SC clarifies law on arbitrability in cases involving serious fraud

United News of India

07-08-2025

New Delhi, Aug 7 (UNI) In a significant judgment, the Supreme Court has outlined the legal principles governing the arbitrability of disputes involving serious allegations of fraud, while dismissing a batch of civil appeals challenging the Patna High Court's decision to appoint arbitrators under Section 11 of the Arbitration and Conciliation Act, 1996.
A Division Bench comprising Justice P.S. Narasimha and Justice Manoj Misra reiterated a set of guiding principles to determine when disputes involving fraud can and cannot be resolved through arbitration. The appeals stemmed from a challenge to the Patna High Court's orders allowing arbitration proceedings in multiple cases despite allegations of serious fraud.
Access to justice for the enforcement of rights is generally through ordinary civil courts. However, Section 28 of the Indian Contract Act, 1872 saves contractual resolution mechanisms such as arbitration.
Section 2(3) of the Arbitration Act restricts arbitrability in cases where other statutes explicitly prohibit arbitration.
The Court clarified that the existence or possibility of criminal proceedings arising from the same facts does not automatically render a civil dispute non-arbitrable. Civil matters such as coercion, fraud, or misrepresentation under the Indian Contract Act can still be resolved through arbitration.
Citing the precedent in Swiss Timing Ltd., the Court observed that permitting arbitration to proceed alongside criminal proceedings does not inherently prejudice either party.
Distinction Between 'Serious Fraud' and 'Fraud Simpliciter'
The Court reaffirmed that serious fraud, due to its public law implications, may exclude a dispute from arbitration, unlike 'fraud simpliciter,' which remains arbitrable.
Contextual Assessment of 'Serious Allegations of Fraud'
The Court laid out two tests:
When the arbitration agreement itself is in doubt, i.e., one party denies entering into it altogether.
When allegations are made against the State or its instrumentalities, requiring scrutiny beyond contractual issues, touching upon public law principles.
Serious fraud allegations with potential criminal implications and broader public impact, such as corruption affecting governance or national security, are non-arbitrable.
The Tribunal has jurisdiction to consider fraud-related disputes within the contract, even if the contract is terminated or challenged. However, fraud allegations directly targeting the arbitration clause itself are non-arbitrable.
When fraud is alleged specifically against the arbitration agreement, the Tribunal lacks authority to adjudicate the issue.
The party raising a plea of non-arbitrability bears the burden to prove it.
The court's role in preliminary enquiry is that when a non-arbitrability plea is raised, the Court examines it only as a jurisdictional question to determine whether the dispute falls within the scope of arbitration.
Senior Advocate Ranjit Kumar appeared for the Appellants, while Senior Advocate Amit Sibal represented the Respondents.
The Court clarified that it had left all jurisdictional objections, including limitation and non-arbitrability, to be decided by the Arbitral Tribunal as preliminary issues.
"The issues that we have not taken up and left to the arbitral tribunal are jurisdictional issues, involving barring of the arbitral proceedings due to limitation or for the reason that they are non-arbitrable. These issues shall be taken up as preliminary issues and the arbitral tribunal will consider them after giving opportunity to all the parties," the bench concluded.
Accordingly, the Supreme Court dismissed the appeals, effectively allowing the arbitration proceedings to continue in accordance with the Patna High Court's earlier directions.
The Court observed that disputes involving allegations of serious fraud need more clarity so that there is a certainty about the available remedy.
UNI SNG RN