Serious Allegations Of Fraud Constituting Criminal Offense Are Non-Arbitrable: Delhi High Court

Brief Facts:

The matter pertained to a dispute which arose between Bentwood Seating System (P) Ltd. (“Appellant”) and Airport Authority Of India (“Respondents”) for the supply and comprehensive annual maintenance contract of baggage trolleys.

Before the arbitral tribunal, the allegations of fraud were pointed out. However, the arbitral tribunal set aside the Termination Order dated 20.02.2018 by which the Appellant was blacklisted and the Contract was terminated. The Respondents challenged this award under Section 34 of the Arbitration Act. The Respondents also filed a criminal complaint on alleging forgery by the Appellant.

The court set aside the arbitrator's award and held that the plea of fraud had not been adjudicated. The Appellant challenged this order before the Division Bench which upheld the decision of the Single Judge. The Appellant's special leave petition before the Supreme Court was also dismissed. The Respondents also filed an appeal which resulted in the appointment of a new arbitrator. The new arbitrator held that the dispute was not arbitrable due to the serious allegations of fraud which required examination of witnesses from foreign authorities and governmental bodies. Thereafter, the Appellant challenged the decision of the new arbitrator under Section 34 of the Arbitration Act.

The Appellant contended that the arbitrator exceeded jurisdiction under Section 16 of the Arbitration Act as the Respondents did not file an application under this provision. The Appellant argued that the arbitrator demonstrated bias by making observations on res judicata after holding the dispute non-arbitrable. The Appellant also claimed that the arbitrator conducted a mini-trial and failed to appreciate that the arbitral tribunal was constituted by the High Court under Section 11(6). The Appellant sought the return of fees paid to the arbitrator and requested the appointment of a new arbitrator to adjudicate the dispute including the plea of fraud.

The Respondents argued that the Appellant committed fraud by submitting forged documents to qualify for the tender. They contended that the plea of res judicata does not bar them from raising the issue of fraud. The Respondents argued that the Appellant failed to controvert the allegations of fraud and that the arbitrator's findings are correct and do not warrant interference.

Observations by the High Court:

The High Court referred to the decisions of the Supreme Court in A. Ayyasamy v. A. Paramasivam & Ors [(2016) 10 SCC 386] and Vidya Drolia and Others v. Durga Trading Corporation [(2021) 2 SCC 1]. The Supreme Court in these cases clarified the distinction between arbitrable and non-arbitrable disputes involving fraud. The Supreme Court held that while allegations of fraud simpliciter could be adjudicated by an Arbitral Tribunal, serious allegations of fraud should be best left to the Civil Courts.

The High Court noted that in this case the allegations of fraud were not simple but involved complex issues. It noted that this included the fabrication of documents from foreign entities and the involvement of international witnesses. The court further held that the Civil Court is better equipped to handle such matters, given the need to summon witnesses from outside the country and the involvement of governmental authorities.

The court noted that:

“The Arbitral Tribunal would have to examine witnesses who are officers from governmental authorities and/or those outside the country, and therefore, it is difficult to summon those witnesses before the Ld. Sole Arbitrator. The Ld. Sole Arbitrator would also have to take the assistance of the Ministry of External Affairs to summon those witnesses which can be more expediently handed over by the Civil Courts than by the Arbitral Tribunal. The allegations of fraud are not of forgery but fabrication of documents of foreign companies/authorities and therefore this could be more conveniently adjudicated by the Civil Courts than by the Arbitral Tribunal.”

The court agreed with the arbitrator reasoning. It held that the nature of the fraud alleged was serious and could potentially constitute a criminal offense. The court held that the issues were not merely internal to the parties but involved external entities and documents.

The court further noted that:

“This Court is therefore of the opinion that the present case is not on the ground of fraud simplicitor. The facts of the case are extremely serious and they do make out a case for criminal offence. The plea of fraud is of such a nature that it permits the entire contract including the agreement to arbitrate as the issue goes to the validity of the entire contract which contains the Arbitration Clause itself.”

Therefore, the court upheld the decision of the arbitrator and held that there was no reason to interfere with the determination that the Civil Court was the appropriate forum to adjudicate the serious allegations of fraud. Consequently, the court dismissed the appeal.

Case Title: Bentwood Seating System (P) Ltd. vs Airport Authority Of India & Anr

Citation: 2025 LiveLaw (Del) 321

Case Number: ARB. A. (COMM.) 55/2023 & I.A. 25113/2023, I.A. 25114/2023, I.A. 3993/2024

Advocate for the Appellant: Mr. S.D. Singh, Mr. Kamla Prasad, Mrs. Meenu Singh, Mr. Siddharth Singh, Advocates.

Advocate for the Respondent: Mr. Digvijay Rai, Mrs. Chetna Rai, Mr. Archit Mishra & Mr. Raghib Ali Khan, Advocates with Mr. Gagan Kochar, Sr. Manager (Law), AAI.

Date of Judgment: 11.03.2025

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