Fraud Allegations can be referred to Arbitration: Supreme Court
The Supreme Court of India has made determined efforts to line up its jurisprudence with international stream and taking up earnest steps to establish India as an arbitration-friendly country. In a recent judgment in the case of World Sport Group v MSM Satellite Supreme Court has reversed its own line and allowed Arbitration in Fraud related subjects too!
Prior to World Sport Group v MSM, the Indian Supreme Court had always refused to allow fraud allegations to be heard before an arbitral tribunal. It has argued that the arbitration tribunals are incapable to deal with such cases for the reason, such cases shall be dealt amidst of complex fact scenarios and evidentiary requirements.
However in World Sport Group v MSM , the Supreme Court clarified the issue by ruling that there is no such bar on issues of fraud being determined by tribunals in international arbitrations. This judgment is expected to reverse the trend of Indian parties in international arbitrations challenging the arbitrability of disputes on the ground that allegations of fraud have been made.
Read Supreme Court Judgment here.
World Sport Group v MSM arose out of a facilitation agreement between the parties concerning media rights for the Indian Premier League broadcasts. The facilitation agreement was governed by English law and contained an ICC, Singapore arbitration clause. This clause granted the parties the right to seek equitable relief prior to the appointment of the arbitrator or remedies beyond the jurisdiction of the arbitrator in the courts in Singapore or in any other court with jurisdiction over the parties.
Following a dispute between the parties, the respondents filed for a declaration that the facilitation agreement was null and void on the grounds of fraud before the Bombay High Court. The appellants then initiated ICC arbitration proceedings in Singapore. The respondents successfully applied to the Bombay High Court for an anti-arbitration injunction; this was granted on the grounds that the substantive aspects of the case raised allegations of fraud, concerned public funds and involved a public body.
The Ruling:
The Supreme Court rejected the appellants’ contention that the High Court did not have the territorial jurisdiction to grant the injunction. Since the facilitation agreement had been executed in India and the alleged fraudulent inducement to enter into the contract and its subsequent rescission had taken place in India, the cause of action arose in India and gave the High Court territorial jurisdiction over the case.
In spite of its assumption of jurisdiction, the Supreme Court noted that the court was bound by the intent of the legislature to encourage arbitrations and referred to Part II of the Indian Arbitration and Conciliation Act, 1996, which draws on the New York Convention and states that parties shall be referred to arbitration unless the arbitration agreement between them is ‘null and void, inoperative or incapable of being performed’. (Section 45, Indian Arbitration and Conciliation Act)
Following Newyork Convention:
The Supreme Court deliberately chose to read section 45 in consonance with international interpretations of the phrase as used in the New York Convention. Using this interpretation, allegations of fraud in relation to the main contract would not necessarily render the arbitration agreement ‘null and void’. The arbitration agreement was a separate contract and would not be avoided merely because the main agreement had been rescinded as void.
In addition, the fact that allegations of fraud would need to be inquired into would not make the arbitration agreement ‘inoperative or incapable of being performed’. These terms only cover situations where the arbitration agreement has ceased to have effect or where the arbitration cannot be effectively set into motion.
The Supreme Court could therefore not refuse to refer the dispute to an arbitral tribunal on the ground that allegations of fraud or misrepresentation would be inquired into while deciding the dispute, or because public bodies and public funds were involved, or even because another suit on the same issue was pending before an Indian court.
While the last point was not discussed in detail, it is likely that the pending suit in the Indian court will be also referred to arbitration.
New Leaf:
By limiting the scope of its decision in World Sport Group v MSM to arbitrations to which Part II of the Indian Arbitration Act applies, the Supreme Court decision applies only to foreign seated arbitrations. Fraud will arguably continue as a bar to a reference to a domestic arbitration.
The Supreme Court alluded to the scope of the arbitration agreement in World Sport Group v MSM. The court acknowledged that it was for the arbitrator to decide on the merits of the case, as the arbitration agreement provided for arbitration of all disputes ‘arising in connection with, touching upon or relating to this Deed’. This should serve as a reminder to parties to draft their arbitration clauses as broadly as possible, since it is arguable that the court could still have refused to refer the parties to arbitration on the ground that the agreement did not cover the issues in question.
The Apex Court’s judgment will be construed as a milestone in the arbitration jurisdiction of India. There are many states in India which are averse to Arbitration and bluntly rejecting to include arbitration clauses in construction contracts.
Inputs from >> Norton Rose Fulbright LLP
The Supreme Court of India has made determined efforts to line up its jurisprudence with international stream and taking up earnest steps to establish India as an arbitration-friendly country. In a recent judgment in the case of World Sport Group v MSM Satellite Supreme Court has reversed its own line and allowed Arbitration in Fraud related subjects too!
Prior to World Sport Group v MSM, the Indian Supreme Court had always refused to allow fraud allegations to be heard before an arbitral tribunal. It has argued that the arbitration tribunals are incapable to deal with such cases for the reason, such cases shall be dealt amidst of complex fact scenarios and evidentiary requirements.
However in World Sport Group v MSM , the Supreme Court clarified the issue by ruling that there is no such bar on issues of fraud being determined by tribunals in international arbitrations. This judgment is expected to reverse the trend of Indian parties in international arbitrations challenging the arbitrability of disputes on the ground that allegations of fraud have been made.
Read Supreme Court Judgment here.
World Sport Group v MSM arose out of a facilitation agreement between the parties concerning media rights for the Indian Premier League broadcasts. The facilitation agreement was governed by English law and contained an ICC, Singapore arbitration clause. This clause granted the parties the right to seek equitable relief prior to the appointment of the arbitrator or remedies beyond the jurisdiction of the arbitrator in the courts in Singapore or in any other court with jurisdiction over the parties.
Following a dispute between the parties, the respondents filed for a declaration that the facilitation agreement was null and void on the grounds of fraud before the Bombay High Court. The appellants then initiated ICC arbitration proceedings in Singapore. The respondents successfully applied to the Bombay High Court for an anti-arbitration injunction; this was granted on the grounds that the substantive aspects of the case raised allegations of fraud, concerned public funds and involved a public body.
The Ruling:
The Supreme Court rejected the appellants’ contention that the High Court did not have the territorial jurisdiction to grant the injunction. Since the facilitation agreement had been executed in India and the alleged fraudulent inducement to enter into the contract and its subsequent rescission had taken place in India, the cause of action arose in India and gave the High Court territorial jurisdiction over the case.
In spite of its assumption of jurisdiction, the Supreme Court noted that the court was bound by the intent of the legislature to encourage arbitrations and referred to Part II of the Indian Arbitration and Conciliation Act, 1996, which draws on the New York Convention and states that parties shall be referred to arbitration unless the arbitration agreement between them is ‘null and void, inoperative or incapable of being performed’. (Section 45, Indian Arbitration and Conciliation Act)
Following Newyork Convention:
The Supreme Court deliberately chose to read section 45 in consonance with international interpretations of the phrase as used in the New York Convention. Using this interpretation, allegations of fraud in relation to the main contract would not necessarily render the arbitration agreement ‘null and void’. The arbitration agreement was a separate contract and would not be avoided merely because the main agreement had been rescinded as void.
In addition, the fact that allegations of fraud would need to be inquired into would not make the arbitration agreement ‘inoperative or incapable of being performed’. These terms only cover situations where the arbitration agreement has ceased to have effect or where the arbitration cannot be effectively set into motion.
The Supreme Court could therefore not refuse to refer the dispute to an arbitral tribunal on the ground that allegations of fraud or misrepresentation would be inquired into while deciding the dispute, or because public bodies and public funds were involved, or even because another suit on the same issue was pending before an Indian court.
While the last point was not discussed in detail, it is likely that the pending suit in the Indian court will be also referred to arbitration.
New Leaf:
By limiting the scope of its decision in World Sport Group v MSM to arbitrations to which Part II of the Indian Arbitration Act applies, the Supreme Court decision applies only to foreign seated arbitrations. Fraud will arguably continue as a bar to a reference to a domestic arbitration.
The Supreme Court alluded to the scope of the arbitration agreement in World Sport Group v MSM. The court acknowledged that it was for the arbitrator to decide on the merits of the case, as the arbitration agreement provided for arbitration of all disputes ‘arising in connection with, touching upon or relating to this Deed’. This should serve as a reminder to parties to draft their arbitration clauses as broadly as possible, since it is arguable that the court could still have refused to refer the parties to arbitration on the ground that the agreement did not cover the issues in question.
The Apex Court’s judgment will be construed as a milestone in the arbitration jurisdiction of India. There are many states in India which are averse to Arbitration and bluntly rejecting to include arbitration clauses in construction contracts.
Inputs from >> Norton Rose Fulbright LLP