The list of issues allowed for arbitration is never an exhaustive list. This list not defined by legislation and not even by the judiciary. But application judicial minds through various case laws has laid down some principles which determines whether issue is arbitrable or not. Recently Supreme Court dealt with the issue of whether cases of Alleged Fraud is arbitrable or not. Here I have discussed here shorty on what basis of precedents Supreme Court applied this line of reasoning.

Here firstly referring one of the basic and classic principle deciding that what matters are arbitrable. the principle that- issues which has impact on public at large should not be arbitrable, secondly issues related dispute in between parties are only arbitrable. In short these principles give connotation that matters of civil dispute are arbitrable and not issues of criminal offence. Now here there are instances where some offences are covered under both civil as well as criminal offences as Fraud ( covered under section 17 of the Indian Contract Act and section 421 of the Indian Penal Code.)

Now discussing latest Supreme Court decision over this complexity that fraud which is of civil disputes can be arbitrable but not fraud in criminal offences. The line of reasoning applied by the court in this case was purely based on differentiating between what is issue related to public purpose and individual party disputes and secondly differentiating on the line of reasoning of matters where there is complexity of investigating multiple evidences and entrusted with series of facts and investigation versus the matters which are compiled of plain facts and it's a only case of alleged fraud.

Before going into complexity of the present case, discussing some of the previous judicial observations, which were actually taken into consideration and upheld by the present bench of Supreme Court. Previously in case of N. Radhakrishnan v. Maestro Engineers[i], where facts were that there involved case of malpractices in the account books, and manipulation of finances of the partnership firm. Now here court was of view that because these facts must be dealt by judiciary due to involvement of detailed investigation into the allegations and production of elaborate evidence. Court used expression that this need to be settled by the Court of Law.

Further in the pursuance to significant observation made in the case of A. Ayyasamy v. A. Paramasivam & Ors[ii], that court may reject admissibility of case for arbitration only for two reasons as:

1. arbitration agreement is found to be invalid and
2. Matters are of Public nature and are of not capable to resolve by adjudication or settlement through arbitration.

In this case distinguished between allegations of serious fraud and fraud simplicitor, court did not define the term but remained them as a question of fact. Generally cases of serious fraud are not arbitrable which include cases of:

1. If there are any implications of fraud on third party apart from the party to the agreement containing the arbitration clause.
2. where there are very serious allegations of fraud, which make a virtual case of criminal offence of fraud.
3. where there is need of appreciation of voluminous evidence to settle the matter.
4. forgery or fabrication of documents, or where fraud is alleged with respect to the arbitration clause itself or permeate the entire contract.

  In case of Avitel Post Studioz Ltd. & Ors. v. HSBC PI Holdings (Mauritius Limited) [iii], court was of opinion that cases of fraud and misrepresentation can be of both civil and criminal nature, and only because case can also be covered under criminal proceeding but also have subject matter of a proceeding under Section 17 of the Indian Contract, 1872, and/or the tort of deceit then it can not be denied that that issue does not deems fit to arbitration.

Now all these views were upheld in the latest case of M/s. N.N. Global Mercantile Pvt. Ltd. vs M/s. Indo Unique Flame Ltd. & Others [iv], here brief facts were that it was a case of alleged fraud of bank guarantee. It was alleged that bank guarantee was fraudulent because agreement was never acted upon, as there was no invoice of payment or payment received under guarantee and even there was no legal liability for any payment for which bank guarantee was invoked.

Now here court was of opinion that this is a case of fraud simplicitor for various reasons as upholding the tests laid down by the precedents as there is no case of - any implications of fraud on third party apart from the party to the agreement containing the arbitration clause, where there are very serious allegations of fraud, which make a virtual case of criminal offence of fraud, where there is need of appreciation of voluminous evidence to settle the matter, forgery or fabrication of documents, or where fraud is alleged with respect to the arbitration clause itself or permeate the entire contract. In this case alleged fraud can be proved by mere appreciation of some documents during the arbitration without any appreciation of voluminous or complex evidence.

What inference we can draw from this discussion is that court must be cautious while dealing or deciding the matter whether it should be allowed for arbitration or not and should be decided in pursuance to test laid down in above discussion. Court should look into matter as whether there is any malic as party is just making approach for the arbitration merely to avoid criminal proceeding. Court should look at the matter as whether it is matter of remedy in personam or remedy in rem and then should decide accordingly.

End-Notes:

1. (2010) 1 SCC 72
2. (2016) 10 SCC 386
3. (2020) SCCOnline SC 656.
4. Civil Appeal Nos. 3802 - 3803 / 2020