Section 8 of The Arbitration Act II: Arbitrability of Fraud

Fraud is a knowing misrepresentation of the truth or concealment of a material fact or abuse of a position of confidence to induce another to act to his detriment. Serious allegations of fraud may not be referred to Domestic Arbitrations.

When the case involves serious allegations of fraud, the dicta contained in N. Radhakrishnan, (2010) 1 SCC 72 and Abdul Kadir, AIR 1962 SC 406 would be understandable. However, at the same time, mere allegation of fraud in the pleadings by one party against the other cannot be a ground to hold that the matter is incapable of settlement by Arbitration and should be decided by the Civil Court. The allegations of fraud should be such that not only these allegations are serious that in normal course these may even constitute a criminal offence, they are also complex in nature and the decision on these issues demand extensive evidence for which a Civil Court should appear to be more a appropriate forum than an Arbitral Tribunal. Otherwise, it may become a convenient mode of avoiding the process of Arbitration by simply using the device of making allegations of fraud and pleading that issue of fraud needs to be decided by the Civil Court.

[D.Y. Chandrachud J] “Judgment in N. Radhakrishnan has been utilised by parties seeking a convenient ruse to avoid Arbitration to raise a defence of fraud. First and foremost, it is necessary to emphasize that the Judgment in N. Radhakrishnan does not subscribe to the broad proposition that a mere allegation of fraud is ground enough not to compel parties to abide by their agreement to refer disputes to Arbitration. More often than not, a bogey of fraud is set forth if only to plead that the dispute cannot be Arbitrated upon. To allow such a plea would be a plain misreading of the Judgment in N. Radhakrishnan.”

Mere allegation of fraud simpliciter may not be a ground to nullify the effect of Arbitration Agreement between the parties. 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.

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.”

Hon’ble Justice A.K. Sikri, A. Ayyasamy v. A. Paramasivam, [Civil Appeal Nos. 8245-8246 of 2016].