M/s. N.N. Global Mercantile Pvt Ltd vs M/s. Indo Unique Flame Lted & others. Civil Appeal 3802 – 3803 /2020. Decided on 11 January 2021.
Judgment Link: https://main.sci.gov.in/supremecourt/2020/23926/23926_2020_38_1502_25365_Judgement_11-Jan-2021.pdf
8 Whether the fraudulent invocation of the Bank Guarantee is arbitrable?
8.11 Traditionally, disputes relating to rights in rem are required to be
adjudicated by courts and / or statutory tribunals. A right in rem is a right exercisable against the world at large. Actions in rem refer to actions which create a legal status such as citizenship, divorce, testamentary and probate issues, etc. A lis in rem is not arbitrable by a private tribunal constituted by the consent of parties. Actions in personam determine the rights and interests of parties to the subject matter of the dispute, which are arbitrable.
The broad categories of disputes which are considered to be non
arbitrable are penal offences which are visited with criminal sanction;
offences pertaining to bribery / corruption; matrimonial disputes relating to divorce, judicial separation, restitution of conjugal rights, child custody and guardianship matters, which pertain to the status of a person; testamentary matters which pertain to disputes relating to the validity of a Will, grant of probate, letters of administration, succession, which pertain to the status of a person, and are adjudicated by civil courts. Certain categories of disputes such as consumer disputes; insolvency and bankruptcy proceedings; oppression and mismanagement, or winding up of a company; disputes relating to trusts, trustees and beneficiaries of a trust are governed by special enactments.
This Court in Booz Allen & Hamilton Inc. v. SBI Home Finance
Ltd.43 has recognized some examples of disputes which are not arbitrable, and held that :
“36. The well recognized examples of non-arbitrable disputes are : (i)
disputes relating to rights and liabilities which give rise to or arise out of criminal offences; (ii) matrimonial disputes relating to divorce, judicial separation, restitution of conjugal rights, child custody; (iii) guardianship matters; (iv) insolvency and winding up matters; (v) testamentary matters (grant of probate, letters of administration and succession certificate); and (vi) eviction or tenancy matters governed by special statutes where the tenant enjoys statutory protection against eviction and only the specified courts are conferred jurisdiction to grant eviction or decide the disputes.”
8.12 The civil aspect of fraud is considered to be arbitrable in contemporary arbitration jurisprudence, with the only exception being where the allegation is that the arbitration agreement itself is vitiated by fraud or fraudulent inducement, or the fraud goes to the validity of the underlying contract, and impeaches the arbitration clause itself. Another category of cases is where the substantive contract is “expressly declared to be void” under Section 1044 of the Indian Contract Act, 1872 where the agreement is entered into by a minor (without following the procedure prescribed under the
Guardian and Wards Act, 1890) or a lunatic, which would be with a party incompetent to enter into a contract.
In the case of voidable agreements, such disputes would be
arbitrable, since the issue whether the consent was procured by coercion, fraud, or misrepresentation requires to be adjudicated upon by leading cogent evidence, which can very well be decided through arbitration. Until it so proved and upheld as per Sections 2(i) and (j) of the Indian Contract Act, 1872 such an agreement would remain enforceable, and is not void.
8.16 The ground on which fraud was held to be non arbitrable earlier was that it would entail voluminous and extensive evidence, and would be too complicated to be decided in arbitration. In contemporary arbitration practice, arbitral tribunals are required to traverse through volumes of material in various kinds of disputes such as oil, natural gas, construction industry, etc.
The ground that allegations of fraud are not arbitrable is a wholly archaic view, which has become obsolete, and deserves to be discarded. However, the criminal aspect of fraud, forgery, or fabrication, which would be visited with penal consequences and criminal sanctions can be adjudicated only by a court of law, since it may result in a conviction, which is in the realm of public law.
8.17 In the present case, the allegations of fraud with respect to the
invocation of the Bank Guarantee are arbitrable, since it arises out of
disputes between parties inter se, and is not in the realm of public law.
Compiled by S. Basavaraj, Advocate, Daksha Legal
Daksha Legal 