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Should an Allegations of fraud be resolved by arbitration?
INTRODUCTION
In a petition arising out of the Bombay High Court's judgment under section 9 of the Arbitration and Conciliation Act, 1996 ("1996 Act"), a Division Bench of the Supreme Court ruled Avital Post Studioz Ltd. v. HSBC PI Holdings (Mauritius) Ltd., where the critical issue was arbitrability of fraud. Nariman J. studied existing legislation, synthesised and standardised it, and concluded that allegations of fraud of no "public flavor" are arbitrable under Indian law.
FACTS
In favour of Singapore arbitration proceedings, HSBC PI Holdings ("HSBC"), an investment holding firm for HSBC's Asia Division, requested interim injunctive relief and relevant orders in the Bombay High Court to require Avital and related respondents to deposit monies and protection to the amount of HSBC's initial investment of US$60 million in a collapsed scheme. HSBC had invested US$60 million in Avital based on representations and undertakings by Avital, among other things, that the funds will be used to buy specialist film equipment, allowing Avitel's subsidiary to service a deal with the BBC worth between US$1 billion and US$1.3 billion. Between the parties, a Share Subscription Agreement (SSA) was concluded. The SSA stipulated, among other things, that the arrangement must be interpreted in compliance with Indian law and that any arbitration must take place in Singapore under the Singapore International Arbitration Centre ("SIAC") Rules.
ISSUE
- Whether HSBC had a prima facie case for enforcement of the Award in India?
- Whether or not allegations of fraud should be resolved by arbitration, or whether a court must decide them?
HELD
After a complete analysis of the law, the Supreme Court determined that only "strong accusations of fraud" would exempt a case from an arbitration provision.
In this respect, the Indian Supreme Court explained that the "strong accusation of fraud" threshold is only reached if one of two tests is met, and not otherwise.
First, where the arbitration provision or arrangement cannot occur owing to a party's failure to enter into the arbitration agreement – either due to fraud or other grounds stated in the Contract Act, 1872.
Second, where charges of fraud are levelled against the state or its agents, requiring the matter to be heard by a writ court, in such situations, the issues presented are more often than not matters of public law and procedure, rather than questions resulting from the contract itself or its violation.
Furthermore, the court noted that the possibility that criminal action may be brought or brought concerning the same (civil) subject matter does not preclude a plaintiff from using arbitration as a contractual or civil remedy.
The court has made a difference between a contract secured by fraud and the performance of a contract that was otherwise legitimate but was vitiated through fraud. The court ruled that the above case is not covered by sections 17 and 19 of the Contract Act, making a contract voidable at the defrauded party's discretion. As a result, if deception occurs during the execution of a contract rather than during its creation, penalties are possible. However, the innocent party is not entitled to rescind the contract. When it comes to the arbitrability of an arrangement involving an arbitration provision, however, all types of deception are grouped under the term "fraud."
According to the evidence, the court further determined that there was no wrongdoing in Avital that would invalidate the arbitration provision, which was, after all, independent and distinct from the underlying deal (s). Notably, the fraudulent statements rendered and funds diverted were between individuals and did not have a "public flavor" to qualify for the fraud exemption. The contracts were allegedly caused by bribery and thus voidable under sections 17 and 19 of the Contract Act, whilst the money siphoning led to a deception tort for which penalties may be sought.
CONCLUSION
This judgment clarifies the situation to arbitration in cases concerning fraud complaints, and it could enable civil courts to be more discerning in deciding whether fraud is being claimed solely to delay arbitration proceedings.
This Article Does Not Intend To Hurt The Sentiments Of Any Individual Community, Sect, Or Religion Etcetera. This Article Is Based Purely On The Authors Personal Views And Opinions In The Exercise Of The Fundamental Right Guaranteed Under Article 19(1)(A) And Other Related Laws Being Force In India, For The Time Being. Further, despite all efforts made to ensure the accuracy and correctness of the information published, White Code VIA Mediation and Arbitration Centre shall not be responsible for any errors caused due to human error or otherwise.
- Introduction
- Analysis of the judgment
- Conclusion
