Arbitrability of fraud in India

Essay, 2017

7 Pages, Grade: 5/7




Mandatory nature of sec 8

Principle of separability

Courts unnecessarily poking their nose?

Maestro to Ayyasamy

Serious issues of fraud and mere allegations of fraud

Void and voidable contract

Departing from Booz Allen’s Test

The 246th law commission report

Way Forward



Arbitration agreement is bar to the jurisdiction of civil courts[1] under sec 8 of the Arbitration and Conciliation Act, 1996[2] (hereinafter, the Act) since the parties agree to settle disputes by a mechanism other than the ordinary court proceedings i.e. arbitration and such an agreement is not hit by sec 28 of Indian Contract Act, 1872[3]. However, a legitimate question arises whether a civil court can try those cases where the agreement is itself tainted by the elements of fraud. This issue has been dealt comprehensively by the courts and has been settled, to a certain extent, by the Supreme Court in the case of A. Ayyasamy vs A. Paramasivam.[4] The essay shall briefly deal with the cases which spurred the debate over arbitrability of fraud along with suggestions for further improvement.

Mandatory nature of sec 8

Sec 8 of the Act gives power to a judicial authority to refer the dispute for arbitration if an arbitration agreement exists.[5] Language of sec 8 is mandatory in nature and leaves little scope for interpretation. However, the clause “unless it finds that prima facie no valid arbitration agreement exists” gives a discretion to the court to determine the validity of the arbitration agreement thereby giving it a power of refusal in referring the dispute for arbitration. This point has been exploited by litigants.

Principle of separability

According to the principle of separability, if the arbitration agreement between the parties is tainted by the elements of fraud but the arbitration clause in the agreement is unaffected by such fraud, then the arbitration clause will sustain. This principle is enshrined in sec 16 of the Act. Sec 16(1)(a) and 16(1)(b) of the Act[6] which state that an arbitration agreement is a separate agreement and if the main contract is declared null and void, it shall not ipso facto hamper the validity of the arbitration clause.

In Premium Nafta Products Ltd. V. Fily Shipping Co. Ltd.[7], the House of Lords held that the claims regarding inducement of the contract did not impeach the arbitration clause contained in the contract. They concluded that “the principle of separability means that the invalidity or rescission of the main contract does not necessarily entail the invalidity or rescission of the arbitration agreement. The arbitration must be treated as a ‘distinct agreement’ and can be void or voidable only on grounds which relate directly to the arbitration agreement”.

Courts unnecessarily poking their nose?

In 2005, Supreme Court brought about a new interventionist role in the case of S.B.P. & Co. v. Patel Engineering[8] where, while interpreting sec 8 of the Act, it observed that when a arbitration agreement exists and one of the parties files a suit before a judicial authority ignoring the agreement, and the other party raises an objection, the judicial authority has to consider that objection, and if the objection is found sustainable, it shall refer the dispute for arbitration. It observed that, “the judicial authority is entitled to, has to and bound to decide jurisdictional issue before it, before making or declining reference”. Thus, the Supreme Court permitted court’s intervention while interpreting sec 8 of the Act.

Maestro to Ayyasamy

In Maestro Engineer’s case,[9] Supreme Court upheld High Court’s decision that when there are serious 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. This judgement relied upon the ratio of Abdul Kadir Shamshuddin Bubere v. Madhav Prabhakar Oak,[10] where it held that serious allegations of fraud would be a sufficient cause for the court not to refer a case for arbitration.

Later, in Swiss Timing Ltd. V. Organising Committee,[11] Supreme Court held that the judgement of the Court in Radhakrishnan’s case was per incurium and did not lay the correct law. However, this judgement was decided by a single judge bench whereas Radhakrishnan’s judgement was pronounced by a division bench. Therefore, principle laid down in Radhakrishnan continued to be the applicable law. Finally the debate, to an extent, got settled in the case of A. Ayyasamy v. A. Paramasivam when the court ruled that the allegations of fraud are generally arbitrable unless they are complex in nature which can be resolved by a detailed analysis of evidence led by the parties. It also held that unless the fraud is alleged against arbitration agreement, the dispute can be resolved through arbitration.

Serious issues of fraud and mere allegations of fraud

Some High Courts have made an attempt to distinguish between “serious issues of fraud” and a “mere allegation of fraud”. In Vestas[12], Delhi High Court observed that “serious issues of fraud” would mean allegations which are prima facie supported by documentary evidence so to convince the court that further investigation is needed. In such cases arbitral tribunal has no jurisdiction. Court further held that mere allegations of fraud which are not supported by documentary evidence can be resolved through arbitration.

Void and voidable contract

In Swiss Timing’s case, Court made a distinction between a void contract and a voidable contract as contemplated under the Indian Contract Act, 1872. Court held that in cases where the contract is void ab initio (such as a party has not attained the age of maturity or the object of the contract is unlawful), reference to arbitration may be declined by court. However, when a contract is challenged on grounds which make it voidable, courts have to consider sec 8 of the Arbitration and Conciliation Act, 1996 and refer the dispute for arbitration. The courts cannot decline reference to arbitration on grounds which it a voidable contract.


[1] Sec 9, Code of Civil Procedure, 1908. Sec 9- Courts to try all civil suits unless barred- The Courts shall (subject to the provisions herein contained) have jurisdiction to try all suits of civil nature excepting suits of which their cognizance is expressly or impliedly barred.

[2] Sec 8(1)- Power to refer parties to arbitration where there is an arbitration agreement.—A judicial authority, before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party to the arbitration agreement or any person claiming through or under him, so applies not later than the date of submitting his first statement on the substance of the dispute, then, notwithstanding any judgment, decree or order of the Supreme Court or any Court, refer the parties to arbitration unless it finds that prima facie no valid arbitration agreement exists.

[3] Sec 28- Agreement in restraint of judicial proceedings are void

[4] Civil Appeal Nos. 8245 and 8246 of 2016

[5] Supra note 2.

[6] Sec 16 1(a)- an arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract & 1(b)- a decision by the arbitral tribunal that the contract is null and void shall not entail ipso jure the invalidity of the arbitration clause.

[7] [2007] UKHL 40

[8] 2005 (9) SCALE 1

[9] 2009 (13) SCALE 403

[10] AIR 1962 SC 406

[11] Arbitration Petition No. 34 of 2013. Available at

[12] 219 (2015) DLT 516

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Arbitrability of fraud in India
Damodaram Sanjivayya National Law University
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Abhinav Mishra (Author), 2017, Arbitrability of fraud in India, Munich, GRIN Verlag,


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