Annual Arbitration Review- 2017,  Arbitration

Kores v. Arnav: Fraud and Forgery under Section 11 of the Arbitration and Conciliation Act, 1996

Reading Time: 5 minutes

This case comment is a part of our Annual Arbitration Review of the year 2017.

CITATION/ORDER: Kores (India) Ltd vs. Arnav International Pvt. Ltd (03.04.2017 – SC Order) : MANU/SCOR/16050/2017

COURT: SUPREME COURT OF INDIA

CORAM: JUSTICE ROHINTON F. NARIMAN and JUSTICE SANJAY KISHAN KAUL

DATE: 01.09.17

This case revolves around the concepts of fraud and forgery, under Section 11 of the Arbitration and Conciliation Act, 1996.

FACTS: The petitioner and the respondent entered into an agreement on August 1, 2013. It also contained an arbitration clause with IST 17:04:09 which called for the appointment of a sole arbitrator in case of dispute concerning the implementation or interpretation of the Agreement with the mutual consent of both parties, in accordance with the (Indian) Arbitration and Conciliation Act 1996, or any modification or amendment thereof. All such arbitration proceeding shall be in the English language and shall be held and conducted exclusively in Mumbai. The arbitral decision would be binding and conclusive upon the Parties and could be enforced in any court of competent jurisdiction. The agreement was also concerning the governing laws of arbitration and the issue of jurisdiction. It also showed to be digitally signed by Usha Rani Bhardwaj on 09.06.17.

The counsel for the respondent was able to show that the signature of his client in his passport differed from that in the agreement. Despite this, the counsel for the petitioner, with the aid of World Sport Group (Mauritius) Ltd. v. MSM Satellite (Singapore) Pvt. Ltd.[1] (herein referred to as the ‘World Sport case’), asserted that the court must look into whether there was an agreement in the first place or not. They used this case to argue that an arbitrator is within his/her power to inquire into an issue of fraud.

ISSUE/S: Whether an element of fraud and forgery vitiated the agreement or not?

DECISION: The court ruled that there was no valid agreement between the two parties. It was made clear by the apex court that ex-facie petitions ought to be dismissed at the outset.  The judges placed reliance on two facts, namely that the signature on the passport was not the same as that on the pages of the agreement; and an electronic mail sent by the respondent to the petitioner, asking them to “please also send the agreement”. Construing that language of the mail as shown by the counsel for the petitioner, the court felt that this showed that no agreement existed. After placing special emphasis on these two facts of the case, the court was further swayed by the fact that they were presented with an affidavit as well, the contents of which clearly showed that the agreement had effect from August 2013 but was signed in October/ November of 2013. However, the agreement stated that it was “signed and sealed on August 1, 2013”. This convinced the court of the falsity of the agreement and labelled it as dishonest on the part of the petitioner. Dismissing the petition, the court abstained from commenting on the charge of forgery and referred it to the Chief Metropolitan Magistrate, Delhi and asked him to submit a report to the court within three months. The court also ordered costs amounting to Rupees 1 lakh to be paid to the respondent within two weeks.

ANALYSIS: From this case, the pertinent point that arises is how the court has looked at case-law related to fraud, and how this impacts arbitration in India. Though the term ‘fraud’ is not statutorily defined, it is most commonly defined as “a knowing misrepresentation of the truth or concealment of a material fact to induce another to act to his or her detriment.”[2] In domestic seated arbitrations, the Bombay High Court, in Blue Star Ltd. v. Farm Fresh Food Processors & Ors.[3], opined that the court must rule on the validity of the arbitration agreement in dispute before appointing an arbitrator. It was also observed that there was no sustainable case of fraud since the arbitration agreement was valid. From the year 2014, the law in India has seen a departure from its earlier position of courts not giving arbitrators the power to decide issues of fraud, as seen in N. Radhakrishnan v. Maestro Engineers & Ors.[4]. The apex court, in the ‘World Sports case’[5] held that arbitration could be resorted to only in foreign seated arbitrations. Thus, in Indian seated international commercial arbitrations, this was a massive step. Similarly, in Swiss Timing Ltd vs Organizing Committee, Commonwealth Games 2010, Delhi[6], the court interpreted Section 11 of the statute. It held that issues of fraud were arbitrable and the court was compelled to exercise jurisdiction in matters where the agreement was void ab initio. The court clarified that the arbitration clause is an independent clause and does not take the power of the court away to refer the matter and the adjudication of the allegation of fraud to the arbitrator. The law was settled once and for all in the case of A. Ayyasamy v. A. Paramasivam & Ors.[7], which held that issues about fraud were, in fact, arbitrable, unless of a “serious and complicated nature” without making it clear as to which cases would meet that threshold. Thus, the case-laws of simple fraud have been allowed to be settled by arbitrators.[8] However, the court has preserved its exclusive power of deciding upon cases of serious fraud.

In the United Kingdom, fraud claims became arbitrable with the coming in of the UK Arbitration Act in 1996. In the USA as well, the case of Prima Paint Corp. v. Flood and Conklin Manufacturing Co.[9] went by the Federal Arbitration Act of 1925. In India, the content of an arbitration agreement usually decides such allegations of fraud. But the World Sports case has seen the Indian courts align with foreign courts in cases of mutually agreed upon arbitrations where they exercise minimal interference. The law in the case made it clear that a mere averment of fraud does not invalidate the agreement and the court must probe into the matter further before holding the arbitration agreement as unenforceable. However, there is a constant struggle for between courts and arbitral institutions regarding the issues and the extent of adjudication power between the two. Though courts have been more willing to allow arbitrators to decide matters of fraud, they tend to preserve their power. Moreover, there is a lack of guidelines which have led to inconsistent precedents.[10] Nonetheless, this being a nascent field of law, fraud has been deemed to be arbitrable unless the court chooses to intervene, and the latter also retains the power to appoint an arbitrator under Section 11 of the statute.

CONCLUSION: This is a landmark case on the validity of arbitration agreements in general. Though the question of fraud and forgery was not specifically discussed by the court, its stand on the validity of such agreements in contracts has set the tone for courts across the country when the facts are suspicious about the veracity of such agreements.

[This case comment has been contributed by Dusyant Kishan Kaul, a fourth year law student of Jindal Global Law School, Sonipat]

REFERENCES:

[1] (2014) 11 SCC 639

[2] Black’s Legal Dictionary, 9th Ed. (2009)

[3] (2013) 4 M LJ 517

[4] (2010) 1 SCC 72

[5] ibid, Note 1

[6] (2014) 6 SCC 677

[7] (2016) 10 SCC 386

[8] Pranav B.R. and Ganesh Gopalakrishnan, Dealing with Arbitrability of Fraud in India – The Supreme Court’s Fra(e)dian Slip?, Kluwer Arbitration Blog, November 17, 2016

[9] 388 US 395 (1967)

[10] Chakrapani Misra, Allegations of fraud as threat to arbitration proceedings, International Law Office, May 01, 2014

Please follow and like us:

Leave a Reply

Your email address will not be published. Required fields are marked *

Enjoy this blog? Please spread the word :)