India’s Supreme Court has progressively moved from treating fraud as non-arbitrable to recognising that simple allegations of fraud between parties can be resolved through arbitration — only serious, pervasive fraud that goes to the root of the contract or affects third parties remains outside arbitration’s scope.

Introduction

Arbitrability — whether a particular dispute can be resolved through arbitration rather than the traditional court system — has undergone significant evolution in Indian law. Traditionally, Indian courts viewed fraud as a matter of utmost seriousness, placing it largely outside the scope of arbitration. However, with the growing emphasis on arbitration as an effective mechanism for commercial dispute resolution, this position has given way to a more modern and balanced understanding.

Tests Laid Down by the Supreme Court

In A. Ayyasamy v. A. Paramasivam, the Supreme Court laid down tests for the arbitrability of fraud. When the allegation of fraud permeates the entire contract and the arbitration agreement itself, rendering it void, the matter is serious and non-arbitrable. However, simple cases of fraud touching upon the internal affairs of the parties inter se, having no implication in the public domain, can be decided by arbitration. The Court in Vidya Drolia and Others v. Durga Trading Corporation further laid down a fourfold test: disputes are non-arbitrable when they relate to actions in rem not pertaining to subordinate rights in personam; affect third party rights or require erga omnes adjudication; relate to inalienable sovereign or public interest functions; or are expressly non-arbitrable under mandatory statute.

Evolution of Contemporary Arbitration Practice

The Supreme Court in Vidya Drolia explicitly overruled N. Radhakrishnan v. Maestro Engineers (2010), which had held that serious allegations of fraud justified refusing arbitration if the accused party desired trial in open court. The Court in NN Global Mercantile v. Indo Unique Flame held that arbitrability of fraud is no longer an issue relating to the competence of the arbitrator or the need for voluminous evidence. Arbitrators are competent to deal with allegations of civil fraud. The Bombay High Court in Nilesh Shejwal v. Agrowon Agrotech Industries Pvt. Ltd. (Commercial Arbitration Petition No. 14 of 2022) similarly overruled past views that fraud disputes involving voluminous evidence were unfit for arbitration, noting that arbitral tribunals routinely navigate extensive material in various dispute types.

Conclusion

The jurisprudence surrounding the arbitrability of fraud in India has undergone important transformation. What was once viewed as an exclusion from arbitration has evolved into a more balanced approach. Arbitration today is recognised as a competent mechanism for resolving commercial disputes involving fraud, except where fraud is of such a pervasive and serious nature that it effectively voids the entire contract including the agreement to arbitrate, or where it affects the rights of third parties.

Key Takeaways

• Simple allegations of fraud between parties inter se with no third-party implications are arbitrable under Indian law following Ayyasamy and Vidya Drolia — only serious, pervasive fraud that goes to the root of the contract or the arbitration clause itself remains non-arbitrable.
• The Supreme Court in Vidya Drolia overruled N. Radhakrishnan v. Maestro Engineers (2010), rejecting the view that a party charged with fraud can unilaterally insist on court trial; the mere desire for open court proceedings is no longer a sufficient ground to refuse arbitration.
• Allegations of fraud do not become non-arbitrable merely because they involve voluminous evidence — contemporary arbitral tribunals routinely handle complex, evidence-intensive disputes in commercial sectors.
• The fourfold test in Vidya Drolia identifies non-arbitrable subject matter: actions in rem, matters with erga omnes effect or third-party rights, sovereign/public interest functions, and disputes expressly excluded by mandatory statute.
• Parties to commercial contracts should ensure that arbitration clauses are clearly drafted and that governing law, seat, and scope of disputes are expressly defined to maximise the enforceability of arbitral proceedings, even where fraud allegations may arise.