The Ground That Allegations Of Fraud Are Not Arbitrable Is A Wholly Archaic View, Deserves To Be Discarded: SC
The Supreme Court’s landmark pronouncement that the ground‑that allegations of fraud are not arbitrable is a wholly archaic view, deserves to be discarded, along with key case laws tracing the evolution of this jurisprudence:
1. The Landmark Judgment: N.N. Global Mercantile Pvt. Ltd. vs. Indo Unique Flame Ltd. (2021)
Facts & Decision (Jan 11, 2021):
A three-Judge Bench (Justices D. Y. Chandrachud, Indu Malhotra, Indira Banerjee) held that:
The earlier notion that fraud allegations are non‑arbitrable—due to the need for voluminous evidence—has become obsolete and should be discarded. Modern arbitral tribunals routinely handle extensive material across industries like oil, gas, and construction.
Allegations of fraud, misrepresentation, or deceit in a civil dispute are arbitrable, as they arise between parties inter se and do not involve the realm of public law.
Only the criminal aspect of fraud—leading to penal consequences—remains non‑arbitrable and must be adjudicated by a court of law.
2. Jurisdictional Evolution: From Old to Modern
a) Early Years – Rigid Approach
N. Radhakrishnan vs. Maestro Engineers (2010):
The Supreme Court ruled that disputes involving serious fraud or malpractices are not fit for arbitration and should be resolved by courts through detailed evidence.
b) Emerging Shift – Nuanced Differentiation
A. Ayyasamy vs. A. Paramasivam (2016):
Introduced a distinction: “serious allegations of fraud” (potentially non-arbitrable) vs. fraud simplicitor (merely alleged, arbitrable). The court emphasized that only serious, complicated fraud should exclude arbitration.
c) Refined Tests
Rashid Raza vs. Sadaf Akhtar (2019):
Laid down twin tests for non-arbitrability:
Fraud impacts the validity of the arbitration agreement itself.
Allegations have public-domain implications (e.g., against the State).
Avitel Post Studioz vs. HSBC PI Holdings (2020):
Reaffirmed the twin tests and clarified that criminal proceedings alone don’t render a civil fraud dispute non-arbitrable.
d) Modern Consolidation
Vidya Drolia vs. Durga Trading Corpn. (2021):
Overruled the broad rationale in Radhakrishnan, reinforced presumption in favor of arbitrability, and held that fraud is arbitrable unless it vitiates the arbitration clause itself.
N.N. Global Mercantile (2021):
Reiterated the modern view: civil fraud is arbitrable; only criminal fraud escapes arbitral adjudication.
3. Why the View That "Fraud is Non‑Arbitrable" is Obsolete
Arbitral tribunals today routinely handle complex, evidence-heavy disputes.
The earlier rationale—that arbitration isn’t equipped to manage such disputes—is outdated.
Modern jurisprudence emphasizes party autonomy, efficiency, and minimal judicial interference, especially where the dispute is civil and inter parties.
4. Case Law Timeline & Summary
| Year | Case | Principle Established |
|---|---|---|
| 1962 | Abdul Kadir Shamsuddin Bubere | Serious fraud excludes arbitration. |
| 2010 | N. Radhakrishnan vs. Maestro | Affirmed non-arbitrability for serious fraud. |
| 2016 | A. Ayyasamy | Distinguished between serious fraud and fraud simplicitor. |
| 2019 | Rashid Raza | Twin test for arbitrability: clause validity & public domain. |
| 2020 | Avitel Post | Criminal proceedings don't automatically exclude arbitration. |
| 2021 | Vidya Drolia | Presumed arbitrability; only fraud vitiating arbitration clause is exempt. |
| 2021 | N.N. Global Mercantile | Civil fraud arbitrable; criminal fraud not. Discards archaic view. |
5. Key Takeaways
Civil fraud (like misrepresentation, non-criminal deceit) is arbitrable.
Only fraud vitiating the arbitration clause itself, or fraud with criminal implications and public interest, is non-arbitrable.
The long-held view that any allegation of fraud automatically excludes arbitration is archaic and no longer stands.
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