Pending Criminal Proceedings Even In Life Imprisonment Cases Don't Bar Arbitration: Bombay High Court

The Bombay High Court on Tuesday held that criminal proceedings or allegations of serious offences, even those punishable with life imprisonment, do not by themselves make a dispute unsuitable for arbitration.

Before declining to hear such a dispute, an arbitral tribunal must explain how the allegations amount to "serious fraud" with wider public implication

Justice Gauri Godse allowed Capalpha Trade Pvt Ltd's appeal and set aside an arbitral tribunal's August 3, 2023 order. The tribunal had accepted Dentsu Communications India Pvt. Ltd.'s objection that allegations of fraud, collusion, conspiracy, forgery and fabrication involving third parties made the dispute non-arbitrable.

"Therefore, mere pendency of criminal proceedings or the alleged offences punishable with severe imprisonment, including life imprisonment, cannot itself be a ground for allowing the application under Section 16. It is necessary to record reasons as to how the allegations in the criminal complaint would amount to an allegation of serious fraud in the arbitral reference resulting in public implications," the court held.

The dispute arose from purchase orders issued under a Letter of Intent dated March 5, 2021. Capalpha financed the procurement of food grains by Suumaya Agro for Dentsu's government mid-day meal projects. Between February and September 2021, Dentsu paid around ₹175 crore under the arrangement. Disputes later arose over unpaid dues.

Capalpha invoked arbitration to recover the money. Dentsu argued that the transactions were tainted by fraud involving its former employees and third parties. It asked the tribunal to decline jurisdiction, contending that the dispute should instead be decided by a civil court.

The tribunal accepted that objection. It held that allegations of fraud involving third parties were better examined in civil proceedings.

The High Court disagreed. It held that the tribunal had failed to apply the tests laid down by the Supreme Court for determining when allegations of fraud make a dispute non-arbitrable. A contractual dispute, the court observed, does not become unsuitable for arbitration merely because criminal proceedings arising from the same transactions are pending.

The court further observed that the dispute involved no allegations against the State or its instrumentalities. Nor did it raise any public law issue requiring the matter to be decided outside arbitration.

Holding that convenience cannot determine whether a dispute is arbitrable, the court observed:

"To fit within the categories of non-arbitrable, as laid down by the Apex Court, neither are there allegations made against the State or its instrumentalities of arbitrary, fraudulent, or mala fide conduct, thus necessitating the hearing of the case by a writ court, nor do allegations of serious fraud show any clarity to ensure certainty about the availability of the remedy. The ground of mere convenience before the civil court cannot be accepted as valid to hold the reference non-arbitrable."

Capalpha had also argued that Dentsu raised its objection to the tribunal's jurisdiction only after filing its defence. The High Court rejected that contention. It held that an arbitral tribunal may consider such an objection at a later stage if the delay is justified. In this case, however, the tribunal had not recorded sustainable reasons for doing so.

The court therefore set aside the tribunal's order, rejected Dentsu's jurisdictional objection and directed that the arbitration resume from the stage at which the objection had been filed.

For Petitioner: Advocates Nirav Shah along with. Aarti R., Amit Shroff, Vijay Mulchandani i/b. Harish Shroff & Co

For Respondent: Senior Advocate Sharan Jagtiani a/w. Advocates Anindita R. Chowdhary, Sushrut Garg, Shraddha Achliya