The case of Avitel Post Studioz Limited v. HSBC PI Holdings Limited resulted in a clarification of the Indian judiciary’s stance on whether those disputes which are centered around the committing of fraud can be directed to arbitral proceedings for resolution or whether they can only be presented before a court of law, following the regular trial procedure.
Background of the Case
A Share Subscription Agreement was entered into by the parties to the case in early 2011, wherein the Appellant party was set to acquire 7.8% of the shares of the Respondent company. This agreement entailed a clause to turn to arbitration in any dispute that may occur in the future.
The passage of time led to disclosing some facts, and allegations were placed upon Avitel Ltd. for using fraudulent means and misrepresentation. The respondents claimed that using a future contract signing with the British Broadcasting Company (BBC) was made by the Appellant to show their standing as a company and lure HSBC into investing in Avitel in return.
As per the clauses of the agreement, an arbitration proceeding was invoked, and the arbitral tribunal in charge of the dispute found enough evidence backing up the allegations which were placed by the respondent company, in totality, ruling in favor, concluding that the investment was made as a result of fraudulent means and misrepresentation of facts because there was no such future contract to be signed by BBC and Avitel at all.
As the Appellant party refused to comply with the order of the arbitral award, HSBC approached the Supreme Court of India, filing a petition under s.9 of the Arbitration and Conciliation Act, 1996.
Further Developments and Conclusion of the Court
Avitel Ltd. claimed that since the subject matter of the dispute, i.e., allegations of fraud and misrepresentation, formed part of serious criminal offenses and did not fall under the umbrella of arbitrable disputes, the enforceability of the award of the arbitration was not legal.
After hearing the contentions of the respondent company HSBC, the Apex Court decided to establish a legal test for the question of non-arbitrability in fraud-related cases, the parameters of which revolved around the following two points:
- If the arbitration agreement itself cannot be said to exist being vitiated by fraud, the case would become non-arbitrable
- If the dispute includes any allegations made against the State and results in giving rise to the question of public law as opposed to questions limited to the contractual relationship between the parties, the dispute would be non-arbitrable.
This test laid down by the Supreme Court of India helped in defining which fraud-related disputes would be eligible for resolution through arbitration, ruling on the conflict at hand, the Court found the subject matter to not fall in the ambit of non-arbitrable cases and conclusion, the Apex Court upheld the award passed by the Singapore International Arbitration Centre. It gave its green light for enforcement in India, which required payment of damages of USD 60 Million by Avitel Ltd. to HSBC.
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