Section 8 of the Arbitration and Conciliation Act, 1996 (Act) provides for powers of the judicial authority/ Court to refer parties to arbitration where there is an agreement to this effect. There are number of judicial pronouncements to contend that when there is an express provision referring disputes to arbitration, the Civil Courts are bound to refer the matter to an Arbitrator. However, whether there would be any change or different interpretation when one of the Parties raise issues relating to misappropriation of funds and malpractices on the part of other party.
The Supreme Court in N. Radhakrishnan vs. Maestro Engineers & Ors. [(2010) 1 SCC 72] held that when a case relates to allegations of fraud and serious malpractices on the part of other party, such a situation can only be settled in Court through furtherance of detailed evidence by either parties and such a situation cannot be properly gone into by the Arbitrator.
In the instant case there were serious allegations like manipulation of accounts, fraud and cheating by one party against the other party to the agreement. The Apex Court followed the principle laid down in the case of Abdul Kadir Shamsuddin Bubere vs. Madhav Prabhakar Oak and Anr. [AIR 1962 SC 406] holding 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…….”
Delhi High Court in the case of Vinay Malani Vs. Delhi Prantiya Marwari Yuva Manch [CM(M) 1067/2011, decided on 30.05.2014] followed the above two cases besides other precedents and came out with following legal proposition on the issue:
• Under section 8 of the Act, where an arbitration agreement is shown to exist, the Court is bound to refer parties and disputes to arbitration.
• The mandate of section 8 of the Act extends only to matters where the disputes are arbitrable in nature.
• A matter involves fraud only when:
o A clear and unambiguous case of fraud – either active concealment or active misrepresentation with intent to make wrongful gain or create wrongful loss – is made out.
o The case of fraud is supported by sufficient particulars to arrive at a prima facie conclusion of existence of a case of fraud.
o The fraud either vitiates the arbitral agreement (and not the agreement containing the arbitral agreement, which is a separate agreement in itself), or goes to the root of the dispute itself, as opposed to the subject matter of the dispute.
o The dispute cannot be tried without trying the issue of fraud.
• Matters involving fraud include matters where allegations of professional/occupational negligence, impropriety and dishonesty or such other allegations as amount to an imputation adverse to their personal or professional character.
• Matters involving fraud are per se arbitrable, subject to the following:
o The party against whom fraud is alleged has an option – but not a right – to demand that the matter be tried in open court and not in arbitration.
o The party alleging fraud or such other allegations has an option – but not a right – to demand that the matter be tried in open court and not in arbitration.
• The Court, when considering the an application under section 8 of the Act in a matter where fraud has been alleged:
o If the party against whom it is so alleged has prayed that it be heard in open court in a regular trial, ought to ordinarily reject the application.
o If the party by whom it is so alleged has prayed that it be heard in open court in a regular trial, ought to ordinarily allow the application, unless it deems it necessary and in the interest of justice and expediency that the matter be heard in Court.
o If neither party makes a prayer that it be heard in open court in a regular trial, ought to ordinarily allow the application.
• In extraordinary circumstances, the Court may exercise its discretion in view of the special circumstances, to either allow or reject the application contrary to what is set out above.
• An allegation of fraud will be considered as an allegation of serious fraud when it is of a grievous, aggravated or egregious nature as would warrant (a) the Court trying the matter itself to ensure a proper trial of the allegation, (b) the findings of facts in respect thereof is likely to so adversely affect either or both parties that they ought to have a right of appeal from the findings, or (c) the allegations are of such a nature that, if found on, it is likely to affect persons other than the parties to the dispute.
• Matters involving serious fraud are ordinarily not arbitrable.
• The Court, when considering the application under section 8 of the Act in a matter where serious fraud has been alleged, has to ordinarily reject the application.
• Although this Court cannot envision any exceptional circumstance that would warrant referring to arbitration a matter involving allegations of serious fraud, the discretion of the Court in such cases is not adversely affected.