Supreme Court: Allegations Of Fraud are Arbitrable When They Relate To Civil Dispute

 A recent judgment of this Court in Avitel Post Studioz Limited and Ors. v. HSBC PI Holdings (Mauritius) Limited18 has examined the law on invocation of 'fraud exception' in great detail and holds that N. Radhakrishnan as a precedent has no legs to stand on. We respectfully concur with the said view and also the observations made in paragraph 14 of the judgment in Avitel Post Studioz Limited, which quotes observations in Rashid Raza v. Sadaf Akhthar MANU/SC/1249/2019 : (2019) 8 SCC 710:

4. The principles of law laid down in this appeal make a distinction between serious allegations of forgery/fabrication in support of the plea of fraud as opposed to "simple allegations". Two working tests laid down in para 25 are: (1) does this plea permeate the entire contract and above all, the agreement of arbitration, rendering it void, or (2) whether the allegations of fraud touch upon the internal affairs of the parties inter se having no implication in the public domain."

to observe in Avitel Post Studioz Limited:

it is clear that serious allegations of fraud arise only if either of the two tests laid down are satisfied and not otherwise. The first test is satisfied only when it can be said that the arbitration Clause or agreement itself cannot be said to exist in a clear case in which the court finds that the party against whom breach is alleged cannot be said to have entered into the agreement relating to arbitration at all. The second test can be said to have been met in cases in which allegations are made against the State or its instrumentalities of arbitrary, fraudulent, or mala fide conduct, thus, necessitating the hearing of the case by a writ court in which questions are raised which are not predominantly questions arising from the contract itself or breach thereof but questions arising in the public law domain.

The judgment in Avitel Post Studioz Limited interprets Section 17 of the Contract Act to hold that Section 17 would apply if the contract itself is obtained by fraud or cheating. Thereby, a distinction is made between a contract obtained by fraud, and post-contract fraud and cheating. The latter would fall outside Section 17 of the Contract Act and, therefore, the remedy for damages would be available and not the remedy for treating the contract itself as void.

47. In view of the aforesaid discussions, we overrule the ratio in N. Radhakrishnan inter alia observing that allegations of fraud can be made a subject matter of arbitration when they relate to a civil dispute. This is subject to the caveat that fraud, which would vitiate and invalidate the arbitration clause, is an aspect relating to non-arbitrability. 

IN THE SUPREME COURT OF INDIA

Civil Appeal No. 2402 of 2019, 

Decided On: 14.12.2020

 Vidya Drolia and Ors. Vs.  Durga Trading Corporation and Ors.

Hon'ble Judges/Coram:

N.V. Ramana, Sanjiv Khanna and Krishna Murari, JJ.

Citation: MANU/SC/0939/2020

Read full judgment here: Click here