Friday 25 November 2016

Dealing with Arbitrability of Fraud in India - The Supreme Court's Fra(e)udian Slip?

On 4th October, 2016, a Division Bench of the Indian Supreme Court, in A. Ayyaswamy v. A. Paramasivam (“Ayyaswamy”) [2016], sought to clear the muddied waters surrounding the arbitrability of issues relating to fraud, albeit offering little clarity in the end. The uncertainties regarding arbitrability of fraud claims had previously reached a legal impasse following the contradictory Supreme Court rulings in N. Radhakrishnan v. Maestro Engineers (“Radhakrishnan”) [2010], and the Single Judge decision in Swiss Timing v. Organizing Committee, Commonwealth Games 2010 (“Swiss Timing”) [2014], and there was onus on the Bench in Ayyaswamy to authoritatively rule on the subject.

The SC Division Bench in Radhakrishnan had previously held, inter alia, that matters of fraud involving complicated questions of law and fact were better suited to be decided by a civil court. However, the Supreme Court in Swiss Timing, in a matter under Section 11 of the Arbitration and Conciliation Act, 1996 (“the Act”) (relating to appointment of arbitrators), disregarded the ratio of the Radhakrishnan case by holding that allegations of fraud may be considered by the arbitral tribunal, in accordance with the powers vested on it under Section 16 of the Act. 

The single Judge in Swiss Timing also held that the Radhakrishnan ruling had not considered all the existing case laws at the time, and was therefore, per incuriam. The direct conflict in the ratios of the Radhakrishnan case and the Swiss Timings case had led to confusion amongst the lower courts, with many High Courts passing decisions that followed either of the two contradictory cases without offering reason. 

Facts-in-brief and Contentions 

In Ayyaswamy, the allegations of fraud pertained to handling of accounts of a hotel by the Appellant. The Respondents, who had entered into a partnership deed for running the hotel with the Appellant, had filed for an injunction before a civil court preventing the latter from managing the affairs of the enterprise. 

The Appellant contended that as a valid arbitration agreement existed between the parties, and as per Section 8 of the Act, the matter must be referred to an arbitral tribunal by the civil court. The Appellant also urged the civil court to follow the ratio laid down in the Swiss Timing case and thus hold that the matter was arbitrable. The Respondents argued that the Radhakrishnan case clearly mandated that matters of fraud were not arbitrable, and that the civil court was the appropriate forum to adjudicate the matter. 

Lower Court decisions and Appeal to Supreme Court 

The Civil Court decided to follow the ratio of Radhakrishnan and dismissed the Appellant’s plea for referral of the matter to an arbitral tribunal. The Appellants preferred an appeal before the Madras High Court, which subsequently dismissed the appeal. In its dismissal, the Madras HC reasoned that as the decision in Swiss Timings was rendered by a single Judge of the Supreme Court while the decision in Radhakrishnan was given by a Division Bench of the Supreme Court, it was bound to follow the judicial precedent set in Radhakirshnan. The Appellant then chose to approach the Supreme Court of India for relief. 

Decision  

The Supreme Court discussed at length the underlying objectives of the Act, observing that the doctrine of separability and kompetenz-kompetenz (embodied in Section 16 of the Act) helped the arbitral tribunal retain powers to adjudicate upon matters without court intervention. The SC attempted to strike a balance in the considerations of arbitrability of fraud. It held that while matters that involved allegations of “serious fraud” would not be arbitrable, matters that had “mere allegations” of fraud were arbitrable. 

Referring to Radhakrishnan, the SC drew contradistinctions between simple allegations and allegations which “demand extensive evidence” and were “complex in nature” - with the latter brought under the ambit of civil courts and non-arbitrable. According to the Court, Swiss Timing did not have precedential value as opposed to Radhakrishnan as they were on varying subject matters. 

In the present case, the matter was referred to arbitration as the fraud claims were deemed to be “were not so serious which cannot be taken care of by the arbitrator”. 

Comments and Analysis 

The Supreme Court has previously, in Sukanya Holdings v. Jayesh Pandya [2003], stated that where both arbitrable and non-arbitrable claims were raised, bifurcation of the subject matter would not be possible. It would therefore seem a matter of concern for arbitration in India if claims relating to fraud are raised in order to vitiate arbitral proceedings, as on account of a claim of fraud being raised, all the other substantive issues may also be relegated for adjudication to the civil court. 

The 246th Indian Law Commission Report that proposed amendments to the Arbitration & Conciliation Act, 1996 also addressed the issue of arbitrability of fraud. The Report of the Commission notes that it is ‘important to set this entire controversy to rest and make issues of fraud expressly arbitrable’ and proposed in the amendments to Section 16 to confer powers on the arbitral tribunal to deal with serious questions of law, including ‘complicated questions of fact or allegations of fraud, corruption, etc.’ It observed that such an amendment was necessary to counter the denudation of the powers of the arbitral tribunal by the Supreme Court. However, the changes proposed by the Law Commission to Section 16 were not effected in the 2015 amendments to the Arbitration Act. 

Instead, the amended Section 8 sought to consolidate the kompetenz-kompetenz principle by stating that the civil court will refer the parties to arbitration ‘unless it finds that prima facie no valid arbitration agreement exists’. The attitude of courts to resort to subject-matter analysis to determine arbitrability is not contemplated, statutorily. 

A cause for worry remains the preemptive analysis of merits by civil courts. The Supreme Court, in Ayyasamy, reasons that on account of the wording employed in Section 34(2)(b) of the Act (power on civil courts to set aside awards of arbitral tribunals), it is necessary to have laws that state what matters are non-arbitrable as the civil court has powers to set aside an award on the  ground that the 'subject matter of the dispute is not capable of settlement by arbitration under the law for the time being in force’. As the Indian Arbitration and Conciliation Act, 1996, omits to define the contours of arbitrability, this mantle of responsibility has fallen to the decisions of various courts. Civil courts have taken this to mean that they are robed with powers to delve into merits on a case-by-case basis to establish arbitrability of the claims. 

The problem is further aggravated by the decision of the Supreme Court in Ayyaswamy because it is, in effect, legitimizing the preemptive examination of cases involving allegations of fraud to determine the arbitrability by the lower courts before they refer the matter for arbitration. This would, in addition to disregarding the statutory time frame established by the 2015 Amendments, undoubtedly result in the erosion of the universally recognized principle of kompetenz-kompetenz that governs the scope of an arbitral tribunal’s powers. This also bring to fore certain problems that may arise: for example, if the court deems a certain fraud claim within the jurisdiction of the tribunal, the tribunal would in effect consider itself to be bound by such a finding. 
Thus, the judicial trend to delve into matters of merits does not augur well, especially in light of the courts choosing to flout statutory safeguards attempting to prevent judicial interventionism.

Few comments in India have welcomed the Ayyaswamy judgment, stating that the consideration of material evidence and analysis of allegations of fraud for complexity and seriousness by the civil court will yield better results. However, such a view adopts one of two premises - first, that the tribunal may elect (wrongly) to adjudicate on matters concerning public policy leading to setting aside of the award by a civil court at a later stage, or, second, that the arbitral tribunal is incapable of adjudicating the matter by itself.

We maintain that both of those premises are problematic as they reinforce the protectionist and interventionist attitude that civil courts have been attempting to shed over the past two decades. The Act is clear that the onus to decide on competency to rule on a subject matter rests on the arbitral tribunal - and this must be treated as sacrosanct to avoid decisions along the lines of Ayyaswamy. Presently, the silver lining to the Ayyaswamy judgment is that it will bring consistency in practice - the courts and lower fora have been supplied a binding decision, but whether this makes up for the usurpation of the tribunal’s powers is another matter entirely.

This post was originally published on the Kluwer Arbitration Blog by Pranav B R and Ganesh Gopalakrishnan, available at: http://kluwerarbitrationblog.com/2016/11/17/dealing-with-arbitrability-of-fraud-in-india-the-supreme-courts-fraeudian-slip/ 
Read more...

Sunday 25 September 2016

Review of The Rights of Persons with Disabilities Bill, 2014


The Right to Persons with Disabilities Bill was tabled in the Rajya Sabha in 2014 for the first time. The bill is sought to be introduced in the Parliament in the monsoon session of 2016 with certain amendments to the 2014 bill. The Bill of 2014 repeals the Persons with Disabilities (Equal Opportunities, Protection of Rights and Full Participation) Act, 1995 and also overrides the Mental Health Act, 1987. This bill has been introduced in order to effectively implement the principles enshrined in the United Nations Convention on the Rights of Persons with Disabilities, 2006 which was ratified by India.

To begin with, it has been opined that the Bill is a newer version of the Persons with Disabilities (Equal Opportunities, Protection of Rights and Full Participation) Act, 1995. Although, this Bill has been brought about for the greater good of persons who constitute about 2% of the population of India, it fails to address the issue appropriately in various matters. The Bill broadly covers issues ranging from issuance of disability certificate to such persons, and granting rights and entitlements to such persons depending on the percentage of disability.
First and foremost, the usage of the term “persons with disabilities” is far from being politically and socially correct as the usage of this term gives a negative connotation implying that characteristics which differ from the majority of the population are considered abnormal and unwelcome. Therefore, in order to accept the differing characteristics, the term persons with disabilities should be replaced with the term “persons with special abilities” or “physically or mentally challenged persons”.
Secondly, the Bill provides for the appointment of guardians to persons who are mentally challenged. The Bill entrusts such guardians with absolute and exclusive power to take decisions relating to the affairs of the mentally challenged person without consulting them. This provision runs antithesis to the objective of the United Nations Convention on the Rights of Persons with Disabilities, 2006 which strives to promote, protect and ensure the full and equal enjoyment of all human rights and fundamental freedoms by all persons with disabilities, and to promote respect for their inherent dignity. The assignment of such exclusive and absolute powers in the hands of the guardians breaches the right to life with dignity of such persons.
Further, the Bill enlists a few conditions by which persons with special abilities are eligible to derive the benefits of the legislation. In this respect, it is essential that such persons have benchmark disability up to 40% in order to avail the benefits of the Bill. These benefits are only available in certain specified institutions which are aided or funded by the government. This significantly reduces the number of institutions in which such persons can avail the benefit and may also lead to a compromise in the quality of benefits obtained. For instance, persons with benchmark disability can avail primary education free of any cost in government aided schools. The quality of education which may be desired for such student may be compromised as the obligation to provide compulsory free education has only been given to government aided institutions.
Similarly, the provision of reservation of 5% of jobs in certain specific institutions limits the opportunities of the persons with special abilities in availing better career options. This reservation has also been limited to government aided or funded institutions by which private employers have no obligation to contribute towards the development of such persons. However, the Bill provides that where a private establishment makes provisions for employment of such persons, the appropriate government would incentivise the private employer according to its economic capacity and development. In this regard, the incentives that would be given to such establishments have not been specifically spelled out which may hamper private establishments from taking such steps. Therefore, in order to encourage private employers the legislation needs to particularly specify the incentives which the private establishments may avail.
Additionally, the provisions regarding the infrastructural development in the general environment relating to Braille, ramps, specific parking lots, among other facilities are dependent on the economic capacity and development of the appropriate government. This provision was also present in the Persons with Disabilities (Equal Opportunities, Protection of Rights and Full Participation) Act, 1995 which has been reproduced in the current Bill. The reliance placed on the economic capacity and development of the appropriate government removes the obligatory nature of the law. Therefore, despite the presence of this law from the past three decades, such facilities have been absent from the general environment. In this respect, the legislators may consider providing a ceiling on the budget that may be spent by every government on the development in order to give effect to this provision. Moreover, in order to implement this effectively, the legislators should also introduce penalties where the local government is not taking active step to improve the lives of persons with special abilities or where their provisions are being impeded by anyone.
Additionally, the setting up of the Advisory Boards may be lauded however, its powers needs to be widened so as to not be a mere bureaucratic setup but an active functioning body. The powers of the Board may be widened to the extent of overlooking the working of the appropriate governments with respect to their obligations towards maintaining the welfare of persons with special abilities. Further, the functions of the Central Advisory Board and the National Commission seem to be overlapping with one another thereby making the two bodies look identical.
Moreover, the bodies set up by the Bill are dominated by persons in position of power who may not be able to fully comprehend the problems faced by persons with special abilities and make suitable policies. Therefore, it is necessary that the Bill mandates representation of persons from persons with special abilities, persons managing shelter homes, persons managing schools for children with special needs, non-governmental organisations working in the area. This stakeholder participation would better serve the needs of persons with special abilities. 

The Bill also lacks in certain areas such as granting additional rights to women with disabilities due to the additional difficulties faced by them, spelling out rights of mentally and physically challenged persons in times of humanitarian crisis, penalties for lack of proper maintenance of shelter homes most of which have been mandated by the UN Convention. It is essential that in order to fully promote and protect the right to life with dignity of mentally or physically challenged persons, their diversities must be recognized and appropriate actions need to be taken to make potential contributions towards their healthy sustenance and all-round development.
Read more...

Saturday 20 August 2016

Object clause under the Companies (Amendment) Bill, 2016


Recently, the Parliament introduced the Companies (Amendment) Bill, 2016 (Bill) to usher changes in the recently amended Companies Act, 2013 (Act of 2013). The Parliament seeks to make substantial changes in the pattern of trade and commerce in the country by liberalizing the procedures and requirements for running a company. Among the reforms proposed, one proposal is to do away with the need to have an ‘object clause’ in the Memorandum of Association (MOA). This article investigates the reasons behind this proposed amendment and the pros and cons it entails

Section 4 (1) (c) of Act of 2013 lays down a requirement of drafting an object clause in the MOA which include the objectives behind the incorporation of a company and mandates every MOA to state “the objects for which the company is proposed to be incorporated and any matter considered necessary in furtherance thereof”. This was a departure from Section 13(d) of the Companies Act, 1956 (Act of 1956) which provided that every company should separately provide for ‘main’ and ‘other’ objects.[1]

The actions undertaken by any company are required to be within bounds of its object clause and any action beyond its realms is to be considered ultra vires, a principle established in the case of Ashbury Railway Carriage & Iron Company Ltd. v. Roche.[2] However, such ultra vires act is different from an illegal act.

For example, an act performed by a company may be otherwise legal and done for attainment of the purpose of carrying out a transaction but may amount to be ultra vires its MOA owing to an ill drafted object clause which does not cover within its ambit the power to carry out such activity. In such cases the burden is shifted on courts to determine whether the action concerned is incidental to or consequential upon the object clause, and thereby treating the transaction as intra vires.[3]

Ultra vires acts largely impact the third parties/outsiders dealing with the company who enter into contracts without thoroughly going through the objects and determining whether the action concerned are within the bounds of company’s objectives. Under such conditions they are neither able to sue the company for breach of contract nor seek specific performance. Such actions undertaken ultra vires the objects were considered void.[4]Thus, the only actions which the company could have undertaken are those within the ambit of objects clause and ones which could be incidental to or consequential upon such clause or the actions essential in the fulfillment of the objects so stated or the actions otherwise authorized to be done by the Companies Act, in the course of its business.

An argument which warranted avoidance of such ultra vires agreements was the principle of constructive notice stating that since outsiders/third parties have access to the MOA which contains the object clause, they would be deemed to have knowledge about extent of company’s ability to enter into transactions.

The detrimental impacts of dealings, on third parties, which were otherwise bona fide but ultra vires the object clause, were identified and Section 31(1) was introduced in the (English) Companies Act, 2006. The provision states that unless the articles of company specifically restrict the objects of a company, its objects are unrestricted.

On similar lines, the Bill pending before the lower house of the Parliament seeks to do away with the requirement of having a specific object clause. It extends an option to the company to either merely mention that it will engage in lawful activities or choose to enumerate specific objects in detail. However if a company chooses to lay down specific objects it won’t be permitted to engage in activities ultra vires its ambit.

The amendment seeks to grant maximum autonomy to persons controlling the affairs of company to enter into any transaction unhindered and un-impacted by any ill-drafted clauses in the Memorandum. But the transactions entered into are subject to laws in force and hence the transactions can still be challenged and be vitiated by laws applicable. Thus the defense that transactions done beyond object clause being void and not binding upon the company is relinquished the moment a company decides not to have an object clause. It is clearly beneficial for third parties since any contract, if breached, could be brought before the court for redressal, without having the burden to defend the vires of transaction.

However, it is not clear what the Parliament tries to achieve through the proviso clause. It merely allows the company to proceed with the traditional approach of laying down an exhaustive object clause. It does not in any way unburden the court of the need to decide on basis of factual analysis whether certain action would be incidental or consequential to what has been expressly mentioned in the clause.

Due to the mandate of having a detailed object clause, the practice had slowly grown to have the clause as wide as possible and which was in direct correlation to obviating the necessity to seek consent of general meeting by special resolution whenever any new venture was contemplated. The proposed clause in the Bill would give unlimited power in the hands of persons controlling the company to enter into any possible transaction as deemed correct without having the need to amend the clause or to seek consent from time to time. But, this has its flip side too. While making all actions intra vires the Memorandum through such clause, the shareholders need to keep adequate check on the exercise of such power by adding appropriate internal management control clauses and distributing powers proportionately. The main stakeholders which could be affected are minority shareholders since with every action not requiring sanction might lead to situations in which the actions otherwise intra vires the MOA would end up causing serious prejudice to their rights. The main reason which Daphtary Sastri Committee gave for having a detailed object clause was to give all the stakeholders (shareholders and other interested parties) a clear idea of what the objects were. With such liberal position, there is higher possibility of their rights being impaired without the presence of adequate check and balance. Thus in such case, a more comprehensive delineation of directors’ powers and duties would become necessary.  While the Act of 2013 only liberalized the need to have a bifurcated object clause, this is a step ahead. The proposed amendment, as even the Company Law Committee Report noted, is in line with the need to facilitate easier incorporation and to provide greater flexibility for carrying out business.


[1] Section 13(d) was amended through the Companies (Amendment) Act, 1965. The changes were in line with the suggestions of Daphtary Sastri Committee.
[2] Ashbury Railway Carriage Co. v. Riche, (1875) LR 7 HL 653
[3] Gujarat Mining & Manufacturing Co. v. Motilal HS Weaving Co., AIR 1930 Bom 84
[4] Supra note 2
Read more...