Dr D Y CHANDRACHUD, J
1 I have had the benefit of the lucid exposition of law in the judgment of my learned brother Justice A K Sikri. I agree with the reasons contained in His Lordship’s judgment while adding some of my own.
2 The issue which arises in these proceedings has generated a considerable degree of uncertainty in the law of arbitration in India. This is an area of law where the intervention of this Court is needed to ensure that a cloud on the efficacy of arbitral proceedings to resolve issues of fraud is resolved Civil Appeal Nos. 8245-8246 of 2016 Page 27Paofg5e1 27 28 conclusively. The litigative uncertainty which the discourse has produced is best set at rest for nothing is as destructive of legitimate commercial expectations than a state of unsettled legal precept.
3 The Arbitration and Conciliation Act, 1996 does not in specific terms exclude any category of disputes – civil or commercial – from arbitrability. Intrinsic legislative material is in fact to the contrary. Section 8 contains a mandate that where an action is brought before a judicial authority in a matter which is the subject of an arbitration agreement, parties shall be referred by it to arbitration, if a party to or a person claiming through a party to the arbitration agreement applies not later than the date of submitting the first statement on the substance of the dispute. The only exception is where the authority finds prima facie that there is no valid arbitration agreement. Section 8 contains a positive mandate and obligates the judicial authority to refer parties to arbitration in terms of the arbitration agreement. While dispensing with the element of judicial discretion, the statute imposes an affirmative obligation on every judicial authority to hold down parties to the terms of the agreement entered into between them to refer disputes to arbitration. Article 8 of the UNCITRAL Model Law enabled a court to decline to refer parties to arbitration if it is found that the arbitration agreement is null and void, inoperative or incapable of being performed. Section 8 of the Act of 1996 has made a departure which is indicative of the wide reach and ambit of the statutory mandate. Section 8 uses the expansive expression “judicial Civil Appeal Nos. 8245-8246 of 2016 Page 28Paofg5e1 28 29 authority” rather than “court” and the words “unless it finds that the agreement is null and void, inoperative and incapable of being performed” do not find place in Section 8.
4 Section 16 empowers the arbitral tribunal to rule upon its own jurisdiction, including ruling on any objection with respect to the existence or validity of an arbitration agreement. Section 16(1)(b) stipulates that a decision by the arbitral tribunal that a contract is null and void shall not entail ipso jure the invalidity of the arbitration clause. Hence, the invalidity of the contract between the parties does not render the arbitration agreement invalid as a consequence of law. This recognises as inhering in the arbitrator the jurisdiction to consider whether the main contract (other than the arbitration clause) is null and void. The arbitration agreement survives for determining whether the contract in which the arbitration clause is embodied is null and void, which would include voidability on the ground of fraud. The severability of the arbitration agreement is a doctrinal development of crucial significance. For, it leaves the adjudicatory power of the arbitral tribunal unaffected, over any objection that the main contract between the parties is affected by fraud or undue influence.
5 Section 34(2)(b) and Section 48(2) provide as one of the grounds for challenge to or in respect of the enforceability of an award that “the subject matter of the dispute is not capable of settlement by arbitration under the law Civil Appeal Nos. 8245-8246 of 2016 Page 29Paofg5e1 29 30 for the time being in force”. Clearly, therefore, the Act contemplates and acknowledges that before it can be held that a particular subject matter is not capable of settlement by arbitration, such a consequence must arise under the law for the time being in force.
6 Ordinarily every civil or commercial dispute whether based on contract or otherwise which is capable of being decided by a civil court is in principle capable of being adjudicated upon and resolved by arbitration “subject to the dispute being governed by the arbitration agreement” unless the jurisdiction of the Arbitral Tribunal is excluded either expressly or by necessary implication. In Booz-Allen and Hamilton Inc. v. SBI Home Finance Ltd.13, this Court held that adjudication of certain categories of proceedings is reserved by the legislature exclusively for public fora as a matter of public policy. Certain other categories of cases, though not exclusively reserved for adjudication by courts and tribunals may by necessary implication stand excluded from the purview of private fora. This Court set down certain examples of non-arbitrable disputes such as:
(i) Disputes relating to rights and liabilities which give rise to or arise out of criminal offences;
13
(2011) 5 SCC 532
Civil Appeal Nos. 8245-8246 of 2016 Page 30Paofg5e1 30 31
(ii) Matrimonial disputes relating to divorce, judicial separation, restitution of conjugal rights and child custody;
(iii) Matters of guardianship;
(iv) Insolvency and winding up;
(v) Testamentary matters, such as the grant of probate, letters of administration and succession certificates; and vi) Eviction or tenancy matters governed by special statutes where a tenant enjoys special protection against eviction and specific courts are conferred with the exclusive jurisdiction to deal with the dispute.
This Court held that this class of actions operates in rem, which is a right exercisable against the world at large as contrasted with a right in personam which is an interest protected against specified individuals. All disputes relating to rights in personam are considered to be amenable to arbitration while rights in rem are required to be adjudicated by courts and public tribunals. The enforcement of a mortgage has been held to be a right in rem for which proceedings in arbitration would not be maintainable. In Vimal Kishore Shah v. Jayesh Dinesh Shah14, this Court added a seventh category of cases to the six non-arbitrable categories set out in Booz Allen, namely, 14 (2016) SCC OnLine SC 825 Civil Appeal Nos. 8245-8246 of 2016 Page 31Paofg5e1 31 32 disputes relating to trusts, trustees and beneficiaries arising out of a trust deed and the Trust Act.
7 In Natraj Studios (P) Ltd. v. Navrang Studios15, a Bench of three judges of this Court dealt with the issue as to whether a dispute between a landlord and a tenant falling within the exclusive domain of the Court of Small Causes at Mumbai, to the exclusion of the civil court, is arbitrable. This Court held that the Bombay Rent Act is a welfare legislation aimed at a definite social objective of protecting tenants as a matter of public policy. The conferment of exclusive jurisdiction on certain courts was in pursuance of a specific social objective which the legislation seeks to achieve. Public policy, this Court held, requires that parties cannot be allowed to contract out of the legislative mandate which requires certain kinds of disputes to be resolved by special courts constituted under rent control legislation. Hence, arbitration agreements between parties whose rights are regulated by rent control legislation would not be recognised by a court of law.
8 In regard to disputes under the Consumer Protection Act, 1986, this Court held in Skypak Courier Ltd. v. Tata Chemical Ltd16, that the existence of an arbitration clause will not be a bar to the entertainment of a complaint by a forum under the Consumer Protection Act, 1986 since the remedy provided 15
(1981) 2 SCR 466
16
(2000) 5 SCC 294
Civil Appeal Nos. 8245-8246 of 2016 Page 32Paofg5e1 32 33 under the law is in addition to the provisions of any other law for the time being in force. This was reiterated in National Seeds Corporation Ltd. v. M. Madhusudhan Reddy17, and Rosedale Developers Pvt. Ltd. v. Aghore Bhattacharya18. It was observed that the remedy is merely optional and is in addition to and not in derogation of the provisions of any other law for the time being in force.
9 Hence, in addition to various classes of disputes which are generally considered by the courts as appropriate for decision by public fora, there are classes of disputes which fall within the exclusive domain of special fora under legislation which confers exclusive jurisdiction to the exclusion of an ordinarily civil court. That such disputes are not arbitrable dovetails with the general principle that a dispute which is capable of adjudication by an ordinary civil court is also capable of being resolved by arbitration. However, if the jurisdiction of an ordinary civil court is excluded by the conferment of exclusive jurisdiction on a specified court or tribunal as a matter of public policy such a dispute would not then be capable of resolution by arbitration.
10 The judgment of a two judge Bench of this Court in N. Radhakrishnan v. Maestro Engineers19, arose out of a partnership dispute. A suit was 17
(2012) 2 SCC 506
18
(2015 )1 WBLR (SC) 385
19 Civil Appeal Nos. 8245-8246 of 2016 Page 33Paofg5e1 33 34 instituted before the civil court for declaratory and injunctive reliefs. An application under Section 8 of the Act of 1996 was rejected by the trial court and the order of rejection was affirmed in revision by the High Court. The submission of the appellant that the dispute between the partners ought to have been referred to arbitration was met with the objection that the appellant having raised issues relating to misappropriation of funds and malpractices, these were matters which ought to be resolved by a civil court. Affirming the judgment of the High Court, a Bench of two judges of this Court held as follows:
“The High Court in its impugned judgment has rightly held that since the case relates to allegations of fraud and serious malpractices on the part of the respondents, 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. “ (I.d. at p. 7) The judgment accepted the submission of the respondent that the appellant having raised serious matters alleging criminal wrongdoing, such disputes ought to be adjudicated upon by the civil court:
“The learned counsel appearing on behalf of the respondents on the other hand contended that the appellant had made serious allegations against the respondents alleging that they had manipulated the accounts and defrauded the appellant by cheating the appellant of his dues, thereby warning the respondents with serious criminal action against them for the alleged commission of criminal offences. In this connection, reliance was placed in a decision of this Court in the case of Abdul Kadir Shamsuddin
(2010) 1 SCC 72
Civil Appeal Nos. 8245-8246 of 2016 Page 34Paofg5e1 34 35
Bubere vs. Madhav Prabhakar Oak and Another, [AIR 1962 SC 406] in which this Court under para 17 held as under:
“There is no doubt 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….”
In our view and relying on the aforesaid observations of this Court in the aforesaid decision and going by the ratio of the above mentioned case, the facts of the present case does not warrant the matter to be tried and decided by the Arbitrator, rather for the furtherance of justice, it should be tried in a court of law which would be more competent and have the means to decide such a complicated matter involving various questions and issues raised in the present dispute.”
The above extract from the judgment in N. Radhakrishnan relies extensively on the view propounded in Abdul Kadir (supra). The decision in Abdul Kadir arose under the Arbitration Act, 1940 and was in the context of the provisions of Section 20. In Abdul Kadir, this Court emphasized that sub-Section (4) of Section 20 of the Arbitration Act, 1940 left a wide discretion in the court. In contrast, the scheme of the Act of 1996 has made a radical departure from the position under the erstwhile enactment. A marked distinction is made in Section 8 where no option has been left to the judicial authority but to refer parties to arbitration. Abdul Kadir explains the position under the Arbitration Act, 1940. The present legislation on the subject Civil Appeal Nos. 8245-8246 of 2016 Page 35Paofg5e1 35 36 embodies a conscious departure which is intended to strengthen the efficacy of arbitration.
11 In P. Anand Gajapathi Raju v. P.V.G. Raju (Dead)20, this Court held that the language of Section 8 is peremptory in nature. Hence, where there is an arbitration agreement, it is obligatory for the court to refer parties to arbitration and nothing remains to be decided in the original action after such an application is made, except to refer the dispute to an arbitrator. The judgment in Abdul Kadir came up for consideration before a Bench of two learned judges in Hindustan Petroleum Corporation Ltd. v. Pinkcity
Midway Petroleums21. In that case, the appellant had appointed the
respondent as a dealer for selling its petroleum products through a retail outlet. The dealership agreement contained an arbitration agreement. In the course of an inspection the appellant found a breach of the dealership agreement and sales of petroleum products were suspended. The respondent instituted a suit before the ordinary civil court seeking declaratory reliefs in which the appellant filed an application under Section 8 of the Arbitration and Conciliation Act, 1996. The civil court rejected the application and the High Court in revision affirmed the view. The submission which weighed with the High Court was that the allegation of tampering of weights and of 20
(2000) 4 SCC 539
21
(2003) 6 SCC 503
Civil Appeal Nos. 8245-8246 of 2016 Page 36Paofg5e1 36 37 measurement seals could only be adjudicated upon under the Standards of Weights and Measures (Enforcement) Act, 1985 and hence such a dispute was not arbitrable. This Court held that once the arbitration agreement was admitted, in view of the mandatory language of Section 8, the dispute ought to have been referred to arbitration. The judgment of this Court dealt with the submission that since the allegations in the case related to an element of criminal wrongdoing, the dispute was not arbitrable. Rejecting this submission, this Court held as follows:
“19 It was argued before the courts below as also before us that the mis-conduct, if any, pertaining to short-supply of petroleum products or tampering with the seals would be a criminal offence under the 1985 Act. Therefore, the investigation into such conduct of the dealer can only be conducted by such offices and in a manner so specified in the said Act, and it is not open to the appellant to arrogate to itself such statutory power of search and seizure by relying on some contractual terms in the Dealership Agreement. It is further argued that such disputes involving penal consequences can only be tried by a court of competent jurisdiction and cannot be decided by an arbitrator…..
20 Having considered the above arguments addressed on behalf of the respondent as also the findings of the courts below, we are of the opinion that the same cannot be accepted because the appellant is neither exercising the power of search and seizure conferred on a competent authority under the 1985 Act nor does the Dealership Agreement contemplate the arbitrator to exercise the power of a criminal court while arbitrating on a dispute which has arisen between the contracting parties. This is clear from the terms of the Dealership Agreement.” (Id. at p. 19-20) Civil Appeal Nos. 8245-8246 of 2016 Page 37Paofg5e1 37 38 In the view of this Court, the dispute between the parties was clearly referable to the terms of the contract and did not entrench upon the legislative provisions contained in the Standards of Weights and Measures (Enforcement) Act, 1985:
“The courts below in our opinion, have committed an error by misreading the terms of the contract when they came to the conclusion that the only remedy available as against a misconduct committed by an erring dealer in regard to short-supply and tampering with the seals lies under the provisions of the 1985 Act. The courts below have failed to notice that when a dealer short-supplies or tampers with the seal, apart from the statutory violation, he also commits a misconduct under Clause 20 of the Agreement in regard to which the appellant is entitled to invoke Clause 30 of the Agreement to stop supply of petroleum products to such dealer. The power conferred under the Agreement does not in any manner conflict with the statutory power under the 1985 Act nor does the prescribed procedure under the 1985 Act in regard to search and seizure and prosecution apply to the power of the appellant to suspend the supply of its petroleum products to an erring dealer. The power exercised by the appellant in such a situation is a contractual power under the agreement and not a statutory one under the 1985 Act. The existence of dual procedure; one under the criminal law and the other under the contractual law is a well-accepted legal phenomenon in the Indian jurisprudence…….
Therefore, in our opinion, the courts below have erred in coming to the conclusion that the appellant did not have the legal authority to investigate and proceed against the respondent for its alleged misconduct under the terms of the Dealership Agreement. We are also of the opinion that if the appellant is satisfied that the respondent is indulging in short-supply or tampering with the seals, it will be entitled to initiate such action as is contemplated under the agreement like suspending or stopping the supply of petroleum products to such erring dealer. If in that process any dispute arises between the appellant and such dealer, the same will have to be referred to arbitration as contemplated under Clause 40 of the Dealership Agreement.” (Id. at p. 23-24) Civil Appeal Nos. 8245-8246 of 2016 Page 38Paofg5e1 38 39
12 Hence, allegations of criminal wrongdoing or of statutory violation would not detract from the jurisdiction of the arbitral tribunal to resolve a dispute arising out of a civil or contractual relationship on the basis of the jurisdiction conferred by the arbitration agreement.
13 In a more recent judgment of two judges of this Court in Sundaram Finance Ltd. v. T. Thankam22, the same position in regard to the mandate of Section 8 has been reiterated. The earlier decisions in Anand Gajapathi Raju, Pink City and in Branch Manager, Magma Leasing and Finance Ltd.
v. Potluri Madhvilata23, emphasizing the mandate of Section 8, have been reaffirmed. This Court has held:
“Once an application in due compliance of Section 8 of the Arbitration Act is filed, the approach of the civil court should be not to see whether the court has jurisdiction. It should be to see whether its jurisdiction has been ousted. There is a lot of difference between the two approaches. Once it is brought to the notice of the court that its jurisdiction has been taken away in terms of the procedure prescribed under a special statute, the civil court should first see whether there is ouster of jurisdiction in terms or compliance of the procedure under the special statute. The general law should yield to the special law - generalia specialibus non derogant. In such a situation, the approach shall not be to see whether there is still jurisdiction in the civil court under the general law. Such approaches 22
AIR 2015 1303
23
(2009) 10 SCC 103
Civil Appeal Nos. 8245-8246 of 2016 Page 39Paofg5e1 39 40 would only delay the resolution of disputes and complicate the redressal of grievances and of course unnecessarily increase the pendency in the court.” (Id. at p. 15)
14 The position that emerges both before and after the decision in N. Radhakrishnan is that successive decisions of this Court have given effect to the binding precept incorporated in Section 8. Once there is an arbitration agreement between the parties, a judicial authority before whom an action is brought covering the subject matter of the arbitration agreement is under a positive obligation to refer parties to arbitration by enforcing the terms of the contract. There is no element of discretion left in the court or judicial authority to obviate the legislative mandate of compelling parties to seek recourse to arbitration. The judgment in N. Radhakrishnan has, however, been utilised by parties seeking a convenient ruse to avoid arbitration to raise a defence of fraud. First and foremost, it is necessary to emphasise that the judgment in N. Radhakrishnan does not subscribe to the broad proposition that a mere allegation of fraud is ground enough not to compel parties to abide by their agreement to refer disputes to arbitration. More often than not, a bogey of fraud is set forth if only to plead that the dispute cannot be arbitrated upon. To allow such a plea would be a plain misreading of the judgment in N. Radhakrishnan. As I have noted earlier, that was a case where the appellant who had filed an application under Section 8 faced with a suit on a dispute in partnership had raised serious issues of criminal wrongdoing, misappropriation Civil Appeal Nos. 8245-8246 of 2016 Page 40Paofg5e1 40 41 of funds and malpractice on the part of the respondent. It was in this background that this Court accepted the submission of the respondent that the arbitrator would not be competent to deal with matters “which involved an elaborate production of evidence to establish the claims relating to fraud and criminal misappropriation”. Hence, it is necessary to emphasise that as a matter of first principle, this Court has not held that a mere allegation of fraud will exclude arbitrability. The burden must lie heavily on a party which avoids compliance with the obligation assumed by it to submit disputes to arbitration to establish the dispute is not arbitrable under the law for the time being in force. In each such case where an objection on the ground of fraud and criminal wrongdoing is raised, it is for the judicial authority to carefully sift through the materials for the purpose of determining whether the defence is merely a pretext to avoid arbitration. It is only where there is a serious issue of fraud involving criminal wrongdoing that the exception to arbitrability carved out in N. Radhakrishnan may come into existence. Allegations of fraud are not alien to ordinary civil courts. Generations of judges have dealt with such allegations in the context of civil and commercial disputes. If an allegation of fraud can be adjudicated upon in the course of a trial before an ordinary civil court, there is no reason or justification to exclude such disputes from the ambit and purview of a claim in arbitration. Parties who enter into commercial dealings and agree to a resolution of disputes by an arbitral forum exercise an option and express a choice of a preferred mode for the resolution of their Civil Appeal Nos. 8245-8246 of 2016 Page 41Paofg5e1 41 42 disputes. Parties in choosing arbitration place priority upon the speed, flexibility and expertise inherent in arbitral adjudication. Once parties have agreed to refer disputes to arbitration, the court must plainly discourage and discountenance litigative strategies designed to avoid recourse to arbitration. Any other approach would seriously place in uncertainty the institutional efficacy of arbitration. Such a consequence must be eschewed.
15 The position as it obtains in other jurisdictions which value arbitration as an effective form of alternate dispute resolution is no different. In the UK, Section 24(2) of the Arbitration Act, 1950 provided that the court could revoke the authority of a tribunal to deal with claims involving issues of fraud and determine those claims itself. The English Act of 1979 provided for a stay of proceedings involving allegations of fraud. However, under the English Arbitration Act, 1996, there is no such restriction and the arbitral tribunal has jurisdiction to consider and rule on issues of fraud. In Fiona Trust and Holding Corporation v. Yuri Privalov24, the Court of Appeal emphasised the need to make a fresh start in imparting business efficacy to arbitral agreements. The Court of Appeal held that:
“For our part we consider that the time has now come for a line of some sort to be drawn and a fresh start made at any rate for cases arising in an international commercial context. Ordinary business men would be surprised at the nice distinctions drawn 24 [2007] 1 All E R (COMM) 891 Civil Appeal Nos. 8245-8246 of 2016 Page 42Paofg5e1 42 43 in the cases and the time taken up by argument in debating whether a particular case falls within one set of words or another very similar set of words. If business men go to the trouble of agreeing that their disputes be heard in the courts of a particular country or by a tribunal of their choice they do not expect (at any rate when they are making the contract in the first place) that time and expense will be taken in lengthy argument about the nature of particular causes of action and whether any particular cause of action comes within the meaning of the particular phrase they have chosen in their arbitration clause. If any business man did want to exclude disputes about the validity of a contract, it would be comparatively simple to say so. .. One of the reasons given in the cases for a liberal construction of an arbitration clause is the presumption in favour of one-stop arbitration. It is not to be expected that any commercial man would knowingly create a system which required that the court should first decide whether the contract should be rectified or avoided or rescinded (as the case might be) and then, if the contract is held to be valid, required the arbitrator to resolve the issues that have arisen. This is indeed a powerful reason for a liberal construction”.
Arbitration must provide a one-stop forum for resolution of disputes. The Court of Appeal held that if arbitrators can decide whether a contract is void for initial illegality, there is no reason why they should not decide whether a contract is procured by bribery, just as much as they can decide whether a contract has been vitiated by misrepresentation or non-disclosure. The judgment of the Court of Appeal was affirmed by the House of Lords in Premium Nafta Products Ltd. (20th Defendant) v. Fily Shipping Co. Ltd25. The House of Lords held that claims of fraudulent inducement of the 25 [2007] UKHL 40 Civil Appeal Nos. 8245-8246 of 2016 Page 43Paofg5e1 43 44 underlying contract (i.e. alleged bribery of one party’s officer to accept uncommercial terms) did not impeach the arbitration clause contained within that contract. The Law Lords reasoned that “if (as in this case) the allegation is that the agent exceeded his authority by entering into a main agreement in terms which were not authorized or for improper reasons, that is not necessarily an attack on the arbitration agreement”. They went on to conclude 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.”
16 The basic principle which must guide judicial decision making is that arbitration is essentially a voluntary assumption of an obligation by contracting parties to resolve their disputes through a private tribunal. The intent of the parties is expressed in the terms of their agreement. Where commercial entities and persons of business enter into such dealings, they do so with a knowledge of the efficacy of the arbitral process. The commercial understanding is reflected in the terms of the agreement between the parties. The duty of the court is to impart to that commercial understanding a sense of business efficacy.
Civil Appeal Nos. 8245-8246 of 2016 Page 44Paofg5e1 44 45
17 Lord Hoffmann, speaking for the House of Lords in Premium Nafta Products, placed the matter eloquently in the following observations:
“In approaching the question of construction, it is therefore necessary to inquire into the purpose of the arbitration clause. As to this, I think there can be no doubt. The parties have entered into a relationship, an agreement or what is alleged to be an agreement or what appears on its face to be an agreement, which may give rise to disputes. They want those disputes decided by a tribunal which they have chosen, commonly on the grounds of such matters as its neutrality, expertise and privacy, the availability of legal services at the seat of the arbitration and the unobtrusive efficiency of its supervisory law. Particularly in the case of international contracts, they want a quick and efficient adjudication and do not want to take the risks of delay and, in too many cases, partiality, in proceedings before a national jurisdiction”.
18 Lord Hoffmann held that if this is the purpose underlying an agreement to arbitrate, it would be inconceivable that parties would have intended that some, amongst their disputes should first be resolved by a court before they proceed to arbitration:
“If one accepts that this is the purpose of an arbitration clause, its construction must be influenced by whether the parties, as rational businessmen, were likely to have intended that only some of the questions arising out of their relationship were to be submitted to arbitration and others were to be decided by national courts. Could they have intended that the question of whether the contract was repudiated should be decided by arbitration but the question of whether it was induced by misrepresentation should be decided by a court? If, as appears to be generally accepted, there is no rational basis upon which Civil Appeal Nos. 8245-8246 of 2016 Page 45Paofg5e1 45 46 businessmen would be likely to wish to have questions of the validity or enforceability of the contract decided by one tribunal and questions about its performance decided by another, one would need to find very clear language before deciding that they must have had such an intention”.
While affirming the judgment of the Court of Appeal, the House of Lords held:
“13 In my opinion the construction of an arbitration clause should start from the assumption that the parties, as rational businessmen, are likely to have intended any dispute arising out of the relationship into which they have entered or purported to enter to be decided by the same tribunal. The clause should be construed in accordance with this presumption unless the language makes it clear that certain questions were intended to be excluded from arbitrator’s jurisdiction. As Longmore LJ remarked, at para 17: “if any businessmen did want to exclude disputes about the validity of a contract, it would be comparatively easy to say so”.... If one adopts this approach, the language of clause 41 of Shelltime 4 contains nothing to exclude disputes about the validity of the contract, whether on the grounds that it as procured by fraud, bribery, misrepresentation or anything else. In my opinion it therefore applies to the present dispute”.
This principle should guide the approach when a defence of fraud is raised before a judicial authority to oppose a reference to arbitration. The arbitration agreement between the parties stands distinct from the contract in which it is contained, as a matter of law and consequence. Even the invalidity of the main agreement does not ipso jure result in the invalidity of the arbitration Civil Appeal Nos. 8245-8246 of 2016 Page 46Paofg5e1 46 47 agreement. Parties having agreed to refer disputes to arbitration, the plain meaning and effect of Section 8 must ensue.
19 In the United States, the Supreme Court in Buckeye Check Cashing, Inc. v. Cardegna26, followed its earlier decisions in Prima Paint Corp. v. Flood & Conklin Manufacturing Co.27, and in Southland Corporation v. Keating28. Justice Scalia, who delivered the judgment of the Supreme Court, summarized the position thus:-
“Prima Paint and Southland answer presented here by establishing three the question propositions.
First, as a matter of substantive federal arbitration law, an arbitration provision is severable from the remainder of the contract. Second, unless the challenge is to the arbitration clause itself, the issue of the contract’s validity is considered by the arbitrator in the first instance. Third, this arbitration law applies in state as well as federal courts. The parties have not requested, and we do not undertake, reconsideration of those holdings. Applying them to this case, we conclude that because respondents challenge the Agreement, but not specifically its arbitration provisions, those provisions are enforceable apart from the remainder of the contract. The challenge should therefore be considered by an arbitrator, not a court”.
26
546 U.S. 440 (U.S.S.Ct.2006)
27
388 US 395 (U.S. S.Ct. 1967)
28
465 U.S. 1 (1984)
Civil Appeal Nos. 8245-8246 of 2016 Page 47Paofg5e1 47 48
20 The Arbitration and Conciliation Act, 1996, should in my view be interpreted so as to bring in line the principles underlying its interpretation in a manner that is consistent with prevailing approaches in the common law world. Jurisprudence in India must evolve towards strengthening the institutional efficacy of arbitration. Deference to a forum chosen by parties as a complete remedy for resolving all their claims is but part of that evolution. Minimising the intervention of courts is again a recognition of the same principle.
21 Academic literature on the law of arbitration points in the same direction. In Russell on Arbitration29, the doctrine of separability has been summarized in the following extract:
“The doctrine of separability. An arbitration agreement specifies the means whereby some or all disputes under the contract in which it is contained are to be resolved. It is however separate from the underlying contract: “An arbitration clause in a commercial contract … is an agreement inside an agreement. The parties make their commercial bargain … but in addition agree on a private tribunal to resolve any issues that may arise between them.” This is known as the doctrine of separability and s.7 of the Arbitration Act 1996 provides a statutory codification of the previous case law on this subject. As the House of Lords noted in Lesotho Highlands v Impreglio SpA:
“it is part of the very alphabet of arbitration law as explained in Harbour Assurance Co. (UK) Ltd. v Kansa General International Insurance Co. Ltd … and spelled out in s.7 of the Act, the 29 (24th Edition, 2015, para 2-007) Civil Appeal Nos. 8245-8246 of 2016 Page 48Paofg5e1 48 49 arbitration agreement is a distinct and separable agreement from the underlying or principal contract”…..
The Court of Appeal has confirmed that the doctrine of separability as it applies to arbitration agreements and jurisdiction clauses is uncontroversial also as a matter of European law”.
Dealing with arbitrability of matters of fraud, the treatise contains the following statement of the legal position:
“Fraud. Claims involving conduct amounting to fraud can be the subject matter of arbitration, as s.107(2) of the Arbitration Act makes clear. The Act expressly recognises that an arbitral tribunal may decide an issue of fraud, and the courts have acknowledged that an arbitrator has jurisdiction to decide allegations of bribery against a party to an arbitration agreement. Even in this context, however, an arbitral tribunal does not have jurisdiction to impose criminal sanctions on a party, even if bribery of a public officer is established; its power is limited consequences of that conduct”.
to the civil Under Section 24(2) of the Arbitration Act, 1950, the court could revoke the authority of a tribunal to deal with claims involving issues of fraud and determine those claims itself. This provision has been repealed in Section 107(2) of the Arbitration Act, 1996.
22 Similarly, Redfern and Hunter on International Arbitration30 contains the following statement of legal position in relation to arbitrability of matters involving fraud:-
30 (6th Edition para 2.154) Civil Appeal Nos. 8245-8246 of 2016 Page 49Paofg5e1 49 50 “(vi) Fraud Where allegations of fraud in the procurement or performance of a contract are alleged, there appears to be no reason for the arbitral tribunal to decline jurisdiction. Indeed, in the heat of battle, such allegations are frequently made, although much less frequently proven”.
23 The legal position has been succinctly summarized in International Commercial Arbitration by Gary B Born31 thus:
“…..under most national arbitration regimes, claims that the parties’ underlying contract (as distinguished from the parties’ arbitration clause) was fraudulently induced have generally been held not to compromise the substantive validity of an arbitration clause included in the contract. The fact that one party may have fraudulently misrepresented the quality of its goods, services, or balance sheet generally does nothing to impeach the parties’ agreed dispute resolution mechanism. As a consequence, only fraud or fraudulent inducement directed at the agreement to arbitrate will, as a substantive matter, impeach that agreement. These circumstances seldom arise: as a practical matter, it is relatively unusual that a party will seek to procure an agreement to arbitrate by fraud, even in those cases where it may have committed fraud in connection with the underlying commercial contract”.
(See also in this context, International Arbitration Law and Practice by Mauro Rubino-Sammartano)32
24 For the above reasons, I agree with the eloquent judgment of my learned brother in coming to the conclusion that a mere allegation of fraud in the 31 (2nd Edition Vol. I, P.846) 32 (2nd Edition p.179) Civil Appeal Nos. 8245-8246 of 2016 Page 50Paofg5e1 50 51 present case was not sufficient to detract from the obligation of the parties to submit their disputes to arbitration. I also agree with the directions issued. A fresh line must be drawn to ensure the fulfilment of the intent of Parliament in enacting the Act of 1996 and towards supporting commercial understandings grounded in the faith in arbitration.
. J [Dr D Y CHANDRACHUD] New Delhi October 04, 2016 Civil Appeal Nos. 8245-8246 of 2016 Page 51Paofg5e1 51