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  • Naresh Thacker & Samarth Saxena

Does Fraud Vitiate Arbitration? Revisting Arbitrability of Frauds in India


In legalese, there exists a rather mundane and oft-quoted phrase – “fraud vitiates everything”. While this phrase has generally stood the test of time in Indian courts, its pertinence, when arbitrating frauds, has had a truly eventful journey. A journey spanning six decades, two legislations and at least eight landmark Supreme Court (“SC”) judgments. Most recently, the SC has re-examined the issue with considerable brevity in Vidya Drolia & Ors. v. Druga Trading Corporation[i](“Vidya Drolia”) and N.N. Global Mercantile Pvt. Ltd. v. Indo Unique Flame Ltd. & Ors[ii](“N.N. Global Mercantile”). In this post, the authors seek to analyze the conspectus of Indian precedents on arbitrability of fraud and ascertain whether Vidya Drolia and N. N. Global Mercantile are really the final pieces to this intriguing puzzle.

Early Judicial Developments

The first authoritative precedent on the subject was laid down in the context of the Arbitration Act, 1940 in Abdul Kadir Samshuddin Bubere v. Madhav Prabharkar Oak[iii](“Abdul Kadir”) where ‘serious allegations of fraud’ were made against a party and the said party desired that the matter be tried in an open court. This was held by the SC as a sufficient cause for the court to not make a reference to arbitration. However, the SC qualified this observation by holding that not every allegation imputing some kind of dishonesty would be enough for taking the matter out of the forum which the parties themselves had chosen i.e., arbitration. In Abdul Kadir, the Court therefore, opined that mere allegations would not be enough to induce the court to refuse to make a reference to arbitration. It was only in cases of allegations of fraud of a ‘serious nature’ that the court would refuse such reference.

The SC’s judgment in Abdul Kadir continued to hold fort over the next five decades. Even after the advent of Arbitration and Conciliation Act 1996 (“the 1996 Act”), there wasn’t any major judicial pronouncement by the SC until2010 when, in N. Radhakrishnan v. Maestro Engineers[iv] (“N. Radhakrishnan”), a Division Bench of the SC relying upon Abdul Kadir ruled that allegations of fraud and serious malpractices could only be settled in court through furtherance of detailed evidence by either party and as such could not be gone into by the arbitrator.

The embargo imposed by N. Radhakrishnan didn’t sit well with the pro-arbitration agenda of the Arbitration and Conciliation Act,1996 (“1996 Act”). More so, because while reaching its findings in N. Radhakrishnan, the SC had failed to consider the following key aspects:

  1. Though N. Radhakrishnan referred to the case of Hindustan Petroleum Corpn. Ltd. v. Pinkcity Midway Petroleums[v](“Hindustan Petroleum”), it did not deal with the ratio thereof. In fact, the ratio of Hindustan Petroleum ran counter to the findings in N. Radhakrishnan. After considering the language of Section 8 of the 1996 Act, Hindustan Petroleum had held that if there existed a clause for arbitration in an agreement between the parties, it would be mandatory for the civil court to refer the dispute to an arbitrator. Similar was also held in the case of P. Anand Gajapathi Raju v. P.V.G. Raju[vi](“P. Anand Gajapathi Raju”). However, the case of P. Anand Gajapathi Raju was not even considered in N. Radhakrishnan.

  2. The provisions contained in Section 16 of the 1996 Act were also not considered by the court. Section 16 expressly provides that a decision by the arbitral tribunal that the contract was null and void would not entail ipso jure the invalidity of the arbitration clause.

For the aforementioned reasons, the judgment in N. Radhakrishnan was held to be per incuriam in the subsequent SC decision in Swiss Timing Ltd. v. Commonwealth Games Organising Committee (“Swiss Timing”).[vii]The judgement in Swiss Timing refused to affirm the contention that whenever a contract was said to be void ab initio, the courts exercising jurisdiction under Section 8 and Section 11 of the 1996 Act would be powerless to refer the disputes to arbitration. On the contrary, in a major departure from the prevailing standard set by Abdul Kadir and N. Radhakrishnan, Swiss Timing further held that arbitration ought not to be refused even in cases where the defence taken was that the contract was voidable, for instance, as provided under Section 17 of the Indian Contract Act, 1872 (“Contract Act”) for fraud. The court ought to decline reference to arbitration only where it reaches the conclusion that the contract is void on a bare reading, thereof without any requirement of further proof.

Testing the ‘Arbitrability’ of Fraud

While the decision in Swiss Timing was a step in the right direction on the issue of arbitrability of fraud, it suffered from a malaise of a different kind and hence in A. Ayyasamy v. A.Paramasivam(“Ayyasamy”),[viii]the same was impliedly over-ruled as being devoid of any precedential value. A necessary outcome of this was that the proposition of law laid down in N. Radhakrishnan stood revived.

Nonetheless, the fact that N. Radhakrishnan did not set out the correct position of law was well accepted. In Ayyasamy, the SC cautioned against placing reliance on N. Radhakrishnan, and further clarified the law on arbitrability of fraud in the following manner:

  1. Mere allegation of fraud simpliciter is not a ground to nullify the effect of the arbitration agreement between the parties.

  2. It is only  ‘serious allegations of fraud’ leading to a criminal offence or those with complicated allegations of fraud leading to such issues necessarily to be decided by the civil court by going through voluminous evidence, that arbitration can be side-tracked. Thus, fraud which vitiates the validity of the contract itself or the entire contract which contains the arbitration clause or the validity of the arbitration clause e.g., forgery/fabrication of documents in support of the plea of fraud would require the civil court’s intervention.

  3. Where there are simple allegations of fraud touching upon the internal affairs of the party inter se and such allegations have no implication in the public domain, the arbitration clause need not be avoided and the parties can be relegated to arbitration.

The judgment in Ayyasamy was further clarified in the subsequent case of Rashid Raza v. Sadaf Akhtar (“Rashid Raza”).[ix] Rashid Raza ruled that to distinguish between ‘serious allegations’ and ‘simple allegations’ of fraud, the rule as laid down by Ayyasamy could be crystallized in the following two tests:[x]

  1. “Does the plea of fraud permeate the entire contract and above all, the agreement of arbitration, rendering it void?”

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

The ratio of Swiss Timing, Ayyasamy and Rashid Raza was then approved in Avitel Post Studioz Ltd. & Ors. v. HSBC PI Holdings (“Avitel”).[xi]In Avitel, the SC held that post Rashid Raza, ‘serious allegations of fraud’ would arise only in two cases:[xii]

  1. When the arbitration clause or agreement itself doesn’t exist, as in, the party against whom breach is alleged claims that it cannot be said to have entered into the arbitration agreement.

  2. When allegations are made against the State or its instrumentalities of arbitrary, fraudulent, or malafide conduct thus necessitating the hearing of the case by a writ court and the questions raised in the dispute are not predominantly questions arising from the contract itself or breach thereof, but questions arising in the public law domain.

The judgment in Avitel also clarified another important aspect pertaining to the effect of pending criminal proceedings arising out of fraud, on its arbitrability. Avitel held that if a civil dispute involved questions of fraud, misrepresentation, etc. which could be the subject matter of proceeding under Section 17 of the Contract Act, and/or the tort of deceit, the mere fact that criminal proceedings could be or were already instituted in respect of the same subject matter would not lead to the conclusion that the dispute was non-arbitrable.

The Current Legal Position

Pertinently, much like Swiss Timing, both Ayyasamy and Avitel cautioned against the use of N. Radhakrishnan as a binding precedent.

Subsequently, in Vidya Drolia, a three-judge bench of the SC again considered its judgment in N. Radhakrishnan. In Vidya Drolia, the SC re-affirmed its findings in Ayyasamy, Rashid Raza and Avitel and over-ruled its judgment in N. Radhakrishnan by holding that allegations of fraud can be made the subject matter of arbitration when they relate to a civil dispute. However, fraud which vitiates the arbitration clause itself would render the dispute non-arbitrable.

The judgment in Vidya Drolia has recently been considered by a co-ordinate bench of the SC in N. N. Global Mercantile. In the said decision, while the SC has referred the findings in paragraph 92 of Vidya Drolia, which held ‘existence’ and ‘validity’ of an arbitration agreement as an intertwined concept, to the Constitution bench, it has re-affirmed Vidya Drolia’s findings with respect to the arbitrability of fraud. N.N. Global Mercantile holds that all civil or commercial disputes, whether contractual or not, which can be adjudicated upon by a civil court, can also be adjudicated through arbitration unless such arbitral proceedings are expressly excluded by statute or by necessary implication. However, the criminal aspect of fraud viz. forgery or fabrication being essentially in the realm of public law, can only be adjudicated by a court. The SC has further clarified that the ground on which fraud was previously held to be non-arbitrable i.e., that the dispute would entail procuring voluminous evidence and would be thus, too complicated to be decided in arbitration is an ‘archaic’ and ‘obsolete’ view. On the contrary, the SC has observed that nowadays arbitral tribunals are required to regularly traverse through volumes of evidence.


From N. Radhakrishnan to N.N. Global Mercantile, the courts have carefully filtered the prerequisites for referring a case to arbitration in disputes involving allegations of fraud. As on date, the decisions in Ayyasamy, Rashid Raza, Avitel, Vidya Drolia and N.N. Global Mercantile concurrently hold the field in this respect. These decisions have set forth different yet inter-linked tests on which arbitrability of fraud ought to be tested. In Ayyasamy, the SC opined that mere allegations of fraud simpliciter would not render a case non-arbitrable and it would be ‘serious allegations of fraud’, requiring consideration of voluminous evidence by the civil court which would be non-arbitrable. Relying on the Ayyasamy judgment, Rashid Raza gives 2 tests to determine ‘serious allegations of fraud’, the first of which deals with fraud permeating the contract entirely, especially the arbitration clause, and the second being determining whether fraud is restricted to internal affairs of the parties and has implications in the public domain. Avitelhas further bucketed the tests laid down in Rashid Raza into cases where the arbitration clause/agreement itself does not exist and cases involving arbitrary, fraudulent, or mala fide conduct, which can be validly brought before writ courts. Both Vidya Drolia and N.N. Global Mercantile have now taken forward these principles by cumulatively upholding the dicta of Ayyasamy, Rashid Raza and Avitel, and by providing sanctity to arbitrating all allegations of fraud pertaining to civil disputes, until the arbitration clause itself is invalidated or allegations of fraud pertains to aspects of public law. However, N.N. Global Mercantile has further clarified that seeking adjudication of the disputes from a civil court and not by means of arbitration, for the sole reason that extensive evidence would require to be conducted, is no longer a permissible ground to side-track arbitrations.


As we move forward, issues of fraud would continue to be raised by Respondents wishing to avoid the arbitral process. Such cases would then have to be tested on the threshold of all the aforementioned principles. Though the principles presently governing arbitrability of frauds in India are undoubtedly sound, their effectiveness in deterring prospective Respondents willfully seeking to avoid arbitral proceedings, remains to be seen.


[i]Vidya Drolia & Ors. v. Druga Trading Corporation 2020 SCC OnLine SC 1018.

[ii]N.N. Global Mercantile Pvt. Ltd. v. Indo Unique Flame Ltd. &Ors. 2021 SCC OnLine SC 13.

[iii]Abdul Kadir Samshuddin Bubere v. Madhav Prabharkar Oak AIR 1962 SC 406.

[iv]N. Radhakrishnan v. Maestro Engineers (2010) 1 SCC 72.

[v]Hindustan Petroleum Corpn. Ltd. v. Pinkcity Midway Petroleums (2003) 6 SCC 503.

[vi]P. Anand Gajapathi Raju v. P.V.G. Raju (2000) 4 SCC 539.

[vii]Swiss Timing Ltd. v. Commonwealth Games 2010 Organising Committee (2014) 6 SCC 677.

[viii]A. Ayyasamy v. A. Paramasivam (2016) 10 SCC 386.

[ix]Rashid Raza v. Sadaf Akhtar (2019) 8 SCC 710.


[xi]Avitel Post Studioz Ltd. & Ors. v. HSBC PI Holdings (Mauritius) Ltd. 2020 SCC OnLine SC 656.


This post has been authored by Mr. Naresh Thacker and Mr. Samarth SaxenaPartner and Associate at Economic Laws Practice. They were assisted by Mr. Siddharth Jain, a student of RGNUL. This blog is a part of the RSRR Excerpts from Experts Series, initiated to bring forth discussion by experts on contemporary legal issues.


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