Supreme Court on Arbitrability of Fraud: Rashid Raza (2019)

A three-judge Bench of the Supreme Court in Rashid Raza v Sadaf Akhtar (2019: SC) had the occasion to clarify the law relating to arbitrability of fraud. The Supreme Court also reiterated and re-stated the law in the two-judge Bench decision in Ayyasamy v. Paramasivam, (2016) 10 SCC 386. The re-stated test as per the three-judge Bench is as follows:

"Two working tests laid down in paragraph 25 are: "(1) does this plea [of fraud] 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."

Note the use of "or" for these two tests, conveying the meaning that one has to establish either of the grounds to enable the court hold the dispute to be non-arbitrable. The focus of the second aspect of the "working tests" suggests that the court has not considered correct the previous position that arbitral tribunals are incapable of handling complicated facts involving collecting evidence. This is a subtle but significant shift in position. Without overruling Ayyasamy insofar the position of law that the "dispute may require voluminous evidence on the part of both the parties to come to a finding which can be only properly undertaken by a civil court of competent jurisdiction”, the court in effect abandoned this position. Now, the two working tests are the only tests for deciding whether a dispute involving allegation of fraud is arbitrable. 

Portions of the (Indian) Arbitration Amendment Act, 2019 Notified

We had two posts (here and here) on the coming into force of the Arbitration and Conciliation (Amendment) Act, 2019. We had argued that the said law had not been brought into force as on the date of the post. The last post was dated 30.08.2019. 

Thereafter, it appears that a Notification dt. 30.08.2019 has been uploaded on the website of the Ministry bringing into force certain provisions of the Arbitration and Conciliation (Amendment) Act, 2019, including Section 15 thereof, confirming our argument that Section 15 had not been brought into force on the date of presidential assent of the Amendment Act. Notification of Section 15 has made these arguments irrelevant since it is retrospective in operation (w.e.f. 23 October 2015). Had Section 15 not been notified, the arguments made in the aforesaid posts would have been valid.

The notification does not bring into force all the provisions of the 2019 Act. Basically, it excludes from its purview those provisions relating to the Arbitration Council of India. Apart from this, the notification also excludes Eighth Schedule, which deals with qualifications of an arbitrator. 

The operative portion of the Notification reads:

"S.O. 3154(E).—In the exercise of the powers conferred by sub-section (2) of section 1 of the Arbitration and Conciliation (Amendment) Act, 2019 (33 of 2019), the Central Government hereby appoints the 30th August, 2019 as the date on which the provisions of the following sections of the said Act shall come into force:—

(1) section 1;

(2) section 4 to section 9 [both inclusive];

(3) section 11 to section 13 [both inclusive];

(4) section 15."

The provisions brought into force are the following:

Section 1:

"1. (1) This Act may be called the Arbitration and Conciliation (Amendment) Act, 2019.

(2) Save as otherwise provided in this Act, it shall come into force on such date as the Central Government may, by notification in the Official Gazette, appoint and different dates may be appointed for different provisions of this Act and any reference in any such provision to the commencement of this Act shall be construed as a reference to the coming into force of that provision."

Sections 4 to 9

"4. In section 17 of the principal Act, in sub-section (1), the words and figures “or at any time after the making of the arbitral award but before it is enforced in accordance with section 36” shall be omitted.

5. In section 23 of the principal Act, after sub-section (3), the following sub-section shall be inserted, namely:––

“(4) The statement of claim and defence under this section shall be completed within a period of six months from the date the arbitrator or all the arbitrators, as the case may be, received notice, in writing, of their appointment.”.

6. In section 29A of the principal Act,—

(a) for sub-section (1), the following sub-section shall be substituted, namely:—

“(1) The award in matters other than international commercial arbitration shall be made by the arbitral tribunal within a period of twelve months from the date of completion of pleadings under sub-section (4) of section 23:

Provided that the award in the matter of international commercial arbitration may be made as expeditiously as possible and endeavour may be made to dispose of the matter within a period of twelve months from the date of completion of pleadings under sub-section (4) of section 23.’’;

(b) in sub-section (4), after the proviso, the following provisos shall be inserted, namely:––

“Provided further that where an application under sub-section (5) is pending, the mandate of the arbitrator shall continue till the disposal of the said application:

Provided also that the arbitrator shall be given an opportunity of being heard before the fees is reduced.”.

7. In section 34 of the principal Act, in sub-section (2), in clause (a), for the words “furnishes proof that”, the words “establishes on the basis of the record of the arbitral tribunal that” shall be substituted.

8. In section 37 of the principal Act, in sub-section (1), for the words “An appeal”, the words “Notwithstanding anything contained in any other law for the time being in force, an appeal” shall be substituted."

9. After section 42 of the principal Act, the following sections shall be inserted, namely:––
“42A. Notwithstanding anything contained in any other law for the time being in force, the arbitrator, the arbitral institution and the parties to the arbitration agreement shall maintain confidentiality of all arbitral proceedings except award where its disclosure is necessary for the purpose of implementation and enforcement of award.
42B. No suit or other legal proceedings shall lie against the arbitrator for anything which is in good faith done or intended to be done under this Act or the rules or regulations made thereunder.”"

Sections 11 to 13

"11. In section 45 of the principal Act, for the words “unless it finds”, the words “unless it prima facie finds”, shall be substituted.

12. In section 50 of the principal Act, in sub-section (1), for the words “An appeal”, the words “Notwithstanding anything contained in any other law for the time being in force, an appeal” shall be substituted.

13. After section 86 of the principal Act, the following section shall be inserted and shall be deemed to have been inserted with effect from the 23rd October, 2015, namely:—

“87. Unless the parties otherwise agree, the amendments made to this Act by the Arbitration and Conciliation (Amendment) Act, 2015 shall—

(a) not apply to––

(i) arbitral proceedings commenced before the commencement of the Arbitration and Conciliation (Amendment) Act, 2015;

(ii) court proceedings arising out of or in relation to such arbitral proceedings irrespective of whether such court proceedings are commenced prior to or after the commencement of the Arbitration and

Conciliation (Amendment) Act, 2015;

(b) apply only to arbitral proceedings commenced on or after the commencement of the Arbitration and Conciliation (Amendment) Act, 2015 and to court proceedings arising out of or in relation to such arbitral proceedings.”.

Section 15

"15. Section 26 of the Arbitration and Conciliation (Amendment) Act, 2015 shall be omitted and shall be deemed to have been omitted with effect from the 23rd October, 2015."