Vikas Dutta

On May 3, the Supreme Court passed a vital judgment in the Ameet Lalchand Shah Case, thereby setting aside the finding of the Delhi High Court concerning the impact of an allegation of fraud in an Arbitration arising out of a commercial contract.

Both the Division Bench and the Single Judge of the Delhi High Court, while dismissing an application under Section 8 of the Arbitration and Conciliation Act, 1996 (“Act”), held that since the agreement in question was not interconnected with the Principal Agreement, the parties can’t be referred to Arbitration in view of the ratio in the Sukanya Holding case.

Rejecting this finding, the Supreme Court held that the arbitrator appointed can thoroughly examine the allegations regarding fraud. The Apex Court further concluded that all agreements are interrelated, and therefore, the dispute is to be adjudicated by an arbitrator.

Importance of Ameet Lalchand Shah Case

For the last twenty years, the jurisdiction of an arbitrator concerning an allegation of fraud has been a debatable issue.  In the Ayyasamy judgment, the Supreme Court dealt with the issue in detail. However, in the Ayyasamy case, the subject matter of adjudication was a partnership deed.

What makes the present case significant is the fact that it concerns four commercial contracts. Also, in this case, one of four commercial contracts does not have an Arbitration clause. 

Factual Matrix of the case

When a dispute arose between the parties, one of the contracting parties (“Party A”) filed a police complaint on the basis of which an FIR was registered. There was also an Income Tax investigation. This FIR was sought to be quashed by the other party (“Party B”), which is pending adjudication.

Party B meanwhile issued notice invoking Arbitration and nominated a retired judge as the sole arbitrator.

To counter this Arbitration notice, Party A filed a civil suit (commercial) before Delhi High Court, leveling various allegations including fraud and misrepresentation. In this suit, besides recovery, the main prayer was to seek a declaration of the contract as void due to serious fraud committed by Party B.

An application under Section 8 of the Arbitration and Conciliation Act was preferred by Party B, seeking for reference of the dispute with regard to all four agreements to arbitration.  The Delhi High Court declared that the Section 8 application filed by Party B was not maintainable.

 Issues before Supreme Court

The Supreme Court framed two issues. The first issue is whether the four agreements are inter-connected to refer the parties to arbitration though there is no arbitration clause in one such agreement. The second issue is whether Arbitration can be refused on the ground of fraud inflicted.

Before analysing the judgment any further, a short digression is required.  It is imperative to first understand the background which led to the adjudication of the Ayyasamy case. The Supreme Court had relied heavily on Ayyasamy case while deciding the present case.

Ayyasamy case

On October 04, 2016, the Supreme Court dealt with the dispute between two brothers, arising out of the partnership concerning running a hotel.

In this case, one side filed a suit for permanent injunction in 2012, restraining the other side from interfering with their right to participate in the administration of the hotel. After the receipt of summons, the other side moved an application under Section 8 of the Act, objecting to the maintainability of the suit.

Both the lower court and the High Court, while dismissing the Section 8 application adopted the dicta laid down in N Radhakrishnan v. Maestro Engineers and Ors. It was held that as there are serious allegations of fraud and malpractice, the case does not warrant to be tried and decided by the arbitrator and a civil court would be more competent.

The Supreme Court rejected the reasoning given by the High Court and the lower court, concluding that a mere allegation of fraud in the present case was not sufficient to detract from the obligation of the parties to submit their disputes to arbitration.

Justice AK Sikri even took note of the Law Commission’s observations contained in its 246^th report.  He observed that the Law Commission has recognized that in cases of serious fraud, courts have entertained civil suits. The Law Commission also tried to make a distinction in cases where there are allegations of serious fraud and fraud simplicitor.

The Supreme Court distinguished applicability of the judgment in N Radhakrishnan, as it does not subscribe to the broad proposition that a mere allegation of fraud is ground enough not to compel parties to abide by their agreement to refer disputes to arbitration.

The Court observed further that only in cases where there is a serious issue of fraud involving criminal wrongdoing, the exception to arbitrability carved out in N Radhakrishnan may come into existence.

With this background in place, it is time to evaluate the Ameet Lalchand Shah case.

Issues involved

As stated earlier, the first issue is concerning interconnectivity of the four agreements, especially when one agreement does not have an Arbitration clause.

Decision: The Apex Court concluded that this is a case where several parties are involved in a single commercial project executed through several agreements/contracts.  It was observed that these four agreements are inter-connected, and despite there being no arbitration clause in one of them, all four contracts can be referred for Arbitration.

Reasons recorded by Apex Court:

1. All the four agreements were for the single purpose to commission Photovoltaic Solar Plant at one particular location only.
2. Controlling parties on both sides are common;
3. Supreme Court extracted various clauses of these contracts to show that all the four agreements are inter-connected.
4. Though there are four different contracts, the Equipment Lease Agreement for commissioning of Solar Plant is the principal/main agreement.
5. Court distinguished Sukanya Holding Judgment in present circumstances.

The second and most important issue as far as legal impact of this judgment is concerned, is whether reference of the dispute between the parties to arbitration is to be refused on the ground of allegations of fraud levelled or whether the agreements ought to be taken as commercial undertaking of the parties “with a sense of business efficacy” as held in Ayyasamy Case?

Decision: Apex Court held that adjudication by Arbitration in this case couldn’t be refused because of an allegation of fraud is involved. Thereby, the Apex Court extended the scope laid down in Ayyasamy case.

Reasons recorded by Apex Court:

1. Arbitration and Conciliation (Amendment) Act, 2015 has brought an amendment to Section 8 to make it in line with Section 45 of the Act.
2. The Court relied upon Ayyasamy case (supra) where it was held that a mere allegation of fraud is not a ground to nullify the effect of an arbitration agreement between the parties
3. Court also noted Justice DY Chandrachud‘s observation in the Ayyasamy case that the duty of the Court is to impart “sense of business efficacy” to the commercial transaction, and that mere allegation of fraud was not sufficient to decline to refer the parties to arbitration.

Conclusion

The Supreme Court adopted an efficient and pragmatic view in the Ameet Lalchand Shah case. The Court virtually stonewalled the attempts to wriggle out of arbitration clauses by leveling “routine” allegations of fraud which parties do not contest or lead any evidence to support. This way, the Court has ensured that the very purpose or objective of Arbitration and Conciliation Act should not get defeated.

Recommendations

The above discussion has provided us with a perfect occasion to suggest critical recommendations. The purpose is to sensitize both the Judiciary and the Executive to make a law that all allegation of fraud is to be adjudicated by arbitration only.

Having said so, the only exception which can be carved out where Arbitration can be avoided in an arbitrable contract should be in cases where the main contention of an affected party (and not the ancillary contention) is that a severe fraud is being played upon a contracting party and consent of such party is obtained by inflicting fraud, in which case such fraud would render consent void ab initio.

Need of the hour

Making this the legal position will only help in getting quick and desired adjudication. Otherwise, India will keep struggling to push itself up in the rankings for enforcement of commercial contracts.  As per a World Bank press release dated October 31, 2017, the time taken to enforce a contract in India is 1,445 days, which put India at 164^th place globally.

To conclude, the Supreme Court observed the following, which sums up the whole message of this Article:

“It is the duty of the Court to impart the commercial understanding with a ‘sense of business efficacy’ and not by the mere averments made in the plaint.” (Emphasis Supplied).

The Author is a Corporate Commercial Litigator and a Litigation Partner at Kapil Sapra & Associates (“KSA”).  KSA is a full service corporate commercial law firm with offices in New Delhi & Bangalore.