(Also read Decisions under Section 11 of Arbitration & Conciliation Act, Not Binding Precedent and Contempt of Order of Arbitration Tribunal)
“Arbitration
improves access to justice. It enhances the likelihood of recovery. It delivers
speedier results. It keeps costs down. For many, it is a superior option to the
expensive, slow, cumbersome ways that have come to typify our civil justice
system.”[1]
- Peter
B. Rutledge
PART – I:
INTRODUCTION
Indian
Courts have in several decisions held that matters, in which grave allegations
of fraud, conspiracy or misappropriation are made, are too serious to be tried
by arbitrators. Therefore, in India, and several other countries, such matters
cannot be the subject-matter of arbitration. This view has also been upheld by
the Supreme Court of India in N. Radhakrishnan vs Maestro Engineers[2] (“N Radhkrishnan”). The
Courts have given various reasons for holding that arbitrators are incompetent
to hear such matters. Reputation of the party, ineffectiveness of arbitration
where substantial amount of documentary evidence needs to be produced and lack
of legal knowledge of the arbitrator, are some of the most cited reasons for
limiting the scope of arbitration by such a huge extent. It is also necessary
to consider the impact of such a limitation on Indian arbitration law, from an
international commercial arbitration perspective.
This
article aims to analyze whether arbitration tribunals should be allowed to hear
such matters and whether they can function effectively in cases involving
fraud. It is to be noted that this article focuses only on fraud, conspiracy or
misappropriation that relates only to the issues between parties of a valid
arbitration agreement. This article does not dwell into issues which arise when
the arbitration agreement itself was obtained by fraud, misrepresentation,
coercion, undue influence or on mistake of fact. 'Fraud' wherever used in this
article includes conspiracy or misappropriation and other similar acts, but
only from the perspective of civil law. It is well settled in law that criminal
offences cannot be referred to arbitration, and the author does not dispute the
correctness of such a limitation on arbitration.
Part II
of this article analyzes the various judgements that have held that matters
involving allegations of fraud cannot
be tried by arbitrators. It also compares the ratio of the judgements passed
under the provisions of The Arbitration Act, 1940 (“the Act of 1940”)
with the judgements passed under the provisions of the Arbitration and
Conciliation Act, 1996 (“the Act of 1996”). Part III of this article
tests, theoretically, the applicability of 'confidentiality' on arbitration
proceedings and awards, in India. It also considers confidentiality in
arbitration proceedings, as a possible solution to widen the scope of
arbitration, thereby bringing allegations of fraud within its ambit. Part IV
proposes possible solutions to minimize judicial intervention in cases
involving fraud, and also puts forth circumstances in which fraud claims can be
tried by arbitrators.
PART
– II: GROUNDS FOR EXCLUSION
Ineffectiveness
of Arbitration tribunal
In N Radhkrishnan,[3] the
parties before the Supreme Court had entered into a partnership and the
partnership deed executed between them contained an arbitration clause.
Disputes arose between the partners and letters were exchanged. In these
letters, one partner who was the appellant, alleged fraud and serious
malpractices by the other document partners and offered to resign from the
partnership.
The
appellant filed an application before the district court under section 8(1) of
the Act of 1996 and requested the district court to refer the dispute to
arbitration in light of the arbitration clause in the partnership deed. The
district court dismissed the appellant's application to refer the matter to
arbitration. On appeal, the Madras High Court also rejected his request for
arbitration. The appellant then sought relief from the Supreme Court, but the
Apex Court also found against him and dismissed his appeal to refer the dispute
to arbitration. The reasoning adopted by the Supreme Court was that such
situations cannot be appropriately settled by arbitration.
In order
to examine the judgement, it is necessary to refer to the relevant provisions
of the Act. Section 5 of the Act of 1996 states as under:
"Notwithstanding
anything contained in any other law for the time being in force, in matters
governed by this Part (Part I of the Act), no judicial authority shall
intervene except where so provided this Part (Part I of the Act)."
No
provision of Part I of the Act of 1996 provides for judicial intervention in
cases involving substantial questions relating to facts or those which involve
serious allegations relating to fraud and malpractice. It is interesting to
note that despite the huge impact of this judgement on section 5 of the Act,
the Supreme Court's judgement does not once mention or refer to section 5 of
the Act.
In N Radhkrishnan, the
Supreme Court relied on Abdul Kadir Shamshuddin Bubere vs Madhav Prabhakar Oak[4], Haryana Telecom Ltd. vs. Sterlite
Industries (India) Ltd. and Oomor Sait Vs. Aslam Sait.
Abdul
Kadir Shamshuddin Bubere vs Madhav Prabhakar Oak arose under the Act of 1940.
In this case, a three-judge bench of the Supreme Court held that "where
serious allegations of fraud are made against a party and the party who is
charged with fraud desires that the matter should be tried in open court, that
would be a sufficient cause for the court not to order an arbitration agreement
to be filed and not to make the reference to the arbitrator."
However,
the court came to the conclusion that judicial intervention is permitted by
virtue of sub-section (3) and (4) of section 20 of the Act of 1940 and reads as
under:
“(3) On such application being made,
the Court shall direct notice thereof to be given to all parties to the
agreement other than the applicants, requiring them to show cause within the
time specified in the notice why the agreement should not be filed.
(4) Where no sufficient cause is shown, the Court
shall order the agreement to be filed, and shall make an order of reference to
the arbitrator appointed by the parties, whether in the agreement or otherwise,
or, where the parties cannot agree upon an arbitrator, to an arbitrator
appointed by the Court. “
Section
20 was the only provision under the Chapter 'Arbitration With Intervention of a
Court Where There Is No Suit Pending' of the Act of 1940. In the judgement of
Abdul Kadir Shamshuddin Bubere vs Madhav Prabhakar Oak, the Court had the
benefit of the wide scope of judicial intervention provided by section 20 of
the Act of 1940. Therefore, under the circumstances, it is humbly submitted
that this case should not have been relied on by the Court in N Radhakrishnan.
The
order of the Supreme Court in Haryana Telecom Ltd. vs. Sterlite Industries
(India) Ltd., although it barely exceeds 500 words, resolved the important
issue of whether winding up of a company can be referred to arbitration. While
answering the question in the negative the Supreme Court held as under:
'Sub-section (1) of
Section 8 provides that where the judicial authority before whom an action is
brought in a matter, will refer the parties to arbitration the said matter in
accordance with the arbitration agreement. This, however, postulates, in our
opinion, that what can be referred to the arbitrator is only that dispute or
matter which the arbitrator is competent or empowered to decide.'
Although
the correctness of the order is not doubted, emphasis must be placed on the
fact that the Supreme Court passed such an opinion in an order, and not in a
judgement, that too without making reference to any precedents, whatsoever. Other relevant factors such as lack of
arbitration agreement with certain creditors were not gone into and more
emphasis could have been placed on the uniqueness of the nature of winding up
proceedings, bringing it out of the scope of arbitration.
Documentary
Evidence
In N
Radhakrishnan the Supreme Court upheld the argument of the Respondent that 'when a case involves
substantial questions relating to facts where detailed material evidence (both
documentary and oral) needed to be produced by either parties, and serious allegations
pertaining to fraud and malpractices were raised, then the matter must be tried
in court and the arbitrator could 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.'
The
Court upheld the High Court's decision that "since
the case relates to allegations of fraud and serious malpractices on the part
of respondents, such a situation can only be settled in court through
furtherance of detailed evidence by either parties and such a situation cannot
be properly gone into by the arbitrator".
The Court went on to state that 'the
civil court is not prevented from proceeding with the suit despite an
arbitration clause if dispute involves serious questions of law or complicated
questions of fact adjudication of which would depend upon detailed oral and
documentary evidence.'
In H.G. Oomor Sait And Another vs O. Aslam Sait[5] the Madras High Court held that
although it was true that the discretion of the Civil Court to proceed with the
suit is narrowed down by the Act, the Court unable read to anything from the
Act of 1996 which would place a total embargo on the Civil Court to continue
the proceedings before it only on the mere existence of an arbitration clause.
A combined reading of all the provisions of the 1996 Act as well as section 8
disclosed that the time-tested reasons which were behind the several judgments
of the various Courts as well as the English Courts holding that Civil Court
can refuse to stay the suit and can proceed with the suit under certain
circumstances continue to hold good even now. The Court acknowledged the
short-comings and deficiencies of enquiries before an arbitrator. The Court
laid down the reason why, over a century, Courts have repeatedly held that in
cases where substantial questions of law arise for consideration or issues
which require serious consideration of evidence relating to fraud and
misrepresentation etc. are involved, such cases are best left to the civil
court and that the arbitrator will not be competent to go into the said issues.
It stated that the nature of the enquiry before an arbitrator is summary and
that the rules of procedure and evidence are not binding.
In
the above case the Court was of the opinion that the Act of 1996 did not remove
the abovementioned inadequacies and deficiencies. The Rules of Procedure and
evidence are not building on the proceedings before an arbitrator vide Section
19(1) of the Act. The Court agreed that a solemn agreement between the parties
to resolve the disputes by an alternative forum before the arbitrator should be
strictly complied with. Thus the Court held that disputes involving
consideration of substantial questions of law and contested allegations of mala
fides, fraud, misrepresentation etc. which depend on adducing of and scrutiny
of detailed oral and documentary evidence, then the parties as well as the
Civil Court would be justified in ignoring the arbitration clause.
Section
27 of the 1996 Act provides for the arbitrator to seek the assistance of the
Court in taking evidence is an example of the admitted deficiencies of a
proceeding before the arbitrator. Even after obtaining such assistance from the
Civil Court, the arbitrator would still be unable to appreciate the demeanour
of the witnesses which is an essential feature of appreciation of oral
evidence. Assuming that the grounds of challenge of an arbitration award as
provided under the New Act has been narrowed down compared to the old Act, that
would be all the more reason why the jurisdiction of the Civil Court to go into
such contentions issues like substantial questions of law or serious allegation
of fraud etc., requiring detailed evidence, should be properly reserved for a
Civil Court to go into and decide.[6]
The
Court also entertained the possibility that the arbitrator may not be even a
law-knowing person.
Reputation
of the Party
The
case of Bombay Gas Co. Ltd. vs Parmeshwar Mittal & Others[7], arose at a
time when the proceedings under the Act of 1940 had not yet commenced and the
Act of 1996 came into force. The Court said that the provisions of the new Act
would apply. The Court in this case held
that it is settled position of law that it is the person against whom fraud is
alleged has an option to have the matter decided by the Civil Court.
English
Courts have also held that in cases of fraud or misconduct or dishonesty or
misappropriation of money or negligence involving the professional reputation
of a party is charged, the court will in general refuse to send the dispute to
arbitration if the party against whom such charges are made desires trial in
open court.[8]
In the landmark judgement of Russel v. Russell[9] the
Court held that in order to oppose reference of the matter for arbitration, the
objection to arbitration proceedings must be by the party on whom fraud has
been alleged.
In
Cunningham Reid v. Buchanan-Jardine[10], the
plaintiff alleged the defendant of wrongful conversion of money. The dispute
arose under a contract which contained an arbitration clause. The defendant
applied for stay of the suit. The court held that despite the serious charge of
fraud, there was no good reason why the normal course of allowing the matter to
proceed to arbitration in accordance with the parties' agreement should not be
adopted. The Court granted a stay, which
was vacated in an appeal by the plaintiff, but was restored in a further appeal
by the defendant. In the second appeal the Court held that a stay would be
refused almost as of course if the party charged with fraud objected to a stay
and wanted to clear his name in open court, but one could not escape from the
conclusion laid down by the House of Lords that, if the case was the other way
round, ie the party charged with fraud was seeking arbitration and the party
charged with fraud was opposing a stay, then even if a strong prima facie case of
fraud was made out, that was not by itself enough to warrant refusing a stay.
Thus, the party on whom fraud was alleged had the right to choose whether or
not to refer the matter for arbitration. It can be inferred that it is the
reputation of the party on whom fraud is alleged, which is given importance.
In
another case, there was an arbitration clause in the contract of employment.
The servant sued the master for wrongful dismissal. Since the master gave an
undertaking to the court that he will not plead or suggest fraud in the
arbitration proceedings, an application for stay was granted in favour of the
master and the matter was referred to arbitration.[13]
PART
– III: CONFIDENTIALITY IN ARBITRATION
PROCEEDINGS
If
factors such as reputation of the party are considered for not referring a
matter for arbitration, then perhaps it is also relevant to take into account
the level of confidentiality in arbitration proceedings. If arbitration
proceedings and awards are made confidential, then it will protect the parties
reputation, since allegations of fraud, etc. will not be made public.
Conversely, when negative allegations have already entered the public domain,
the party on whom such allegations are made may wish to clear his name by
making the decision or award public. In such case, making arbitration
proceedings and awards confidential will be counter-productive.
Article
30[14] of the
LCIA India Arbitration Rules[15] imposes a general principal of
confidentiality in the deliberations, materials and even award in arbitration,
and enumerates the limited circumstances in which the disclosure is permitted
by the arbitrators and the parties to the arbitration. However, the Act of 1996
only mentions confidentiality only with respect to conciliation.
In
England, the concept of confidentiality in arbitration, domestic as well as
international, has slowly flourished. Although the English Arbitration Act,
1996 does not have any specific provision relating to confidentiality in arbitration
proceedings, the general principles of confidentiality have been laid down in
several cases.[16] Thus, in English law,
confidentiality is considered as an implied term in arbitration agreements.[17]
It
appears that, other than in England, the current trend in international
arbitration is to discourage arbitral confidentiality.[18]
In the Australian case of Esso Australia Resources Ltd v. The Honourable Sidney
James Plowman[19] the
court concluded that while confidentiality should be respected, it was not an
essential attribute of arbitration.
Courts in Sweden and the United States have moved away from a general duty of
confidentiality in arbitration.[20] The new
French arbitration law states that subject to legal requirements, and unless
otherwise agreed by the parties, arbitral proceedings shall be confidential in
the case of domestic arbitration.[21] Thus,
the requirement of confidentiality in domestic arbitration proceedings is
presumed. In the case of international arbitration, the new French arbitration law
also provides that the deliberations of the arbitration tribunal must be
confidential.[22]
PART – IV: CONCLUSION
It is
humbly submitted that preventing the matter from going into arbitration merely
because the arbitrator is not a person having legal-knowledge and may not be
aware of rules of procedure and evidence, is not sufficient cause to refrain
the parties from proceeding with arbitration. The qualification of the arbitrator
may always be an issue, for sometimes the disputes may arise on unforeseeable
technical complexities, other than on areas of law. For example, some cases
would require the arbitrator to have a high-level knowledge of accounts,
architecture, stock markets, a specific area of engineering, etc. Even judges,
who may be skilled only in law, must in several case, become experts on other
technical aspects. The fact that the arbitrator does not have legal knowledge
may affect the choice of the arbitrator, but not the arbitration proceedings
itself. Therefore, if parties are restrained from proceeding with arbitration
simply because a particular arbitrator is not an expert on the subject-matter
of the arbitration, arbitration agreements will not be worth the papers they
are printed on.
Even in
Justice Bachawat's 'Law of Arbitration & Conciliation' it is stated that,
in view of the mandatory provisions of section 8, the objections as to
reference to arbitration on the grounds that the action of the defendant
amounts to criminal offence and fabrication of the records are without any
merit.[23]
The
issue of reputation of the parties can be resolved by giving the party on whom
the fraud is alleged the option of confidentiality in arbitration proceedings.
Since the Act of 1996 does not provide anything about confidentiality of the
arbitration proceedings, Courts can adopt the practice of giving the “option of
confidentiality”, which would have a minimal interference with the arbitration
proceedings, instead of giving the “option of clearing name in open court”. As
discussed above, when the arbitration proceedings are made compulsorily
confidential it may prove to be counter-productive in cases where allegations
of fraud against one of the parties has already entered the public domain. This
issue does not arise when such party has the “option of confidentiality”.
In the
author's opinion, the most valid reason for limiting the scope of arbitration
in cases of fraud is ineffectiveness of arbitration tribunals in processing
substantial amount of evidence. It is submitted that this limitation does not
arise solely due to the provisions of the Act, but due to practical
difficulties in their implementation. Whenever judicial intervention is
required in arbitration proceedings, delays are bound to arise. Unfortunately
section 27 of the Act of 1996 is a necessary evil. The mechanism for dealing
with applications under section 27 is, indeed, in need of improvement.
However,
instead of ousting the jurisdiction of the arbitral tribunal, perhaps the
Courts could consider referring the matter for arbitration, while holding that
the arbitrator, under section 16 of the Act of 1996, had the power to rule that
the tribunal did not have jurisdiction, in cases where the evidence was too
substantial. Thus, the decision of whether the evidence is too substantial or
not, should be left to the arbitrator. This would ensure minimal judicial
intervention in arbitration proceedings, and would be in-line with section 5 of
the Act of 1996.
Excluding cases involving fraud or those involving
large amount of documentary evidence from the scope of arbitration is a huge
impediment on the flourishing of arbitration, as a mechanism for alternate
dispute resolution, in India. Indian Courts must, as far as possible, refrain
from interfering with the arbitral process. Such restrictions on arbitration
also discourage parties from selecting the Act of 1996, or any part thereof, as
the arbitral law.
However, until Courts change their view regarding
fraud allegations and arbitration, or until the Act of 1996 is appropriately
amended, parties entering into to an arbitration agreement and legal
practitioners drafting such an agreement, must keep in mind the factors such as
confidentiality of the arbitral proceedings, with respect to the nature of the
possible disputes that may arise.
[1] Catholic University of America, Columbus School of Law “Arbitration – A Good Deal for Consumers,”
2008
[2] 2009 (13) SCALE 403
[3] 2009 (13) SCALE 403
[4] AIR 1962 SC 406
[5] (2001) 2 MLJ 672
[6] H.G. Oomor Sait And Another vs O. Aslam Sait, (2001) 2 MLJ 672
[7] 1998 (2) BomCR 25
[8] Justice Bachawat's 'Law of Arbitration &
Conciliation: Including Commercial, International & ADR', Volume 1, 5th
Edition, LexisNexis Butterworths Wadhwa Nagpur, (2010), Page 52
[9] (1880) 14 Ch D 471
[10] (1987) JBL 380
[11] (1880) 14 Ch D 471
[12] [1976] 2 Lloyd's Rep 10
[13] Schaik v. Kane (Frederick Co.) Ltd., (1963) 107
Sol J 273
[14] Article
30 Confidentiality: 30.1
Unless the parties expressly agree in writing to the contrary, the parties
undertake as a general principle to keep confidential all awards in their
arbitration, together with all materials in the proceedings created for the
purpose of the arbitration and all other documents produced by another party in
the proceedings not otherwise in the public domain - save and to the extent
that disclosure may be required of a party by legal duty, to protect or pursue
a legal right or to enforce or challenge an award in bona fide legal
proceedings before a court or other judicial authority.
30.2 The deliberations of the arbitral tribunal
are likewise confidential to its members, save and to the extent that
disclosure of an arbitrator’s refusal to participate in the arbitration is
required of the other members of the arbitral tribunal under Articles 10, 12
and 26.
30.3 The LCIA Court does not publish any
award or any part of an award without the prior written consent of all parties
and the arbitral tribunal.
[15] Commenced on 17 April 2010.
[16] Dolling-Baker v. Merrett [1990] 1 WLR 1205; Ali
Shipping Corporation v. Shipyard Trogir [1997] EWCA Civ 3054, Emmott v.
Michael Wilson & Partners Ltd [2008] EWCA Civ 184.
[17] Simon Bushell, Arish Bharucha, Stephanie
Balsys, Bringing Fraud Claims under an Arbitration Agreement – Does the arbitral
Process Pack Enough Punch?, AUSTRIAN YEARBOOK ON INTER-NATIONAL ARBITRATION
2012 , 325, at page 341 (Klausegger, Klein, Kremslehner, Petsche, Pitkowitz,
Power, Welser & Zeiler eds., 2012)
[18] Nigel Blackaby, Constantine Partasides, Alan
Redfern, Martin Hunter, 'Redfern and Hunter on International Arbitration, 5th
Edition, Oxford University Press, (2009) at 2.152.
[19] (1995) 193 CLR 10..
[20] Simon Bushell, Arish Bharucha, Stephanie
Balsys, Bringing Fraud Claims under an Arbitration Agreement – Does the arbitral
Process Pack Enough Punch?, AUSTRIAN YEARBOOK ON INTER-NATIONAL ARBITRATION
2012 , 325, at page 341 (Klausegger, Klein, Kremslehner, Petsche, Pitkowitz,
Power, Welser & Zeiler eds., 2012)
[21] Republic of France, Ministry of Justice and
Civil Liberties, Decree No. 2011-48 of 13 January 2011, Article 1464
[22] Republic of France, Ministry of Justice and
Civil Liberties, Decree No. 2011-48 of 13 January 2011, Article 1479
[23] Justice Bachawat's 'Law of Arbitration &
Conciliation: Including Commercial, International & ADR', Volume 1, 5th
Edition, LexisNexis Butterworths Wadhwa Nagpur, (2010), Page 524
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