The Ground that Allegations of Fraud are not Arbitrable is a Wholly Archaic View, Which has Become Obsolete and Deserves to be Discarded: SC

The ground that allegations of fraud are not arbitrable is a wholly archaic view, which has become obsolete, and deserves to be discarded, noted the Supreme Court.

Issue before the Court

This case rose an interesting issues with respect to the application of the doctrine of separability of an arbitration agreement from the underlying substantive contract in which it is embedded; whether an arbitration agreement would be non-existent in law, invalid or un-enforceable, if the underlying contract was not stamped as per the relevant Stamp Act; and, whether allegations of fraudulent invocation of the bank guarantee furnished under the substantive contract, would be an arbitrable dispute.

Observation made by the Court

  • The ground that allegations of fraud are not arbitrable is a wholly archaic view, which has become obsolete, and deserves to be discarded, noted the Supreme Court, while holding that the allegations of fraud with respect to the invocation of the Bank Guarantee are arbitrable, since it arises out of disputes between parties inter se, and is not in the realm of public law.

The ground on which fraud was held to be non arbitrable earlier was that it would entail voluminous and extensive evidence, and would be too complicated to be decided in arbitration. 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.”

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  • The Court held that, if it is clear that a civil dispute involves questions of fraud, misrepresentation, etc. which can be the subject matter of a proceeding under Section 17 of the Indian Contract, 1872, and/or the tort of deceit, the mere fact that criminal proceedings can or have been instituted in respect of the same subject matter, would not lead to the conclusion that a dispute which is otherwise arbitrable, ceases to be so, the Court noted the legal position as held in many judgments.
  • On the question that whether voidable agreements are arbitrable, the court held that such disputes would be arbitrable, since the issue whether the consent was procured by coercion, fraud, or misrepresentation requires to be adjudicated upon by leading cogent evidence, which can very well be decided through arbitration. Until it so proved and upheld as per Sections 2(i) and (j) of the Indian Contract Act, 1872 such an agreement would remain enforceable, and is not void.

Case Name: N.N. GLOBAL MERCANTILE PVT. LTD VS. INDO UNIQUE FLAME LTD.

Citation: CIVIL APPEAL NOS. 3802 – 3803 / 2020]

Coram: Justices DY Chandrachud, Indu Malhotra and Indira Banerjee

The ground that allegations of fraud are not arbitrable is a wholly archaic view, which has become obsolete, and deserves to be discarded.

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