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Arbitrability in matters of Fraud and Non-Signatory Third Party

This paper intends to analyze in what situations does a matter qualify for arbitration and whether allegations of fraud or involvement of a non-signatory third party act as a bar to arbitration. There are primarily three issues that need to be addressed to determine the outcome of under Section 8.
  1. Does the district court have to cede jurisdiction to the arbitral tribunal as per Section 8 of the Arbitration and Conciliation Act, 1996?
  2. Can a non-signatory third party be bound for arbitration?
  3. Are issues of fraud arbitrable?

The first question to be deliberated is whether arbitration can be made applicable to a civil dispute.  As seen in the case H. Srinivas Pai and Anr. v. H.V. Pai (D) thr. L.Rs. and Ors[1]., Supreme Court held that:
Reference to arbitration and arbitrability depends upon the existence of an arbitration agreement, and not upon the question whether it is a civil dispute or commercial dispute. There can be arbitration agreements in non-commercial civil disputes also."

An essential requirement is the existence of an arbitration agreement that explicitly states that both parties have decided that in case of a dispute arising, the matter will be dealt with, through arbitration and details of the same have been mentioned regarding the number of arbitrators required and the procedure for selecting them.

In the case of Jagdish Chander vs. Ramesh Chander[2], it was held that while there need not be one specific format for an arbitration agreement as long as it can be clearly interpreted that the parties have decided to take up the obligation of going to arbitration.

In the case of Smt. Kalpana Kothari v. Smt. Sudhya Yadav[3], the Supreme court speaks of the significance of the arbitration agreement when it says that the mere presence of an arbitration clause:
"As long as the Arbitration clause exists, having recourse to Civil Court for adjudication of disputes envisaged to be resolved through arbitral process or getting any orders of the nature from Civil Court for appointment of Receiver or prohibitory orders without evincing any intention to have recourse to arbitration in terms of the agreement may not arise."

Often, the validity of the arbitration clause itself comes into question. As per the case of Hindustan Petroleum Corpn. Ltd. v. Pinkcity Midway Petroleums[4], it was seen that under the new Act[5], the power of a judicial authority to send a case for arbitration has been granted a clear procedure. The ambit for the judge to use their discretion has been narrowed down as the Supreme Court has declared that the language of Section 8[6] is irrefutable and that it is mandatory for the court to send the case for arbitration if their agreement has an arbitration clause.

In the judgment of India Household and Healthcare Ltd. v. LG Household and Healthcare Ltd[7], the Supreme Court said:
Section 45 of the 1996 Act contains a non obstante clause. A judicial authority, therefore, may entertain an application at the instance of a party which alleges that there exists an arbitration agreement whereupon judicial authority may refer the parties to arbitration, save and except in a case where it finds that the said agreement is null and void, inoperative and incapable of being performed.

In the case of Thomson CSF vs. American Arbitration Association[8], it was held that a:
Non signatory party may be bound to an arbitration agreement if so dedicated by the ordinary principles of contract and agency.
In the case of Sukanya holdings[9] it was said:
that the bifurcation of causes of action is not permitted and cases that involved non signatory third party cannot go for arbitration.

The doctrine of the Group of Companies was first recognized in India in the case of Chloro Controls Ltd. vs. Severn Trent Water Purification[10], with help of Section 45[11] of the Act. This doctrine has been utilized to justify a tribunal taking jurisdiction of a party which is not a signatory to the arbitration agreement. The focus in this case was on the intent of the parties which has to be confirmed before one can formulate the answer for whether the third party can come within the ambit of arbitration.

However, since Sukanya holdings[12] was a case regarding domestic jurisdiction, unlike Chloro Controls case, the former was not overruled. Interestingly, in a high court matter in Bombay[13], an application regarding Section 9 where pre-arbitration reliefs were sought from the non-signatory parties, the court referred to the Chloro Controls[14][i] case in order to analyse the scope of the arbitration clause, even though the dispute was domestic in nature.


AmeetLalchand Shah v. Risabh Enterprises[15] contemplated the question of law regarding non-signatory parties could be constituted within the single composite domestic arbitration, where the parties had signed multiple contracts with each other, and only some of them had an arbitration clause fixed. It regards amended section 8[16] in line with Section 45[17], to the effect that the ratio of Chloro Controls[18] case can be applied.

The Supreme Court considered the Equipment Lease Agreement[19] as the primary agreement and all other agreements to be ancillary in nature. This essentially fits the definition of a single composite arbitration.

 The 2015 Amendments[20]  have impacted Section 8[21] significantly. Two of those amendments that are relevant to our situation are as follows:
  1. The definition of the ‘party' that has the capacity to seek arbitration for the matter has been broadened to include persons claiming ‘'through or under'' such a party to the arbitration agreement.
  2. The ambit of the judge to use his discretion has been limited significantly and now the only thing the judge has to scrutinize is whether a valid arbitration agreement exists.

The Supreme Court in Mahanagar Telephone Nigam Ltd. v. Canara Bank and Ors[22]., while allowing the impleading of a non-signatory party to single composite arbitration dictated the criteria for invoking the Group of Companies doctrine.

The judgment relied to a certain degree on the case of the ICC award in Dow Chemicals[23], the Court observed:
To include a third party in an arbitration, it must be evident that there is a direct relationship between the party which is a signatory to the arbitration agreement; direct commonality of the subject matter; the composite nature of the transaction between the parties.

The definition of a composite transaction is that of an inter-linked endeavor where the performance of the agreement may not be feasible without the aid, execution, and performance of the supplementary or the ancillary agreement. 

The case of Swiss Timings[24] reads section 5[25] and section 16[26] of the Act together, to emphasize on how courts must only check the validity of an arbitration agreement and that is sufficient to qualify the matter for arbitration. The focus is on ensuring minimal court intervention.

 However in the cases of Abdul Kadir[27] as well as N. Radhakrishnan v. Maestro Engineers[28], the Court held that when a party is accused of “serious allegations of fraud'' makes the case not suitable for arbitration. At an initial glance, one may consider that the amount of money involved in a fraud is the determining factor behind the allegation being perceived as serious in nature, however that is not the complete picture.

In Ayyaswamy[29], Court said that where an arbitration agreement exists, there the onus will be on the court to refer the matter to the arbitration tribunal. However, if the allegations of fraud are involved, the court has to first examine what is the veracity of the allegations.

In the case of N. Radhakrishnan[30], since it was held that the allegations of fraud automatically make the case unfit for arbitration, without the court introspecting about the details of such allegation, this became a sort of loophole for parties to allege fraud in order to avoid arbitration, which would have been binding on them through Section 8.

In Ayyaswamy[31], the court creates a distinction between cases with “serious allegations of fraud” that are non-arbitrable because they involve complicated issues of fact and require adducing of elaborate evidence.

Therefore, in the eyes of the law, the amount of evidence required to prove or disprove an allegation is the determining factor behind whether or not that the allegation can be perceived as serious in nature and the amount of money is not the only or primary criteria here. The court needs to scrutinize whether fraud is based on a mere allegation, as a tactic to escape the arbitration clause or whether it is backed by evidence.

In conclusion, cases that may involve fraud for a large sum of money but do not necessarily need elaborate evidence, may be referred to the arbitral tribunal. The amendment[32] sets aside the judgment of the Supreme Court in Booz Allen Hamilton v. SBI Home finance[33], where the ruling declared that cases with serious allegations of fraud are not suitable for arbitration. Although, the Sukanya Holdings[34] case has not been overruled, its applicability has been significantly restricted.

On a secondary line of argument, one can claim that even if allegations of fraud are present, there is not something that the Arbitral Tribunal cannot ascertain on its own accord. Section 16[35] of the Act captures the essence of the universally recognized jurisprudential principle of Kompetenz-Kompetenz.

The idea behind this is that the arbitral tribunal has the capacity and authorization to determine the scope of its own jurisdiction. It aims to puts a restriction on the interventional nature of the courts that often hinder the arbitral tribunal's decisions. If one says that every case of allegations of fraud cannot go for arbitration, this may become a tool for judicial intervention.

End-Notes:
  1. H.. v. H.V. Pai (D) thr. L.Rs. and Ors  (2010) 12 SCC 521
  2. Jagdish Chander vs. Ramesh Chander (2007) 5 SCC 719
  3. Smt Srinivas Pai and Anr. Kalpana Kothari v. Smt. Sudhya Yadav  (2002)1SCC203
  4. Hindustan Petroleum Corpn. Ltd. v.Pinkcity Midway Petroleums  (2003)6SCC503.
  5. The Arbitration And Conciliation Act, 1996
  6. The Arbitration And Conciliation Act, 1996
  7. Household and Healthcare Ltd. v. LG Household and Healthcare Ltd (2007)5SCC510.
  8. Thomson-CSF, S.A. v. American Arbitration Ass'n, 64 F.3d 773, 777 (2d Cir. 1995)
  9. Sukanya Holdings vs. Jayesh Pandya AIR2003 SC 2252
  10. Chloro Controls (I) P. Ltd vs Severn Trent Water Purification (2013)1 SCC 641
  11. The Arbitration And Conciliation Act, 1996
  12. Sukanya Holdings vs. Jayesh Pandya AIR2003 SC 2252
  13. Rakesh S. Kathotia &Anr v. Milton Global Ltd. &Ors, -  2014 SCCOnlineBom  1119
  14. Chloro Controls (I) P. Ltd vs Severn Trent Water Purification (2013)1 SCC 641
  15. Ameet Lalchand Shah & Ors Vs Rishabh Enterprises & Anr, AIR 2018 SC 3041
  16. The Arbitration And Conciliation Act, 1996
  17. The Arbitration And Conciliation Act, 1996
  18. Chloro Controls (I) P. Ltd vs Severn Trent Water Purification (2013)1 SCC 641
  19. Ameet Lalchand Shah & Ors Vs Rishabh Enterprises & Anr, AIR 2018 SC 3041
  20. Justice R.S. Bachawat's Law of Arbitration and Conciliation, Sixth Edn., Vol. I (Sections 1 to 34) at p. 695 published by LexisNexis).
  21. The Arbitration And Conciliation Act, 1996
  22. Mahanagar Telephone Nigam Ltd. v. Canara Bank and Ors  2019 SCC OnLine SC 995
  23. ICC Award No. 4131, YCA 1984
  24. Swiss Timings Ltd. vs. Organizing Committee, Commonwealth Games 2010 Delhi AIR 2014 S 3723
  25. The Arbitration And Conciliation Act, 1996
  26. The Arbitration And Conciliation Act, 1996
  27. Abdul Kadir Shamsuddin Bubere v. Madhav Prabhakar Oak, AIR 1962 SC 406
  28. N. Radhakrishnan v. Maestro Engineering 2009 (13) SCALE 403
  29. A. Ayyasamy Vs A. Paramasivam & Ors (2016) [10 SCC 386]
  30. N. Radhakrishnan v. Maestro Engineering 2009 (13) SCALE 403.
  31. A. Ayyasamy Vs A. Paramasivam & Ors (2016) [10 SCC 386]
  32. The 2015 amendment to the The Arbitration And Conciliation Act, 1996
  33. Booz-Allen & Hamilton Inc Vs SBI Home Finance Ltd. & Ors (2011) 5 SCC 532
  34. Sukanya Holdings vs. Jayesh Pandya AIR2003 SC 2252
  35. The Arbitration And Conciliation Act, 1996

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