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AVITEL: A PROGRESSIVE BUT POTENTIALLY PROBLEMATIC PRECEDENT.

-Rajeswari Mukherjee

Keywords- Arbitrability of fraud, Serious allegations of fraud, Arbitration

The question of the ability of a dispute to be resolved by arbitration has been a recurring theme in Indian arbitral discourse over the past two decades. This question befalls immense scrutiny through the heavily litigated debate regarding the arbitrability of fraud. Substantive elements aside, “arbitrability” is also faced with procedural concerns, such as confusion as to the stages at which questions of arbitrability may be examined by the court.

This post shall analyse the recent judgment of a division bench of the Indian Supreme Court (“SC”) in the case of Avitel Post Studioz Ltd. & Ors. v. HSBC PI Holdings (Mauritius) Ltd. (“Avitel”) dated 19 August 2020. Avitel has been the subject of recent literature due to its successful attempt at clarifying the ambit of the phrase “serious allegations of fraud” in a narrow fashion. In doing so, if the tests laid down in Avitel are to be applied, most disputes involving fraud are amenable to arbitration. This post shall focus on two possible issues that may arise out of the SC’s judgment – firstly, its potential contradictions with the landmark case, A. Ayyasamy v. A. Paramasivam (2016) 10 SCC 386 (“Ayyasamy”), and secondly, its discussion on whether arbitrability can be raised as an objection to the reference of matter to arbitration under Section 8 of the Arbitration and Conciliation Act, 1996 (“Act”).

Will Avitel’s Holding regarding the ambit of the term “serious allegations of fraud” withstand further judicial scrutiny

The primary question of law in Avitel was whether or not the dispute at hand was arbitrable, considering, it involved various allegations of fraud on the part of Avitel (the original respondent in the arbitration before the Singapore International Arbitration Centre (“SIAC”). If the answer were to be negative, this would cast severe doubts on the impugned judgment of the Bombay High Court, which was the focus of the present appeal. Therein, the High Court had ordered Avitel to deposit a sum of money as security under Section 9 of the Act because it was of the opinion that a failure to have this amount deposited would gravely endanger proceedings for the enforcement of SIAC’s award in favour of HSBC (the original claimant in the SIAC arbitration), which were sub-judice before the High Court. It also held that there was a prima facie case in favour of HSBC. In the present case before the SC, Avitel contended that such an order was incorrect because the dispute involved serious allegations of fraud, which rendered SIAC’s award unenforceable in any case. In order to make this argument, Avitel relied on the usual suspects – N. Radhakrishnan v. Maestro Engineers (2010) 1 SCC 72 (“N. Radhakrishnan”) and Ayyasamy. The former told us that serious allegations of fraud were not arbitrable, and the latter reinforced the same, while listing out vague scenarios that may be categorized as such – including fraud as a criminal offence.

The SC did not find any merit in this line of argumentation. Instead, while using the phraseology employed in N. Radhakrishnan and Ayyasamy, i.e., “serious allegations of fraud”, the SC seriously narrowed down the ambit of what could constitute such serious allegations to two scenarios: (i) where “the arbitration clause or agreement itself cannot be said to exist in a clear case in which the court finds that the party against whom breach is alleged cannot be said to have entered into the agreement relating to arbitration at all.”; or (ii) where “allegations are made against the State or its instrumentalities of arbitrary, fraudulent, or malafide conduct”, i.e., public law concerns. To come to this conclusion, the SC analysed all jurisprudence regarding the arbitrability of fraud, from N. Radhakrishnan to Swiss Timing Ltd. v. Commonwealth Games 2010 Organising Committee (2014) 6 SCC 677 (“Swiss Timing”) to Ayyasamy to the SC’s recent judgment in Rashid Raza v. Sadaf Akhtar (2019) 8 SCC 710 (“Rashid Raza”) (which employed a test similar to, but slightly broader than that of the SC in Avitel). Avitel also contradicted Ayyasamy to the extent that it held that civil matters which overlapped with criminal matters where the cause of action was the same fraud (such as the present case where there were ongoing EOW proceedings) did not amount to serious allegations of fraud and could well be the subject on an arbitration.

Based on this primary holding, Avitel has brought Indian jurisprudence closer to the standard adopted in foreign jurisdictions regarding the arbitrability of fraud, where practically all disputes involving fraud (both simpliciter and serious / criminal) are considered arbitrable. However, it remains to be seen as to whether or not Avitel will withstand further judicial scrutiny in this regard. Its language clearly upholds Ayyasamy, but interprets its holding in a very narrow way. Despite the fact that the SC’s finding was one of the most progressive judgments in the field of subject-matter arbitrability, it seems likely that there will be another decade of litigation where any arguments reliant on Avitel will be countered by the broader language used in Ayyasamy, coupled with the fact that Ayysamy was also a division bench judgment which is not subservient to Avitel.

Avitel also went to great extents to establish that civil and criminal proceedings can coexist without impacting each other in a convincing and precedentially-backed fashion. However, It would not be surprising if a potential respondent/defendant in a fraud-related arbitration claim were to contend that Ayyasamy, read with Rashid Raza (a judgment of a three—judge bench of the SC which holds that fraud allegations which have an impact on the public domain are serious allegations of fraud), dictates that any fraud-related dispute which has significant criminal components is not arbitrable, because criminal matters necessarily involve the state and are primary examples of matters that have an impact on the public domain. It is hard to predict the success of these arguments, especially because emerging consensus about Avitel is that it is a ‘pro-arbitration’ judgment which promotes ‘minimal judicial interference’ – both very appealing buzzwords.

The Argument that the Question of Arbitrability cannot be raised at the Section 8 Stage

While this question of law does not form the crux of the matter in Avitel, the SC’s views on the persuasive value of Swiss Timings require us to take another look at the scope of Section 8 of the Act – can an arbitrability objection be raised at this stage? As one would recall, Swiss Timings was a progressive, but flawed single-bench judgment of the SC regarding the arbitrability of fraud. It held that N. Radhakrishnan was per incuriam because it ignored prior case law (P. Anand Gajapathi Raju & Ors. v. P.V.G. Raju (Died) & Ors. (2000) 4 SCC 539 and Hindustan Petroleum Corp. Ltd. v. Pinkcity Midway Petroleums (2003) 6 SCC 503) which held that while deciding an application under Section 8, the court must restrict itself to examination of the validity of the arbitration agreement.

Avitel acknowledged that Swiss Timing did not have precedential authority to hold N. Radhakrishnan per incuriam, but also stated that Swiss Timings’ rationale has persuasive value. One can see why the SC in Avitel would be tempted to make this argument – a bare reading of Section 8, which has only been fortified by the Act’s 2015 Amendment, tells us that the court may not deny a reference to arbitration unless it finds that prima facie no valid arbitration agreement exists. In contrast, both Section 34 and Section 48 specifically list out subject matter arbitrability as a ground for challenging an award / refusing enforcement of an award. On the other hand, Booz Allen & Hamilton Inc. v. SBI Home Finance Ltd. (2011) 5 SCC 532 (“Booz Allen”) changed the game in 2011. It was the seminal authority on all matters related to arbitrability, and the SC in this case denied the reference of a matter to arbitration under Section 8 on the ground that the subject matter of the dispute (a mortgage issue in that case) was not arbitrable. The case law which Swiss Timings relied on was prior to Booz Allen. Thereafter, a vast number of cases have considered questions of arbitrability at this stage – including Ayyasamy.

Even if one were to argue that Booz Allen predated the 2015 Amendment to the Act, which has created the narrow exception of a finding that prima facie no valid arbitration agreement exists, subsequent case law continued to examine questions of arbitrability at the Section 8 stage. In 2018, another division bench of the SC in Emaar MGF Land Ltd. v. Aftab Singh (2019) 12 SCC 751 (“Emaar MGF”) went so far as to specifically hold that the 2015 Amendment did not change status quo and objections regarding arbitrability can be raised in response to a Section 8 application.

Therefore, in light of the above, it might be a worthless task to try and respond to such objections by citing Avitel because of the plethora of cases (some of which were of larger or coordinate benches of the SC) which do raise successful arbitrability objections at the Section 8 stage. The aforementioned holding of a coordinate bench of the SC in Emaar MGF does not help this line of argument either. However, one cannot rule out the possibility of this question of law being referred to a larger bench for settlement. There is merit in the contention that Swiss Timings and Avitel’s approval thereof are more in sync with the literal interpretation of the Act and the principle of minimal jurisprudence. This take on the limited ambit of Section 8 may not be the correct position of law by virtue of the operation of judicial precedent, but that does not change the fact that it should be.

Rajeswari Mukherjee is a former associate at a leading law firm in India, Khaitan & Co where her expertise lay in Dispute Resolution. An alumnus of the National Law Institute University, Rajeswari has won multiple accolades including the prestigious Willem C. Vis. Moot Court Competition.

Preferred Method of Citation – Rajeswari Mukherjee, ‘Avitel: A Progressive but Potentially Problematic Precedent.’ (ICAR, 12 September 2020)

<https://www.investmentandcommercialarbitrationreview.com/post/avitel-a-progressive-but-potentially-problematic-precedent >.

The views and opinions expressed in the article are those of the author(s) solely and do not reflect the of official position of the institution(s) with which the author(s) is /are affiliated. Further, the statements of the author(s) produced herein should not be construed as legal advice.

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