enforceable, and is not void, it added.

Also Read : Whether Non-Payment Of Stamp Duty On Commercial Contract Will Invalidate Arbitration Agreement? Supreme Court Refers Issue To Constitution Bench

CASE: N.N. GLOBAL MERCANTILE PVT. LTD VS. INDO UNIQUE FLAME LTD. [CIVIL APPEAL NOS. 3802 - 3803 / 2020]

CORAM: Justices DY Chandrachud, Indu Malhotra and Indira Banerjee

CITATION: LL 2021 SC 13