II.

THE ISSUE CONCERNING FRAUD ALONG WITH FORGERY WAS NOT

ARBITRABLE BEFORE THE SINGAPORE ARBITRAL TRIBUNAL.

The definition of Fraud as furnished in The Indian Contract Act, 1872 asserts an act committed
by a party to a contract with the intent to deceive or to induce the party deceived to enter into a
contract.1 The gist of Fraud as envisaged in the act is propagating an untrue fact which the party
knows is untrue and consciously concealing a fact from the other party. Arbitrability of Fraud is
a settled proposition in the jurisprudence of Arbitration. Although the Arbitration and
Conciliation Act, 1996 does not bifurcate upon the arbitrability of different subject matters, the
judiciary has filled the void by delivering landmark judgments.2

A) THE RATIONALE BEHIND BIFURCATING THE ISSUES WHICH CAN BE TRIED BY

ARBITRAL TRIBUNALS AND TRIAL COURTS.

The distinctive judgment of A. Ayyaswamy v. A. Paramasivam 3 lucidly puts forth the reasoning
for adjudication of issues which should be brought to the cognizance of courts and which should
be heard by an arbitral tribunal. The principles propounded by the bench covers a gap of The
Arbitration and Conciliation Act, 1996 which is silent on arbitrability of different subject –
matters.

The bench lays the cornerstone of its justification by explaining the position of arbitral tribunals
and courts. The former is a private body and the latter is a public forum. The Legislature has
explicitly kept certain subject matters for adjudication to trial courts only as a matter of public
policy. A few examples of the same can be serious criminal offences, divorce matters, child
custody, insolvency matters etc. The list is non-exhaustible. The bench placed its reliance on the
judgment of Booz Allen & Hamilton Inc. v. SBI Home Finance Limited and others for making
this distinction.4

The bench then postulates in a broad perspective the bifurcation of issues with the concept of
right in rem and right in personam.5 Right in rem refers to rights exercisable against the whole

1
Section 17 of Contract Act
2

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world.6 Whereas right in personam means rights and liabilities against a single individual. 7 If
comprehended with a deeper perspective it can be seen that subject – matters which are non -
arbitrable comes under the category of right in rem. Thus, the court lays down that, disputes
which are right in rem are not amenable to arbitration. The court also remarks that this is not a
rigid rule. It is a fundamental duty of the court to recognize the subject matter in cases where the
right of personam is emancipating from a right in rem. If such is the case the dispute can be
brought under the purview of arbitration.8

B) THE ARBITRABILITY OF FRAUD SIMPLICITOR AND SERIOUS FRAUD.

The Judiciary has given plethora of decisions on the subject – matter. It becomes germane to
mention the case of Abdul Kadir Shamsuddin Bubere v. Madhav Prabhakar Oak9, a 1962 case
where the bench propagated that issue of serious fraud should not be referred to arbitration. The
roots of the ratio laid down in this case can be traced back to the judgment of Russell v. Russell
wherein the court held that fraud in general is not amenable to arbitration.

The law regarding arbitrability of fraud was inevitably developed and seasoned in times to come
with the judgment of N. Radhakrishnan v. Maestro Engineers10 being the first in line. As the law
of the land was blossoming to the changing times, this judgment failed to be un to the mark as it
missed a very important differentiation of arbitrability of serious fraud and mere allegation of
fraud. Ultimately the judgment was held per incuriam in Swiss Timing Ltd v. Organising
Committee.11 Although the Swiss Timing Case is based on a different subject - matter it clears
the air regarding the issue implicitly.

The 246th Law Commission considers all the above-mentioned decisions and leads us towards
the distinction of serious fraud and fraud Simplicitor. It is the culmination of all these events
which led to the landmark verdict of A. Ayyaswamy v. A. Paramasivam. 12 The court in this case
settles the dilemma by stating:

“In view of our aforesaid discussions, we are of the opinion that mere allegation of fraud
Simplicitor may not be a ground to nullify the effect of arbitration agreement between the

10

11

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parties. It is only in those cases where the Court, while dealing with Section 8 of the Act,
finds that there are very serious allegations of fraud which make a virtual case of criminal
offence or where allegations of fraud are so complicated that it becomes absolutely essential
that such complex issues can be decided only by civil court on the appreciation of the
voluminous evidence that needs to be produced, the Court can side-track the agreement by
dismissing application under Section 8 and proceed with the suit on merits”

Pursuant to the above – mentioned ratio the court also opined that serious allegation of
forgery/fabrication in support of fraud is also not arbitrable. The reasoning of the court is
crisp and simple. If the fraud committed attacks the validity of the whole agreement including
the arbitration clause then such a serious issue should be adjudicated by trial courts. If the
allegations of fraud are mere and not of grave concern and does diminish the roots of the
contract then it should be amenable to arbitral tribunal. The latest Supreme Court judgment of
Rashid Raza v. Sadaf Akhtar resorting to the Ayyaswamy judgment as its precedent reiterated
the legal jurisprudence for deciding the case.

If delved into the facts with acumen, G&T relying on the investigation report of
Cosmopolitan LLP which allegedly reports that the respondents i.e. Martinium has fabricated
its licenses and approvals and which compromised the quality of power turbines which was
the sole purpose of the contract is a serious issue of fraud which pounces upon the heart of
the contract. The authenticity and admissibility of the report by a private investigation
company is different issue which is also addressed by the respondents, however
contemplating the alleged contents of reports, it can be easily concluded that they constituted
serious fraud and was not arbitrable before the Singapore Arbitral Tribunal. As a result, the
proceedings of the arbitral tribunal were bad in law and the award is not legally enforceable.