Will Arbitration Go Awry?

The Indian judiciary has largely demonstrated a pro-arbitration stand when it comes to dispute resolution in tune with international commercial arbitration. This alternative legal mechanism can benefit those who do not want to take recourse to lengthy courtroom procedures. However, there are legal traps which can be used by a party to avoid arbitration. One way of doing it is to raise an allegation of fraud against others and approach a civil court for an anti-arbitration injunction. But Indian courts are wary of this practice and do not grant anti-arbitration injunctions except in rarest of cases.

Point-Counterpoint

As per my understanding, the first leading case (Russel versus Russel) related to the anti-suit injunction was a foreign one over the partnership between two brothers, and their agreement had an arbitration clause. One of them gave notice to the other to dissolve the partnership. The other brother brought an action, alleging various charges of fraud and claiming that the notice should be declared void. Thereupon, the brother charged with fraud moved that the matter be referred to arbitration under the arbitration clause. The plea was resisted, though. The court held that in a case where there were fraud charges, the court would, in general, refuse to send the dispute to arbitration if the party charged with fraud desires a public inquiry. But where the party bringing the charge objects to arbitration, the court will not necessarily accede to it, and will never do so unless a prima facie case of fraud is proved.

In India, the first such leading case (Abdul Kadir Shamsuddin Bubere versus Madhav Prabhakar Oak) was related to allegations of fraud regarding accounts maintenance by one of the parties. The Supreme Court (SC) held if serious allegations of fraud have risen against a party and that party wants the matter to be heard in a public forum, the court can refuse to send the matter before arbitration. But in this case, the SC referred the parties to arbitration inter alia, saying (based on the facts of the case) that no serious allegation of fraud has been made out to oust the jurisdiction of arbitration. The apex court also laid down the law that the person against whom fraud has been alleged can choose the forum and the person who is alleging fraud cannot do so until he/she can show that serious allegation of fraud is prima facie supported by evidence.

Interestingly, there was a significant change in arbitration jurisdiction after the Arbitration and Conciliation Act 1996 (made in line with the UNCITRAL Model Law on international commercial arbitration) was promulgated. In its various judgements, the SC has upheld the provisions under Section 16, which provide absolute power to the arbitral tribunal to rule on its own jurisdiction, including ruling on any objection regarding the existence or validity of the arbitration agreement. Civil courts do not have the jurisdiction to go into that question. Also, when arbitration has been invoked first, civil courts do not have any jurisdiction to go into the question of competence or jurisdiction of the arbitral tribunal. In other words, the apex court took a clear stand in favour of arbitration in these cases.

Not always, though. In N. Radhakrishnan versus Maestro Engineers case, the SC said that civil courts could refuse to refer a matter to arbitration if a complicated question of fact or law is involved or where an allegation of fraud is made. Incidentally, this judgement has often been used as a tool to avoid arbitration.

Loopholes & Clarifications

The scenario changed when the 2015 Amendment Act was introduced to ensure independent and impartial proceedings, and the SC fixed two more issues during a 2016 lawsuit (A. Ayyasamy versus A. Paramasivam and Others) which leaned heavily towards arbitration. To begin with, what should be done when arbitration has been invoked first, and a party has approached a civil court inter alia, claiming anti-arbitration injunction? According to the apex court, when the arbitration clause has been invoked first, civil courts should go off the dispute and allow the tribunal to decide all issues as mentioned under Section 16.

Secondly, what should be done if a lawsuit is filed first and then the defendant files an application under Section 8 of the A&C Act, questioning the validity of the suit on the ground that an arbitration agreement exists between the parties? In such a case, the court is to decide on the arbitrability of the dispute. The SC also pointed out that the 1996 Act did not list arbitrable and non-arbitrable disputes. But various judicial pronouncements have helped pinpoint several issues as non-arbitrable, including patent, trademarks and copyright issues, anti-trust/competition laws, insolvency/winding-up proceedings, bribery/corruption, fraud and criminal offences.

According to the apex court, when a case involves serious allegations of fraud, the civil court could exercise its jurisdiction. However, a mere allegation of fraud cannot decide that the matter is incapable of settlement by arbitration. The allegations of fraud should be so serious that in the normal course, these may even constitute a criminal offence; they should also be complex in nature, and the decision on these issues demands extensive evidence for which the civil court should appear to be a more appropriate forum than the 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," the SC said in a note of caution. Incidentally, this judgement has been followed in various matters related to anti-arbitration injunctions.

The Bottom Line

In cases such as A. Ayyasamy, Ameet Lalchand Shah versus Rishabh Enterprises, Ravi Arya versus Palmview Investments Overseas and Himachal Sorang Power versus NCC Infrastructure Holdings, the Indian judiciary ultimately upheld the supremacy of arbitral tribunal over civil courts. A perusal of these judgements also underlines that Indian courts are very slow in granting anti-arbitration injunctions unless they conclude that the arbitration proceeding initiated is vexatious and/or oppressive. The courts have also made a distinction between the principles governing anti-suit and anti-arbitration injunctions. The fact that a trial will be required if a civil court takes charge is another factor which is weighed against the grant of an anti-arbitration injunction. Therefore, endeavours are made to support and aid arbitration instead of allowing parties to move away from chosen adjudicatory processes.