Civil & Criminal Proceedings can go on concurrently: Fraud passing twin test arbitrable

When the law regarding arbitrability of fraud in India seemed settled by the Ayyasamy v. A. Paramasivam, (2016) 10 SCC 386 [Ayyasamy] judgment, Justice Nariman sought to bring more clarity on the issue, by two subsequent judgments viz. Rashid Raza v. Sadaf Akhtar, (2019) 8 SCC 710 [Rashid Raza] and the recent being Avitel Post Studioz Ltd. vs. HSBC PI Holdings Mauritius Limited [Avitel]. The present post highlights the law explained in the Avitel judgment, while briefly touching upon the development of law on arbitrability of fraud in two preceding judgments viz. Ayyasamy and Rashid Raza.

In Avitel judgment [rendered by R.F. Nariman, Navin Sinha JJ.] dated 19.08.2020 in Civil Appeal 5156/2016 and Civil Appeal No. 5158/2016 the Supreme Court has held that civil and criminal proceedings can be proceeded with concurrently, issues on the civil side involving allegations of fraud [passing twin test as laid down in Rashid Raza] can be decided in arbitration even though the same set of facts may lead to a criminal proceeding as well. While further clarifying the principle that that mere allegations of fraud would not take a matter outside the purview of arbitration, the Apex Court, taking a que from judgment of Justice Sikri in Ayyasamy, and the separate judgment of Justice Chandrachud made thereunder, has explained the 2 tests laid down in Rashid Raza which need to be satisfied before a matter is taken outside arbitration.

Background

Arbitrability of Fraud has been a contentious issue for quite some time. The test which was propounded by Indian Supreme Court way back in 2009 in N. Radhakrishnan vs. Maestro Engineers, (2010) 1 SCC 72 [rendered by Tarun Chatterjee and V. S. Sirpurkar, JJ.] was whether the allegations of fraud are of serious nature which can only be settled in court through furtherance of detailed evidence by either of the parties. If the allegations of fraud pass this test, the matter would be referred to arbitration and not otherwise.

However, often the party contesting the institution of the arbitral proceedings, would take a plea of fraud to scuttle the proceedings. N Radhakrishnan became their shield as the definition of ‘serious allegations of fraud’ had been left open for interpretation. It therefore become important to define what would constitute the ‘serious allegation of fraud’.

Ayyasamy on fraud

Before we come on the discussion on what transpired in the Avitel case, it is important to note that in a well-crafted judgment of Ayyasamy, Justice Sikri had held that a judicial authority dealing with a S. 8 application, would refuse to refer matter to arbitration, only in the following circumstances: -

(i) where very serious allegations of fraud are made which make a case for criminal offence or

(ii) where allegations of fraud are so complicated that it becomes essential that such complex issues can be decided only by civil court on the appreciation of voluminous evidence that needs to be produced or

(iii) where serious allegations of forgery/ fabrication of documents are made in support of the plea of fraud or

(iv) where fraud is alleged against the arbitration agreement itself or is such a nature that it permeates the entire contract, including the agreement to arbitrate

As a corollary, Justice Sikri had further suggested that where there are simple allegations of fraud touching upon the internal affairs of the party inter se and the same has no implication in the public domain, the arbitration clause need not be avoided.

Concurring albeit with a separate judgment in Ayyasamy case, Justice Chandrachud had elaborated that the scheme of the Arbitration Act 1996 is such that no discretion has been vested in court/ judicial authority but to refer parties to arbitration, in case it comes across a valid arbitration agreement. On N. Radhakrishnan v. Maestro Engineers, (2010) 1 SCC 72, Justice Chandrachud had explained that it would be to misread the judgment to interpret it as saying that allegations of fraud plain-speaking must not be referred to arbitration. It was rather a case of criminal wrongdoing, misappropriation of funds and malpractices, and in this background it was contended therein that the arbitrator would not be competent to deal with such matters “which involved an elaborate production of evidence to establish the claims relating to fraud and criminal misappropriation”. He had clarified that as a matter of first principle, the Apex Court has not held that a mere allegation of fraud will exclude arbitrability.

Tests laid down in Rashid Raza

Justice Nariman [speaking for himself, R. Subhash Reddy, Surya Kant, JJ.] in Rashid Raza had summarized the tests of distinguishing ‘serious allegations of fraud’ from the ‘simple allegations’ as were propounded by Justice Sikri in Ayyasamy case. These were:

(i) Does the plea of fraud permeate the entire contract and above all the agreement of arbitration rendering it void or

(ii) Whether the allegation of fraud touch upon the internal affairs of the parties inter se having no implication in the public domain

The tests explained in Avitel

Elaborating on the above two tests, Justice Nariman held that serious allegations of fraud arise only if either of the 2 test is satisfied and not otherwise. He explained that the first situation will arise when the arbitration agreement cannot be said to exist and the second situation would be met in which allegations are made against the State or its instrumentalities, typically in writ proceedings in which questions are raised which are not predominantly from the contract itself or breach thereof.

In explaining the definition of fraud being used in the series of judgments vis-à-vis the arbitrability of contract, the Court held that whether it is fraud which vitiates the agreement itself or fraud which vitiates the performance of the contract, both are covered under the expression “fraud” as used in the judicial pronouncements.

The Court held that judgments of Afcons Infrastructure Ltd. v. Cherian Varkey Construction Co. (P) Ltd., (2010) 8 SCC 24 and Booz Allen Hamilton Inc. v. SBI Home Finance Ltd., (2011) 5 SCC 532 [which are on the aspect of arbitrability of disputes] have to be understood in the sense as laid down in Ayyasamy and Rashid Raza. In clarifying this position, the Court was right to point that same set of facts may have civil as well criminal consequences. Mere fact that the 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.

Conclusion

This judgment has gone a step further from Ayyasamy and Rashid Raza and said that a set of facts may lead to civil as well as criminal proceedings, and if the dispute is otherwise arbitrable i.e. it is not falling in one of the two situations laid down in Rashid Raza, the same would be arbitrable notwithstanding the allegations of fraud raised therein. Furthermore, the judgment has laid emphasis on Justice Chandrachud opinion in Ayyasamy which has categorically held that it would be to misread N Radhakrishnan to say that fraud per se is not arbitrable, and the said judgment was only applicable in case of serious cases of allegations of criminal misappropriation and malpractices which require elaborate appreciation of evidence to establish such claims.