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A AYYASAMY V. A. PARAMASIVAM: AN ANALYSIS IN REFERENCE TO COURT’S APPROACH TOWARDS ARBITRATORS

The case emerged from a dispute between brothers who entered into a deed of partnership to operate a hotel. The respondents filed a complaint against the appellants requesting a declaration of their right to engage in the hotel administration. In order to give effect to the arbitration provision of the partnership contract, the appellants complained about section 8 of the Arbitration Act. [1]  The respondents opposed the appeal by arguing that the case should not be referred to the arbitrator because there were significant charges of fraud. The respondents relied on Maestro Case (The Apex Court considering the issue in N. Radhakrishnan v. Maestro Engineers[2] A Division Bench decided the Maestro case under Section 8. In Maestro, the Court found that the arbitration clause in the case covered the dispute in question at the outset. However, it proceeded to rule that the case can only be settled in Court as it involved severe allegations of fraud. The Court reasoned that such allegations require adducing of detailed evidence, which cannot be dealt with appropriately by an arbitrator).

At the same time, the appellants relied on Swiss Timings Case [3]  (in Swiss Timing, the issue framed was not of arbitrability but again that of jurisdiction. The Court had to decide whether the contract between the parties was void on the grounds of fraud. The Court refused to apply Maestro and held it to be per incuriam for not relying on the cases of Hindustan Petroleum Corpn. Ltd. v. Pinkcity Midway Petroleums [4]  and P. Anand Gajapathi Raju v. P.V.G. Raju [5], where the Apex Court held that Section 8 mandates a reference to arbitration according to the terms of the agreement. In Swiss Timings, the Court also noted that the judgment in Maestro did not rely on Section 16 of the Act and thus ignored the cardinal principles of arbitration, i.e., the autonomy of the arbitration agreement and kompetenz-kompetenz. The Court adopted the policy of least interference embodied in Section 5 and Section 16[6]  to arrive at its conclusion that the Court should decline reference to arbitration only when it finds that the contract is void on a reading of the contract itself (without requiring any external evidence) to stand against it. The Trial Court and the High Court followed the Maestro case judgment and declined to appoint an arbitrator to the dispute in the Ayyasamy case. The appellants chose the High Court order to appeal. In the present case, the question was whether or not the Maestro case principle was relevant?
The Court decided at the outset that the question was one of “arbitrability,” noting that the Act “does not make any particular provision that excludes any group of conflicts that qualifies them as non-arbitrable.” Arbitrability, in its agreed context, implies that the topic of a dispute is “capable of being decided via arbitration.” Occasionally, it can be used in a broader context, including the arbitration agreement’s scope and fairness though this usage is widely criticized for causing ambiguity.
Due to its very existence, such disputes are reserved solely for national courts, as the adjudication of such disputes can have public implications. This is called objective arbitrability. Arbitrability has been defined as “one of the issues where the contractual and jurisdictional nature of international commercial arbitration collides head-on.” In determining arbitrability, a court should assume that the arbitration process is efficient and effective and that the parties’ consent is implied. The Court’s analysis of the question of arbitrability has, in our view, been stripped of any such presumption, and its inference is the product of its apprehensions of the arbitration process.
In Ayyasamy Case, the Court held that the Court had to determine the dispute’s arbitrability in an appeal under Section 8 of the Arbitration Act, 1996. It also considered the Abdul Kadir case[7]  and Maestro case judgments where the Court distinguished the dicta by arguing that they are valid where there are “significant allegations of fraud” and not where there are true allegations of fraud. Therefore, the Court found that “serious allegations of fraud” are not arbitrable because they are “pure allegations of fraud.”
As per the researcher’s findings of the distinction between a “serious allegation” and a “mere allegation,” it is a very vague one. Had severe allegations of fraud meant allegations of fraud worthy of a criminal trial (which the judgment contemplates to some extent), it would have been in line with the Booz Allen test as such fraud would have affected rights in rem (meaning rights affecting the public interest at large). However, part of the interpretation is false. Whether or not the charges are “significant” must be decided by evaluating the quantity and quality of the facts that will be adduced before the tribunal to establish it.
This interpretation allows the Court a massive ground in determining what a severe accusation of fraud amounts to exist. Use of ambiguous terms like “serious allegations” or “mere fraud” allows the courts to interfere in places where they should not. No uniformity can be achieved by distinguishing between “serious” and “mere allegations,” This will depend on the Court’s attitude toward arbitration processes directly. A pro-arbitration court may find that the arbitral tribunal can deal with a certain amount of facts and nature, as well as civil courts. A court that is not an arbitration mechanism believer may, however, decide otherwise.
The Ayyasamy judgment is simply an example of the Court’s apprehensions or judiciary’s intentions regarding arbitration. In this regard, the Law Commission proposed amendments to Section 16, which would affirm the jurisdiction of the tribunal to rule on “serious questions of law, complicated questions of fact or allegations of fraud, corruption, or any such criminal act as they like to call it.etc.” Such suggestions would imply that fraud should be arbitrable, but also contemplates negative jurisdiction-competence in which the tribunal will rule on fraud matters. The legislature did not integrate the recommendations into the Amendment Act of 2015.
As we talk about how the recommendations from the 246th Law Commission and giving due deference to the concept of competence, the best way to answer this conundrum between the Judiciary and Arbitration.
The principle of kompetenz-kompetenz and autonomy of the arbitration agreement are statutorily recognized in Section 16 of the Arbitration Act 1996. Kompetenz-Kompetenz can be seen in two dimensions- positive kompetenz, which grants the power to the arbitration to rule on its jurisdiction and the negative kompetenz, which prohibits courts from intervening with the arbitral tribunal’s power of kompetenz-kompetenz from the very outset of the arbitration process.
Negative kompetenz-kompetenz requires arbitrators to be the first judges in their jurisdiction and restrict the courts’ position in evaluating the award. Negative kompetenz-kompetenz is advantageous as it means that jurisdictional disputes are to be resolved by the arbitral tribunal itself, which in effect, will save time. This principle is expressed in Section 16, but in reality, it is rejected and ignored as often as possible. According to the judgment of the Apex Court in SBP v. Patel Engineering Ltd.,[8]  it was held that any ruling on the jurisdiction of a court, according to Section 8 or Section 11,[9]  would be binding on the arbitral tribunal. In effect, if the Court were to decide that the tribunal could settle the question of fraud, the tribunal would have to accept the ruling and cannot arrive at the opposite conclusion.
The Act also provides for the abandoning of an arbitral award because the subject-matter is not arbitrable. The Arbitration and Conciliation Act, 1996, ss. 34(2) and 48(2);
When arbitrability issues are determined by the courts at the referral stage, it will only add to the possibility that a conniving party would have to postpone the arbitration process because the party would have the opportunity to raise arbitrability concerns at the referral stage as well as the post-award stage. As clearly as it appears, in such a situation where arbitrability issues will not be decided in the referral stage but only after the award has been passed, the rule of negative kompetenz-kompetenz may help.
The researcher does not recommend that negative kompetenz-kompetenz be adopted in its entirety, which would allow the arbitral tribunal to look into questions of existence and validity of the arbitration agreement. The Swiss Timing case contemplated negative kompetenz-kompetenz by holding that the Court can only look at the contract with a  prima facie view to satisfy itself of its genuineness and validity. Brekoulakis opposes complete acceptance of negative kompetenz-kompetenz on theoretical, practical, and policy grounds.[10] As per his belief, a concurrent jurisdiction of the courts and tribunals with regards to the validity of the arbitration agreement strikes the right balance. However, as per the researcher, that can only be possible if the Patel Engineering case is overruled since a concurrent jurisdiction will not be possible if the Court finds no valid arbitration agreement and hence no jurisdictional effect.
Although arbitration jurists and the Law Commission both from time to time, have made arguments in favor of kompetenz, the legislature has not expressly adopted it, and the judiciary appears to be indifferent and confused. Fraud allegations are common in commercial disputes, and holding such allegations non-arbitrable would foreclose a highly effective and desirable dispute resolution mode for the parties. This is a sad state of affairs that the issue of fraud claims, be it severe or mere are arbitrable or no still lives on our system and that outdated conceptions of arbitrability are being determined.
India has an estimated over 30 million cases in the various courts in India. On average, it takes over 20 years for a property or any civil dispute to get settled in our country. Furthermore, just not that India has a low ranking in terms of the consistency of judicial processes, court structure and hearings, case management, court automation, and alternative dispute resolution around the globe. Known and criticized for being an anti-arbitration state, developing at a languid pace. It is high time; we discover the acceptance towards not just arbitration but other alternate dispute resolution mechanisms such as conciliation, mediation, and negotiations.
At the end, the researcher is of an idea to deal with this entire conundrum lies in the strict acceptance of the negative dimension of kompetenz-kompetenz. 
References
[1] The Arbitration and Conciliation Act, 1996 (Act 26 of 1996), s. 8.
[2] (2010)1 SCC 72
[3] (2014) 6 SCC 677
[4] (2003) 6 SCC 503
[5] (2000) 4 SCC 539
[6] Supra note 1, ss. 5, 16.
[7] (1962) 3 SCC 702
[8] AIR 2006 Supreme Court 450(1)
[9] The Arbitration and Conciliation Act, 1996, s. 11.
[10] Brekoulakis, Stavros, The Negative Effect of Compétence-Compétence: The Verdict Has to Be Negative. Austrian Arbitration Yearbook, pp. 238-258, 2009; Queen Mary School of Law Legal Studies Research Paper No. 22/2009. Available here

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