SC: Fraud allegations being non-arbitrable are archaic and deserve to be discarded

Sreya Kanugula

The Supreme Court observed that any allegations of fraud being on non-arbitrable grounds is an entirely archaic view and has grown obsolete, and must be discarded

The bench consisting of Justices DY Chandrachud, Indu Malhotra, and Indira Banerjee stated that holding fraud allegations with regards to the invocation of the Bank Guarantee is arbitrable since it arises out of disputes between parties and does not fall under the domain of public law.

One of the several issues given consideration by the Supreme Court bench in the appeal was the question of whether allegations made on fraudulent invocations of the Bank Guarantee that the substantive contract furnishes, would be considered arbitrable or not.

In this case of N.N Global Mercantile Pvt. Ltd. v. Indo Unique Flame Ltd., the High Court held that the fraudulent allegations do not count as a criminal offence since that would entail voluminous records and evidence.

Thus, the High Court stated that these disputes can find a resolution through the process of arbitration.

An observation on the simplicity of the allegations made was also noted and since the allegations aren’t complex and they don’t establish a criminal offence as per the normal course, the arbitration was suggested.

In a recent judgment made in the case of Vidya Drolia & Others v. Durga Trading Corporation along with several similar judgments, the Court held that, if it is made clear that a dispute of civil nature involves questions concerning fraud or misrepresentation and so on, which make them a subject matter under a proceeding Section 17 of the 1872’s Indian Contract and/or the tort of deceit, this mere fact of criminal proceeding possibly taking place with respect to the same subject matter, would not lead to a conclusion that the dispute which continues to remain arbitrable, ceases to be so.

The court stated that the earlier grounds on which fraud was held to a non-arbitrable standard entails extensive detailed evidence to be produced and was considered to be far too complication to entail a resolution through arbitration.

The court stated that, “In contemporary arbitration practice, arbitral tribunals are required to traverse through volumes of material in various kinds of disputes such as oil, natural gas, construction industry, etc. The ground that allegations of fraud are not arbitrable is a wholly archaic view, which has become obsolete, and deserves to be discarded. However, the criminal aspect of fraud, forgery, or fabrication, which would be visited with penal consequences and criminal sanctions can be adjudicated only by a court of law, since it may result in a conviction, which is in the realm of public law.”

On the problem of whether agreements that are voidable can also be arbitrated or not, the court noted that they would be considered arbitrable since the problem of whether the consent for the agreements was sought through coercion or fraud or misrepresentation, would require adjudication through leading cogent proof collected, which can be decided through the arbitration process.

The court lastly added that such an agreement made will remain enforceable and not void until it is so proved and upheld as such as per Sections 2(i) and (j) written under the Indian Contract Act of 1872.