The Delhi High Court, in a recent ruling, held that allegations of fraud that are serious and could constitute a criminal offense are non-arbitrable. The court emphasized that such fraud claims impact the validity of the entire contract, including the arbitration agreement. Consequently, these disputes should be adjudicated by civil courts rather than arbitral tribunals.
Background of the Case
The dispute arose between Bentwood Seating System (P) Ltd. (the Appellant) and the Airport Authority of India (AAI) (the Respondents) over a contract for the supply and maintenance of baggage trolleys at various airports. The Respondents alleged that the Appellant had obtained the contract using forged documents.
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Initially, an arbitral tribunal was set up to resolve the matter. The tribunal ruled in favor of the Appellant, setting aside AAI’s termination order. However, AAI challenged this decision under Section 34 of the Arbitration and Conciliation Act, alleging that the fraud committed by the Appellant had not been adequately adjudicated.
AAI also filed a criminal complaint, claiming that the Appellant had submitted forged performance certificates from foreign airports to qualify for the tender. The matter eventually reached the Delhi High Court, which ruled that such serious allegations of fraud required examination by civil courts.
Court’s Observations and Ruling
Fraud and Non-Arbitrability
The Delhi High Court relied on the Supreme Court rulings in A. Ayyasamy v. A. Paramasivam & Ors [(2016) 10 SCC 386] and Vidya Drolia v. Durga Trading Corporation [(2021) 2 SCC 1]. The court distinguished between simple fraud allegations, which can be arbitrated, and serious fraud allegations involving public interest, which require judicial scrutiny.
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The court noted:
“The allegations of fraud in this case are not mere forgery but involve the fabrication of documents issued by foreign companies and governmental authorities. Such matters require examination beyond the purview of arbitration.”
Complexity and International Witnesses
One key factor in the court’s decision was the complexity of the fraud allegations, which involved foreign authorities and international witnesses. The arbitral tribunal lacked the jurisdiction to summon such witnesses, making it impractical to resolve the dispute through arbitration.
“The Arbitral Tribunal would have to examine witnesses from governmental authorities and international bodies, which would require the assistance of the Ministry of External Affairs. Civil courts are better equipped to handle such matters.”
Impact on the Contract and Arbitration Clause
The court highlighted that fraud allegations were central to the validity of the entire contract, including the arbitration agreement itself. If the contract was obtained through fraudulent means, the arbitration clause within it would also be invalid.
“This case does not involve a mere contractual dispute but questions the very foundation of the contract. The fraud alleged is of such a nature that it undermines the agreement to arbitrate itself.”
The Delhi High Court upheld the decision that the matter was non-arbitrable and dismissed the Appellant’s appeal.
Case Title: Bentwood Seating System (P) Ltd. vs Airport Authority Of India & Anr
Case Number: ARB. A. (COMM.) 55/2023 & I.A. 25113/2023, I.A. 25114/2023, I.A. 3993/2024
Advocate for the Appellant: Mr. S.D. Singh, Mr. Kamla Prasad, Mrs. Meenu Singh, Mr. Siddharth Singh, Advocates.
Advocate for the Respondent: Mr. Digvijay Rai, Mrs. Chetna Rai, Mr. Archit Mishra & Mr. Raghib Ali Khan, Advocates with Mr. Gagan Kochar, Sr. Manager (Law), AAI.
Date of Judgment: 11.03.2025
