Is Fraud Arbitrable?

Justice AK Sikri's judgment, delivered in 2016, laid the foundation of using proportionality as a tool of interpretation on the question of arbitrability. The judge had conceptualised a dual criterion for determining the arbitrability of fraud, categorising charges into simple and sophisticated frauds

- Balram Pandey and Lokendra Malik

Justice Aharon Barak in his famous treaties on proportionality defines it as a legal construction. He further argues that it is a methodological tool which consists of four components-a proper purposes, a rational connection, necessary means, and a proper relationship between the benefit obtained from accomplishing the proper purpose and the harm caused to the statutory right-the final component is also referred to as “proportionality stricto sensu” (balancing). These four components constitute the restriction clause's nucleus. They are critical for comprehending proportionality. Justice AK Sikri's judgment in A Ayyasamy vs A Paramasivam & Ors-delivered in 2016-had laid the foundation of using proportionality as a tool of interpretation on the question of arbitrability.

In A Ayyasamy, the Supreme Court had clarified and partially overruled its earlier decision in N Radhakrishnan vs Maestro Engineers. Justice Sikri speaking for the bench had conceptualized a dual criterion for determining the arbitrability of fraud, categorizing charges of fraud into simple and sophisticated frauds. Thus, it was held that simple fraud occurred when allegations of fraud concerned only the parties' internal affairs and had no spillover effect on the public domain, whereas complex fraud occurred when allegations of fraud concerned the heart of the agreement or the validity of the arbitration clause/agreement itself. The Court further observed that mere charges of fraud would not undermine the effect of the parties' arbitration agreement, and the parties can be referred to arbitration. However, where severe claims of fraud are made, they are to be treated as nonarbitrable and should be decided exclusively by a civil court.