In Kapil Chopra v Satish Chopra,6 the Delhi High Court refused to stay proceedings in favour of arbitration, despite the existence of a valid arbitration clause, where the subject matter of the dispute involved serious allegations of fraud.

Facts of the Case

The three petitioners (the “Petitioners”) and two respondents (the “Respondents”) were family members and shareholders of a partnership firm (the “Firm”), which was created by way of an execution of a partnership deed (the “Deed”). The Deed provided that any dispute among the partners relating to the partnership was to be referred to a sole arbitrator.

The Petitioners alleged that the Respondents were not in compliance with the Deed, and engaged in fraud, cheating, forgery and manipulation in an attempt to take over the control and management of the Firm. The Petitioners also alleged that the Respondents fraudulently transferred to themselves shares held by the Firm in another company.

The Petitioners sought to resolve these various disputes by referring the matter to arbitration and made an application before the Delhi High Court for appointment of an arbitrator.

A threshold question the court had to answer before appointing an arbitrator was whether the disputes between the parties with regard to alleged fraudulent conduct of the Respondents was one thatshould be referred to arbitration or be determined in court.

Decision of the Court

The Delhi High Court dismissed the Petitioners' arguments and refused to refer the matter to arbitration. The court relied on a series of court decisions (including the oft-quoted decision of the Supreme Court in N Radhakrishnan v Maestro Engineering7) and held that matters relating to allegations of fraud of a serious nature can only be settled in court through a detailed review of evidence from both parties, particularly when the party who is charged with fraud desires that the matter be tried in open court.

The Court was careful to note that this would apply only to instances involving serious malpractice, and that the mere existence of allegations of either moral dishonesty or moral misconduct would not be sufficient for the Court to exercise jurisdiction over a claim subject to an arbitration agreement.

Analysis

The judgment reaffirms – what has now become a well-established position – that disputes involving serious allegations of fraud are not arbitrable. While the case itself only involved domestic Indian parties, the conclusions in the case apply equally to international commercial arbitration as it deals with the subject matter of the arbitration be it in a domestic or international arbitration.

Further, parties seeking to enforce foreign awards in India may face difficulties if the subject matter of the award involves serious fraud allegations which the Indian courts deem not to be arbitrable.