Friday, June 20, 2014

Maestro Engineers Per Incuriam: The Supreme Court on the Arbitrability of Fraud

In its recent decision in Swiss Timing Ltd, the Supreme Court has dealt with some important questions relating to arbitrability in Indian law. Swiss Timing, a (as the name suggests) Swiss company, was engaged by the Organising Committee of the Commonwealth Games (‘Delhi 2010’) in 2010 to provide timing, score and result systems for the CWG (‘TSR Contract’). After the conclusion of the games, Delhi 2010 refused to make the final payment of about CHF 1.3 million which Swiss Timing said was due to it under the contract. The TSR Contract provided that all disputes would, in the first instance, be resolved amicably, in default of that by the Chairman of Delhi 2010 and that the parties could invoke arbitration only if the Chairman failed to resolve the dispute within five days. After exchanging letters which bore no fruit, Swiss Timing appointed an arbitrator but Delhi 2010 refused to do so. There was an issue about whether these mandatory pre-arbitration steps had been exhausted but I say no more about it in this post. Swiss Timing filed a petition under section 11(6) of the Arbitration and Conciliation Act, 1996 seeking the appointment of the remaining members of the Tribunal.

Delhi 2010 made essentially two arguments in support of the proposition that the section 11 petition was not maintainable: (a) because Swiss Timing was in breach of a ‘warranty’ that it would not engage in ‘corrupt practices’, the TSR Contract was ‘void ab initio’ and therefore the arbitration clause was ineffective as well; and (b) disputes involving allegations of fraud or corruption are not arbitrable in Indian law. At first sight—although of course any view about this must be provisional, as the language of the warranty clause is not reproduced in the judgment—(a) is a surprising contention for two reasons. First, it is true that fraud sometimes has the effect of defeating contract formation, but this is usually because the fraudster cannot accept an offer which he knows is not intended for him (as the mistaken identity cases show). Where a contract has been validly formed, a fraudulent misrepresentation only confers a right of rescission, which can be lost if one of the bars to rescission is attracted. So it does not follow that there was never a contract. Secondly, even if the allegation is that the contract is ‘void’, it does not follow (subject to SBP v Patel Engineering) that it cannot be referred to arbitration. As Lord Hoffmann explained in his classic speech in Fiona Trust v Privalov, the question is not whether the allegation is of fraud or of some other vitiating factor, but whether the allegation attacks the arbitration agreement specifically.

Nijjar J held that the court must distinguish between an allegation that a contract is voidable and one that it is void; and even in the latter case, that a refusal to appoint an arbitrator is justified only if the contract is ‘patently void’, that is, where the Court is able to conclude that the contract is void ‘without receiving evidence’ ([27). The requirement that it must be void in default of evidence is important because few contracts would satisfy that test. Four examples of contracts that do satisfy the test are given: a contract with a minor, ‘where both parties are under a mistake of fact essential to the agreement’ (assuming that no evidence is required to prove this), and classes of unlawful contracts. It is not clear, however, that the mistake example is correct: an appropriately worded arbitration clause can give the Tribunal with the power to determine the restitutionary consequences of the parties having entered into an agreement that is invalid or ineffective and whether the clause has in fact done so or not must be a matter of construction. It is possible that Nijjar J is here attempting to distinguish between the invalidity of an arbitration clause arising out of contested questions of fact (which do not prevent reference) and contested questions of law (which do, if the court decides those questions in favour of the person challenging validity). Applying these principles, Nijjar J held that it was for the Tribunal to decide whether Delhi 2010 had established any factual basis for the allegation that Swiss Timing was in breach of the corruption warranty: the mere allegation that the contract was void does not disable the court from appointing an arbitrator ([17]).

The second issue in Swiss Timing was the allegation that fraud is not arbitrable. It was suggested by Delhi 2010 that the existence of parallel criminal proceedings and the supposed ‘manipulation’ of the contract by Swiss Timing were also reasons to refuse appointment but these arguments are vulnerable to the same objections. As Shantanu has explained in a previous post, the backdrop to this issue in Indian law is the much-criticised decision of the Supreme Court in Radhakrishnan v Maestro Engineers. In that case, the Court held that a dispute involving serious allegations of fraud should normally not be referred to arbitration even if there is a valid arbitration clause. The reasoning in Maestro is, with respect, not beyond question and, in Swiss Timing, Nijjar J has held that it was decided per incuriam, essentially because it did not consider the effect of Pinkcity Medway and Anand Gajapathi Raju:

21 … In my opinion, judgment in N. Radhakrishnan (supra) is per incuriam on two grounds:  Firstly, the judgment in Hindustan Petroleum Corpn. Ltd. (supra) though referred has not been distinguished but at the same time is not followed also. The judgment in P. Anand Gajapathi Raju (supra) was not even brought to the notice of this Court. Therefore, the same has neither been followed nor considered. Secondly, the provision contained in Section 16 of the Arbitration Act, 1996 were also not brought to the notice by this Court.  Therefore, in my opinion, the judgment in N. Radhakrishnan (supra) does not lay down the correct law and cannot be relied upon.

It should be noted that these observations were made in a section 11 petition, and that Maestro Engineers was decided by a Bench of two judges. Nevertheless, it is perhaps not far-fetched to suggest that the case is likely to prove influential in hastening the demise of the rule in Maestro Engineers.

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