SUPREME COURT OF INDIA
Avitel Post Studioz Limited & Ors. Vs. HSBC PI Holdings (Mauritius) Ltd.
Civil Appeal No. 5145 of 2016 | Date: 19.08.2020
The Appellant and the Respondent entered into a Share Subscription Agreement (“Agreement”), wherein the Parties decided that the Respondent would invest in Appellant’s equity capital. The Appellant made representation to the Respondent in the said Agreement that their investment would be used to buy equipments to fulfil a contract with British Broadcasting Corporation (“BBC”).
The said Agreement provided that the Parties must resort to arbitration through the Singapore International Arbitration Centre (“SIAC”) in the event of any dispute arising out of the terms of the Agreement. In addition, they may file a petition pursuant to Section 9 of the Arbitration and Conciliation Act 1996 (“the Act”) for any interim relief while awaiting such arbitral proceedings.
Around April 2012, the Respondent claimed that there existed no BBC deal with the Appellant and that in order to gain investment, the Appellant had fraudulently conveyed evidence to the Respondent.
Thus, the Respondent began arbitral proceedings at SIAC, where two provisional awards against the Appellant were passed by the arbitrator. The said Interim Awards allowed the Respondent to have the Appellant’s accounts frozen in India, UAE and Dubai and also to conduct investigations into the Appellant’s financial matters.
The Respondent subsequently filed a petition before the High Court of Bombay under Section 9 of the Act, whereby the Single Bench of the Court passed an order directing the Appellant to deposit and retain a balance of in their bank, as the Respondent had a good chance of success in arbitral proceedings at SIAC. Aggrieved by the said Order, the Appellant filed an appeal before the Division Bench of the Court.
The Division bench also upheld the decision of the Single bench, and further reduced the amount of deposit to half. It was also observed by the bench that the dispute pertaining to the act of fraud and misrepresentation by the Appellant is civil in nature.
Later, SIAC Arbitrator found the Appellant guilty of inducing the Respondent to invest in their business by making a misrepresentation that their investment would be used to buy equipment and material to fulfil a contract with BBC. The Arbitrator further ordered the Appellant to pay the amount of investment loss caused to the Respondent.
The Appellant subsequently challenged the award under Section 34 of Act before the High Court of Bombay, which was dismissed on the ground that it was untenable. In the meantime, while the enforcement proceedings were going on, the Appellant filled an appeal before the Supreme Court against the order of the Single Bench of the High Court, whereby the Court barred the Appellant from making withdrawals and ordered that his accounts be frozen until further orders.
Whereas the Respondent filled a cross appeal before the Supreme Court against the order of the Division Bench of the High Court, whereby the Court reduced the amount of the deposit to half.
ISSUE BEFORE THE SUPREME COURT OF INDIA
The following issue were considered by the Supreme Court of India:
1. What is the substantive law in India qua arbitrability when allegation of fraud is raised by one of the parties to Arbitration Agreement?
2. What would be the quantum of damages that can be claimed in cases where contract is voidable due to fraud and misrepresentation?
The Supreme Court with respect to the first issue observed that there is a distinction between a contract obtained by fraud or performance of contract being initiated by fraud. The second type of fraud that vitiates the value of the contract would fall beyond Section 17 of the Indian Contract Act, 1872 (“ICA”) and would be regulated by tort of deception, resulting in a lawsuit for damages rather than a contract recession itself. However, the Court also noted that all forms of deception are subsumed under the term “deception” when it comes to the arbitrability of an arbitration clause agreement.
For inferring the above observation, the Court relied on various judicial precedents, for instance-
In the case of Radhakrishnan v. Maestro Engineers, (2010) 1 SCC 72, the Supreme Court held that, “Since the case related to allegations of fraud and serious malpractices on the part of the respondents, such a situation could only be settled in court through furtherance of detailed evidence by either parties and such a situation could not be properly gone into by the arbitrator.”
In the case of Afcons Infrastructure Ltd. v. Cherian Varkey Constructions Co. (P) ltd., (2010) 8 SCC 24, it was held that the cases involving serious and specific allegation of fraud, fabrication of documents, forgery, impersonation, coercion, etc. and the cases involving prosecution for criminal offences would fall in the category of cases not suitable for ADR process.
Further, in the case of Booz Allen & Hamilton Inc. v. SBI Home Finance Ltd., (2011) 5 SCC 532, the Supreme Court identified certain disputes and held that proceedings in rem are not arbitrable.
The Court opined that the decision of Afcons and of Booz Allen are now subject to the rider’s reading that the same collection of facts can lead to civil and criminal proceedings, and where it is clear that a civil dispute includes questions of fraud, misrepresentation, etc., which may be the subject of such proceedings under Section 17 of the ICA, then mere possibility of criminal proceedings being initiated against the same subject does not render an arbitrable dispute non-arbitrable.
The Court further noted that in the recent judgment of Rashid Raza v. Sadaf Akhtar, (2019) 8 SCC 710, it was held that there was a distinction between serious allegations of forgery/fabrication in support of the plea of fraud as opposed to “simple allegations”. It was held in that the working tests were –
1. whether the plea permeate the entire contract and above all, the agreement of arbitration, rendering it void;
2. whether the allegations of fraud touch upon the internal affairs of the parties inter se having no implication in the public domain.
The Supreme Court with respect to the second issue observed that in such cases there was only one measure of injury, namely the harm actually sustained by the affected parties who had to be returned to the same position as if they had never entered into the transaction. The price charged less value at the sale date in an action for deception is simply a way of calculating such a loss. Referring to the finding in the Final Award, the Court noted that it was clear that most of the representations made to the Respondent by the Appellant were incorrect.
Conclusively, the Supreme Court clarified that the “serious allegation of fraud” threshold is only met if either of the two tests is satisfied:
1. where it can be said that the arbitration clause or agreement itself cannot exist, due to inability of the party to enter into the arbitration agreement – either due to fraud or other specified reasons in the ICA; or
2. where allegations of fraud are made against the State or its instrumentalities, thus necessitating the hearing of the case by a writ Court. In such cases the questions raised are not predominantly questions arising from the contract itself or breach thereof, but rather questions arising in the domain of public law and policy.
The Supreme Court held that the act of inducing the Respondent to invest in the Appellant on the false representation that the said investment would be used for purchasing material to service the BBC Contract amounted to fraud under Section 17 of the ICA. As a result, the Agreement became voidable at the instance of the Respondent under Section 19 of the ICA.
The Court held that usually the arbitration provision of the said agreement is also vitiated when an agreement becomes voidable due to fraud or misrepresentation under Section 19 of the ICA. Consequently, the parties are prohibited from triggering the arbitration clause.
But in this case, as the Agreement had become voidable at the Respondent’s instance, it did not make the arbitration clause null, as the Parties agreed that the arbitration clause would be read as a separate clause at the time of entering into the Agreement. Thus, the Court held that the dispute was arbitrable and that the Respondent is not prohibited from triggering arbitration clause in the Agreement.
Furthermore, based on the facts and circumstances of the case and the extent of loss suffered by the Respondent as a result of the Appellant’s fraudulent actions, the Division Bench of the High Court of Bombay was not justified in reducing damages to half.
The Court therefore held the Appellant responsible for fraudulently inducing the Respondent to invest in their business and ordered them to pay the requisite amount to help restore the Respondent to the same position as if the agreement had never been signed.
This decision reflects the radical change to maximize the efficiency of arbitration provided in the Act. It was held that as long as there is an arbitration arrangement, mere charges of misconduct or the initiation of criminal proceedings does not make the conflicts non-arbitrable.
It is only in those unusual cases that arbitration clause will also cease to exist when the contract containing arbitration clause is found to be invalid. Inter-se claims of “fraud” by one of the parties rendering the contract null and void pursuant to Section 17 of the ICA and following the principle of the separability of the arbitration clause / agreement from the underlying contract, parties cannot be entitled to escape arbitration solely on the grounds of such complaints of fraud.
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