Problems
!. Should the application for early dismissal be allowed
- The Arbitration tribunal has the right to decide whether the
arbitration clause is valid or not rather than dismissing the
proceedings just on the basis of the respondent’s submissions
Section 16 of the arbitration and conciliation
Act
o “(1) The arbitral tribunal may rule on its
own jurisdiction, including ruling on any
objections with respect to the existence or
validity of the arbitration agreement, and
for that purpose,—
(a) an arbitration clause which forms
part of a contract shall be treated as
an agreement independent of the
other terms of the contract; and
(b) a decision by the arbitral tribunal
that the contract is null and void shall
not entail ipso jure the invalidity of
the arbitration clause.”
- They are claiming that there is no jurisdiction as the contract
is void ab initio, But even if it is void, the arbitration clause
will be read separately from the contract
o Neyveli Lignite Corporation Limited vs M/S. Metro
Machinery Traders on 1 April, 2008 (MADRAS
HIGH COURT)
“We have also held that the question of whether
there was fraud must be decided only by a court
of fact. If there is fraud, Section 19 of
the Contract Act will come into play, which deals
with voidable contracts. Therefore, assuming
that fraud is proved, the contract only
becomes voidable and not void ab initio.
Therefore, the finding of the learned single Judge
that the contract is void ab initio is also
erroneous. The question of whether there is
unjust enrichment or whether NLC had knowingly
entered into a contract which was incapable of
being performed are all matters which can be
decided only by adducing evidence. In view of the
decisions cited above, even if
the contract is void, the arbitral clause does not
become void in any circumstance, and the
parties would have to go before the arbitrator,
who will decide whether the contract has
become void.”
- When can the agreement be rendered as non arbitrable in the
case of fraud
o A. Ayyasamy v. A. Paramasivam, (2016) 10 SCC
386
“ In view of our aforesaid discussions, we are of the
opinion that mere allegation of fraud simpliciter may not
be a ground to nullify the effect of arbitration agreement
between the parties. It is only in those cases where the
court, while dealing with Section 8 of the Act, finds that
there are very serious allegations of fraud which make a
virtual case of criminal offence or where allegations of
fraud are so complicated that it becomes absolutely
essential that such complex issues can be decided only
by the civil court on the appreciation of the voluminous
evidence that needs to be produced, the court can
sidetrack the agreement by dismissing the application
under Section 8 and proceed with the suit on merits. It
can be so done also in those cases where there are
serious allegations of forgery/fabrication of documents in
support of the plea of fraud or where fraud is alleged
against the arbitration provision itself or is of such a
nature that permeates the entire contract, including the
agreement to arbitrate, meaning thereby in those cases
where fraud goes to the validity of the contract itself of
the entire contract which contains the arbitration clause
or the validity of the arbitration clause itself. Reverse
position thereof would be that where there are simple
allegations of fraud touching upon the internal affairs of
the party inter se and it has no implication in the public
domain, the arbitration clause need not be avoided and
the parties can be relegated to arbitration. While dealing
with such an issue in an application under Section 8 of
the Act, the focus of the court has to be on the question
as to whether jurisdiction of the court has been ousted
instead of focusing on the issue as to whether the court
has jurisdiction or not. It has to be kept in mind that
insofar as the statutory scheme of the Act is concerned,
it does not specifically exclude any category of cases as
non-arbitrable. Such categories of non-arbitrable subjects
are carved out by the courts, keeping in mind the
principle of common law that certain disputes which are
of public nature, etc. are not capable of adjudication and
settlement by arbitration and for resolution of such
disputes, courts i.e. public fora, are better suited than a
private forum of arbitration. Therefore, the inquiry of the
Court, while dealing with an application under Section 8
of the Act, should be on the aforesaid aspect viz. whether
the nature of dispute is such that it cannot be referred to
arbitration, even if there is an arbitration agreement
between the parties. When the case of fraud is set up by
one of the parties and on that basis that party wants to
wriggle out of that arbitration agreement, a strict and
meticulous inquiry into the allegations of fraud is needed
and only when the Court is satisfied that the allegations
are of serious and complicated nature that it would be
more appropriate for the Court to deal with the subject-
matter rather than relegating the parties to arbitration,
then alone such an application under Section 8 should be
rejected.”
- What constitutes Serious allegation of fraud
o Avitel Post Studioz Ltd. v. HSBC PI Holdings
(Mauritius) Ltd., (2021) 4 SCC 713
“34. In a recent judgment reported as Rashid
Raza [Rashid Raza v. Sadaf Akhtar, (2019) 8 SCC
710 : (2019) 4 SCC (Civ) 503] , this Court referred
to Sikri, J.'s judgment in Ayyasamy [A.
Ayyasamy v. A. Paramasivam, (2016) 10 SCC 386
: (2017) 1 SCC (Civ) 79] and then held : (Rashid
Raza case [Rashid Raza v. Sadaf Akhtar, (2019) 8
SCC 710 : (2019) 4 SCC (Civ) 503] , SCC p. 712,
para 4)
“4. The principles of law laid down in this appeal
make a distinction between serious allegations of
forgery/fabrication in support of the plea of fraud
as opposed to “simple allegations”. Two working
tests laid down in para 25 are : (1) does this plea
permeate the entire contract and above all, the
agreement of arbitration, rendering it void, or (2)
whether the allegations of fraud touch upon the
internal affairs of the parties inter se having no
implication in the public domain
35. After these judgments, it is clear that “serious
allegations of fraud” arise only if either of the two
tests laid down are satisfied, and not otherwise.
The first test is satisfied only when it can be said
that the arbitration clause or agreement itself
cannot be said to exist in a clear case in which the
court finds that the party against whom breach is
alleged cannot be said to have entered into the
agreement relating to arbitration at all. The
second test can be said to have been met in
cases in which allegations are made against the
State or its instrumentalities of arbitrary,
fraudulent, or mala fide conduct, thus
necessitating the hearing of the case by a writ
court in which questions are raised which are not
predominantly questions arising from the contract
itself or breach thereof, but questions arising in
the public law domain.”
- Fourfold test of arbitrability
o Vidya Drolia v. Durga Trading Corpn., (2021) 2
SCC 1
“76. In view of the above discussion, we would
like to propound a fourfold test for determining
when the subject-matter of a dispute in an
arbitration agreement is not arbitrable:
76.1. (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.
76.2. (2) When cause of action and subject-
matter of the dispute affects third-party rights;
have erga omnes effect; require centralised
adjudication, and mutual adjudication would not
be appropriate and enforceable.
76.3. (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
76.4. (4) When the subject-matter of the dispute
is expressly or by necessary implication non-
arbitrable as per mandatory statute(s).
76.5. These tests are not watertight
compartments; they dovetail and overlap, albeit
when applied holistically and pragmatically will
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.”
