A Share Subscription Agreement (“SSA”) was entered into between Avitel and HSBC, by way of which HSBC invested USD 60 million in Avitel to acquire 7.80% of its shareholding. The SSA contained a clause providing for arbitration at the Singapore International Arbitration Centre in case of a dispute. An accompany Shareholders’ Agreement (“SHA”) was also executed, which contained an identical arbitration clause. Thereafter, a dispute arose between the parties. HSBC alleged that the promoters of Avitel, the name had induced HSBC to invest in Avitel by making a representation that Avitel was on the verge of finalizing a lucrative contract with the British Broadcasting Corporation. HSBC alleged that there was no such contract and that around USD 51 million from the USD 60 million investment had in fact been siphoned away to other companies owned or controlled by the Jain Family. Arbitral proceedings were initiated, and a final award was passed in favor of HSBC inter alia holding the above allegations to be true (“Award”). The matter reached the Supreme Court in the context of a petition under Section 9 of the Arbitration and Conciliation Act, 1996 (“Act”), filed by HSBC seeking orders of deposit of the full claim amount of USD 60 million to protect the subject matter of the Award.
The SC was asked to consider whether HSBC had a prima facie case for enforcement of the Award in India. It was contended on behalf of Avitel that since the allegations of fraud have been made in arbitral proceedings involving serious criminal offenses, such as forgery and impersonation, such a dispute is not arbitrable then under Indian law and the award unenforceable, as a consequence. On behalf of HSBC, it was contended that non-arbitrability would be triggered only in cases where serious allegations of fraud would vitiate the arbitration agreement and not in other cases.
After taking stock of the jurisprudence on this point thus far, the Court held that “serious allegations of fraud”, leading to non-arbitrability would arise only if either of the following two tests were satisfied, and not otherwise.
Where the Court finds that the arbitration agreement itself cannot be said to exist being vitiated by fraud;
Where allegations are made against the State or its instrumentalities, relating to arbitrary, fraudulent, or mala fide conduct, giving rise to the question of public law as opposed to questions limited to the contractual relationship between the parties.
The Court found that the issues raised and answered in the Award were the subject matter of civil as opposed to criminal proceedings. The fact that a separate criminal proceeding was sought to be initiated by HSBC is of no consequence whatsoever. It was held that the impersonation, false representations, and siphoning of funds found to have been committed were all inter parties and had no “public flavor” so as to be non-arbitrable on account of allegations of fraud. The SC inter alia upheld the orders of deposit of the full claim amount of USD 60 million to be kept aside for the purposes of enforcement of the Award in India.
This article does not intend to hurt the sentiments of any individual, community, sect, or religion, etcetera. This article is based purely on the author’s personal opinion and views in the exercise of the Fundamental Rights guaranteed under Article 19(1)(A) and other related laws being enforced in India for the time being.