Arbitrability of Fraud Disputes in India: Discussing the Development Post-Ayyasamy



The issue of arbitrability of fraud disputes has consistently been a predicament faced by the Indian Courts. The ever-developing jurisprudence on this issue did not seem to settle the debate and surely did not reflect the pro-arbitration ideology that Indian Courts seek to portray. The Courts in a quest to bring certainty and settle the position of law have ignored certain important questions that still need to be answered. In this article, the author seeks to highlight the recent developments in the jurisprudence regarding the arbitrability of fraud disputes and analyze the change in Indian Court’s stance over the years.

A brief overview of position till Ayyasamy

The issue regarding arbitrability of a dispute arises because the Arbitration and Conciliation Act, 1996 [‘the Act’] does not explicitly provide for disputes that are arbitrable or non-arbitrable. In such a scenario, while referring a case to arbitration under section 8 of the Act, a court has to see whether a valid arbitration agreement exists and if the subject matter of dispute is arbitrable.

The issue regarding arbitrability of fraud first arose in the case of Abdul Kadir v. Madhav Prabhakar Oak [‘Abdul Kadir’], where the court held that court will refuse to refer disputes to arbitration if there are serious allegations of fraud and the party charged with fraud desires that the matter be tried in court.

By placing reliance on this judgment Supreme Court of India[‘SCI’] in N. Radhakrishnan v. M/S. Mastero Engineers [‘N. Radhakrishnan’] held that matters of serious allegations of fraud cannot be properly dealt by an arbitrator and hence, in the interest of justice only a court of law can decide such complex matters. The position in N. Radhakrishnan has been discussed in detail in the post here.

Indian regime saw a paradigm shift in this position in the case of A. Ayyasamy v. A. Paramasivam [‘Ayyasamy’] where it was categorically laid down that simple allegations of fraud touching upon the internal affairs of the party inter se and having no implication in the public domain are arbitrable.

Development post-Ayyasamy

One of the first cases post Ayyasamy inculcating its reasoning was Ameet Lalchand Shah & Ors. v. Rishabh Enterprises & Ors., where the SCI declared that mere allegation of fraud by a party to obstruct arbitration would not render disputes inarbitrable. Court also observed that the arbitrator so appointed can examine the allegations related to fraud.

Even though there was consistency in court’s approach that mere allegation of fraud did not make a matter inarbitrable, there still was uncertainty as to what can be considered as “serious offence”. SCI to some extent tried tackling this uncertainty by explaining the judgment of Ayyasamy by delineating a twin test in Rashid Raza v. Sadaf Akhtar [‘Rashid Raza’].

1.  Does the plea permeate the entire contract and above all, the agreement of arbitration, rendering it void, or

2. Whether the allegations of fraud touch upon the internal affairs of the parties inter se having no implication in the public domain.

The most recent and significant development in this regard has been the case of Avitel Post Studioz Ltd. v. HSBC PI Holdings (Mauritius) Ltd. [‘Avitel’]. In this case, HSBC and Avitel entered into a Shareholders Agreement. Avitel informed HSBC that they are in the advanced stage of finalizing a contract with BBC and was expected to generate huge revenues. Subsequently, HSBC discovered that there was no such contract and it was fabricated by Avitel in order to induce HSBC to invest. Due to this, HSBC invoked arbitration proceedings before the Singapore International Arbitration Chamber as per the dispute resolution clause.

SCI while referring to Afcons Infrastructure v. Cherian Varkey and Booz Allen v. SBI Home Finance, observed that the statement “cases involving serious and specific allegation of fraud, fabrication of documents, forgery, impersonation, coercion etc.” have to be interpreted by applying the test laid down in Rashid Raza. It categorically laid down that same set of facts can lead to civil as well as criminal consequences and a matter will not cease to be arbitrable merely because criminal proceedings are pending in that matter. This is a significant deviation by the SCI from position in Ayyasamy which provided for a blanket bar on arbitrability by stating that if “serious allegations of fraud give rise to criminal office” then it is inarbitrable.

SCI referred the matter for arbitration and stated that, the fraud does not have a “public flavour” and is not such that it would render the contract and the arbitration agreement null and void.  While discussing the issue at hand SCI also clarified that N. Radhakrishnan does not have precedential value while affirming the observation in Swiss Timing v. Organising Committee, which held N. Radhakrishnan to be per incuriam as it failed to consider essential precedents.

Another judgment passed on the same day as Avitel was Deccan Paper Mills Co. Ltd. vs Regency Mahavir Properties [‘Deccan Paper Mills’], where the court relied on the observation in Avitel and held that if the matter has no “public overtone” and if a valid arbitration agreement exists, the court has to refer the dispute to arbitration.

Analysis of the developments

The observation in Ayyasamy and Rashid Raza that allegations of serious fraud are not fit to be decided in arbitration proceedings is problematic. The reasoning behind such observation by the court was that such a dispute requires collection and appreciation of evidence which can only be done by a civil court. This observation and reasoning is in complete disregard of section 27 of the Act. Section 27 of the Act allows the arbitral tribunal or a party to apply to the court for its assistance in taking of evidence and court can take evidence applying procedure as applicable in a proceeding before it. Moreover, even if party do not intend to take the assistance of courts, under section 19 of the Act, they are free to choose the rules of procedure. In such a scenario, parties can incorporate elaborate rules such as IBA Rules on Taking of Evidence for governing procedures related to evidence during arbitration proceedings.

It is noteworthy that the SCI did not resort to such a reasoning in Avitel. In fact, the Court tried explaining the two tests laid down by Rashid Raza. The issue regarding Ayyasamy and Rashid Raza was that even when these cases changed the position of law from what was observed in N. Radhakrishnan, the usage of phrase “serious allegations of fraud” continued since the 1960s’ (see Abdul Kadir).The court, in these cases, failed to explain and remove the ambiguity surrounding cases that  can be categorized as ‘mere allegations of fraud simplicitor’ and cases that can be considered as ‘complex cases of fraud’.

Avitel took a positive step towards explaining and narrowing the same. SCI referred to Rashid Raza to explain when the two tests can be considered satisfied. The first test is satisfied when the agreement or arbitration agreement could not have been entered into by the party if not for the fraud. The Court laid down the “public flavour” standard while explaining the second test. It observed that second test is satisfied when the allegations are made against the state or its instrumentalities and these allegations are questions arising in public domain rather than from a breach of contract.

This kind of observation will also clear the uncertainty regarding the kind of merit-based analysis a court can conduct while determining the arbitrability of a dispute. Under Section 8 of the Act the court only has to analyze if a prima facie valid arbitration agreement exists and not enter into a merit-based analysis. The Court laying down a narrow test in Avitel seen in conjunction with the fact that in the 2015 amendment, legislature inserted the phrase “prima facie” in section 8 to reduce the judicial intervention, signifies a true movement towards the pro-arbitration approach.

The aforementioned cases of Abdul Kadir, N. Radhakrishnan, and Ayyasamy show judiciary’s clear lack of confidence in capability of arbitral tribunals to handle complex matters with utmost care and caution. This may be due to the fact that India lacks an institutional arbitration setup. Where the objective of the 2015 amendment to the Act was to reduce judicial intervention, the 2019 amendment focused on the institutionalization of arbitration mechanism in India on recommendation of Justice Srikrishna Committee. Despite having some obvious concerns, this amendment is a positive step towards having qualified arbitrators and intuitional arbitration reinforcing the judiciary’s and international community’s trust in India as an arbitration hub.


Over the years, India has been criticized for being anti-arbitration and having unfettered judicial intervention in arbitration. In order to change this outlook, the 246th Law Commission Report suggested major changes in the Act in order to reduce judicial intervention and adopt a pro-arbitration approach. Avitel acts as a progressive precedent that would strengthen India’s position internationally and help it in achieving the status of an arbitration friendly jurisdiction. A change initiated by Ayyasamy having certain faults was molded appropriately by SCI in Avitel by narrowing the scope for judicial scrutiny. It remains to be seen whether upcoming cases on arbitrability of fraud apply the broader test laid down in Ayyasamy or a narrow test propounded in Avitel.

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