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

The Supreme Court has held that the allegations of fraud can be made a subject matter of arbitration when they relate to a civil dispute.

The court however, clarified that the fraud, which would vitiate and invalidate the arbitration clause, is an aspect relating to non-arbitrability(Vidya Drolia and others v Durga Trading Corporation)

The bench comprising Justices NV Ramana, Sanjiv Khanna and Krishna Murari overruled a two judge bench judgment in N. Radhakrishnan v. Maestro Engineers  which had held otherwise. The court was answering a reference from a two judge bench which had doubted the dictum laid down in Himangni Enterprises v. Kamaljeet Singh Ahluwalia (2017) 10 SCC 706 that landlord-tenant disputes governed by the provisions of the Transfer of Property Act, 1882, are not arbitrable as this would be contrary to public policy. To answer the reference, the bench discussed the meaning of non-arbitrability and when the subject matter of the dispute is not capable of being resolved through arbitration.

The court noted that in N. Radhakrishnan, the two judge bench had upheld the order rejecting the application under Section 8 of the Arbitration Act on the ground that it would be in furtherance of justice that the allegations as to fraud and manipulation of finances in the partnership firm are tried in the court of law which is more competent and has means to decide a complicated matter. It was held therein that the dispute would be non-arbitrable on public policy consideration if it relates to serious allegations of fraud.

Disagreeing with this ruling, the bench observed that non-arbitrability question cannot be answered by examining whether the statute has a public policy objective which invariably every statue would have. It said:

"There is a general presumption in favour of arbitrability, which is not excluded simply because the dispute is permeated by applicability of mandatory law. Violation of public policy by the arbitrator could well result in setting aside the award on the ground of failure to follow the fundamental policy of law in India, but not on the ground that the subject matter of the dispute was non-arbitrable."

The court further observed that, to accept the reasoning in N. Radhakrishnan, one would have to agree that arbitration is a flawed and compromised dispute resolution mechanism that can be forgone when public interest or public policy demands the dispute should be tried and decided in the court of law. The bench further observed:

Arbitrators, like the courts, are equally bound to resolve and decide disputes in accordance with the public policy of the law. Possibility of failure to abide by public policy consideration in a legislation, which otherwise does not expressly or by necessary implication exclude arbitration, cannot form the basis to overwrite and nullify the arbitration agreement. This would be contrary to and defeat the legislative intent reflected in the public policy objective behind the Arbitration Act. Arbitration has considerable advantages as it gives freedom to the parties to choose an arbitrator of their choice, and it is informal, flexible and quick. Simplicity, informality and expedition are hallmarks of arbitration. Arbitrators are required to be impartial and independent, adhere to natural justice, and follow a fair and just procedure. Arbitrators are normally experts in the subject and perform their tasks by referring to facts, evidence, and relevant case law.

Complexity is not sufficient to ward off arbitration. In terms of the mandate of Section 89 of the Civil Procedure Code and the object and purpose behind the Arbitration Act and the mandatory language of Sections 8 and 11, the mutually agreed arbitration clauses must be enforced. The language of Sections 8 and 11 of the Arbitration Act are peremptory in nature. Arbitration Act has been enacted to promote arbitration as a transparent, fair, and just alternative to court adjudication.

Public policy is to encourage and strengthen arbitration to resolve and settle economic, commercial and civil disputes. Amendments from time to time have addressed the issues and corrected the inadequacies and flaws in the arbitration procedure. It is for the stakeholders, including the arbitrators, to assure that the arbitration is as impartial, just, and fair as court adjudication. It is also the duty of the courts at the post-award stage to selectively yet effectively exercise the limited jurisdiction, within the four corners of Section 34(2)(b)(ii) read with Explanation 1 and 2 and check any conflict with the fundamental policy of the applicable law. 

The court further noticed that in a recent judgment in Avitel Post Studioz Limited, it was held that Section 17 of the Contract Act would apply if the contract itself is obtained by fraud or cheating. Thereby, a distinction is made between a contract obtained by fraud, and post-contract fraud and cheating. The latter would fall outside Section 17 of the Contract Act and, therefore, the remedy for damages would be available and not the remedy for treating the contract itself as void.", it said.

The bench then laid down a a fourfold test for determining when the subject matter of a dispute in an arbitration agreement is not arbitrable:

(1) when cause of action and subject matter of the dispute relates to actions in rem, that do not pertain to subordinate rights in personam that arise from rights in rem.

(2) when cause of action and subject matter of the dispute affects third party rights; have erga omnes effect; require centralized adjudication, and mutual adjudication would not be appropriate and enforceable;

(3) when cause of action and subject matter of the dispute relates to inalienable sovereign and public interest functions of the State and hence mutual adjudication would be unenforceable; and

(4) when the subject-matter of the dispute is expressly or by necessary implication non-arbitrable as per mandatory statute(s).

These tests are not watertight compartments; they dovetail and overlap, albeit when applied holistically and pragmatically will 60 help and assist in determining and ascertaining with great degree of certainty when as per law in India, a dispute or subject matter is non-arbitrable. Only when the answer is affirmative that the subject matter of the dispute would be non-arbitrable

Applying this test, the bench observed that insolvency or intracompany disputes, grant and issue of patents and registration of trademarks, Criminal cases, Matrimonial disputes, Matters relating to probate, testamentary matter, disputes which are to be adjudicated by the DRT under the DRT Act etc. are not arbitrable. On N. Radhakrishnan, the bench held thus:

"We overrule the ratio in N. Radhakrishnan inter alia observing that allegations of fraud can be made a subject matter of arbitration when they relate to a civil dispute. This is subject to the caveat that fraud, which would vitiate and invalidate the arbitration clause, is an aspect relating to non-arbitrability."

Also Read :Landlord-Tenant Disputes Under Transfer Of Property Act Arbitrable Except When Covered By Rent Control Laws : Supreme Court

Disputes Which Are To Be Adjudicated By DRTs Are Not Arbitrable: Supreme Court Overrules 2012 Delhi HC Judgment

Expression 'Existence Of Arbitration Agreement' In Section 11 Of Arbitration Act Includes Aspect Of Validity Of Agreement : Supreme Court

CASE: VIDYA DROLIA vs. DURGA TRADING CORPORATION [ CIVIL APPEAL NO. 2402 OF 2019 ]

CORAM: Justices NV Ramana, Sanjiv Khanna and Krishna Murari

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