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Suitablility & maintainability of fraud in arbitration

The question apropos of fraud was first raised before the Supreme Court in the case of Abdul Kadir Shamsuddin Bubere v. Madhav Prabhakar Oak, wherein the three judges’ bench held that a matter containing fraud cannot be tried for in arbitration.

Dhruv Srivastava

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INTRODUCTION

Arbitration is a mechanism for the resolution of disputes which takes place, usually in private, pursuant to an agreement between two or more parties, under which the parties agree to be bound by the decision to be given by the arbitrator according to law or, if so agreed, other considerations, after fair hearing, such decision being enforceable at law. An arbitration agreement is an agreement to submit present or future disputes (whether they are contractual or not). An arbitration agreement is therefore a contractual undertaking by two or more parties to resolve disputes by the process of arbitration, even if the disputes themselves are not based on contractual obligations. From the aforementioned definitions, one can conclude that, an arbitrable matter can be tried for in arbitration. “Arbitrability” generally connotes the capability of a dispute or classes of disputes that can be settled by an arbitrator.

What disputes are arbitrable? This question has been raised time and again in light of Arbitration. The Arbitration and Conciliation Act, 1996 (The Arbitration Act) nowhere explicitly bars the adjudication of a dispute through arbitration. The liberty to deliberate on the following aspect has been bestowed to the Courts. Interalia, ‘fraud’ has been one of the contentions. The doubt of its arbitrability has been put forth to our judiciary. The Supreme Court in the Afcons case categorically laid down the cases which are not arbitrable. The judgment clearly laid down serious fraud as a ground for non-arbitrability. Keeping that in mind this article will illuminate on the concept of fraud in light of arbitration with the help of relevant landmark developments up until the recent development along with the stance of the International arbitration in terms of its arbitrability and why certain cases are considered arbitrable, despite having been held as a non-arbitrable matter.

PREPONDERANCE ON FRAUD & ITS ARBITRABILITY

The question apropos fraud was first raised before the Supreme Court in the case of Abdul Kadir Shamsuddin Bubere v. Madhav Prabhakar Oak, wherein the three judges’ bench held that a matter containing fraud cannot be tried for in arbitration. An arbitrator does not have the jurisdiction to entertain a matter having essence of fraud. As per them, a matter of fraud probes a judicial inquiry and examination of evidence, which is to be tried for in a Court of Law. The judgment was given under the Arbitration Act, 1940. Even the adoption of the Arbitration Act, did not change the position laid down by Abdul Kadir. The validity of the same was upheld in N. Radhakrishnan Case, which simply put, held all disputes containing fraud allegations are not arbitrable.

The judgment in N. Radhakrishnan affirmed the position of Abdul Kadir. Howbeit, the judgment was in relation to domestic arbitration. The clarification in regards to International Arbitration was provided for by the Supreme Court in World Sport Group (Mauritius) Ltd v. Msm (Singapore) Pte, wherein vis-à-vis Foreign seated Arbitration, the court held that an arbitrator is well capable and within jurisdiction to decide any allegations of fraud. Inter alia, it is pertinent to note, the aforementioned judgment failed to propound and differentiate on the distinction of fraud in domestic and international/foreign seated arbitration. This created an anomaly between foreign seated arbitration and domestic arbitration which was well put in to perspective after the landmark judgment of A. Ayyasamy v. A. Paramasivam. The judgment upheld the validity of Swiss Timing and overruled N. Radhakrishnan, wherein, the judgment was declared per incuriam.

The A. Ayyasamy judgment was a landmark case which made a categorical segregation, which one might have to consider while probing around fraud allegations. Fraud was categorized into the following two terms:

Fraud Simpliciter (Plain allegations) and;

Complex Fraud (Serious allegations).

Fraud Simpliciter was held to be an arbitrable matter whereas; complex or serious fraud allegations were to be tried by the Court. This is where the anomaly arises and still exists. International or Foreign Seated Arbitration empowers an arbitrator to adjudicate on fraud allegations in toto, wherein, in domestic arbitration in India segregates the arbitrability of fraud in to two categories.

THE COMPLEX FRAUD TEST

The Supreme Court in a recent judgment of Rashid Raza v. Sadaf Akhtar affirmed the view of A. Ayyasamy, which impliedly overruled the judgment in N. Radhakrishnan because technically Ayyasamy could not overrule the judgment as the strength of the bench was the same.

The judgment in Rashid Raza gave a new dimension to determine a complex fraud. The test is reiterated down below:

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

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

The test clearly lays down that serious allegations of fraud arises if the allegations satisfy the two grounds, if it fails, then the allegation falls under Fraud Simpliciter, which can be adjudicated in arbitration. In the case, the court held the matter to have failed the test and as a result can be tried for in arbitration.

THE AVITEL CLARIFICATION:

The most recent judgment of the Supreme Court in Avitel Post Studioz Limited v. HSBC PI Holdings (Mauritius) Limited has further reignited the spark of arbitrability of fraud, wherein, the Avitel Post studioz (appellant) through fraud asked the HSBC (respondent) to invest 60 Million USD into the company under false pretences. Respondent under suspicion asked two audit firms to do an inquiry into the matter. On the basis of the findings, HSBC moved to Arbitration under SIAC rules in Singapore as mentioned in the agreement, wherein an award was passed in their favor. The appellant in response filed various applications and appeals which were either against them or were denied. The division bench of Bombay HC, however, passed an order reducing the amount of compensation to be paid. The respondent aggrieved by this fact, moved to Supreme Court under Article 136 by the way of special leave petition.

The case shed clarity on why certain cases of fraud are arbitrable. The Court propounded on the matter using right in rem and right in personem along with the aforementioned test. Right in rem are rights available against public and whereas right in personem are enforceable against a private person. The court related this aspect to fraud and observed, those cases are fraud are arbitrable which are against a person in individual capacity. A right in rem is a right exercisable against the world at large, as contrasted from right in personem which is an interest protected solely against specific individuals as held in Booz Allen Case. Any allegations which affect the public morality or public at large in any capacity are to be tried for in a Court of Law.

The Court in this case held separate criminal proceedings have no bearing on a civil suit. It further held that the matter was arbitrable, as the matter in question was of personal obligation between parties. The respondent followed proper rules and procedure. No question of the matter being tried arises. The Supreme Court reversed the decision of the Bombay High Court Division Bench, returning the compensation to its original position.

CONCLUSION

The Avitel Jugdment has illuminated with some much needed clarity in terms of arbitrability of fraud. Lack of description of matters not arbitrable has caused some problems in this regard. Both the Amendments which undertook in 2015 and 2019 did not incorporate any heads outlining the same. The judgment has put a boost in the pro arbitration regime, moving step by step in right direction. It affirmed the view of World Sport. The bare-bones analysis and insight provided for by the Supreme Court in matters of fraud being arbitrable is commendable.

Inter alia, there is a situation which might hamper and increase the judicial intervention in an arbitration matter. A pro-arbitration judge might refer the matter to arbitration if the agreement provides for an arbitration clause or an agreement in light of section 8 of the Arbitration Act. However, on the contrary a judge who is not a big supporter of arbitration might inquire deeply into the validity of the fraud allegations, wherein, the speedy justice of the parties will be affected.

I am of the opinion, our arbitration tribunals should be allowed to stand on the same footing as that of courts when it comes to examination of a claim or evidences. As pro-arbitration India is right now, we could still use some deliberations on the gray areas of arbitration in order to be a global arbitration hub for dispute adjudication.

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IN MEDICAL NEGLIGENCE COMPENSATION CLAIMS, MCI FINDINGS REGARDING DOCTORS’ PROFESSIONAL CONDUCT HAVE GREAT RELEVANCE: SC

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The Supreme Court in the case Harnek Singh vs Gurmit Singh observed while considering medical negligence compensation claims that the findings of the report of Medical Council of India on professional conduct of doctors are relevant.

from the date of SCDRC order as compensation thereafter the court directed the Respondents to pay to the complainants a total amount of Rs. 25,00,000 with interest @ 6% per annum. the complainants have made out a case of medical negligence against Respondents 1 and 2 and are entitled to seek compensation on the ground of deficiency of service and the court hold that the decision of the NCDRC deserves to be set aside. in reversing the findings of the SCDRC and not adverting to the evidence on record including the report of the MCI, the court is of the opinion that the NCDRC has committed an error. The case of medical negligence leading to deficiency in his services, the above-referred findings of the MCI on the conduct of Respondent 1 leave no doubt in our mind that this is certainly, observed by the bench.

The bench further observed that he opinion and findings of the MCI regarding the professional conduct of Respondent 1 have great relevance while referring to the contents in the report of MCI.

The issue raises in the above-mentioned case is weather a professional negligence is established by the complainant as per the standards governing the duty to care of a medical practitioner on the part of Respondent As the NCDRC gave its decision without referring to the MCI finding the complainants/appellants submitted, in an appeal submitted by the Apex Court. this complaint got summarily disposed of and they filed appeals before Medical Council Of India The Ethics Committee of MCI held one doctor medically negligent and issued a strict warning to be more careful during the procedure and to be more diligent in treating and monitoring his patients during and after the operation he complainants had also made a complaint to the Punjab State Medical Council against the professional misconduct of the doctors, hospitals, surgeons, While the proceedings were pending before the SCDRC.

the complaint and two among the opposite parties were allowed by SCDRC to directly pay Rs. 15,44,000 jointly and severally and Rs. 10,000 as costs as the appeal was allowed by The National Consumer Disputes Redressal Commission of these opposite parties and set aside the order of the SCDRC holding that negligence was not proved by the complainants.

The bench comprising of Justice UU Lalit, justice S. Ravindra Bhat and the justice PS Narasimha also observed and contended the question of intention does not arise that in the proceedings for damages due to professional negligence.

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WHERE THE CLAIMS OF EVENTS HAVE BEEN SUCCESSFULLY ESTABLISHED BY THE PROSECUTION, SECTION 106 OF THE EVIDENCE ACT APPLIES TO CASES: SUPREME COURT

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The Supreme Court in the case Sabitri Samantaray vs State of Odisha observed here chain of events has been successfully established by the prosecution, from which a reasonable inference is made out against the accused, the Section 106 of the Indian Evidence Act applies to cases.

in light of Section 106 of the Evidence Act the High Court rightly observed that as how the deceased lost his life and the onus was now on the appellants to disclose further the court observed that the appellants have failed to offer any credible defense in this regard and it can be deduced that the entire sequence of events strongly point towards the guilt of the accused appellants the burden was on the appellants to prove it otherwise as once the prosecution had successfully established the chain of events.

in the light of the statements made by all the sets of witnesses, with such an intention when analyzed and the fatal injuries sustained by the deceased at the relevant place and time further the court contended while dismissing the plea that it certainly makes out a strong case that death of the deceased was indeed caused by the appellants. in establishing intention of the accused-appellants for the commission of the offence, the prosecution has succeeded, the Court notice.

whenever an incriminating question is posed to the accused and he or she either evades response, or offers a response which is not true, in a case based on circumstantial evidence then in the chain of events such a response in itself becomes an additional link, when a case is based on circumstantial evidence As Section 106 of the Evidence Act from its burden to establish the guilt of an accused is in no way aimed at relieving the prosecution. where chain of events has been successfully established by the prosecution, it only applies to those cases from which a reasonable inference is made out against the accused.

the Section 106 it merely prescribes that when an individual has done an act and in no way exonerates the prosecution from discharging its burden of proof beyond reasonable doubt Thereafter the onus of proving that specific intention falls onto 9 the individual and not on the prosecution. If the accused had a different intention than the facts are specially within his knowledge which he must prove, with an intention other than that which the circumstances indicate. As the Section 106 of the Evidence Act postulates that the burden of proving things which are within the special knowledge of an individual is on that individual. Although the Section in no way exonerates the prosecution from discharging its burden of proof beyond reasonable doubt, observed by the Bench as the said provisions Since it is all based upon the interpretation of Section 106 Evidence Act, the contentions of either

the bench comprising of CJI NV Ramana, Justice Krishna Murari and the justice Hima Kohli observed and contended whenever an incriminating question is posed to the accused and he or she either evades response or that which being offers a response is not true then such a response in itself becomes an additional link in the chain of event, in a case based on circumstantial evidence.

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A candidate has no legal right to insist that the recruitment process set in motion be carried to its logical end: SC

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The Supreme Court in the present case Employees State Insurance Corporation vs Dr. Vinay Kumar observed that the recruitment process set in motion be carried to its logical end as the candidate does not have a legal right to insist.

The bench directed the Corporation-appellants to take a decision regarding whether to complete the recruitment process, bearing in mind all relevant aspects within a period of two months, while allowing the appeal further it stated there is however no doubt from holding that the employer is free to act in an arbitrary manner.

A recruitment process which is set in motion be carried to its logical end candidate who has applied does not have a legal right to insist that Even in the select list may not clothe the candidate with such a right and that too even in the inclusion of a candidate.

A recruitment process carried to its logical end and the process set in motion, the candidate who applied does not have the legal right and thereafter the court further contended that the cardinal principle we must bear in mind is that this is a case of direct recruitment, observed by the bench.

The Court further said that it is quite likely that any candidate who may have being desirous of applying, may not have applied being discouraged by the fact that the advertisement has been put on hold and by agreeing with the applicant the court contended and said that the direction to conclude the proceedings within 45 days is unsupportable.

The recruitment process set in motion be carried to its logical end and the Candidate who has applied does not have a legal right to insist the recruitment process.

The ground raised by the appellants for not proceeding with the procedure of direct recruitment is untenable, the respondent contended before the court and on the other hand on account of certain developments which took place, there may really be no need to fill up the post of Associate Professor and the respondent may not have a right as such, the appellant contended before the Apex Court.

The High Court which dismissed the writ petition filled by the Corporation and it directed the Corporation to conclude the process positively within a period of 45 day. the Corporation filed appeal before the Apex Court, Aggrieved with this direction.

The bench comprising of Justice KM Joseph and the justice Hrishikesh Roy observed that Even inclusion of a candidate in the select list may not clothe the candidate with such a right and it does not mean that the employer is free to act in an arbitrary manner, the bench clarified.

The recruitment process set in motion be carried to its logical end and the Candidate who has applied does not have a legal right to insist the recruitment process.

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ON THE PLEA TO STAY THE RETIREMENT OF EXISTING MEMBERS UNTIL THE ACTUAL JOINING OF NEW MEMBERS, SUPREME COURT ISSUES NOTICE

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The Supreme Court in the case Central Administrative Tribunal (Principal Bench) Bar Association, New Delhi v Union of India & Or’s observed in a petition till all the vacancies which arose from 2019-2022 are filled by actual joining of candidates by putting a stay on the impending retirement of all the existing Judicial/ Administrative Members of CAT the court further issued the notice.

In the plea it was stated in the petition that although 35 Judicial Members including the Chairman and 35 Administrative Members cater to 19 benches and 8 circuit benches, many benches of the Tribunals have become non functional because of the retirement of members at regular intervals as it was Preferred by Central Administrative Tribunal (Principal Bench) Bar Association, New Delhi.

Furthermore, the petition stated the Jabalpur Bench, Cuttack Bench, Lucknow Bench, Jammu and Srinagar Bench are left with only one member either Judicial or Administrative because of which no division bench can be constituted there. As on 31st March, 2022, the Guwahati Bench has become totally non-functional as no Member is available there.

Justice Chandrachud stated by taking a note of the above submissions:

A bench can’t be constituted with one member.

Justice Chandrachud further asked to submit an up-to-date chart with regards to the number of members who are present in the various benches of CAT and ordered the counsel for the Central Administrative Tribunal (Principal Bench) Bar Association, New Delhi to do the same.

Justice Kant further added by taking a note of the above submissions:

The members whose term is likely now to expire in Future, give the details of those members.

The benches of the Central Administrative Tribunal will become non-functional if the aforesaid situation continues for a couple of more months, more than half of the sanctioned stated in the plea.

AOR Amita Singh Kalkal, has filled a plea before the Supreme Court.

The bench of comprising of Justice DY Chandrachud and the justice Surya Kant by making a note of the above submissions ordered to issue a notice and in addition the liberty to serve the Central Agency.

The bench ordered to comply with the same and listed the matter on 13th May.

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Supreme Court upholds disciplinary action against judicial officers for showing undue favour to a party in the worst kind of judicial dishonesty

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The Supreme Court in the case Muzaffar Hussain versus State of Uttar Pradesh observed a judicial officer in Uttar Pradesh for passing orders to unduly favour certain parties for taking against the disciplinary action.

The High Court reduced the punishment as curtailment of pensionary benefits by 70% and refused to interfere with the findings and the officer approached the Supreme Court for Challenging the High Court’s verdict.

A writ petition was filed before the High Court challenging the punishment by the officer. In 2005, the Allahabad High Court initiated disciplinary enquiry against him for misconduct and found the charges to be proved. On the recommendation made by the Full Court, the State of Uttar Pradesh imposed a punishment of curtailment of his pensionary benefits by 90% to join the Central Administrative Tribunal as a judicial member in 2003, the officer took Voluntary Retirement from Service.

Supreme Court observed while dismissing the appeal that the appellant had misconducted himself while discharging his duties as a judicial officer and there was enough material and evidence to show that. to unduly favour the subsequent purchasers of the acquired lands who had no right to claim compensation, and that such orders were actuated by corrupt motive, and had passed the judicial orders in utter disregard of the specific provisions of law.

The bench of Justice Bela Trivedi, an judgement authored noted:

the public servants are like fish in the water, none can say when and how a fish drank the water”. A judge must decide the case on the basis of the facts on record and the law applicable to the case and if he decides a case for extraneous reasons, then he is not performing his duties in accordance with law. As often quoted, a judge, like Caesar’s wife, must be above suspicion. The extraneous consideration for showing favour need not always be a monetary consideration further she said that In our opinion, showing undue favour to a party under the guise of passing judicial orders is the worst kind of judicial dishonesty and misconduct.

while being the Additional District Judge at Agra during 2001 to 2003, the officer named Muzaffar Hussain and the charge was that in a batch of land acquisition matters in violation of settled principles in order to unduly favour certain subsequent purchasers had exorbitantly enhanced the compensation.

Thereafter the Apex Court added that under Article 235 of the Constitution of India the High Court had perfectly justified in exercising its supervisory jurisdiction, under these circumstances.

The division bench comprising of justice DY Chandrachud and the justice Bela M Trivedi observed under the guise of passing judicial orders is the worst kind of judicial dishonesty and misconduct and that showing undue favour to a party.

The Court stated, the case must be decided by the Judge on the basis of the law applicable to the case and the facts on record. He is not performing his duties in accordance with law if he decides the case or extraneous reasons.

Supreme Court observed while dismissing the appeal that the appellant had misconducted himself while discharging his duties as a judicial officer and there was enough material and evidence to show that. to unduly favour the subsequent purchasers of the acquired lands who had no right to claim compensation, and that such orders were actuated by corrupt motive, and had passed the judicial orders in utter disregard of the specific provisions of law.

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ONCE CIRP IS ADMITTED AND MORATORIUM IS ORDERED THE SARFAESI PROCEEDINGS CANNOT BE CONTINUED AGAINST CORPORATE DEBTOR: SC

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The Supreme Court in the case Indian Overseas Bank vs RCM Infrastructure Ltd observed that once the CIRP is initiated and the moratorium is ordered, the proceedings under the SARFAESI Act cannot be continued.

the appellant Bank could not have continued the proceedings under the SARFAESI Act once the CIRP was initiated and the moratorium was ordered as Section 14(1)(c) of the IBC has an overriding effect interest created by the Corporate Debtor in respect of its property including any action under the SARFAESI Act is prohibited with respect to any other law, any action to foreclose, to recover or to enforce any security, the court observed in view of this provision.

It was further being observed and was stated clearly that once the CIRP is commenced, there is complete prohibition for any action created by the Corporate Debtor to foreclose, recover or enforce any security interest are prohibited with respect of its property. All the actions including any action under the SARFAESI Act to foreclose, to recover or to enforce any security interest are prohibited, after the CIRP initiate, the legislative point is clear at this, the bench observed while referring to Section 14 and Section 238 of the IBC.

The contentions made by bank: on 13th December 2018 and as such, and on 3rd January 2019 the admission of the petition by the learned NCLT would not affect the said sale as the sale in question was complete on its confirmation and further stated that it will not deprive the Bank from receiving the said money in pursuance to the sale which has already been completed, merely because a part of the payment was received subsequently after initiation of CIRP.

under Section 10 of the Insolvency and Bankruptcy Code, 2016, an application was filled by the Corporate Debtor before NCLT. On 03.01.2019, the NCLT admitted the petition and a moratorium was also notified the auction was continued by the bank the auction proceedings and accepted the balance 75% of the bid amount and completed the sale, even after that. The NCLT passed an order setting aside the sale, while allowing the application filled by the Corporate Debtor and the appeal filled by the Bank was dismissed by the Bank and thereafter the bank approached the Apex Court. As to recover the public money availed by the Corporate Debtor, an E-­auction notice came to be issued by the Bank.

The bench comprising of Justice L. Nageswara Rao and the justice B R Gavai observed that in respect of its property including any action under the SARFAESI Act is prohibited in such a situation, any action to foreclose, to recover or to enforce any security interest created by the Corporate Debtor.

The contentions made by bank: on 13th December 2018 and as such, and on 3rd January 2019 the admission of the petition by the learned NCLT would not affect the said sale as the sale in question was complete on its confirmation and further stated that it will not deprive the Bank from receiving the said money in pursuance to the sale which has already been completed, merely because a part of the payment was received subsequently after initiation of CIRP.

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