Avitel Post Studioz Limited & Ors. Vs HSBC PI Holdings (Mauritius) Limited (Supreme Court of India)
Summary: The Supreme Court considered the scope of the “fraud exception” to arbitrability while deciding cross-appeals arising from interim protection granted under Section 9 of the Arbitration and Conciliation Act, 1996 in the dispute between Avitel Post Studioz Limited and its promoters and HSBC PI Holdings (Mauritius) Limited. HSBC had invested USD 60 million for a 7.8% equity stake in Avitel India under a Share Subscription Agreement containing a Singapore-seated SIAC arbitration clause. HSBC alleged that it was induced to invest on representations that the Avitel Group was close to securing a major BBC contract for conversion of its film library from 2D to 3D. Investigations subsequently indicated that the purported BBC contract did not exist and that a substantial part of HSBC’s investment had allegedly been diverted to entities connected with the Jain family. SIAC proceedings followed, and the arbitral tribunal eventually awarded HSBC USD 60 million with interest and costs for fraudulent misrepresentation, deceit and breach of warranty.
The Supreme Court examined the development of Indian law on arbitrability of fraud, including Abdul Kadir Shamsuddin Bubere, N. Radhakrishnan, Swiss Timing, A. Ayyasamy and Rashid Raza. It held that “serious allegations of fraud” render a dispute non-arbitrable only within a narrow field. Broadly, the exception applies where fraud attacks the arbitration agreement itself so fundamentally that the agreement to arbitrate cannot be said to exist, or where the allegations have implications in the public domain rather than merely concerning the internal affairs of the contracting parties. The Court held that N. Radhakrishnan no longer furnished a sound basis for a broad proposition that serious fraud by itself excludes arbitration. The statutory scheme of the 1996 Act, particularly the independence of an arbitration clause from the underlying contract, required a much narrower approach.
