The Supreme Court of India has recently determined that allegation of fraud in a dispute will affect a party's ability to require that dispute to be referred to arbitration under Part I of the Arbitration and Conciliation Act, 1996 (the Act) in N. Radhakrishnan vs Maestro Engineers, (2009 (13) SCALE 403).

Part I of the Act deals with domestic arbitration.

Facts
In the case at hand, the parties before the Supreme Court had entered into a partnership and the partnership deed executed between them contained an arbitration clause. Disputes arose between the partners and letters were exchanged. In these letters, one partner who was the appellant, alleged fraud and serious malpractices by the other partners and offered to resign from the partnership.

The other partners filed a suit in the district court. They sought to obtain a declaration that the appellant was no longer a partner in the firm and prayed for an injunction restraining the appellant from interfering in the affairs of the firm.

Thereafter, the appellant filed an application before the same district court under section 8(1) of the Indian Arbitration and Conciliation Act, 1996 and requested the district court to refer the dispute to arbitration in light of the arbitration clause in the partnership deed.

The district court dismissed the appellant's application to refer the matter to arbitration. On appeal, the Madras High Court also rejected his request for arbitration. The appellant then sought relief from the Supreme Court, but the Apex Court also found against him and dismissed his appeal to refer the dispute to arbitration.

Supreme Court's Judgment
The Supreme Court initially observed that the dispute between the partners "squarely fell within the purview of the arbitration clause of the partnership deed". However, the Court upheld the High Court's decision that "since the case relates to allegations of fraud and serious malpractices on the part of respondents, such a situation can only be settled in court through furtherance of detailed evidence by [the] parties and such a situation cannot be properly gone into by the Arbitrator".

The Supreme Court went on to add that "the facts of the present case [did] not warrant the matter to be tried and decided by the Arbitrator, rather for the furtherance of justice, it should be tried in a court of law which would be more competent and have the means to decide such a complicated matter involving various questions and issues raised in the present dispute".
In arriving at this view, the Supreme Court relied on two earlier judgments.

The first judgement was in Abdul Kadir Shamshuddin Bubere vs Madhav Prabhakar Oak, AIR 1962 SC 406, which arose under the Arbitration Act of 1940 as the arbitration law applicable in India. In this case, a three-judge bench of the Supreme Court held that "where serious allegations of fraud are made against a party and the party who is charged with fraud desires that the matter should be tried in open court, that would be a sufficient cause for the court not to order an arbitration agreement to be filed and not to make the reference [to arbitration]".

The second judgment relied on by the Supreme Court was a more recent decision of the Madras High Court in Oomor Sait Vs. Aslam Sait, 2001 (3) CTC 269. In this case which came up for consideration under the provisions of the current Arbitration and Conciliation Act, 1996, the Madras High Court held that the civil court could refuse to stay suits under certain grounds, despite the existence of an arbitration clause.

After pointing out that the nature of the enquiry before an arbitrator is summary and rules of procedure and evidence are not binding, the court went on to state that "wherever the dispute involves a consideration of substantial questions of law or complicated questions of fact which would depend upon detailed oral and documentary evidence, the civil court is not prevented from proceeding with the suit and [may] refuse to refer the dispute to the arbitrator".

Comments
Before analyzing the Supreme Court's judgement in the above case, it is useful to examine the language of two key provisions of Section 5 and Section 8 given under Part I of the Arbitration and Conciliation Act, 1996.

Section 5 states that "[n]otwithstanding anything contained in any other law for the time being in force, in matters governed by [Part I of the Act], no judicial authority shall intervene except where so provided [in Part I of the Act]."

The other provisions in Part I of the Act do not explicitly provide for judicial intervention where complicated questions of law or fact are in issue or where detailed evidence needs to be adduced. Therefore, there appears to be no explicit statutory exception to section 5 in cases where fraud has been alleged. On the contrary, section 27 of the Act allows the court to assist arbitral tribunals by taking evidence in such cases, on an application by the tribunal or by a party with the approval of the tribunal.

Section 8 in material part reads as follows:
1.    A judicial authority before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party so applies not later than when submitting his first statement on the substance of the dispute, refer the parties to arbitration.
2.    The application referred to in sub-section (1) shall not be entertained unless it is accompanied by the original arbitration agreement or a duly certified copy thereof.

The language of section 8, on the face of it, appears to mandate the judicial authority to refer the matter to arbitration if the two requirements are met (i.e. the party applies for the reference while submitting his first statement on the substance of the dispute and the application is accompanied by the original arbitration agreement or a duly certified copy).

In the present case, the Supreme Court also found that appellant had not met the requirements under section 8(2) of the Act. However, this finding did not have a bearing on the Supreme Court's decision on the ability to arbitrate a dispute where fraud has been alleged.

Despite the clear language of section 5 of the Act, the Supreme Court saw fit to dilute the prohibition against judicial intervention contained in there in cases that relate to allegations of fraud and serious malpractices. The reasoning adopted by the Supreme Court was that such situations can only be appropriately settled in court. Interestingly, despite its effect on section 5 of the Act, the Supreme Court's decision does not once mention or refer to the mandate contained in section 5 of the Act.

Conclusion
It is too early to say whether this judgment will lead to a further dilution of the prohibition against judicial intervention in Part I of the Act. In any event, parties seeking to invoke arbitration should proceed with caution when alleging fraud against other parties to the dispute.

Kriti Tannan is an associate at Mundkur Law Partners