Materials Before Court Insufficient To Decide Fraud In Relation To Existence Of Arbitration Agreement, Arbitrator To Decide Issue: Kerala HC

The Kerala High Court on Thursday reiterated that where a plea of fraud is raised in a dispute, the civil aspect of fraud is arbitrable, unless the very arbitration agreement is found to have been vitiated by fraud.

As to the forum to decide upon the arbitrability of the agreement, Justice Satish Ninan reiterated that the Courts would be bound to refer the parties for adjudication unless it was evident that there was no valid arbitration agreement, nor an arbitrable dispute.

While observing so, the bench held that in the instant case, since the materials before the Court were insufficient to conclusively decide upon the plea of fraud and on the existence of the arbitration agreement, 

"Applying the principles of "prima facie test" and "when in doubt refer", laid down by the Apex Court, the power conferred on the Arbitral Tribunal under Section 16 of the Act, and taking cue from the judgment of the Apex Court in Praveen Electricals case, I deem it appropriate that, the Arbitrator be directed to consider the issue of existence of the Arbitration agreement as a preliminary issue and to proceed with the merits only if it is found in favour".

The instant application before the Court was one for appointment of an arbitrator as per Section 11 (5)  of the Arbitration and Conciliation Act 1996 (hereinafter 'Act').

It was the applicant's case that an agreement dated 17th October 2018, had been entered into between the parties regarding the manufacture and supply of sanitary wares for the applicant company, and that defective goods had been supplied by the respondent in this regard. It was further alleged that although the applicant had requested the respondent for their cooperation in appointing an Arbitrator for dispute resolution, no such measure had been taken by the latter.

On the other hand, the respondent, through its counter affidavit, contended that they had not signed the Agreement and that the signature therein was a forged one. 

The applicants, represented by Advocates K. Shaj, Renjit George, C. Ijlal, Arun Chand, Vinayak G. Menon, Bharat Vijay P. and Majid Muhammed K., contended that the emails between the parties would make it clear that there had indeed been communication between them and that the respondent had duly signed the Agreement. It was submitted that the agreement had been duly executed and that their silence as to the email communications would itself prove its genuineness. 

On behalf of the respondents, it was contended by Advocates R. Bindu, Raymond George Dias, and Harshit S. Tolia, that the signature of the Managing Director assailed in the agreement is a forged one. To substantiate the same, the respondents had also produced the opinion of a handwriting expert, which had supported their contention. It was further alleged that the seal of the company found beneath the alleged signature of the Managing Director was also fabricated. Thus, a complaint had been filed by the respondent before the police alleging forgery and fabrication. It was contended in this light that an agreement that had been created by forgery, fabrication and fraud could not be the basis for initiation of an arbitration proceeding, and that fraud could not be made the subject matter of an arbitration proceeding. 

In order to determine the first question as to whether disputes in which plea of fraud has been raised are arbitrable or not, the Court perused the developments in case laws in this regards such as Afcons Infrastructure Ltd. v. Cherian Varkey Construction Co. (P) Ltd. (2010) and Booz Allen and Hamilton Inc. v. SBI Home Finance Ltd and Ors (2011) in which it had been held that allegations of fraud, fabrication, forgery could not be subject matters for arbitration.

It also referred to A. Ayyasamy v. Paramasivam (2016), wherein the Court drew a distinction between cases where there are serious allegations of forgery or fabrication of document in support of the plea of fraud or where the fraud alleged is of such a nature that permeates the entire contract including the agreement to arbitrate, and a plea of fraud touching upon the internal affairs of the parties (simple allegations).

In Rashid Raza v. Sadaf Akhtar (2019), the Apex Court reiterated the same and even formulated a twin test for considering the issue of non-arbitrability namely; (i) whether the plea permeates the entire contract and the very agreement of arbitration rendering it void, and (ii) whether the allegations of fraud relate to the internal affairs of the parties inter se, having no implication in the public domain. Subsequent cases of Avitel Post Studioz Ltd. v. HSBC PI Holdings(Mauritius) Ltd. (2021), and Vidya Drolia v. Durga Trading Corpn. (2021) also reiterated this view.

In N.N.Global Mercantile Private Limited v. Indo Unique Flame Limited and Others (2021), the Court definitively ruled that "the civil aspect of fraud is arbitrable unless the very arbitration agreement itself is vitiated by fraud, and that the criminal aspect of fraud, forgery or fabrication could be adjudicated only by a court of law", and went on to state that the "the view that allegations of fraud are not arbitrable is a wholly archaic view which has become obsolete and deserves to be discarded".

In order to discern the forum to determine non-arbitrability, the Court perused Section 16(1) of the Act which empowers the Arbitral Tribunal to decide on the challenge on the very existence or validity of arbitration agreement. In Vidya Drolia's case, it was held by the Apex Court that the Arbitral Tribunal is to be the first preferred authority to "determine and decide all questions of non-arbitrability and that the court is conferred with the power of a second look", and that rarely, the Court may "interfere at the Section 8 or Section 11 stage when it is manifestly and ex facie certain that the arbitration agreement is non-existent or the disputes are non-arbitrable". It was further held in that case that,

"unless it is ex facie evident that there is no valid arbitration agreement or an arbitrable dispute, the court is bound to refer the parties to arbitration",

and added that if the question of arbitrability could not be determined prima facie, the proper course would be to refer the parties to arbitration ('when in doubt, do refer' test). In Ayyasamy's case, the Apex Court held that the Arbitral Tribunal is empowered to adjudicate on a plea of fraud. The Court reiterated the position in that case that, 

"If an allegation of fraud can be adjudicated upon in the course of a trial before an ordinary civil court, there is no reason or justification to exclude such disputes from the ambit and purview of a claim in arbitration".

Importantly, the Court took note of Pravin Electricals Pvt. Ltd. v. Galaxy Infra Engineering Pvt. Ltd. (2021) in which the genuineness of signatures on the agreement in question was in issue as in the present case, and wherein it was held that the Arbitrator could decide the existence of the arbitration agreement on existence, on evidence, and proceed with the merits of the claims only if it is found that such an agreement exists.

It was in this context that Retired Justice K. Balakrishnan Nair was nominated as the Sole Arbitrator to adjudicate upon the disputes between the parties, and directed to raise the preliminary issue of existence of arbitration agreement and adjudicate on the dispute between the parties. It was further directed that the Arbitrator was to decide on the merits of the claim only if the arbitration agreement was found to exist. 

Case Title: M/S SVS Marketing Sanitary Pvt. Ltd. v. M/S Bathtouch Metals Pvt. Ltd. 

Citation: 2022 LiveLaw (Ker) 494

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