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India – Supreme Court Upholds Role of Courts in Appointing Arbitrators where Allegations of Fraud are made.

8 March, 2012

 

 

The Supreme Court recently reaffirmed its earlier decision in the case of SBP & Co. v. Patel Engineering Ltd [1], recognising the ability of courts to examine the validity of an arbitration agreement when appointing arbitrators. The court also made some very important observations on the role of courts in dealing with allegations of fraud in the context of arbitration.
 
In Bharat Rasiklal v. Gautam Rasiklal [2], conflict within a partnership resulted in one partner seeking to commence arbitration. The partner applied to the Gujarat High Court under section 11 of the Arbitration and Conciliation Act 1996 for appointment of an arbitrator. The rival partner, however, contested the existence and validity of the arbitration agreement, alleging that the relevant documents had been forged.
 
The Gujarat High Court appointed an arbitrator but the rival partner appealed this appointment to the Supreme Court, which quashed the decision.
 
The Supreme Court, relying on its previous decision in Patel Engineering, held that while deciding on an application under section 11, the court is entitled to rule on issues concerning the existence of the arbitration agreement – especially where questions of fraud or forgery had been raised – before referring the dispute to arbitration.
 
The court stated that it would not be possible for the court to appoint an arbitrator where serious allegations of fraud and fabrication had been made because the validity of the arbitration agreement was such a fundamental issue that it had to be decided by the court in those circumstances. The court upheld this position despite noting that this could result in a delay to the arbitral process.
 
Given the potential for vexatious claims of fraud to be raised as a tactic for delaying proceedings, the Supreme Court sought to limit the effect of its supervisory role to claims where the agreement alleged to contain the arbitration agreement had not yet been acted on, such that its existence was less patent. The court commented that in circumstances where the issue is termination, performance or frustration of a contract, the arbitrators were better suited to decide the validity of the agreement. In all cases, the court noted, questions relating to the ambit of the arbitration clause and the merits of the claim had to be left to be decided by the arbitrators. The court also indicated that there would be serious costs consequences for parties who made false claims of fraud.
 

 

For further information, please contact:

 

Alastair Henderson, Partner, Herbert Smith

[email protected]

 

Dispute Resolution Law Firms in India

 

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