Arbitration is seen as preferred way of resolving disputes outside the court sphere for the parties who don’t want to opt for litigation. In Modern times due to the surge in commercial disputes the matters adjudicated through Arbitration are widening, which in turn draws attention on certain issues pertaining to same.

One such issue is whether Frauds are arbitral under Arbitration & Conciliation act, 1996. Under the established law all civil proceedings can be dealt under arbitration act however nothing explicitly is mentioned with respect to the frauds relating to civil disputes and whether they will be arbitral and the concept had to be evolved and further defined by the court.

In the case of Avitel Post Studioz vs. HSBC PI holdings (Mauritius) Limited, the Supreme Court made the Arbitration of Frauds clearer.

The facts of the case were such that an order was passed under sector 9 in favour of HSBC. HSBC alleged Avitel to have misrepresented and fraudulently induced it to invest money in equity capital of Avitel.

The award was passed in favour of HSBC at Singapore International Arbitration Centre was applied for interim measures in India by HBSC; however, Avitel apprised that allegations of fraud cannot be Arbitrated.

The court observed that “serious allegations of fraud” warranting the exclusion of arbitration could arise only on the satisfaction of two tests:

Serious allegations of fraud excluding the arbitration could only arise when the arbitration clause/agreement is non-existent.

The allegations of arbitrary, fraudulent or mala fide conduct are made against the state or its instrumentalities, in which case, the questions would lie in the public domain and must be entertained by a writ court.

The Supreme Court further held that, false representation, diversion of funds and impersonation are all inter parties and have no public flavour.

Similarly the Court in the latest case of Vidya Darolia Vs Durga Trading Corporations held overruling the judgement of N Radhakrishna case that allegations of frauds in civil disputes are arbitral.

A Four Fold test was propounded and the Court held that disputes are not arbitral when the cause of action/subject matter of the dispute

(1) Relates to actions in rem, that do not pertain to subordinate rights in personam that arise from rights in rem

(2) Affects third party rights; have erga omnes effect; require centralized adjudication, and mutual adjudication

(3) Relates to inalienable sovereign and public interest functions of the State

(4) Is expressly or by necessary implication non-arbitral under a specific statute.

Related Post