AVITEL POST STUDIOZ LIMITED & ORS. versus HSBC PI HOLDINGS (MAURITIUS) LIMITED
[2020] 10 S.C.R. 791, Supreme Court of India, 2020
Outcome: Disposed off
Segment: Body
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AVITEL POST STUDIOZ LIMITED & ORS.
v.
HSBC PI HOLDINGS (MAURITIUS) LIMITED
(Civil Appeal No. 5145 of 2016)
AUGUST 19, 2020
[R. F. NARIMAN AND NAVIN SINHA, JJ.]
Arbitration and Conciliation Act, 1996 – s. 9 – Contract Act,
1872 – ss. 17 and 18 – A Share Subscription Agreement (SSA) and
Shareholders’ Agreement (SHA) was entered into between the
claimant and the appellants – Both SSA and SHA contained an
identical arbitration clause – It was alleged that the appellants made
a representation that they were at a very advanced stage of finalising
a contract with the British Broadcasting Corporation (BBC) to
convert the BBC’s film library from 2D to 3D – This contract was
expected to generate a revenue of USD 300 million in first phase,
and ultimately over USD 1 billion – Pursuant thereto, the claimant
made an investment in the equity capital of the appellants for a
consideration of USD 60 million in order to acquire 7.8% of its
paid up capital – The claimant discovered that the purported BBC
contract was non-existent and was set up by the appellants to induce
the claimants into investing the aforesaid money of USD 60 million
in the shares of Appellants – It was also alleged that the entire
investment proceeds of USD 60 million was siphoned off to
Companies in which the appellants had a stake – As dispute arose
between the parties, the notices of arbitration were issued by the
claimant to the Singapore International Arbitration Centre to
commence arbitral
proceedings – The Emergency Arbitrator passed
two interim awards in favour of the claimant – The claimant filed
application u/s. 9 of the 1996 Act – The Single Judge of the High
Court directed appellants to deposit any shortfall in their account
so as to maintain a balance of USD 60 million – The Division Bench
of the High Court, however, directed appellants to deposit half of
USD 60 million i.e. at USD 30 million – By a final award, the Arbitral
Tribunal held that the claimant was entitled to damages in the total
amount of USD 60 million plus interest and costs – The Foreign
[2020] 10 S.C.R. 791
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[2020] 10 S.C.R.
award was challenged by the appellants u/s. 34 before the High
Court – The petition u/s. 34 was dismissed by the High Court – An
appeal u/s. 37 of the 1996 Act was also dismissed – Meanwhile, the
claimant moved the High Court for the enforcement of the Foreign
Final award – Before the Supreme Court, the appellant contended
that if the transaction entered into between the parties involve serious
criminal offences such as forgery and impersonation, then it is clear
that under Indian Law, such dispute would not be arbitrable – The
claimant countered that issues were predominantly civil law issues
to be decided inter parties – After hearing the parties, the Court
formulated question: Whether there is a strong prima facie case
made out in favour of the claimant in the s. 9 proceedings – Whether
balance of convenience tilts in favour of the claimant – Held: On a
conspectus of facts and following Supreme Court judgments, the
issues raised and answered in the Foreign Final award would
indicate that there is no such fraud as would vitiate the arbitration
clause in the SSA entered into between the parties as it is clear that
this clause has to be read as an independent clause – Further, any
finding that the contract itself is either null and void or voidable as
a result of fraud or misrepresentation does not entail the invalidity
of the arbitration clause – Further, the impersonation, false
representation made and diversion of
funds are all inter parties,
having no ‘public flavour’ and attract the ‘fraud exception’ – A
reading of the Foreign Final award would show that a strong prima
facie case was made out as the award holds the BBC transaction as
a basis on which the contract was entered into and the USD 60
million paid by the claimant, which would fall within fraudulent
inducement to enter into contract u/s. 17 of the Contract Act – The
order passed by the Single Judge of the High Court to keep aside
USD 60 million was fair – However, the reduction of USD 60 million
to USD 30 million by the Division Bench of the High Court was not
justified – The claimant has made out a strong prima facie case
necessitating that USD 60 million, being the principal amount
awarded to them, is kept apart in the manner indicated by the Single
Judge of the High Court – The balance of convenience is also in its
favour.
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Dismissing the Civil Appeal No.5145 of 2016 and allowing
the Civil Appeal No.5158 of 2016, Civil Appeal no.9820 of 2016,
the Court
HELD: 1. In order to discover whether there is a strong
prima facie case made out in favour of the Claimant before the
Arbitral Tribunal in the present section 9 proceedings, it is
necessary to refer to the Foreign Final Award dated 27.09.2014.
The Arbitral Tribunal found that the siphoning off of a large part
of the amount of USD 60 million into companies owned or
controlled by the appellants herein was made out. As a result
thereof, it was found that the Claimant, in respect of its claim for
fraudulent misrepresentation, and its claim in tort for deceit, is
entitled to damages in the total amount of USD 60 million plus
interest and costs as awarded. [Para 20][843-A-B; 844-F; 852-
G]
2. There can be no doubt whatsoever after reading the
issues and some of the material findings in the Foreign Final Award
that the issues raised and answered are the subject matter of
civil as opposed to criminal proceedings. The fact that a separate
criminal proceeding was sought to be started and may have failed
is of no consequence whatsoever. Therefore, on a conspectus of
these facts, and following Supreme Court judgments, that the
issues raised and answered in the Foreign Final Award would
indicate:
(i) That there is no such fraud as would vitiate the arbitration
clause in the SSA entered into between the parties as it is clear
that this
clause has to be read as an independent clause.  Further,
any finding that the contract itself is either null and void or voidable
as a result of fraud or misrepresentation does not entail the
invalidity of the arbitration clause which is extremely wide.
(ii) That the impersonation, false representations made, and
diversion of funds are all inter parties, having no “public flavour”
as explained earlier so as to attract the “fraud exception”.
[Para 21][853-B-F]
3. Thus, a reading of the Foreign Final Award in this case
would show that a strong prima facie case has indeed been made
out as the Award holds the BBC transaction as a basis on which
the contract was entered into and the USD 60 million paid by the
Claimant, which would clearly fall within fraudulent inducement
to enter into a contract under section 17 of the Contract Act.
AVITEL POST STUDIOZ LIMITED & ORS. v. HSBC PI
HOLDINGS (MAURITIUS) LIMITED
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Such a contract would be voidable at the instance of the Claimant.
Also, the findings on the siphoning off of monies that were meant
to be allocated for the performance of the BBC contract would
attract the tort of deceit. The measure of damages for such
fraudulent misrepresentation is not the difference between the
value of the shares on the date of making the contract and the
value Claimant would have received, if it had resold those shares
in the market, after the purchase. The measure of such damages
would be to put Claimant in the same position as if the contract
had never been entered into, which is, the entitlement to recover
the price paid for the shares and all consequential losses. This
being the case, it is difficult to accede to the Division Bench’s
finding as to the measure of damages in such cases. [Para 22][853-
F-H; 854-A-B]
4. So far as the appeal of Claimant is concerned, this Court
is of the view that it has substance in that the USD 60 million that
was to be kept aside vide the Single Judge’s (High Court) order,
was fair and just in the facts of the case in that it is only the principal
amount without any interest or costs that is ordered to be kept
aside. Further, the reduction of USD 60 million to USD 30 million
by the Division Bench of the High Court is not justified given
our finding on the measure of damages in the facts of this case.
[Para 23][854-B-D]
5. It is clarified that any finding
made on facts in this
judgment is only prima facie for the purpose of deciding the
section 9 petition. This Court have held that the Claimant has
made out a strong prima facie case necessitating that USD 60
million, being the principal amount awarded to them, is kept apart
in the manner indicated by the Single Judge of the Bombay High
Court. The balance of convenience is also in its favour. It is clear
that in case Claimant was to enforce the Foreign Final Award in
India in accordance with section 48 of the 1996 Act, irreparable
loss would be caused to it unless at least the principal sum were
kept aside for purposes of enforcement of the award in India.
[Para 24][854-E-F]
Afcons Infrastructure Ltd. v. Cherian Varkey
Construction Co. (P) Ltd. (2010) 8 SCC 24 : [2010] 8
SCR 1053; Booz  Allen & Hamilton Inc. v. SBI Home
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Finance Ltd. (2011) 5 SCC 532 : [2011] 7 SCR 310;
Haryana Telecom Ltd. v. Sterlite Industries (India) Ltd.
(1999) 5 SCC 688 : [1999] 3 SCR 861; Vimal Kishor
Shah v. Jayesh Dinesh Shah (2016) 8 SCC 788 : [2016]
7 SCR 102; A. Ayyasamy v. A. Paramasivam (2016) 10
SCC 386 : [2016] 11 SCR 521; Ameet Lalchand Shah
v. Rishabh Enterprises (2018) 15 SCC 678 : [2018] 6
SCR 1001; Rashid Raza v. Sadaf Akhtar (2019) 8 SCC
710 : [2019] 12 SCR 460; Kishan Singh v. Gurpal Singh
(2010) 8 SCC 775 : [2010] 10 SCR 16; Guru Granth
Saheb Sthan Meerghat Vanaras v. Ved Prakash
(2013) 7 SCC 622 – relied on.
Abdul Kadir Shamsuddin Bubere v. Madhav Prabhakar
Oak [1962] 3 SCR 702; Swiss Timing Ltd. v.
Commonwealth Games 2010 Organising Committee
(2014) 6 SCC 677 : [2014] 6 SCR 514; Vidya Drolia
and Ors. v. Durga Trading Corporation (2019) SCC
OnLine SC 358; N. Radhakrishnan v. Maestro
Engineers (2010) 1 SCC 72 : [2009] 15 SCR 371; K.G.
Premshanker v. Inspector of Police (2002) 8 SCC 87 :
[2002] 2 Suppl. SCR 350; Syed Askari Hadi Ali
Augustine Imam v. State (Delhi Admn.) (2009) 5 SCC
528 : [2009] 3 SCR 1017; P. Swaroopa Rani v. M. Hari
Narayana (2008) 5 SCC 765 : [2008] 3 SCR 900; M.S.
Sheriff v. The State of Madras [1954] SCR 1144; V.M.
Shah v. State of Maharashtra (1995) 5 SCC 767 : [1995]
3 Suppl. SCR 79; State of West Bengal v. Associated
Contractors (2015) 1 SCC 32 : [2014] 10 SCR 426;
Hindustan Petroleum Corporation Ltd. v. Pinkcity
Midway Petroleums (2003) 6 SCC 503; P. Anand
Gajapathi Raju v. P.V.G. Raju (2000) 4 SCC 539 :
 [2000] 2 SCR 684; State of Tripura v. Province of East
Bengal, Union of India [1951] SCR 1; Ellerman &
Bucknall Steamship Co. Ltd. V. Shar Misrimal Bherajee
[1966] Supp SCR 92 – referred to.
Fazal D. Allana v. Mangaldas M. Pakvasa AIR 1922
Bom 303; John Minas Apcar v. Louis Caird Malchus
AIR 1939 Cal 473 – referred to.
AVITEL POST STUDIOZ LIMITED & ORS. v. HSBC PI
HOLDINGS (MAURITIUS) LIMITED
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President of India and La Pintada Compania
Navigacion S.A. [1985] A.C. 104; Russel v. Russel
[1880] 14 Ch D 471; Charles Osenton & Co. v.
Johnston 1942 A.C. 130; Chatham and Dover Railway
Company v. South Eastern Railway Company [1893]
A.C. 429; British Railways Board and Herrington 1972
A.C. 877; Smith New Court Securities Ltd. v. Scrimgeour
Vickers (Asset Management) Ltd. [1996] 4 All ER 769;
Doyle v. Olby (Ironmongers) Ltd. [1969] 2 All ER 119
– referred to.
Case Law Reference
[2014] 6 SCR 514  
referred to
Para 2
[2009] 15 SCR 371
referred to
Para 2
[2014] 10 SCR 426 
referred to
Para 2
[2019] 12 SCR 460
relied on
Para 3
[2016] 11 SCR 521
relied on
Para 3
[1962] 3 SCR 702
referred to
Para 5
(2003) 6 SCC 503
referred to
Para 6
[2010] 8 SCR 1053 
relied on
Para 7
[2011] 7 SCR 310  
relied on
Para 8
[1999] 3 SCR 861 
relied on
Para 8
[2000] 2 SCR 684 
referred to
Para 9
[2016] 7 SCR 102  
relied on
Para 10
[2018] 6 SCR 1001 
relied on
Para 13
[2002] 2 Suppl. SCR 350 
referred to
Para 15
[1995] 3 Suppl. SCR 79
referred to
Para 15
[1954] SCR 1144
referred to
Para 15
[2008] 3 SCR 900 
referred to
Para 15
[2009] 3 SCR 1017
referred to
Para 15
[2010] 10 SCR 16 
relied on
Para 15
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(2013) 7 SCC 622
relied on
Para 15
[1951] SCR 1
referred to
Para 17
[1966] Suppl. SCR 92
referred to
Para  19
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 5145
of 2016.
From the Judgment and Order dated 31.07.2014 of the Bombay
High Court in Appeal No. 196 of 2014.
WITH
Civil Appeal Nos. 5158 and 9820 of 2016.
Mr. Mukul Rohatgi, Harish Salve, Nikhil Sakhardande, Vinay
Navare, Sr. Advs., Saurabh Kirpal, Sanjay Agarwal, Ms. Diksha Rai,
Ms. Manali Singhal, Nikhil Rohatgi, Ishan Bisht, Ms. Palak Mahajan,
Ms. Liz Mathew, Gautam Awasthi, Mrs. Meena Doshi, Mrs. Prabha
Swami, Nikhil Swami, Ms. Divya Swami, Ms. Abha R. Sharma,
Ms. Jasmine Damkewala, Sriniwas Joshi, Ms. Varshali Sharma, Yogesh
C. Naidu, Ms. Priyanka Shetty, Mr. Santosh Sachin, Advs. for the
appearing parties.
The Judgment of the Court was delivered by
R. F. NARIMAN, J.
1. These two appeals being Civil Appeal No. 5145 of 2016 by
Avitel Post Studioz Ltd. [“Avitel India”] and its promoters [the “Jain
family”], and the cross appeal being Civil Appeal No. 5158 of 2016 by
HSBC PL Holdings (Mauritius) Ltd. [“HSBC”], impugn the interlocutory
judgment and order passed in the appeal under section 9 of the Arbitration
and Conciliation Act, 1996 [“1996 Act”] dated 31.07.2014. To dispose
of the said appeals, we refer to the facts in Civil Appeal No. 5145 of
2016. The brief facts necessary to appreciate the controversy that arises
in the present case are as follows:
(i) On 21.04.2011, a Share Subscription
Agreement [“SSA”] was
entered into between HSBC and the Appellants. HSBC made an
investment in the equity capital of Avitel India for a consideration of
USD 60 million in order to acquire 7.8% of its paid-up capital. This SSA
contained an arbitration clause which reads as follows:-
AVITEL POST STUDIOZ LIMITED & ORS. v. HSBC PI
HOLDINGS (MAURITIUS) LIMITED
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“16. DISPUTE RESOLUTION
16.1. Arbitration
16.1.1. Any dispute, controversy or claim arising out of or in
connection with this Agreement, including any question regarding
its existence, validity, interpretation, breach or termination shall
be referred to and finally resolved by binding arbitration at the
Singapore International Arbitration Centre (“SIAC”) in accordance
with the International Arbitration Rules in  force at the date of this
Agreement (“Rules”), which Rules are deemed to be incorporated
by reference into this clause and as may be amended by the rest
of this clause.
16.1.2. The seat of arbitration shall be Singapore.
16.1.3. The language of the arbitration proceedings shall be
English.
16.1.4. The arbitration tribunal shall consist of three (3) arbitrators:
the claimant party shall nominate one (1) arbitrator, the respondent
party shall nominate one (1) arbitrator and the two (2) arbitrators
thus appointed shall nominate the third arbitrator who shall be the
presiding arbitrator (the “Arbitration Tribunal”). If there is more
than one claimant party and/or more than one respondent party,
the claimant parties (for the purposes of this Clause 16.1 together
a “party”) shall together designate one (1) arbitrator and the
respondent parties (for the purposes of this Clause 16.1 together
a “party”) shall together designate one (1) arbitrator. If within 30
days of a request from the other party to do so, a party
fails to
designate an arbitrator, or if the two (2) arbitrators fail to designate
the third arbitrator within 30 days after the confirmation of the
appointment of the second arbitrator, the appointment shall be
made, upon request of a party, by the SIAC council in accordance
with the Rules.
16.1.5. If within 14 days of a request from the other party to do
so, a party fails to nominate an arbitrator, or if the two (2) arbitrators
fail to nominate the third arbitrator within 14 days after the
confirmation of the appointment of the second arbitrator, the
appointment shall be made, upon request of a party, by the SIAC
council in accordance with the Rules.
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16.1.6. The parties waive any right to apply to any court of law
and/or other judicial authority to determine any preliminary point
of law and/or review any question of law and/or the merits, insofar
as such waiver may be validly made. The parties shall not be
deemed, however, to have waived any right to challenge any award
on the ground that the tribunal lacked substantive jurisdiction and/
or the ground of serious irregularity affecting the tribunal, the
proceedings or the award to the extent allowed by the law of the
seat of the arbitration.
16.1.7. Nothing in this Clause 16.1 shall be construed as preventing
any party from seeking conservatory or interim relief in any court
of competent jurisdiction.
16.1.8. Any award of the arbitration tribunal shall be made in
writing and shall be final and binding on the parties from the day it
is made and the parties agree to be bound thereby and to act
accordingly. The parties undertake to carry out the award without
delay.
16.1.9. During the conduct of any arbitration proceedings pursuant
to this Clause 16.1, this Agreement shall remain in full force and
effect in all respects except for the matter under arbitration and
the parties shall continue to perform their obligations hereunder,
except for those obligations involved in the matter under dispute,
and to exercise their rights here under.
16.2. Costs
The costs and expenses of the arbitration, including the fees of
the arbitration and the Arbitration Tribunal,
shall be borne equally
by each Party to the dispute or claim and each Party shall pay its
own fees, disbursements and other charges of its counsel, except
as may be determined by the Arbitration Tribunal. The Arbitration
Tribunal would have the power to award interest on any sum
awarded pursuant to the arbitration proceedings and such sum
would carry interest, if awarded, until the actual payment of such
amounts.
16.3. Final and Binding
It is agreed by the Parties that any award made by the Arbitration
Tribunal shall be final and binding on each of the Parties that
were parties to the dispute.
AVITEL POST STUDIOZ LIMITED & ORS. v. HSBC PI
HOLDINGS (MAURITIUS) LIMITED [R. F. NARIMAN, J.]
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16.4. Application of Arbitration Act
Save for section 9, Part 1 of the Indian Arbitration and Conciliation
Act, 1996 (the “Arbitration Act”), the provisions of Part 1 of the
Arbitration Act shall not apply to the terms of this Agreement.”
(ii) On 06.05.2011, the aforesaid parties entered into a
Shareholders’ Agreement [“SHA”]which defined the relationship
between the parties after the SSA dated 21.04.2011 had been entered
into. The SHA also contained an arbitration clause which was identical
to the arbitration clause contained in the SSA. It is the case of HSBC
that a representation had been made by Appellants No. 2-4 (the Jain
family) that the Appellants were at a very advanced stage of finalising a
contract with the British Broadcasting Corporation [“BBC”] to convert
the BBC’s film library from 2D to 3D. This contract was expected to
generate a revenue of USD 300 million in the first phase, and ultimately
over USD 1 billion. It is the further case of HSBC that this investment
of USD 60 million was required by Avitel India to purchase equipment
for Avitel Post Studioz FZ LLC [“Avitel Dubai”] to service the BBC
contract (Avitel Dubai is a 100% subsidiary of Avitel Holdings Ltd.,
Mauritius [“Avitel Mauritius”], which, in turn, is a 100% subsidiary of
Avitel India. Avitel India, Avitel Mauritius, and Avitel Dubai are collectively
referred to as the “Avitel Group”).
(iii) In early April 2012, HSBC grew suspicious about
the Avitel
Group’s business of digitising films and Ernst & Young and KPMG Dubai
were appointed to inquire into and return findings as to the business
activities of the Avitel Group. It is the further case of HSBC that they
discovered, thanks to certain preliminary findings of Ernst & Young and
KPMG Dubai, inter alia, that the purported BBC contract was non-
existent and was set up by the Appellants to induce HSBC into investing
the aforesaid money of USD 60 million in the shares of Appellant No. 1.
It is also HSBC’s case that though Avitel Dubai received the entire
investment proceeds of USD 60 million on or about 10.05.2011, it
appeared that around USD 51 million were not used to purchase any
equipment to service the BBC contract, but appeared to have been
siphoned off to companies in which the Jain family had a stake.
(iv) As disputes arose between the parties, on 11.05.2012, notices
of arbitration were issued by HSBC to the Singapore International
Arbitration Centre[“SIAC”] to commence arbitral proceedings. On
14.05.2012, the SIAC appointed Mr. Thio Shen Yi, SC, as an Emergency
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Arbitrator pursuant to an application dated 11.05.2012. On 17.05.2012,
the Appellants’ challenge to the appointment of the Emergency Arbitrator
was considered by the SIAC and rejected. On 25.05.2012, the Appellants
filed their response to the notices of arbitration.
(v) The Emergency Arbitrator then passed two Interim Awards
dated 28.05.2012 and 29.05.2012, in the SSA and the SHA, respectively,
in favour of HSBC, directing the Appellants and Avitel Dubai to refrain
from disposing of or dealing with or diminishing the value of their assets
up to USD 50 million, and permitting HSBC to deliver a copy of the
Interim Awards to financial institutions in India and the UAE with which
any of the Appellants hold or may hold or be signatory to accounts,
together with a request that the financial institutions freeze such accounts
consistent with the Interim Awards. On 27.07.2012, the Emergency
Arbitrator made an amendment to Interim Awards dated 28.05.2012
and 29.05.2012 passed in the SSA and the SHA, respectively, granting
further relief to HSBC by, inter alia, directing the Appellants and Avitel
Dubai to cease and desist from prohibiting or inhibiting Ernst & Young
and KPMG Dubai from conducting investigations into the financial affairs
of Avitel Dubai and Avitel Mauritius.
(vi) On 30.07.2012, HSBC filed Arbitration Petition No. 1062 of
2012 under section 9 of the 1996 Act in the Bombay High Court, inter
alia seeking directions to call upon the Appellants to
deposit a security
amount to the extent of HSBC’s claim in the arbitration proceedings that
had begun under both the SSA and the SHA.
(vii) On 03.08.2012, a learned Single Judge of the Bombay High
Court passed an interim order under the section 9 petition, inter alia
directing the Corporation Bank to allow the Appellants to withdraw a
sum of INR 1 crore from their account on or before 09.08.2012, but not
to allow any further withdrawals until further orders, till which time, the
account was to remain frozen.
(viii) Meanwhile, the Appellants challenged the jurisdiction of the
three-member Arbitral Tribunal comprising of Mr. Christopher Lau, SC
as its Chairman, and Dr. Michael C. Pryles and Justice (Retd.) Ferdino
I. Rebello as co-arbitrators [“Arbitral Tribunal”] set up under the
auspices of the SIAC. On 25.09.2012, the Arbitral Tribunal decided that
this would be decided as a preliminary issue. On 17.12.2012, the Arbitral
Tribunal passed a unanimous “final partial award on jurisdiction”,
dismissing the jurisdictional challenge, and stating that since Singapore
AVITEL POST STUDIOZ LIMITED & ORS. v. HSBC PI
HOLDINGS (MAURITIUS) LIMITED [R. F. NARIMAN, J.]
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law governs the arbitration agreement, allegations of fraud and
complicated issues relating to facts are arbitrable.
(ix) Meanwhile, in the section 9 petition pending before the Bombay
High Court, an order was passed by a learned Single Judge dated
22.01.2014, in which the Appellants were directed to deposit any shortfall
in their account with the Corporation Bank so as to maintain a balance
of USD 60 million. The learned Single Judge gave prima facie findings
that the seat of arbitration was at Singapore and that the arbitration
agreement was governed by Singapore law; hence, arbitrability of the
dispute at hand would be governed by Singapore law. It held that the
unanimous “final partial award on jurisdiction” dated 17.12.2012, delivered
by the Arbitral Tribunal in Singapore, upholding the jurisdiction of the
Arbitral Tribunal to proceed, had not been challenged in Singapore by
the Appellants, and further held that this being the case, since HSBC
has a good chance of success in the final arbitral proceedings, the
aforesaid order to deposit the shortfall in the account so as to maintain a
balance of USD 60 million was passed.
(x) An appeal against the order of the learned Single Judge was
disposed of by the impugned judgment and order of the Division Bench
dated 31.07.2014, returning a prima facie finding that since Singapore
law governs the arbitration agreement, there was no need to interfere
with the findings of
the learned Single Judge in this respect. Further, it
was held that there is no estoppel in filing the present proceeding despite
the Emergency Awards being passed in Singapore as the section 9 petition
could be maintained on a plain reading of the arbitration agreement itself.
It was further held that an issue of fraud in the context of sections 17
and 18 of the Indian Contract Act, 1872 [“Contract Act”] referred to
want of free consent, and was a well-accepted ground that would vitiate
the contract, rendering it voidable. After referring to various judgments
of this Court, it was held that there was a distinction between the
“suitability” and “arbitrability” of disputes, and on the facts of the present
case, it could not be said that the dispute was not arbitrable because of
an allegation of fraud made by HSBC. After then referring to the claim
statement of HSBC before the Arbitral Tribunal at Singapore, it was
held that the allegations of fraud and misrepresentation were primarily
in the context of “fraud” and “misrepresentation” as defined in sections
17 and 18 of the Contract Act, thus establishing a civil profile of the
disputes that had arisen between the parties. However, after referring
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to certain judgments on interim mandatory injunctions, the High Court
prima facie found that HSBC had carried out due diligence by engaging
leading agencies like Ernst & Young and Clifford Chance. Also, it was
held that the measure of damages that may ultimately be awarded may
not be the amount of loss ultimately sustained by HSBC, but can at best
be the difference between the price paid by HSBC in acquiring Avitel
India’s shares and the price HSBC would have received had it resold
the said shares in the market. This being the case, and an interim
mandatory injunction being in the nature of equitable relief, the Division
Bench was of the opinion that the interest of justice would be served if
the Appellants are directed to deposit an additional amount equivalent to
USD 20 million in its Corporation Bank account, so that the total deposit
in the said account is maintained at half the said figure of USD 60 million,
i.e., at USD 30 million. The appeal against the order dated 22.01.2014
was therefore partly allowed.
(xi) By a Final Award in the SSA dated 27.09.2014 [“Foreign
Final Award”], the Arbitral Tribunal held as follows:
“21. FORMAL FINAL AWARD
21.1 The Tribunal has carefully considered the oral and
documentary evidence as well as the submissions of the Parties
and given due weight thereto and rejecting all submissions to the
contrary hereby makes, issues and publishes this Final Award and
for the reasons set out above FINDS, AWARDS, ORDERS AND
DECLARES as follows:
21.2 Finds that the Respondents jointly and severally represented
to the Claimant the following:
a. the Avitel Group’s propriety stereoscopy technology was
superior to that of its competitor;
b. Avitel Dubai played an important role in the Avitel Group’s
business;
c. the Avitel Group was in advanced negotiations with the BBC
and that the BBC Contract was close to execution;
d. the Claimant’s investment was required and was to be utilized
for purchasing equipment in order to enable Avitel Dubai to
service the BBC Contract;
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e. the Avitel Group had the benefit of the Material Contracts
with Kinden, SPAC and Purple Passion with a total value of
approximately USD 658 million;
f. the Avitel Group’s key customers Kinden, SPAC and Purple
Passion as well as Avitel Dubai’s key supplier, Digital Fusion,
and key service provider, Highend, were all independent and
legitimate companies;
g. the representations and warranties contained in Clauses 6.1
and 6.2 of the SSA and in Clauses 7.1, 7.3, 7.5 , 8, 10 and 11 of
Schedule 3 of the SSA to be true, complete, accurate and not
misleading;
21.3 Finds that the Respondents made the representations and/or
warranties in order to induce the Claimant to invest in the First
Respondent;
21.4 Finds that the Claimant did rely on the representations and/
or warranties in making its investment in the First Respondent;
21.5 Finds that the representations and/or warranties referred to
in paragraph 21.2 (a) to (g) above were false and/or misleading;
21.6 Finds that the Respondents made the representations and/or
warranties referred to in paragraph 21.2 (a) to (g) above knowing
that these were false and/or without belief in their truth;
21.7 Finds that the Respondents are jointly and severally liable to
the Claimant in tort for deceit;
21.8 Finds that the Respondents are jointly and severally liable to
the Claimant for fraudulent misrepresentation under the Contract
Act;
21.9 Finds that the Respondents are jointly and
severally liable to
the Claimant for breach of warranty;
21.10 Finds that the Second, Third and Fourth Respondents are
to jointly and severally indemnify the Claimant for the loss of its
investment in the amount of USD 60 million as well as for the
costs of and associated with this arbitration and associated court
actions;
21.11 Finds that the Claimant in respect of its claim for fraudulent
misrepresentation and its claim in tort for deceit is entitled to
damages in the total amount of USD 60 million;
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21.12 Finds that the Claimant is entitled to interest on the sum of
USD 60 million from 6 May 2011 to the date of this Final Award
at the rate of 4.25 % per annum;
21.13 Finds that the Claimant is entitled to its legal and other
costs as well as the costs of the arbitration in the total amount of
SGD 827,615.67 comprising of the following:
(a) the amount of SGD 29,235.88 in respect of the Emergency
Arbitrators fees and expenses
(b) the amount of SGD 756,513.19 in respect of the Tribunal’s
fees and expenses;
(c) the amount of SGD 41,866.60 in respect of SIAC
administrative fees and expenses;
21.14 Finds that upon the Respondents’ paying in full and
unconditionally the sums awarded to the Claimant in paragraphs
21.15, 21.16, 21.18, 21.19 below, the Claimant’s Preference
Subscription Shares and Equity Subscription Shares (as defined
in the SSA) in Avitel India are to be cancelled forthwith;
21.15 Awards to the Claimant and Orders the Respondents to
pay damages in the amount of USD 60 million in respect of which
award the First, Second, Third and Fourth Respondents are jointly
and severally liable;
21.16 Awards to the Claimant and Orders the Respondents to
pay interest on the sum of USD 60 million from 6 May 2011 to the
date of this Final Award at the rate of 4.25% per annum in respect
of which award the First, Second, Third and Fourth Respondents
are jointly and severally liable;
21.17 Orders in terms identical to the orders in the Interim Award
(as amended
by the Addendum and Amendment to Interim Award
dated 15 June 2012 and by the Amendment to Interim Award
dated 27 July 2012), which orders are to remain in force up to and
including the date on which the Respondents comply with all other
orders in this Final Award;
21.18 Awards to the Claimant and Orders the Respondents to
pay the Claimant’s legal and other costs amounting to USD
1,652,890.14 in respect of which award the First, Second, Third
and Fourth Respondents are jointly and severally liable;
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21.19 Awards to the Claimant and Orders the Respondents to
pay all the costs of this arbitration in the total amount of SGD
827,615.67 as follows:
(a) the amount of SGD 29,235.88 in respect of the Emergency
Arbitrator’s fees and expenses;
(b) the amount of SGD 756,513.19 in respect of the Tribunal’s
fees and expenses;
(c) the amount of SGD 41,868.60 in respect of SIAC
administrative fees and expenses;
21.20 Declares the Second, Third and Fourth Respondents jointly
and severally liable to indemnify the Claimant for the loss of its
investment in the amount of USD 60 million together with interest
thereon for the period and at the rate specified in paragraph 21.16
hereinabove and the Claimant’s legal costs, related expenses as
well as the costs of this arbitration as specified in paragraph 21.19
hereinabove;
21.21 Declares and Orders that upon the Respondents’ paying in
full and unconditionally the sums awarded to the Claimant in
paragraphs 21.15, 21.16, 21.18, 21.19 hereinabove and all costs
arising out of and incidental to the cancellation of the Claimant’s
Preference Subscription Shares and Equity Subscription Shares
(as defined in the SSA) in Avitel India, that the said shares be
cancelled and that in this regard, the Parties take the requisite
steps to effect the said cancellation within 30 days of receipt of
such payment.”
Initially, this Foreign Final Award was challenged by the Appellants
in a section 34
proceeding in the Bombay High Court. By a judgment
dated 28.09.2015, the section 34 petition was dismissed as being not
maintainable. An appeal under section 37 of the 1996 Act was dismissed
on 05.05.2017. Meanwhile, HSBC moved the Bombay High Court on
15.04.2015 to enforce the Foreign Final Award in the SSA dated
27.09.2014, which enforcement proceedings are still pending.
2. Mr. Mukul Rohatgi, learned Senior Advocate and Mr. Saurabh
Kirpal, learned counsel, appearing on  behalf of the Appellants, took us
through the Single Judge order and the Division Bench judgment, and
then referred to the Indian law on the allegations of fraud made in arbitral
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proceedings, which, according to them, show that if the transaction
entered into between the parties involve serious criminal offences such
as forgery and impersonation, then it is clear that under Indian law, such
dispute would not be arbitrable. In fact, they stated that a criminal
complaint was filed by HSBC against the Appellants dated 16.01.2013,
alleging offences under sections 420, 467, 468, read with section 120B
of the Indian Penal Code, 1860, with the Economic Offences Wing,
Mumbai [“EOW”], resulting in an FIR being registered. However, the
EOW informed HSBC that a closure report was filed before the
concerned Magistrate in Mumbai. This closure report was then accepted.
HSBC then filed a protest petition seeking rejection of the closure report,
which was dismissed by the learned Magistrate on 05.05.2018. This
order passed by the Magistrate was in turn challenged by HSBC in Writ
Petition (Criminal) No. 5659 of 2018, which petition is still pending. They
then argued that, ultimately, in enforcement proceedings in India, the
gateways of section 48 of the 1996 Act have to be met. “The public
policy of India” is contained in the judgments of this Court regarding
serious allegations of fraud made in arbitral proceedings, and if HSBC
cannot pass this gateway, then enforcing a foreign award in India would
not be possible. It was from this prism that a prima facie case had to be
made out under section 9 of the 1996 Act. They, therefore, attacked
both the
Single Judge order and the Division Bench judgment, stating
that a prima facie case for enforcement of such foreign awards cannot
possibly refer to the Singapore law on fraud being alleged in arbitral
proceedings, but can only refer to Indian law. They further argued that
the Division Bench of the Bombay High Court had relied upon a Single
Judge judgment of this Court reported as Swiss Timing Ltd. v.
Commonwealth Games 2010 Organising Committee, (2014) 6
SCC 677 [“Swiss Timing”] which had held the judgment in N.
Radhakrishnan v. Maestro Engineers, (2010) 1 SCC 72 [“N.
Radhakrishnan”] per incuriam, vitiating the entire Division Bench
judgment. This is clear because a Single Judge judgment of this Court
under section 11 of the 1996 Act has no precedential value as has correctly
been held in State of West Bengal v. Associated Contractors, (2015)
1 SCC 32 [“Associated Contractors”]. Mr. Rohatgi also indicated
that Mr. Christopher Lau, SC, the Chairman of the Arbitral Tribunal in
the Singapore proceedings was biased, in that HSBC was a client of the
firm to which he belonged, and this is one of the important grounds taken
up in the section 48 proceeding which is pending in the Bombay High
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Court. He also sought to raise an argument (for the first time before us)
that the award being insufficiently stamped could not be looked at and
that this would also go to show that there is no prima facie case in order
to sustain the interim mandatory orders passed by the Division Bench of
the High Court. It was further added that Report No. 246 of the Law
Commission of India on ‘Amendment to the Arbitration and Conciliation
Act, 1996’ of August 2014 [“246th Law Commission Report”] had
recommended that a section 16(7) be added so as to do away with the
ratio of N. Radhakrishnan (supra). However, Parliament thought it fit,
when it passed the Arbitration and Conciliation (Amendment) Act, 2015
[“2015 Amendment Act”], not to incorporate such a section, showing
that N. Radhakrishnan(supra) holds the field and that, therefore, serious
questions of fraud raised, like in the present arbitral proceedings, would
render such dispute inarbitrable. For this proposition, they relied heavily
on the House of Lords judgment in President of India and La Pintada
Compania Navigacion S.A., [1985] A.C. 104 [“La Pintada”].
3. Mr. Harish Salve, learned Senior Advocate appearing on behalf
of the Respondent, HSBC, countered all these submissions by relying
upon several judgments of this Court, including the recent judgment in
Rashid Raza v. Sadaf Akhtar, (2019) 8 SCC 710 [“Rashid Raza”].
According to the learned Senior Advocate, this
judgment has, with great
clarity, explained the judgment in A. Ayyasamy v. A. Paramasivam,
(2016) 10 SCC 386 [“Ayyasamy”], which in turn had explained N.
Radhakrishnan (supra), as referring only to such serious allegations of
fraud as would vitiate the arbitration clause along with the agreement,
and allegations of fraud which are not merely inter parties, but affect the
public at large. He argued that a reading of the pleadings in the present
case would show that neither of these two tests has been met. He also
copiously read from the Foreign Final Award dated 27.09.2014, which
found not merely on impersonation, which was one small leg on which it
stood, but also on siphoning off or diversion of a substantial portion of
the USD 60 million paid by HSBC into companies owned or controlled
by the Jain family. He said that these issues are predominantly civil law
issues to be decided inter parties. He further argued that insofar as Mr.
Christopher Lau SC’s alleged bias is concerned, this was not the time or
place to go into such allegations, which would only be fully met in the
section 48 proceedings which are pending. He indicated that in any case,
this Foreign Final Award was unanimous and consisted of two other
arbitrators, Dr. Michael C. Pryles and Justice (Retd.) Ferdino I. Rebello,
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retired Chief Justice of the Allahabad High Court. He also asked us not
to go into the stamping aspect of the Foreign Final Award inasmuch as it
was raised here for the first time without any proper pleading; if properly
pleaded, then his client would have had an opportunity to rebut the same
to show that there was no insufficiency of stamp duty paid. Mr. Salve
therefore supported the ultimate order of the learned Single Judge of the
Bombay High Court, and said that the Division Bench ought not to have
reduced the amount of USD 60 million to half, i.e., USD 30 million without
any reasoning worth the name, particularly because the Foreign Final
Award had held that the USD 60 million was to be paid by way of
damages with interest and costs, the shares in HSBC’s name standing
cancelled. Once it is clear that the aforesaid shares stood cancelled, it is
clear that the 7.8% of the paid-up share capital of Avitel India that was
held by HSBC reverts to Avitel India. This being the case, there would
be no awarding of the difference between market value of the shares as
on the date of breach and USD 60 million, as the shares are back in the
hands of Avitel India.
4. Having heard learned counsel appearing on behalf of both the
parties, the only real question that needs to be addressed in the section 9
proceedings is the extent to which HSBC could be said to have a strong
prima facie case in the enforcement proceedings under section 48 which
are pending before the
Bombay High Court. If so, whether irreparable
prejudice would be caused to HSBC if protective orders were not issued
in its favour, and generally, whether the balance of convenience tilts in
its favour and to what extent.
5. First and foremost, it is correct to state that this prima facie
case would necessarily depend upon what is the substantive law in India
qua arbitrability when allegations of fraud are raised by one of the parties
to the arbitration agreement. The law on this point has its origins in a
judgment under the Arbitration Act, 1940 [“1940 Act”], the predecessor
to the 1996 Act, which repealed the 1940 Act. Thus, in Abdul Kadir
Shamsuddin Bubere v. Madhav Prabhakar Oak, [1962] 3 SCR
702 [“Abdul Kadir”], disputes arose out of an agreement between the
parties, which contained an arbitration clause. Consequently, respondents
no.1 and 2 filed an application under section 20 of the 1940 Act, as it
then stood. This application was opposed by the appellant on four grounds
before the Hon’ble Supreme Court. The fourth ground is important from
our point of view and reads thus:
“xxx xxx xxx
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(4) The respondents had made allegations of fraud against the
appellant in their application and that was also a ground for not referring
the dispute to arbitration.”
(at p. 707)
In dealing with this ground, the Court first referred to section
20(4) of the 1940 Act, which laid down that “where no sufficient cause
is shown, the Court shall order the agreement to be filed, and shall
make an order of reference to the arbitrator appointed by the parties,
whether in the agreement or otherwise or, where the parties cannot
agree upon an arbitrator, to an arbitrator appointed by the Court.”
This Court referred to the fact that the words of this sub-section leave a
wide discretion with the Court to consider whether an order for filing an
agreement should be made and reference thereon should also be made.
Various English judgments were referred to. Russel v. Russel, [1880]
14 Ch D 471 was referred to for the proposition that the Court will, in
general, refuse to send a dispute to arbitration if the party charged with
fraud desires a public inquiry, but where the objection to arbitration is by
the party charging the fraud, the Court will not necessarily accede to it,
and will never do so unless a prima facie case of fraud is proved [see
Abdul Kadir (supra) at p. 713]. The next English judgment is Charles
Osenton & Co. v. Johnston, 1942 A.C. 130. This case held that as
the professional reputation of a particular firm was
involved, the matter
should not be referred to arbitration for the reason that the normal tribunal
of a High Court with a jury, from which there is recourse to a right to
appeal, could not be substituted by proceedings before an official referee
under section 89 of the Judicature Act, 1925. After referring to these
cases, this Court cautioned:
“There is no doubt that where serious allegations of fraud are
made against a party and the party who is charged with fraud
desires that the matter should be tried in open court, that would be
a sufficient cause for the court not to order an arbitration
agreement to be filed and not to make the reference. But it is not
every allegation imputing some kind of dishonesty, particularly in
matters of accounts, which would be enough to dispose a court to
take the matter out of the forum which the parties themselves
have chosen. This to our mind is clear even from the decision
in Russel case [1880 14 Ch D 471]. In that case there were
allegations of constructive and actual fraud by one brother against
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the other and it was in those circumstances that the court made
the observations to which we have referred above. Even so, the
learned Master of the Rolls also observed in the course of the
judgment at p. 476 as follows:
“Why should it be necessarily beyond the purview of this
contract to refer to an arbitrator questions of account, even
when those questions do involve misconduct amounting even
to dishonesty on the part of some partner? I do not see it. I do
not say that in many cases which I will come to in the second
branch of the case before the Court, the Court may not, in the
exercise of its discretion, refuse to interfere; but it does not
appear to me to follow of necessity that this clause was not
intended to apply to all questions, even including questions either
imputing moral dishonesty or moral misconduct to one or other
of the parties.”
We are clearly of opinion that merely because some allegations
have been made that accounts are not correct or that certain
items are exaggerated and so on that is not enough to induce the
court to refuse to make a reference to arbitration. It is only in
cases of allegations of fraud of a serious nature that the court will
refuse as decided in Russel’s case [1880 14 Ch D 471] to order
an arbitration agreement to be filed and will not make a reference.
We may in this connection refer to Minifie v. Railway
Passengers Assurance Company [(1881) 44 LT 552]. There the
question was whether certain proceedings should
be stayed; and
it was held that notwithstanding the fact that the issue and the
evidence in support of it might bear upon the conduct of a certain
person and of those who attended him and so might involve a
question similar to that of fraud or no fraud, that was no ground
for refusing stay. It is only when serious allegations of fraud are
made which it is desirable should be tried in open court that a
court would be justified in refusing to order the arbitration
agreement to be filed and in refusing to make a reference.”
(at pp. 714-716)
The Court then turned to the facts of the case before it and held
that allegations as to the correctness or otherwise of entries in accounts
are not serious allegations of fraud, stating that such allegations are often
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made in suits for accounts, which are purely civil proceedings. It was
added:
“That is why we emphasise that even in the leading case
of Russel [1880 14 Ch D 471], the learned Master of the Rolls
was at pains to point out that it could not necessarily be said in a
case of accounts that no reference to arbitration should be made,
even though questions relating to accounts which might involve
misconduct amounting even to dishonesty on the part of some
partner might arise in the arbitration proceedings and even cases
where moral dishonesty or moral misconduct is attributed to one
party or the other might be referred to arbitration. It seems to us
that every allegation tending to suggest or imply moral dishonesty
or moral misconduct in the matter of keeping accounts would not
amount to such serious allegation of fraud as would impel a court
to refuse to order the arbitration agreement to be filed and refuse
to make a reference. Looking to the allegations which have been
made in this case we are of opinion that there are no such serious
allegations of fraud in this case as would be sufficient for the
court to say that there is sufficient cause for not referring the
dispute to arbitration. This contention of the appellant must also
therefore fail.”
(at pp. 717-718)
6. In N. Radhakrishnan (supra), differences between the
partners of a firm were sought to be adjudicated in a civil suit filed by the
respondents. The appellant
filed an application under section 8 of the
1996 Act stating that as there was an arbitration clause between the
partners, the matter should now be referred to arbitration. This Court,
after considering the judgment in Abdul Kadir (supra), extracted one
sentence from the said judgment at p. 714 as follows:
“There is no doubt that where serious allegations of fraud are
made against a party and the party who is charged with fraud
desires that the matter should be tried in open court, that would be
a sufficient cause for the court not to order an arbitration
agreement to be filed and not to make the reference.”
This sentence, according to the learned Division Bench, being the
ratio in Abdul Kadir (supra), would necessarily mean that wherever
serious allegations of fraud are raised in a case in which there is an
arbitration agreement, they should be tried in a court of law. In the fact
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situation before the Court, the Court found that the appellant had made
serious allegations against the respondents alleging that they were
committing malpractices in the account books and had manipulated the
finances of the partnership firm. This, according to the learned Division
Bench of this Court, was enough to dismiss the section 8 application.
We may also refer to the fact that the appellant’s counsel had relied
upon the judgment in Hindustan Petroleum Corporation Ltd. v.
Pinkcity Midway Petroleums, (2003) 6 SCC 503 [“Hindustan
Petroleum”], in which it was stated that it is mandatory for a civil court
to refer to arbitration a dispute that arises between parties with an
arbitration agreement, under section 8 of the 1996 Act. We may only
note at this stage that this judgment was not dealt with at all by the
Court. On the contrary, a judgment delivered under section 20(4) of the
1940 Act was referred to, in order to arrive at the conclusion arrived at
by the Court.
7. In Afcons Infrastructure Ltd. v. Cherian Varkey
Construction Co. (P) Ltd., (2010) 8 SCC 24 [“Afcons”], this Court
held as follows:
“27. The following categories of cases are normally considered
to be not suitable for ADR process having regard to their nature:
(i) Representative suits under Order 1 Rule 8 CPC which
involve public interest or interest of numerous persons who
are not parties before the court. (In fact, even a compromise
in such a suit is a difficult process requiring
notice to the
persons interested in the suit, before its acceptance).
(ii) Disputes relating to election to public offices (as contrasted
from disputes between two groups trying to get control over
the management of societies, clubs, association, etc.).
(iii) Cases involving grant of authority by the court after enquiry,
as for example, suits for grant of probate or letters of
administration.
(iv) Cases involving serious and specific allegations of fraud,
fabrication of documents, forgery, impersonation, coercion, etc.
(v) Cases requiring protection of courts, as for example, claims
against minors, deities and mentally challenged and suits for
declaration of title against the Government.
(vi) Cases involving prosecution for criminal offences.”
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It will be seen that items (iv) and (vi) are relevant from our point
of view and require to be explained in the light of subsequent decisions
of this Court.
8. In Booz Allen & Hamilton Inc. v. SBI Home Finance Ltd.,
(2011) 5 SCC 532 [“Booz Allen”], this Court decided that proceedings
in rem, such as a mortgage suit filed under Order XXXIV of the Civil
Procedure Code, 1908 (which was a proceeding in rem), would not be
arbitrable. In a significant passage, this Court held:
“36. The well-recognised examples of non-arbitrable disputes are:
(i) disputes relating to rights and liabilities which give rise to or
arise out of criminal offences; (ii) matrimonial disputes relating to
divorce, judicial separation, restitution of conjugal rights, child
custody; (iii) guardianship matters; (iv) insolvency and winding-
up matters; (v) testamentary matters (grant of probate, letters of
administration and succession certificate); and (vi) eviction or
tenancy matters governed by special statutes where the tenant
enjoys statutory protection against eviction and only the specified
courts are conferred jurisdiction to grant eviction or decide the
disputes.
37. It may be noticed that the cases referred to above relate to
actions in rem. A right in rem is a right exercisable against the
world at large, as contrasted from a right in personam which is an
interest protected solely against specific individuals. Actions in
personam refer to
actions determining the rights and interests of
the parties themselves in the subject-matter of the case, whereas
actions in rem refer to actions determining the title to property
and the rights of the parties, not merely among themselves but
also against all persons at any time claiming an interest in that
property. Correspondingly, a judgment in personam refers to a
judgment against a person as distinguished from a judgment against
a thing, right or status and a judgment in rem refers to a judgment
that determines the status or condition of property which operates
directly on the property itself. (Vide Black’s Law Dictionary.)
38. Generally and traditionally all disputes relating to rights in
personam are considered to be amenable to arbitration; and all
disputes relating to rights in rem are required to be adjudicated by
courts and public tribunals, being unsuited for private arbitration.
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This is not however a rigid or inflexible rule. Disputes relating to
subordinate rights in personam arising from rights in rem have
always been considered to be arbitrable.
39. The Act does not specifically exclude any category of disputes
as being not arbitrable. Sections 34(2)(b) and 48(2) of the Act
however make it clear that an arbitral award will be set aside if
the court finds that “the subject-matter of the dispute is not capable
of settlement by arbitration under the law for the time being in
force”.”
The Court then held, following Haryana Telecom Ltd. v. Sterlite
Industries (India) Ltd., (1999) 5 SCC 688, that similarly, winding up
proceedings under the Companies Act, 1956 cannot be referred to
arbitration (see paragraph 42). As against this, suits for specific
performance are arbitrable despite the fact that the court is vested with
discretion to be exercised based upon principles laid down as to when
not to decree specific performance (see paragraphs 43 and 44). The
Court then concluded:
“46. An agreement to sell or an agreement to mortgage does not
involve any transfer of right in rem but creates only a personal
obligation. Therefore, if specific performance is sought either in
regard to an agreement to sell or an agreement to mortgage, the
claim for specific performance will be arbitrable. On the other
hand, a mortgage is a transfer of a right in rem. A mortgage suit
for sale of the mortgaged property is an action in rem, for
enforcement of a
right in rem. A suit on mortgage is not a mere
suit for money. A suit for enforcement of a mortgage being the
enforcement of a right in rem, will have to be decided by the
courts of law and not by Arbitral Tribunals.
47. The scheme relating to adjudication of mortgage suits contained
in Order 34 of the Code of Civil Procedure, replaces some of the
repealed provisions of the Transfer of Property Act, 1882 relating
to suits on mortgages (Sections 85 to 90, 97 and 99) and also
provides for implementation of some of the other provisions of
that Act (Sections 92 to 94 and 96). Order 34 of the Code does
not relate to execution of decrees, but provides for preliminary
and final decrees to satisfy the substantive rights of mortgagees
with reference to their mortgage security.”
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9. We now come to a learned Single Judge’s judgment in Swiss
Timing (supra). There is no doubt that this judgment delivered by a
learned Single Judge under a section 11 jurisdiction cannot be said to be
a binding precedent [see Associated Contractors (supra) at paragraph
17]. However, the learned Judge’s reasoning has strong persuasive value
which we are inclined to adopt. The learned Single Judge first held that
the judgment in P. Anand Gajapathi Raju v. P.V.G. Raju, (2000) 4
SCC 539, was not brought to the notice of this Court in N.
Radhakrishnan (supra). The judgment of Hindustan Petroleum
(supra) which was brought to the notice of the Court was not dealt with
at all. Further, the provisions of sections 5 and 16 of the 1996 Act were
also not referred to.  Section 5 of the 1996 Act states as follows:
“5. Extent of judicial intervention.—Notwithstanding anything
contained in any other law for the time being in force, in matters
governed by this Part, no judicial authority shall intervene except
where so provided in this Part.”
Section 16(1) of the 1996 Act states:
“16. Competence of arbitral tribunal to rule on its
jurisdiction.—(1) The arbitral tribunal may rule on its own
jurisdiction, including ruling on any objections with respect to the
existence or validity of the arbitration agreement, and for that
purpose,—
(a) an arbitration clause which forms part of a contract shall
be treated as an agreement independent
of the other terms of
the contract; and
(b) a decision by the arbitral tribunal that the contract is null
and void shall not entail ipso jure the invalidity of the arbitration
clause.”
These provisions, together with section 8 of the 1996 Act, which
now makes it mandatory to refer an action which is brought before a
judicial authority, which is the subject matter of an arbitration agreement,
to arbitration, if the conditions of the section are met, all point to a sea
change from the 1940 Act which was repealed by this 1996 Act. By
way of contrast with section 8 of the 1996 Act, section 20 of the 1940
Act is set out hereinbelow:
“20. Application to file in Court arbitration agreement.—
(1) Where any persons have entered into an arbitration agreement
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before the institution of any suit with respect to the subject-matter
of the agreement or any part of it, and where a difference has
arisen to which the agreement applies, they or any of them, instead
of proceeding under Chapter II, may apply to a Court having
jurisdiction in the matter to which the agreement relates, that the
agreement be filed in Court.
(2) The application shall be in writing and shall be numbered and
registered as a suit between one or more of the parties interested
or claiming to be interested as plaintiff or plaintiffs and the
remainder as defendant or defendants, if the application has been
presented by all the parties, or, if otherwise, between the applicant
as plaintiff and the other parties as defendants.
(3) On such application being made, the Court shall direct notice
thereof to be given to all parties to the agreement other than the
applicants, requiring them to show cause within the time specified
in the notice why the agreement should not be filed.
(4) Where no sufficient cause is shown, the Court shall order the
agreement to be filed, and shall make an order of reference to the
arbitrator appointed by the parties, whether in the agreement or
otherwise or, where the parties cannot agree upon an arbitrator,
to an arbitrator appointed by the Court.
(5) Thereafter the arbitration shall proceed in accordance with,
and shall be governed by, the other provisions of this Act so far as
they can be made applicable.”
It will be seen
from section 20 of the 1940 Act, as was held in
Abdul Kadir (supra), that a wide discretion is vested in the Court if
sufficient cause is made out not to refer parties to arbitration. It was in
that context that the observations in Abdul Kadir (supra) as to serious
allegations of fraud triable in a civil court, being “sufficient cause” shown
under section 20(4) of the 1940 Act were made. Also, the approach of
the 1940 Act is made clear by section 35(1),which is set out hereinbelow:
“35. Effect of legal proceedings on arbitration.—(1) No
reference nor award shall be rendered invalid by reason only of
the commencement of legal proceedings upon the subject-matter
of the reference, but when legal proceedings upon the whole of
the subject-matter of the reference have been commenced
between all the parties to the reference and a notice thereof has
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been given to the arbitrators or umpire, all further proceedings in
a pending reference shall, unless a stay of proceedings is granted
under Section 34, be invalid.
xxx xxx xxx”
Thus, even where arbitral proceedings are ongoing, such
proceedings become invalid the moment legal proceedings upon the whole
of the subject matter of the reference have been commenced between
all the parties to the reference and a notice thereof has been given to the
arbitrators or umpire. As against this, sections 5,8 and 16 of the 1996
Act reflect a completely new approach to arbitration, which is that when
a judicial authority is shown an arbitration clause in an agreement, it is
mandatory for the authority to refer parties to arbitration bearing in mind
the fact that the arbitration clause is an agreement independent of the
other terms of the contract and that, therefore, a decision by the arbitral
tribunal that the contract is null and void does not entail ipso jure the
invalidity of the arbitration clause. Even otherwise, N. Radhakrishnan
(supra) did not refer to the ratio of Abdul Kadir (supra) correctly. As
has been seen by us hereinabove, Abdul Kadir (supra) held that serious
allegations of fraud are not made out when allegations of moral or other
wrongdoing inter parties are made. In particular, it was held that
discrepancies in account books are the usual subject matter in account
suits, which are purely of a civil nature. For
all these reasons, we are
broadly in agreement with the observations of Nijjar, J. rendering N.
Radhakrishnan (supra) lacking in precedential value.
10. The next judgment to be dealt with, chronologically speaking,
is the judgment in Vimal Kishor Shah v. Jayesh Dinesh Shah, (2016)
8 SCC 788 [“Vimal Kishor Shah”].To the six categories of exceptions
to arbitrability of civil disputes, a seventh category has been added, namely,
disputes arising under trust deeds governed by the Trusts Act, 1882.
Here, it was held that a consideration of the Trusts Act would show that
the intention of the legislature was to confer jurisdiction only on civil
courts for deciding disputes arising under the Trusts Act, which would
amount to an implied bar on other proceedings including arbitral
proceedings. The Court therefore found:
“53. We, accordingly, hold that the disputes relating to trust,
trustees and beneficiaries arising out of the trust deed and the
Trusts Act, 1882 are not capable of being decided by the arbitrator
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despite existence of arbitration agreement to that effect between
the parties. A fortiori, we hold that the application filed by the
respondents under Section 11 of the Act is not maintainable on
the ground that firstly, it is not based on an “arbitration agreement”
within the meaning of Sections 2(1)(b) and 2(1)(h) read with
Section 7 of the Act and secondly, assuming that there exists an
arbitration agreement (Clause 20 of the trust deed) yet the disputes
specified therein are not capable of being referred to private
arbitration for their adjudication on merits.
54. We thus add one more category of cases i.e. Category (vii),
namely, cases arising out of trust deed and the Trusts Act, 1882,
in the list of six categories of cases specified by this Court in para
36 at pp. 546-47 of the decision rendered in Booz Allen &
Hamilton Inc.[Booz Allen & Hamilton Inc.v. SBI Home Finance
Ltd., (2011) 5 SCC 532 : (2011) 2 SCC (Civ) 781] which as held
above cannot be decided by the arbitrator(s).”
[This judgment was referred to with approval in Vidya Drolia
and Ors. v. Durga Trading Corporation, 2019 SCC OnLine SC
358 at paragraph 30].
11. Now comes the important judgment in Ayyasamy (supra).
Two separate judgments were delivered by a Division Bench of this
Court. Sikri, J., after referring to the judgments in Abdul Kadir (supra),
N. Radhakrishnan (supra), Swiss Timing (supra), and Booz Allen
(supra), then referred to the 246th Law Commission Report, in particular
to
paragraphs 50 and 51 thereof. He then held:
“23. A perusal of the aforesaid two paragraphs brings into fore
that the Law Commission has recognised that in cases of serious
fraud, courts have entertained civil suits. Secondly, it has tried to
make a distinction in cases where there are allegations of serious
fraud and fraud simpliciter. It, thus, follows that those cases where
there are serious allegations of fraud, they are to be treated as
non-arbitrable and it is only the civil court which should decide
such matters. However, where there are allegations of fraud
simpliciter and such allegations are merely alleged, we are of the
opinion that it may not be necessary to nullify the effect of the
arbitration agreement between the parties as such issues can be
determined by the Arbitral Tribunal.
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24. Before we apply the aforesaid test to the facts of the present
case, a word on the observations in Swiss Timing Ltd.
case [Swiss Timing Ltd. v. Commonwealth Games 2010
Organising Committee, (2014) 6 SCC 677 : (2014) 3 SCC (Civ)
642] to the effect that the judgment of N. Radhakrishnan [N.
Radhakrishnan v. Maestro Engineers, (2010) 1 SCC 72 : (2010)
1 SCC (Civ) 12] was per incuriam, is warranted. In fact, we do
not have to labour on this aspect as this task is already undertaken
by this Court in State of W.B. v. Associated Contractors [State
of W.B. v. Associated Contractors, (2015) 1 SCC 32 : (2015) 1
SCC (Civ) 1]. It has been clarified in the aforesaid case that Swiss
Timing Ltd. [Swiss Timing Ltd. v. Commonwealth Games 2010
Organising Committee, (2014) 6 SCC 677 : (2014) 3 SCC (Civ)
642] was a judgment rendered while dealing with Section 11(6) of
the Act and Section 11 essentially confers power on the Chief
Judge of India or the Chief Justice of the High Court as a designate
to appoint an arbitrator, which power has been exercised by
another Hon’ble Judge as a delegate of the Chief Justice. This
power of appointment of an arbitrator under Section 11, by the
Court, notwithstanding the fact that it has been held in SBP &
Co. v. Patel Engg. Ltd. [SBP & Co. v. Patel Engg. Ltd., (2005)
8 SCC 618] as a judicial power, cannot be deemed to have
precedential value and, therefore, it cannot be deemed to have
overruled the
proposition of law laid down in N. Radhakrishnan
[N. Radhakrishnan v. Maestro Engineers, (2010) 1 SCC 72 :
(2010) 1 SCC (Civ) 12].
25. In view of our aforesaid discussions, we are of the opinion
that mere allegation of fraud simpliciter may not be a ground to
nullify the effect of arbitration agreement between the parties. It
is only in those cases where the court, while dealing with Section
8 of the Act, finds that there are very serious allegations of fraud
which make a virtual case of criminal offence or where allegations
of fraud are so complicated that it becomes absolutely essential
that such complex issues can be decided only by the civil court on
the appreciation of the voluminous evidence that needs to be
produced, the court can side-track the agreement by dismissing
the application under Section 8 and proceed with the suit on merits.
It can be so done also in those cases where there are serious
allegations of forgery/fabrication of documents in support of the
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plea of fraud or where fraud is alleged against the arbitration
provision itself or is of such a nature that permeates the entire
contract, including the agreement to arbitrate, meaning thereby in
those cases where fraud goes to the validity of the contract itself
of the entire contract which contains the arbitration clause or the
validity of the arbitration clause itself. Reverse position thereof
would be that where there are simple allegations of fraud touching
upon the internal affairs of the party inter se and it has no implication
in the public domain, the arbitration clause need not be avoided
and the parties can be relegated to arbitration. While dealing with
such an issue in an application under Section 8 of the Act, the
focus of the court has to be on the question as to whether
jurisdiction of the court has been ousted instead of focusing on
the issue as to whether the court has jurisdiction or not. It has to
be kept in mind that insofar as the statutory scheme of the Act is
concerned, it does not specifically exclude any category of cases
as non-arbitrable. Such categories of non-arbitrable subjects are
carved out by the courts, keeping in mind the principle of common
law that certain disputes which are of public nature, etc. are not
capable of adjudication and settlement by arbitration and for
resolution of such disputes, courts i.e. public fora, are better suited
than a private forum of arbitration. Therefore, the inquiry of the
Court, while
dealing with an application under Section 8 of the
Act, should be on the aforesaid aspect viz. whether the nature of
dispute is such that it cannot be referred to arbitration, even if
there is an arbitration agreement between the parties. When the
case of fraud is set up by one of the parties and on that basis that
party wants to wriggle out of that arbitration agreement, a strict
and meticulous inquiry into the allegations of fraud is needed and
only when the Court is satisfied that the allegations are of serious
and complicated nature that it would be more appropriate for the
Court to deal with the subject-matter rather than relegating the
parties to arbitration, then alone such an application under Section
8 should be rejected.”
Chandrachud, J., in a separate judgment, referred to the judgment
in N. Radhakrishnan (supra) and then held:
“40. The above extract from the judgment in N. Radhakrishnan
[N. Radhakrishnan v. Maestro Engineers, (2010) 1 SCC 72 :
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(2010) 1 SCC (Civ) 12] relies extensively on the view propounded
in Abdul Kadir [Abdul Kadir Shamsuddin Bubere v. Madhav
Prabhakar Oak, AIR 1962 SC 406]. The decision in Abdul
Kadir[Abdul Kadir Shamsuddin Bubere v. Madhav Prabhakar
Oak, AIR 1962 SC 406] arose under the Arbitration Act, 1940
and was in the context of the provisions of Section 20. In Abdul
Kadir [Abdul Kadir Shamsuddin Bubere v. Madhav
Prabhakar Oak, AIR 1962 SC 406] , this Court emphasised that
sub-section (4) of Section 20 of the Arbitration Act, 1940 left a
wide discretion in the court. In contrast, the scheme of the 1996
Act has made a radical departure from the position under the
erstwhile enactment. A marked distinction is made in Section 8
where no option has been left to the judicial authority but to refer
parties to arbitration. Abdul Kadir [Abdul Kadir Shamsuddin
Bubere v. Madhav Prabhakar Oak, AIR 1962 SC 406] explains
the position under the Arbitration Act, 1940. The present legislation
on the subject embodies a conscious departure which is intended
to strengthen the efficacy of arbitration.
xxx xxx xxx
43. Hence, the allegations of criminal wrongdoing or of statutory
violation would not detract from the jurisdiction of the Arbitral
Tribunal to resolve a dispute arising out of a civil or contractual
relationship on the basis of the jurisdiction conferred by the
arbitration agreement.”
He then cautioned against the use of N. Radhakrishnan
(supra)
as a precedent, and distinguished it as follows:
“45. The position that emerges both before and after the decision in
N. Radhakrishnan [N. Radhakrishnan v. Maestro Engineers,
(2010) 1 SCC 72 : (2010) 1 SCC (Civ) 12] is that successive
decisions of this Court have given effect to the binding precept
incorporated in Section 8. Once there is an arbitration agreement
between the parties, a judicial authority before whom an action is
brought covering the subject-matter of the arbitration agreement
is under a positive obligation to refer parties to arbitration by
enforcing the terms of the contract. There is no element of
discretion left in the court or judicial authority to obviate the
legislative mandate of compelling parties to seek recourse
to arbitration. 
The 
judgment 
in 
N.Radhakrishnan
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[N.Radhakrishnan v. Maestro Engineers, (2010) 1 SCC 72 :
(2010) 1 SCC (Civ) 12] has, however, been utilised by parties
seeking a convenient ruse to avoid arbitration to raise a defence
of fraud:
45.1. First and foremost, it is necessary to emphasise that the
judgment in N. Radhakrishnan [N. Radhakrishnan v. Maestro
Engineers, (2010) 1 SCC 72 : (2010) 1 SCC (Civ) 12] does not
subscribe to the broad proposition that a mere allegation of fraud
is ground enough not to compel parties to abide by their agreement
to refer disputes to arbitration. More often than not, a bogey of
fraud is set forth if only to plead that the dispute cannot be arbitrated
upon. To allow such a plea would be a plain misreading of the
judgment in N. Radhakrishnan [N. Radhakrishnan v. Maestro
Engineers, (2010) 1 SCC 72 : (2010) 1 SCC (Civ) 12] . As I have
noted earlier, that was a case where the appellant who had filed
an application under Section 8 faced with a suit on a dispute in
partnership had raised serious issues of criminal wrongdoing,
misappropriation of funds and malpractice on the part of the
respondent. It was in this background that this Court accepted
the submission of the respondent that the arbitrator would not be
competent to deal with matters “which involved an elaborate
production of evidence to establish the claims relating to fraud
and criminal misappropriation”. Hence, it is necessary to
emphasise that as a matter of first principle, this Court has not
held that a
mere allegation of fraud will exclude arbitrability. The
burden must lie heavily on a party which avoids compliance with
the obligation assumed by it to submit disputes to arbitration to
establish the dispute is not arbitrable under the law for the time
being in force. In each such case where an objection on the ground
of fraud and criminal wrongdoing is raised, it is for the judicial
authority to carefully sift through the materials for the purpose of
determining whether the defence is merely a pretext to avoid
arbitration. It is only where there is a serious issue of fraud involving
criminal wrong doing that the exception to arbitrability carved out
in N.Radhakrishnan [N.Radhakrishnan v. Maestro Engineers,
(2010) 1 SCC 72 : (2010) 1 SCC (Civ) 12] may come into
existence.
45.2. Allegations of fraud are not alien to ordinary civil courts.
Generations of judges have dealt with such allegations in the
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context of civil and commercial disputes. If an allegation of fraud
can be adjudicated upon in the course of a trial before an ordinary
civil court, there is no reason or justification to exclude such disputes
from the ambit and purview of a claim in arbitration. The parties
who enter into commercial dealings and agree to a resolution of
disputes by an arbitral forum exercise an option and express a
choice of a preferred mode for the resolution of their disputes.
The parties in choosing arbitration place priority upon the speed,
flexibility and expertise inherent in arbitral adjudication. Once
parties have agreed to refer disputes to arbitration, the court must
plainly discourage and discountenance litigative strategies designed
to avoid recourse to arbitration. Any other approach would seriously
place in uncertainty the institutional efficacy of arbitration. Such
a consequence must be eschewed.”
After the statement of the law, the learned Judge referred to an
instructive passage by Gary B. Born as follows:
“56. The legal position has been succinctly summarised
in International Commercial Arbitration by Gary B. Born [2nd
Edn., Vol. I, p. 846] thus:
“… under most national arbitration regimes, claims that the
parties’ underlying contract (as distinguished from the parties’
arbitration clause) was fraudulently induced have generally been
held not to compromise the substantive validity of an arbitration
clause included
in the contract. The fact that one party may
have fraudulently misrepresented the quality of its goods,
services, or balance sheet generally does nothing to impeach
the parties’ agreed dispute resolution mechanism. As a
consequence, only fraud or fraudulent inducement directed at
the agreement to arbitrate will, as a substantive matter, impeach
that agreement. These circumstances seldom arise: as a
practical matter, it is relatively unusual that a party will seek to
procure an agreement to arbitrate by fraud, even in those cases
where it may have committed fraud in connection with the
underlying commercial contract.”
(See also in this context International Arbitration Law and
Practice by Mauro Rubino-Sammartano [2nd Edn., p. 179].)”
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Mr. Saurabh Kirpal took exception to Sikri, J.’s judgment in that
Sikri, J. did not refer to paragraph 52 of the 246thLaw Commission Report
and its aftermath. Paragraph 52 of the 246thLaw Commission Report
reads as follows:
“52. The Commission believes that it is important to set this entire
controversy to a rest and make issues of fraud expressly arbitrable
and to this end has proposed amendments to section 16.”
(at p. 28)
The Law Commission then added, by way of amendment, a
proposed section 16(7) as follows:
“Amendment of Section 16
10. In section 16,
After sub-section (6), insert sub-section “(7) The arbitral tribunal
shall have the power to make an award or give a ruling
notwithstanding that the dispute before it involves a serious question
of law, complicated questions of fact or allegations of fraud,
corruption etc.”
[NOTE: This amendment is proposed in the light of the Supreme
Court decisions (e.g. N. Radhakrishnan v. Maestro Engineers,
(2010) 1 SCC 72) which appear to denude an arbitral tribunal of
the power to decide on issues of fraud etc.]”
(at p. 50)
He then referred to the fact that the aforesaid sub-section was
not inserted by Parliament by the 2015 Amendment Act, which largely
incorporated other amendments proposed by the Law Commission. His
argument therefore was that N. Radhakrishnan (supra) not having
been legislatively overruled, cannot now be said to be in any way deprived
of its precedential value, as Parliament has taken note of the
proposed
section 16(7) in the 246th Law Commission Report, and has expressly
chosen not to enact it. For this proposition, he referred to La Pintada
(supra). This judgment related to a challenge to an award granting
compound interest, inter alia, in a case where a debt is paid late, but
before any proceedings for its recovery had begun. Lord Brandon of
Oakbrook, who wrote the main judgment in this case, stated:
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“There are three cases in which the absence of any common law
remedy for damage or loss caused by the late payment of a debt
may arise, cases which I shall in what follows describe for
convenience as case 1, case 2 and case 3. Case 1 is where a debt
is paid late, before any proceedings for its recovery have been
begun. Case 2 is where a debt is paid late, after proceedings for
its recovery have been begun, but before they have been
concluded. Case 3 is where a debt remains unpaid until as a result
of proceedings for its recovery being brought and prosecuted to a
conclusion, a money judgment is given in which the original debt
becomes merged.”
(at p. 122)
After referring to various precedents, the learned Judge referred
to a Law Commission Report of 07.04.1978, which contained
recommendations for alterations in the law and a draft bill which would
remedy injustice to unpaid creditors in all the three cases set out
hereinabove. However, when Parliament passed the Administration of
Justice Act, 1982, it covered cases 2 and 3 but not case 1. In this context,
Lord Brandon held:
“My first main reason is that the greater part of the injustice to
creditors which resulted from the London, Chatham and Dover
Railway case has now been removed, to a large extent by
legislative intervention, and to a lesser extent by judicial qualification
of the scope of the decision itself. My second main reason is that,
when Parliament has
given effect by legislation to some
recommendations of the Law Commission in a particular field,
but has taken what appears to be a policy decision not to give
effect to a further such recommendation, any decision of your
Lordships’ House which would have the result of giving effect,
by another route, to the very recommendation which Parliament
appears to have taken that policy decision to reject, could well be
regarded as an unjustifiable usurpation by your Lordships’ House
of the functions which belong properly to Parliament, rather than
as a judicial exercise in departing from an earlier decision on the
ground that it has become obsolete and could still, in a limited
class of cases, continue to cause some degree of injustice.”
(at pp. 129-130)
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One can see from the speeches of the other Law Lords, with
what great reluctance they allowed the appeal and set aside the Court
of Appeal’s judgment. Each of the Law Lords did so with regret and
reluctance. The real reason why London, Chatham and Dover
Railway Company v. South Eastern Railway Company, [1893] A.C.
429 [“London Railway Case”] could not be overruled via a common
law (as opposed to a statutory) route was because the statutory route
regarded the award of interest on debts as a remedy to which a creditor
should not be entitled to as of right, but only as a matter of discretion;
whereas the common law route granted them such interest as a matter
of right. If, in overruling the London Railway Case (supra), two parallel
remedies would be created, this would lead to an inconsistent position in
law, as a result of which, no departure was made from the 1893 decision.
Also, in the words of Lord Brandon, it was held:
“In any event the only remaining loophole of injustice to creditors
paid late is small, has existed for many years and does not seem
to require closing urgently.”
(at pp. 130-131)
12. It is a little difficult to apply this case to resurrect the ratio of
N. Radhakrishnan (supra) as a binding precedent given the advance
made in the law by this Court since N. Radhakrishnan (supra) was
decided. Quite apart from what has been stated by us in paragraph 9
above, as to how N. Radhakrishnan (supra) cannot be considered to
be a binding precedent
for the reasons given in the said paragraph, we
are of the view that the development of the law by this Court cannot be
thwarted merely because a certain provision recommended in a Law
Commission Report is not enacted by Parliament. Parliament may have
felt, as was mentioned by Lord Reid in British Railways Board and
Herrington, 1972 A.C. 877 [House of Lords], that it was unable to
make up its mind and instead, leave it to the courts to continue, case by
case, deciding upon what should constitute the fraud exception.1
Parliament may also have thought that section 16(7), proposed by the
Law Commission, is clumsily worded as it speaks of “a serious question
of law, complicated questions of fact, or allegations of fraud, corruption,
etc.” N.Radhakrishnan (supra) did not lay down that serious questions
of law or complicated questions of fact are non-arbitrable. Further,
1 This case is referred to in Lord Brandon’s judgment in La Pintada (supra) and
distinguished at p. 130 of his judgment.
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“allegations of fraud, corruption, etc.” is vague. For this reason also,
Parliament may have left it to the courts to work out the fraud exception.
In any case, we have pointed out that dehors any such provision, the
ratio in N. Radhakrishnan (supra), being based upon a judgment under
the 1940 Act, and without considering sections 5, 8 and 16 of the 1996
Act in their proper perspective, would all show that the law laid down in
this case cannot now be applied as a precedent for application of the
fraud mantra to negate arbitral proceedings.For the reasons given in this
judgment, the House of Lords’ decision would have no application
inasmuch as N. Radhakrishnan (supra) has been tackled on the judicial
side and has been found to be wanting.
13. The judgment in Ayyasamy (supra) was then applied in Ameet
Lalchand Shah v. Rishabh Enterprises, (2018) 15 SCC 678.After
extracting paragraph 25 from Sikri, J.’s judgment and paragraph 48 of
Chandrachud, J.’s judgment in Ayyasamy (supra), the Court held:
“37. It is only where serious questions of fraud are involved, the
arbitration can be refused. In this case, as contended by the
appellants there were no serious allegations of fraud; the allegations
levelled against Astonfield is that Appellant 1 Ameet Lalchand
Shah misrepresented by inducing the respondents to pay higher
price for the purchase of the equipments. There is, of course, a
criminal case registered against the
appellants in FIR No. 30 of
2015 dated 5-3-2015 before the Economic Offences Wing, Delhi.
Appellant 1 Ameet Lalchand Shah has filed Criminal Writ Petition
No. 619 of 2016 before the High Court of Delhi for quashing the
said FIR. The said writ petition is stated to be pending and therefore,
we do not propose to express any views in this regard, lest, it
would prejudice the parties. Suffice to say that the allegations
cannot be said to be so serious to refuse to refer the parties to
arbitration. In any event, the arbitrator appointed can very well
examine the allegations regarding fraud.”
14. In a recent judgment reported as Rashid Raza (supra), this
Court referred to Sikri, J.’s judgment in Ayyasamy (supra) and then
held:
“4. The principles of law laid down in this appeal make a distinction
between serious allegations of forgery/fabrication in support of
the plea of fraud as opposed to “simple allegations”. Two working
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tests laid down in para 25 are: (1) does this plea permeate the
entire contract and above all, the agreement of arbitration,
rendering it void, or (2) whether the allegations of fraud touch
upon the internal affairs of the parties inter se having no implication
in the public domain.”
After these judgments, it is clear that “serious allegations of fraud”
arise only if either of the two tests laid down are satisfied, and not
otherwise.The first test is satisfied only when it can be said that 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. The second test can be said to have been met in cases
in which allegations are made against the State or its instrumentalities of
arbitrary, fraudulent, or malafide conduct, thus necessitating the hearing
of the case by a writ court in which questions are raised which are not
predominantly questions arising from the contract itself or breach thereof,
but questions arising in the public law domain.
15. At this stage, it is necessary to deal with the broad statement
of the law in Afcons (supra) and Booz Allen (supra). When Afcons
(supra) refers in paragraph 27(iv) to “cases involving serious and specific
allegations of fraud, fabrication of documents, forgery, impersonation,
coercion, etc.”, this must now be understood in the sense laid
down in
Ayyasamy (supra) and Rashid Raza (supra). When it comes to
paragraph 27(vi) in Afcons (supra), and paragraph 36(i) in Booz Allen
(supra), namely, cases involving prosecution for criminal offences, it is
also important to remember that the same set of facts may have civil as
well as criminal consequences. Thus, in K.G. Premshanker v.
Inspector of Police, (2002) 8 SCC 87[“Premshanker”], this Court
had to answer a reference made to it as follows:
“7. This Court on 9-11-1998, passed the following order:
“Since we are of the view that the judgment of this Court in V.M.
Shah v. State of Maharashtra[(1995) 5 SCC 767 : 1995 SCC
(Cri) 1077] which has been relied upon by Mr Gopal Subramaniam,
learned Senior Counsel appearing for the petitioner, requires
reconsideration, we refer this petition to a larger Bench for
disposal. Let the record be placed before Hon. the Chief Justice
for necessary orders.”
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The observations in V.M. Shah v. State of Maharashtra, 1995
(5) SCC 767,which led to the reference, are set out in paragraph 11 as
follows:
“11. In the background of the aforesaid facts, we would refer to
the observations made in V.M. Shah case [(1995) 5 SCC 767 :
1995 SCC (Cri) 1077] which are as under: (SCC p. 770, para 11)
“11. As seen that the civil court after full-dressed trial
recorded the finding that theappellant had not come into
possession through the Company but had independent
tenancy rights from the principal landlord and, therefore,
the decree for eviction was negatived. Until that finding is duly
considered by the appellate court after weighing the evidence
afresh and if it so warranted reversed, the findings bind the
parties. The findings, recorded by the criminal court, stand
superseded by the findings recorded by the civil court.
Thereby, the findings of the civil court get precedence over
the findings recorded by the trial court, in particular, in summary
trial for offences like Section 630. The mere pendency of the
appeal does not have the effect of suspending the operation of
the decree of the trial court and neither the finding of the civil
court gets nor the decree becomes inoperative.”
(emphasis in original)
After referring to sections 40 to 43 of the Indian Evidence Act,
1872, and the judgment in M.S. Sheriff v. The State of Madras, 1954
SCR 1144, this Court held:
“32. In the present case,
the decision rendered by the Constitution
Bench in M.S. Sheriff case [AIR 1954 SC 397 : 1954 Cri LJ
1019] would be binding, wherein it has been specifically held that
no hard-and-fast rule can be laid down and that possibility of
conflicting decision in civil and criminal courts is not a relevant
consideration. The law envisages
“such an eventuality when it expressly refrains from making
the decision of one court binding on the other, or even relevant,
except for limited purpose such as sentence or damages”.
33. Hence, the observation made by this Court in V.M. Shah
case [(1995) 5 SCC 767 : 1995 SCC (Cri) 1077] that the finding
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recorded by the criminal court stands superseded by the finding
recorded by the civil court is not correct enunciation of law.
Further, the general observations made in Karam Chand
case [(1970) 3 SCC 694] are in context of the facts of the case
stated above. The Court was not required to consider the earlier
decision of the Constitution Bench in M.S. Sheriff case [AIR
1954 SC 397 : 1954 Cri LJ 1019] as well as Sections 40 to 43 of
the Evidence Act.”
Likewise, in P. Swaroopa Rani v. M. Hari Narayana, (2008) 5
SCC 765, this Court laid down the proposition:-
“11. It is, however, well settled that in a given case, civil
proceedings and criminal proceedings can proceed simultaneously.
Whether civil proceedings or criminal proceedings shall be stayed
depends upon the facts and circumstances of each case. (See
M.S. Sheriff v. State of Madras [AIR 1954 SC 397], Iqbal Singh
Marwah v. Meenakshi Marwah[(2005) 4 SCC 370 : 2005 SCC
(Cri) 1101] and Institute of Chartered Accountants of India v.
Assn. of Chartered Certified Accountants [(2005) 12 SCC 226
: (2006) 1 SCC (Cri) 544].)”
In Syed Askari Hadi Ali Augustine Imam v. State (Delhi
Admn.), (2009) 5 SCC 528 , it was held:
“24. If primacy is to be given to a criminal proceeding, indisputably,
the civil suit must be determined on its own merit, keeping in view
the evidence brought before it and not in terms of the evidence
brought in the criminal proceeding. The question came up for
consideration in K.G. Premshanker
v. Inspector of Police [(2002)
8 SCC 87 : 2003 SCC (Cri) 223] ……
25. It is, however, significant to notice that the decision of this
Court in Karam Chand Ganga Prasad v. Union of India [(1970)
3 SCC 694] , wherein it was categorically held that the decisions
of the civil courts will be binding on the criminal courts but the
converse is not true, was overruled ……Axiomatically, if judgment
of a civil court is not binding on a criminal court, a judgment of a
criminal court will certainly not be binding on a civil court.’’
In Kishan Singh v. Gurpal Singh (2010) 8 SCC 775, the Court
referred to all the relevant judgments on the subject and ultimately held
thus:
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“13. In V.M. Shah v. State of Maharashtra [(1995) 5 SCC 767
: 1995 SCC (Cri) 1077] this Court has held as under: (SCC p. 770,
para 11)
“11. As seen that the civil court after full-dressed trial recorded
the finding that the appellant had not come into possession
through the Company but had independent tenancy rights from
the principal landlord and, therefore, the decree for eviction
was negatived. Until that finding is duly considered by the
appellate court after weighing the evidence afresh and if it so
warranted reversed, the findings bind the parties. The findings,
recorded by the criminal court, stand superseded by the findings
recorded by the civil court. Thereby, the findings of the civil
court get precedence over the findings recorded by the trial
court, in particular, in summary trial for offences like Section
630. The mere pendency of the appeal does not have the effect
of suspending the operation of the decree of the trial court and
neither the finding of the civil court gets disturbed nor the decree
becomes inoperative.”
14. The correctness of the aforesaid judgment in V.M. Shah [(1995)
5 SCC 767 : 1995 SCC (Cri) 1077] was doubted by this Court and
the case was referred to a larger Bench in K.G. Premshanker v.
Inspector of Police [(2002) 8 SCC 87 : 2003 SCC (Cri) 223 :
AIR 2002 SC 3372] . In the said case, the judgment in V.M. Shah
[(1995) 5 SCC 767 : 1995 SCC (Cri) 1077] was not approved.
While deciding
the case, this Court placed reliance upon the
judgment of the Privy Council in King Emperor v. Khwaja Nazir
Ahmad [(1943-44) 71 IA 203 : AIR 1945 PC 18] wherein it has
been held as under: (IA p. 212)
“… It is conceded that the findings in a civil proceeding are
not binding in a subsequent prosecution founded [upon]
the same or similar allegations. Moreover, the police
investigation was stopped, and it cannot be said with certainty
that no more information could be obtained. But even if it were
not, it is the duty of a criminal court when a prosecution for a
crime takes place before it to form its own view and not to
reach its conclusion by reference to any previous decision which
is not binding [upon] it.”
(emphasis added)
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15. In P. Swaroopa Rani v. M. Hari Narayana [(2008) 5 SCC
765 : (2008) 3 SCC (Cri) 79 : AIR 2008 SC 1884] this Court has
held as under: (SCC pp. 769-71, paras 11, 13 & 18)
“11. It is, however, well settled that in a given case, civil
proceedings and criminal proceedings can proceed
simultaneously. Whether civil proceedings or criminal
proceedings shall be stayed depends upon the facts and
circumstances of each case. …
xxx xxx xxx
13. Filing of an independent criminal proceeding, although
initiated in terms of some observations made by the civil court,
is not barred under any statute. …
xxx xxx xxx
18. It goes without saying that the respondent shall be at liberty
to take recourse to such a remedy which is available to him in
law. We have interfered with the impugned order only because
in law simultaneous proceedings of a civil and a criminal case
are permissible.”
16. In Iqbal Singh Marwah v. Meenakshi Marwah [(2005) 4
SCC 370 : 2005 SCC (Cri) 1101] this Court held as under: (SCC
pp. 389-90, para 32)
“32. Coming to the last contention that an effort should be
made to avoid conflict of findings between the civil and criminal
courts, it is necessary to point out that the standard of proof
required in the two proceedings is entirely different. Civil cases
are decided on the basis of preponderance of evidence while
in a criminal case the entire burden lies on the prosecution and
proof beyond reasonable doubt has to be given. There is neither
any statutory
provision nor any legal principle that the findings
recorded in one proceeding may be treated as final or binding
in the other, as both the cases have to be decided on the basis
of the evidence adduced therein.”
17. In Syed Askari Hadi Ali Augustine Imam v. State (Delhi
Admn.) [(2009) 5 SCC 528] this Court considered all the earlier
judgments on the issue and held that while deciding the case in
Karam Chand [(1970) 3 SCC 694 : AIR 1971 SC 1244], this
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Court failed to take note of the Constitution Bench judgment in
M.S. Sheriff [AIR 1954 SC 397 : 1954 Cri LJ 1019] and, therefore,
it remains per incuriam and does not lay down the correct law. A
similar view has been reiterated by this Court in Vishnu Dutt
Sharma v. Daya Sapra [(2009) 13 SCC 729 : (2010) 1 SCC
(Cri) 1229] , wherein it has been held by this Court that the decision
in Karam Chand [(1970) 3 SCC 694 : AIR 1971 SC 1244] stood
overruled in K.G. Premshanker [(2002) 8 SCC 87 : 2003 SCC
(Cri) 223 : AIR 2002 SC 3372].
18. Thus, in view of the above, the law on the issue stands
crystallised to the effect that the findings of fact recorded by the
civil court do not have any bearing so far as the criminal case is
concerned and vice versa. Standard of proof is different in civil
and criminal cases. In civil cases it is preponderance of probabilities
while in criminal cases it is proof beyond reasonable doubt. There
is neither any statutory nor any legal principle that findings recorded
by the court either in civil or criminal proceedings shall be binding
between the same parties while dealing with the same subject-
matter and both the cases have to be decided on the basis of the
evidence adduced therein. However, there may be cases where
the provisions of Sections 41 to 43 of the Evidence Act, 1872,
dealing with the relevance of previous judgments in subsequent
cases may be taken into consideration. “
To complete
the review of case law on the subject, we may finally
refer to Guru Granth Saheb Sthan Meerghat Vanaras v. Ved
Prakash, (2013) 7 SCC 622, wherein this Court, after referring to the
previous case law on the subject held as follows:
“17. In K.G. Premshanker [K.G. Premshanker v. Inspector of
Police, (2002) 8 SCC 87 : 2003 SCC (Cri) 223] the effect of the
above provisions (Sections 40 to 43 of the Evidence Act) has
been broadly noted thus: (SCC p. 97, para 30)
“30. … (4) if the criminal case and civil proceedings are for
the same cause, judgment of the civil court would be relevant
if conditions of any of Sections 40 to 43 are satisfied, but it
cannot be said that the same would be conclusive except as
provided in Section 41. Section 41 provides which judgment
would be conclusive proof of what is stated therein.”
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Moreover, the judgment, order or decree passed in previous civil
proceedings, if relevant, as provided under Sections 40 and 42 or
other provisions of the Evidence Act then in each case the court
has to decide to what extent it is binding or conclusive with regard
to the matters decided therein. In each and every case the first
question which would require consideration is, whether the
judgment, order or decree is relevant; if relevant, its effect. This
would depend upon the facts of each case.
18. In light of the above legal position, it may be immediately
observed that the High Court was not at all justified in staying the
proceedings in the civil suit till the decision of criminal case. Firstly,
because even if there is a possibility of conflicting decisions in the
civil and criminal courts, such an eventuality cannot be taken as a
relevant consideration. Secondly, in the facts of the present case
there is no likelihood of any embarrassment to the defendants
(Respondents 1 to 4 herein) as they had already filed the written
statement in the civil suit and based on the pleadings of the parties
the issues have been framed. In this view of the matter, the outcome
and/or findings that may be arrived at by the civil court will not at
all prejudice the defence(s) of Respondents 1 to 4 in the criminal
proceedings.”
16. In the light of the aforesaid judgments, paragraph 27(vi) of
Afcons (supra) and paragraph 36(i) of Booz Allen (supra), must now
be read subject
to the rider that the same set of facts may lead to civil
and criminal proceedings and if it is clear that a civil dispute involves
questions of fraud, misrepresentation, etc. which can be the subject matter
of such proceeding under section 17  of the Contract Act, and/or the tort
of deceit, the mere fact that criminal proceedings can or have been
instituted in respect of the same subject matter would not lead to the
conclusion that a dispute which is otherwise arbitrable, ceases to be so.
17. Section 17 of the Contract Act defines “fraud” as follows:
“17. “Fraud” defined.—”Fraud” means and includes any of
the following acts committed by a party to a contract, or with his
connivance, or by his agent2, with intent to deceive another party
thereto or his agent, or to induce him to enter into the contract—
2 Cf. S. 238, infra.
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(1) the suggestion, as a fact, of that which is not true, by one who
does not believe it to be true;
(2) the active concealment of a fact by one having knowledge or
belief of the fact;
(3) a promise made without any intention of performing it;
(4) any other act fitted to deceive;
(5) any such act or omission as the law specially declares to be
fraudulent.
Explanation.—Mere silence as to facts likely to affect the
willingness of a person to enter into a contract is not fraud, unless
the circumstances of the case are such that, regard being had to
them, it is the duty of the person keeping silence to speak3, or
unless his silence is, in itself, equivalent to speech.”
Section 10 of the Contract Act states that all agreements are
contracts if they are made with the free consent of parties competent to
contract, for a lawful consideration and with a lawful object, and are not
hereby expressly declared to be void. Section 14 states that consent is
said to be free when it is not caused inter alia by fraud as defined in
section 17. Importantly, the section goes on to say that consent is said to
be so caused when it would not have been given but for the existence,
inter alia, of such fraud. Where such fraud is proved, and consent to an
agreement is caused by fraud, the contract is voidable at the option of
the party whose consent was so caused. This is provided by section 19
of the Contract Act which reads as follows:
“19.
Voidability of agreements without free consent.—
When consent to an agreement is caused by coercion, fraud or
misrepresentation, the agreement is a contract voidable at the
option of the party whose consent was so caused.
A party to a contract, whose consent was caused by fraud
or misrepresentation, may, if he thinks fit, insist that the contract
shall be performed, and that he shall be put in the position in which
he would have been if the representation made had been true.
Exception.—If such consent was caused by
misrepresentation or by silence, fraudulent within the meaning of
3 See S. 143, infra.
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Section 17, the contract, nevertheless, is not voidable, if the party
whose consent was so caused had the means of discovering the
truth with ordinary diligence.4
Explanation.—A fraud or misrepresentation which did not
cause the consent to a contract of the party of whom such fraud
was practised, or to whom such misrepresentation was made,
does not render a contract voidable.
It has been held by the Bombay High Court in Fazal D. Allana v.
Mangaldas M. Pakvasa, AIR 1922 Bom 303, that section 17 of the
Contract Act only applies if the contract itself is obtained by fraud or
cheating. However, a distinction is made between a contract being
obtained by fraud and performance of a contract (which is perfectly
valid) being vitiated by fraud or cheating. The latter would fall outside
section 17 of the Contract Act, in which the remedy for damages would
be available, but not the remedy for treating the contract itself as being
void (see pp. 311-312). This is for the reason that the words “with intent
to deceive another party thereto or his agent” must be read with the
words “or to induce him to enter into the contract”, both sets of
expressions speaking in relation to the formation of the contract itself.
This is further made clear by sections 10, 14 and 19, which have already
been referred to hereinabove, all of which deal with “fraud” at the stage
of entering into the contract. Even section 17(5) which speaks of “any
such act or omission as the law specially
deals to be fraudulent” must
mean such act or omission under such law at the stage of entering into
the contract. Thus, fraud that is practiced outside of section 17 of the
Contract Act, i.e., in the performance of the contract, may be governed
by the tort of deceit, which would lead to damages, but not rescission of
the contract itself.5
4 It is important to note that the exception in section 19 does not apply to fraudulent
misrepresentation as the words “by silence” alone go with the word “fraudulent”, thus
not applying to cases of fraudulent misrepresentation. In John Minas Apcar v. Louis
Caird Malchus, AIR 1939 Cal 473, the concurrent judgments of Derbyshire, C.J. and
Lort Williams, J. referred to a passage from Sir Frederick Pollock and Sir Dinshah
Mulla, in their work on the Contract Act, 6th Edition, which said:
“It will be observed that the exception does not apply to cases of active fraud as
distinguished from misrepresentation which is not fraudulent”. (see pp. 476-477)
5 In State of Tripura v. Province of East Bengal, Union of India, 1951 SCR 1, in a
separate concurring judgment, Mukherjea, J. went into what in English law was
considered as a tort (see pp. 44-49). The learned Judge concluded as follows:
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18. Both kinds of fraud are subsumed within the expression “fraud”
when it comes to arbitrability of an agreement which contains an
arbitration clause.
19. Now, as to the measure of damages for fraudulent
misrepresentation by which a party to the contract is induced to enter
into the contract.In Smith New Court Securities Ltd. v. Scrimgeour
Vickers (Asset Management) Ltd., [1996] 4 All ER 769, the
appellant, Smith New Court [“SMC”] purchased shares in a company,
Ferranti International Signal Inc. [“F. Inc.”], which had been pledged to
a bank as security for a loan made by the bank to a client. SMC was
given the impression that it was in competition with two other bidders
for the shares and, therefore, bid a very high price for the shares. When
the share price collapsed as a result of a major fraud, SMC investigated
the circumstances of its purchase and discovered that the two other
bidders were not there at the time of the sale. SMC then brought
proceedings against the first defendant, Scrimgeour Vickers (Asset
Management) Ltd., and the bank, claiming damages for fraudulent
misrepresentation. The House of Lords referred to the leading judgment
in Doyle v. Olby (Ironmongers) Ltd., [1969] 2 All ER 119 (Queen’s
Bench) [“Doyle”], and held:
“Doyle v. Olby (Ironmongers) Ltd. establishes four points. First,
that the measure of damages where a contract has been induced
by fraudulent misrepresentation is reparation for all
the actual
damage directly flowing from (i.e. caused by) entering into the
transaction. Second, that in assessing such damages it is not an
“Thus tort is a civil injury other than a breach of contract which is capable of sustaining
an action for unliquidated damages in a court of law. If the appropriate remedy is not a
claim for unliquidated damages but for injunction or some other relief, it would not rank
as a tort though all the same it would be an actionable wrong.”
(at p. 48)
Likewise, in Ellerman & Bucknall Steamship Co. Ltd. v. Sha Misrimal Bherajee,
[1966] Supp SCR 92, the Court referred to the tort of deceit as follows:
“Deceit is a false statement of a fact made by a person knowingly or recklessly with the
intent that it shall be acted upon by another who does act upon it and thereby suffers
damage”; see A Textbook of the Law of Tort by Winfield, 5th Edn., at p. 379.”
(at p. 99)
On the facts, it was then concluded:
“Now let us look at the relevant facts of the present case. It was one of the terms of the
contract between the seller and the buyer that the goods should be packed in new fibre
drums. The standard of good order and condition of the packages was agreed upon by
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inflexible rule that the plaintiff must bring into account the value
as at the transaction date of the asset acquired: although the point
is not adverted to in the judgments, the basis on which the damages
were computed shows that there can be circumstances in which
it is proper to require a defendant only to bring into account the
actual proceeds of the asset provided that he has acted reasonably
in retaining it. Third, damages for deceit are not limited to those
which were reasonably foreseeable. Fourth, the damages
recoverable can include consequential loss suffered by reason of
having acquired the asset.”
(at p. 777)
In this judgment of Lord Browne-Wilkinson, a useful summary of
the principles that apply in assessing the damages payable where the
plaintiff has been induced to enter into a contract by a fraudulent
misrepresentation, are stated as follows:
“In sum, in my judgment the following principles apply in assessing
the damages payable where the plaintiff has been induced by a
fraudulent misrepresentation to buy property:
(1) the defendant is bound to make reparation for all the damage
directly flowing from the transaction;
(2) although such damage need not have been foreseeable, it must
have been directly caused by the transaction;
(3) in assessing such damage, the plaintiff is entitled to recover by
way of damages the full price paid by him, but he must give credit
for any benefits which he has received as a result of the transaction;
(4) as a
general rule, the benefits received by him include the
market value of the property acquired as at the date of acquisition;
but such general rule is not to be inflexibly applied where to do so
the parties to the contract. The shipowners knew that condition as the Mate’s receipt
disclosed the same. If the drums had been mentioned as old in the bill of lading, the said
bill would not have been a clean bill. Though the apparent condition of the drums was
old, the shipowners made an assertion that they were not old drums, i.e., they gave a
clean bill. This representation was obviously intended, in collusion with the seller, to
enable him to operate upon the credit with the Bank. This collusion is also apparent
from the indemnity bond they took from the seller to guard themselves against the
consequences of the said representation. All the elements of deceit are present.”
(at p. 102)
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would prevent him obtaining full compensation for the wrong
suffered;
(5) although the circumstances in which the general rule should
not apply cannot be comprehensively stated, it will normally not
apply where either (a) the misrepresentation has continued to
operate after the date of the acquisition of the asset so as to
induce the plaintiff to retain the asset or (b) the circumstances of
the case are such that the plaintiff is, by reason of the fraud,
locked into the property.
(6) In addition, the plaintiff is entitled to recover consequential
losses caused by the transaction;
(7) the plaintiff must take all reasonable steps to mitigate his loss
once he has discovered the fraud.”
(at pp. 778-779)
Likewise, in the same judgment Lord Steyn, after referring to the
seminal judgment in Doyle [supra] stated the law thus:-
“The logic of the decision in Doyle v. Olby (Ironmongers)
Ltd. justifies the following propositions.
(1) The plaintiff in an action for deceit is not entitled to be
compensated in accordance with the contractual measure of
damage, i.e. the benefit of the bargain measure. He is not entitled
to be protected in respect of his positive interest in the bargain.
(2) The plaintiff in an action for deceit is, however, entitled to be
compensated in respect of his negative interest. The aim is to put
the plaintiff into the position he would have been in if no false
representation had been made.
(3) The practical
difference between the two measures was lucidly
explained in a contemporary case note on Doyle v. Olby
(Ironmongers) Ltd.: G. H. Treitel, “Damages for Deceit” (1969)
32 M.L.R. 556, 558–559. The author said:
“If the plaintiff’s bargain would have been a bad one, even on
the assumption that the representation was true, he will do
best under the tortious measure. If, on the assumption that the
representation was true, his bargain would have been a good
one, he will do best under the first contractual measure (under
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which he may recover something even if the actual value of
what he has recovered is greater than the price).”
(4) Concentrating on the tort measure, the remoteness test whether
the loss was reasonably foreseeable had been authoritatively laid
down in The Wagon Mound in respect of the tort of negligence
a few years before Doyle v. Olby (Ironmongers) Ltd. was
decided: Overseas Tankship (U.K.) Ltd. v. Morts Dock &
Engineering Co. Ltd. (The Wagon Mound) [1961] A.C.
388. Doyle v. Olby (Ironmongers) Ltd. settled that a wider test
applies in an action for deceit.
(5) The dicta in all three judgments, as well as the actual calculation
of damages in Doyle v. Olby (Ironmongers) Ltd. , make clear
that the victim of the fraud is entitled to compensation for all the
actual loss directly flowing from the transaction induced by the
wrongdoer. That includes heads of consequential loss.
(6) Significantly in the present context the rule in the previous
paragraph is not tied to any process of valuation at the date of the
transaction. It is squarely based on the overriding compensatory
principle, widened in view of the fraud to cover all direct
consequences. The legal measure is to compare the position of
the plaintiff as it was before the fraudulent statement was made
to him with his position as it became as a result of his reliance on
the fraudulent statement.”
(at p. 792)
In an important passage titled “the date of transaction rule”, Lord
Steyn emphasised that in cases of
fraudulent misrepresentation, there is
only one and not two alternative measures of damages, namely, the loss
truly suffered by the party affected who must be put back in the same
place as if he had never entered into the transaction. In an action for
deceit, the price paid less the valuation at the transaction date is simply
a method of measuring such a loss, but is not a substitute for the basic
rule. This was felicitously stated as follows:
“The date of transaction rule
That brings me to the perceived difficulty caused by the date of
transaction rule. The Court of Appeal [1994] 1 W.L.R. 1271,
1283G, referred to the rigidity of “the rule in Waddell v.
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Blockey (1879) 4 Q.B.D. 678, which requires the damages to be
calculated as at the date of sale.” No doubt this view was influenced
by the shape of arguments before the Court of Appeal which
treated the central issue as being in reality a valuation exercise. It
is right that the normal method of calculating the loss caused by
the deceit is the price paid less the real value of the subject matter
of the sale. To the extent that this method is adopted, the selection
of a date of valuation is necessary. And generally the date of the
transaction would be a practical and just date to adopt. But it is
not always so. It is only prima facie the right date. It may be
appropriate to select a later date. That follows from the fact that
the valuation method is only a means of trying to give effect to the
overriding compensatory rule: Potts v. Miller , 64 C.L.R. 282,
299, per Dixon J. and County Personnel (Employment Agency)
Ltd. v. Alan R. Pulver & Co. [1987] 1 W.L.R. 916, 925–
926, per Bingham L.J. Moreover, and more importantly, the date
of transaction rule is simply a second order rule applicable only
where the valuation method is employed. If that method is
inapposite, the court is entitled simply to assess the loss flowing
directly from the transaction without any reference to the date of
transaction or indeed any particular date. Such a course will be
appropriate whenever the overriding compensatory rule requires
it. An
example of such a case is to be found in Cemp Properties
(U.K.) Ltd. v. Dentsply Research & Development
Corporation [1991] 2 E.G.L.R. 197, 201, per Bingham L.J. There
is in truth only one legal measure of assessing damages in an
action for deceit: the plaintiff is entitled to recover as damages a
sum representing the financial loss flowing directly from his
alteration of position under the inducement of the fraudulent
representations of the defendants. The analogy of the assessment
of damages in a contractual claim on the basis of cost of cure or
difference in value springs to mind. In Ruxley Electronics and
Construction Ltd. v. Forsyth [1996] A.C. 344, 360 G, Lord Mustill
said: “There are not two alternative measures of damages, as
opposite poles, but only one; namely, the loss truly suffered by the
promisee.” In an action for deceit the price paid less the valuation
at the transaction date is simply a method of measuring loss which
will satisfactorily solve many cases. It is not a substitute for the
single legal measure: it is an application of it.”
(at pp. 793-794)
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20. At this stage, in order to discover whether there is a strong
prima facie case made out in favour of HSBC in the present section 9
proceedings, it is necessary to refer to the Foreign Final Award dated
27.09.2014. The Foreign Final Award in this case, after setting out the
case of HSBC (the Claimant before the Arbitral Tribunal) and the case
of Avitel India and the Jain family (the Respondents before the Arbitral
Tribunal), set out the issues for determination thus:
“ISSUES
Issues for Determination
4.8 Against this background, the Tribunal considers that the issues
for determination are as follows:
i. have any of the Respondents made representations and/or
warranties to the Claimant before the Claimant’s investment in
Avitel India and if so, what were these representations and/or
warranties;
ii. if so, did the Respondents make the representations and/or
warranties in order to induce the Claimant to invest in Avitel India;
iii. if so, was the Claimant so induced and did it rely on the
Respondents’ representations and/or warranties;
iv. if so, were any of these representations and/or warranties
untrue;
v. if so, have any of the Respondents made such representations
and/or warranties knowing that these were false and/or without
belief in their truth, or recklessly and without caring whether these
representations and/or warranties were true or false;
vi. if so, are any of the Respondents liable to the Claimant in tort
for deceit;
vii. if so, are any of
the Respondents liable to the Claimant for
fraudulent misrepresentation pursuant to the relevant provisions
of the Contract Act;
viii. if so, is the Claimant entitled to damages for fraudulent
misrepresentation pursuant to the relevant provisions of the
Contract Act;
ix. If so, are any of the Respondents liable to the Claimant for
breach of warranty;
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x. If so, are any of the Respondents to indemnify the Claimant in
respect of any of the Claimant’s claims;
xi. if the Claimant is entitled to claim damages, what is the amount
of damages the Claimant is entitled to;
xii. if so, is the Claimant entitled to interest and if so, at what rate;
xiii. is the Claimant entitled to the reliefs sought;
xiv. costs;
xv. are the Claimant’s shares in Avitel India to be cancelled and if
so, on what basis?”
In answering these issues, the Arbitral Tribunal found:
“7.14 The Tribunal additionally accepts the Claimant’s submission
and finds that the Claimant was induced by and did rely on the
Respondents’ further representations that, inter alia, the Avitel
Group had immediate business with a value of approximately USD
1 billion with independent and legitimate customers as well as
good relationships with independent and legitimate suppliers and
service providers (see paragraphs 5.2(i)(l), 5.17(a.xv) and
5.17(a.xvi) above).
7.15 The Tribunal rejects the Respondents’ submission and finds
that Clause 6.3 of the SSA unequivocally establishes that the
Claimant did rely on the representations and warranties in making
its investment in Avitel India.”
It further found that the siphoning off of a large part of the amount
of USD 60 million into companies owned or controlled by the Jain family
was made out as follows:
“8.20 The Claimant relies in support, inter alia, on the witness
evidence of Mr.
van Schalkwyk, HSBC Middle East Limited’s
Regional Head of Fraud Risk, who conducted an investigation
into the banking activities of the Jain Family in the United Arab
Emirates. This investigation established the flow of funds following
the Claimant’s investment [Witness Statement of Mr. van
Schalkwyk, at para.9] in summary as follows:
(i) on 10 May 2011,an amount of USD 60,000,000.00 was received
by Avitel Dubai (Emirates NDB account number 744859021001)
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(“the Avitel Dubai Account”) from Avitel Mauritius. This
represented the Claimant’s initial investment [ Witness Statement
of Mr. van Schalkwyk, at para.17(a)].  Mr. van Schalkwyk was
able to ascertain this information from a statement of the Avitel
Dubai Account for the period between 1 May 2011 to 23 September
2011 which statement was provided to him by Mr. Derek Wylde
of HSBC [A copy of this statement is exhibited to the Witness
Statement of Mr. van Schalkwyk, at RVS-I pp. 2 to 3];
(ii) a series of payments was then made by Avitel Dubai as follows:
a. on 15 May 2011 the Avitel Dubai Account was debited in
the amount of USD 6 million and which amount was credited
to an Emirates NBD account held in the name of Highend.
This was followed by multiple small transfers out of Highend’s
bank account to a number of miscellaneous accounts [Witness
Statement of Mr. van Schalkwyk, at para. 17(b)(i)] ;
b. on 23 May 2011, the Avitel Dubai Account was debited in
the amount of USD 12.22 million and which amount was
credited to the same Emirates NBD account held in the name
of Highend. This amount was in turn transferred to an entity
identified as Avitel Limited on 30 May 2011 whose full beneficial
ownership Mr. van Schalkwyk has not been able to confirm
[Witness Statement of Mr. van Schalkwyk, at para. 17(b)(ii)];
c. on 9 June 2011 the Avitel Dubai Account was debited in the
amount of USD 10 million which amount was then credited to
a different Emirates NBD bank
account which is also held in
the name of Highend. On 27 July 2011 this amount was
transferred to a further Emirates NBD account in the name of
Digital Fusion. This sum was thereafter transferred to Cralton
Capital Commercial Broker Services LLC (“Cralton”) which
appears to be a broking and investment company [Witness
Statement of Mr. van Schalkwyk, at para.17(b) (iii)] in respect
of which company Mr. Boban Idiculla is the sole signatory to
its bank account with Emirates NDB [Witness Statement of
Mr. van Schalkwyk, at fn. 9];
d. on 13 June 2011 and 14 June 2011, the Avitel Dubai Account
was debited in the amounts of USD 10 million and USD 5
million respectively which amounts were credited to an Emirates
AVITEL POST STUDIOZ LIMITED & ORS. v. HSBC PI
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NBD account held in the name of Digital Fusion. On 19 July
2011 and 26 July 2011, Digital Fusion’s account was debited in
the amounts USD 5 million and USD 10 million respectively
which amounts were credited to an Emirates NBD account
held in the name of Cralton. The account records of Cralton
held with Emirates NBD show that the transfers in July 2011
totalling USD 25 million were used to make various transfers,
fixed term deposits and investments between Cralton, Highend,
Digital Fusion and SPAC [Witness Statement of Mr. van
Schalkwyk, at para.17(b)(iv)];
e. on 23 February 2012, the Avitel Dubai Account was debited
in the amount of USD 8 million which amount was credited to
the Emirates NBD account held in the name of Highend. On
28 February 2012, this account was debited in the amount of
USD 7.48 million which was credited to a different Emirates
NBD account held in the name of SPAC. A further debit in the
amount of USD 500,000 occurred on 28 February 2012 which
sum was routed through two different Emirates NBD accounts,
one held in the name of DejaVu FZ-LLC and one in the name
of Al Jalore Trading FZE, before this sum was finally credited
to a Dubai Multi Commodities Centre entity, namely Emerald
DMCC [Witness Statement of Mr. van Schalkwyk, at
para.17(b)(v)];
f. Mr. van Schalkwyk understands that between 18 April 2012
and 29 April 2012, there was a further transfer from the Avitel
Dubai Account of USD 8.5
million. However, he has been
unable to ascertain to which account(s) these funds have been
transferred to [Witness Statement of Mr. van Schalkwyk, at
para.18].”
It then found that the following admitted facts would show that
most of the representations made by the Avitel Group and the Jain family
to HSBC were false in that:
“8.70 The Tribunal notes that the Respondents have not denied
the accuracy of thefollowing:
a. the Avitel Group did not have a direct relationship with the
BBC and was not close to signing the BBC Contract;
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b. Avitel Dubai’s offices had been closed for a period of time;
c. Mr. Siddhartha Jain was a forty nine percent shareholder in
Highend as well as in Digital Fusion at the material time;
d. Mr. Siddhartha Jain is the sole signatory of and therefore
controls Highend’s and Digital Fusion’s bank accounts with
Emirates NBD;
e. Mr. Siddhartha Jain was co-signatory (together with one
Mr. Ankit Garg) of SPAC’s bank accounts with Emirates NDB;
f. Kinden was not in existence between 12 October 2010 and
26 October 2011;
g. Mr. Boban Idiculla who is the sole shareholder and director
of Kinden, is also the sole signatory of and therefore controls
Cralton’s bank accounts with Emirates NDB;
h. Purple Passion, which was wholly owned by Mr. Siddhartha
Jain, was dissolved on 23 November 2010;
i. In total, USD 59.72 million of the Claimant’s USD 60 million
investment have been transferred out of Avitel Dubai’s bank
accounts and into bank accounts the majority of which are
controlled by the Jain Family;
j. the domain names for Kinden, SPAC, Highend and Digital
Fusion had been registered by Mr. Hrishi Jain;
k. on 28 January 2012, the websites for Kinden, SPAC, Highend
and Digital Fusion had been transferred from the hosting site
“rediffinalpro.com ” to “rirev.com”, the same hosting site which
had been utilized by Avitel Dubai since 28 June 2011. Each
website was thereafter re-registered employing a proxy service
called “Domains By Proxy, LLC”, which provides anonymity
to the
owners of websites on the internet.”
As a result thereof, issue (iv) was answered stating:
“8.72 In these circumstances and also for the reasons set out
below, the Tribunal accepts the Claimant’s submissions and finds that
the following representations and/or warranties made by the Respondents
were false and/or misleading:
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a. the Avitel Group had been in advanced negotiations with the
BBC and a BBC Contract had been close to execution. This is
because the Respondents do not deny that the Avitel Group
never had a direct relationship with the BBC and was not about
to sign the BBC Contract;
b. at the Completion Date, the Avitel Group had the benefit of
the Material Contracts with Kinden, SPAC and Purple Passion
in total valued at approximately USD 658 million. This is
because in effect, Kinden and Purple Passion had not been in
existence at the time of the Claimant’s investment;
c. at the Completion Date, the Avitel Group’s key customers
Kinden, SPAC and Purple Passion as well as Avitel Dubai’s
key supplier, Highend, and key service provider, Digital Fusion,
were all independent and legitimate companies. This is because
in effect, Kinden and Purple Passion had not been in existence
at the time of the Claimant’s investment and Mr. Siddhartha
Jain was the shareholder and/or sole signatory to Highend’s
and Digital Fusion’s bank accounts with Emirates NDB and
was also co-signatory to SPAC’s bank accounts with Emirates
NDB. Further, in light of the complex web of transactions to,
from and between Highend’s, Digital Fusion’s, SPAC’s and
Cralton’s various bank accounts with Emirates NDB (see
paragraph 8.20 above), the Tribunal accepts the Claimant’s
submission that none of these entities were independent and
legitimate companies. As for Mr. van
Schalkwyk’s evidence,
as there is no evidence adduced which would challenge the
veracity and reliability of Mr. van Schalkwyk’s evidence, the
Tribunal sees no reason to disregard his evidence. In the
Tribunal’s view he is a credible witness;
d. the Claimant’s investment was required and was to be utilized
for purchasing equipment in order to enable Avitel Dubai to
service the BBC Contract. In light of the circumstances
referred to in paragraph 8.68 above, the Tribunal accepts the
Claimant’s submission that its investment has been siphoned
off by the Respondents;
e. the representations and/or warranties contained in Clause
6.2.1 of the SSA because the information provided to the
Claimant prior to and during the negotiations and the
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preparations of the SSA had not been provided by the
Respondents and its/or their representatives and advisors in
good faith and had been untrue, inaccurate and misleading for
the reasons set out in paragraphs 8.72 (a) to (d) above;
f. the representations and/or warranties contained in Clause
6.2.2 of the SSA because the representations and warranties
made by the Respondents in the SSA read in conjunction with
Clause 7 of Schedule 3 as well as Annexure C to the Disclosure
Letter did contain untrue statements of material facts as the
Avitel Group did not have immediate business worth close to
USD 1 billion with independent and legitimate customers
including the purported relationship with the BBC;
g. the representations and/or warranties contained in Clause
6.2.3 of the SSA because there had been facts or circumstances
relating to the affairs of Avitel India or any Subsidiary which
had not been disclosed to the Claimant and which could have
had an impact on the decision of the Claimant to invest in Avitel
India. In the Tribunal’s view, the fact that Kinden and Purple
Passion did not exist at the material time and that Highend’s,
Digital Fusion’s and SPAC’s bank accounts with Emirates
NDB are controlled by Mr. Siddhartha Jain, would have had
an impact on the Claimant’s decision to invest in Avitel India;
h. the representations and/or warranties contained in Clauses
7.1 and 7.3 of Schedule 3 of the SSA read in conjunction with
the Disclosure Letter as Kinden
and Purple Passion did not
exist at the Completion Date such that the Material Contracts
with these entities could not have existed either;
i. the representations and/or warranties contained in Clause
7.5 of Schedule 3 of the SSA because Mr. Siddhartha Jain
was at the Completion Date a forty nine percent shareholder
of Highend and Digital Fusion so any transactions with these
entities were Related Party Transactions which were not
permitted pursuant to Clause 7.5 of Schedule 3 of the SSA and
which, in any event, had not been concluded on an arm’s length
basis;
j. the representations and/or warranties contained in Clause
10 of Schedule 3 of the SSA because Avitel India’s and the
AVITEL POST STUDIOZ LIMITED & ORS. v. HSBC PI
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Subsidiaries’ accounts could not have given a true and fair
view of the assets, liabilities and state of affairs of Avitel India
and the Subsidiaries at the Accounts Date and of the profits or
losses for the period concerned. For example, the Material
Contracts with Kinden and Purple Passion did not exist at the
Completion Date;
k. the representations and warranties contained in Clause 8 of
Schedule 3 of the SSA  because if the accounts did not give a
true and fair view of the assets, liabilities and state of affairs
of Avitel India and the Subsidiaries, all Tax Returns relating to
Avitel India and the Subsidiaries or the Business or the assets
of Avitel India and each of the Subsidiaries could not have
been correct in all material respects;
l. the representations and warranties contained in Clause 11 of
Schedule 3 of the SSA because the Respondents falsely
represented and warranted that Avitel India and each of the
Subsidiaries were in material compliance with all applicable
laws which in light of the Tribunal’s findings in paragraphs
8.72(a) to (j) above, could not have been the case;
m. the representations and warranties contained in Clause 6.1
of the SSA because in light of the Tribunal’s findings in
paragraphs 8.72 (a) to (k) above, not every representation and
warranty made in the SSA and in Schedule 3 of the SSA was
true, complete, accurate and not misleading at the Completion
Date.”
As a result, in paragraph
20, a summary of findings was given as
follows:
“20. SUMMARY
20.1 The Respondents chose not to attend the November 2013
Oral Hearing and the Tribunal is not satisfied that they were unable
to attend or prevented from doing so. The dates for the November
2013 Oral Hearing had been fixed some nine months before the
hearing itself. It was only on 19 April 2013 that the First Respondent
vide Mr. Yogesh Garodia’s Request applied for these dates to be
rescheduled to dates later than 9 November 2013 but without any
indication as to the exact dates it sought. The Second, Third and
Fourth Respondent did not seek a re-scheduling of the November
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2013 Oral Hearing until 29 July 2013 giving also no indication of
alternative hearing dates asserting that the Respondents following
the issue of the EOW Final Report, required additional time to file
their witness statements and to prepare for the oral hearing. The
Tribunal did not find this to be persuasive as there was still time.
In subsequent correspondence on 15 October 2013, the
Respondents further asserted that the November 2013 Oral
Hearing fell over a holiday period in India, namely the Diwali
Festival. While the Tribunal accepts this, this hearing which was
scheduled for and to be held in Singapore together with the
substantial delay in seeking a postponement of the November 2013
Oral Hearing was not satisfactorily explained. The Respondents
also sought an adjournment on the grounds, inter alia, of their
inability to engage counsel. However, it appears to the Tribunal
that during this period (i.e. from the time when they sought an
adjournment up to the date of the November 2013 Oral Hearing),
they were able to. The Tribunal also points out that although the
Respondents at various stages ceased to be represented by
lawyers, the letters written and signed by Mr. Yogesh Garodia
either on behalf of the First Respondent or on behalf of all
Respondents or the letters signed by the First Respondent (through
Mr. Yogesh Garodia) Second, Third and Fourth Respondents,
during this period were written in legal terminology including the
employment of legal
Latin maxims. The Respondents’ applications
for re-scheduling the hearing dates in the Tribunal’s view must be
viewed against the background of the failure of the Respondents
to comply with the orders of the Emergency Arbitrator in
proceedings in Singapore in which the Respondents had been
represented by both Indian and Singapore counsel and provided
evidence. All of the above are suggestive to the Tribunal of an
attempt to delay these proceedings.
20.2 The Respondents provided no witness statements and did
not adduce any oral evidence before this Tribunal although the
Tribunal accepts that they did so in the proceedings before the
Emergency Arbitrator, namely in Mr. Yogesh Garodia’s Witness
Statement. In reaching its findings and its decisions, this Tribunal
has considered fully the Respondents’ numerous submissions and
Mr. Yogesh Garodia’s Witness Statement as well as the
documentary evidence. The Claimant provided evidence from a
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number of witnesses and also documentary evidence. As the
Respondents did not attend the November 2013 Oral Hearing,
the Tribunal tested the evidence of the Claimant’s witnesses by
asking a number of questions. The Tribunal finds each of the
Claimant’s witnesses to be credible and it accepts their evidence
part of which is corroborated by the documentary evidence
submitted by the Claimant Including an email from Ms. Sarah
Jones, General Counsel at the BBC, dated 4 May 2012 confirming,
inter alia, that the BBC had not entered into a contract with Avitel
India, that Mr. John Linwood had not attended a meeting on 19
April 2011 with Mr. Anthony Bernbaum but at the same time was
in an internal meeting with BBC staff.
20.3 In summary, the Tribunal finds that the Jain Family (namely
the Second, Third and Fourth Respondents) engaged in a deliberate
and dishonest scheme to induce the Claimant (part of HSBC) to
invest in Avitel India (namely the First Respondent). The Claimant
placed the investment because it had been advised by the Jain
Family (making the representations also on behalf of Avitel India),
verbally, in writing and in the SSA itself, that Avitel India was
about to and from 2 August 2011 had signed a contract with the
BBC, for the BBC to use the services of Avitel India. This was
false. Not only had a contract not been negotiated, let alone signed
with the BBC, but the BBC had no knowledge of it.
20.4 The
misrepresentations and deception of the Respondents
included the arrangement of a meeting between a representative
of HSBC and a person who was falsely held out by the
Respondents and purported to be the Chief Technical Officer of
the BBC and who falsely purported to corroborate the
Respondents’ misrepresentations. The representations were made
prior to the conclusion of the SSA and in the SSA itself. They
were made knowingly to be untrue and were fraudulent.”
As a result thereof, it was found that HSBC, in respect of its
claim for fraudulent misrepresentation, and its claim in tort for deceit, is
entitled to damages in the total amount of USD 60 million plus interest
and costs as awarded. The final declaration made in the Award then
reads:
“21.21 [The tribunal] Declares and Orders that upon the
Respondents paying in full and unconditionally the sums awarded
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to the Claimant in paragraphs 21.15, 21.16, 21.18, 21.19
hereinabove and all costs arising out of and incidental to the
cancellation of the Claimant’s Preference Subscription Shares and
Equity Subscription Shares (as defined in the SSA) in Avitel India,
that the said shares be cancelled and that in this regard, the Parties
take the requisite steps to effect the said cancellation within 30
days of receipt of such payment.”
21. There can be no doubt whatsoever after reading the issues
and some of the material findings in the Foreign Final Award that the
issues raised and answered are the subject matter of civil as opposed to
criminal proceedings. The fact that a separate criminal proceeding was
sought to be started and may have failed is of no consequence whatsoever.
We, therefore, hold on a conspectus of these facts, and following our
judgments, that the issues raised and answered in the Foreign Final Award
would indicate:
(i) That there is no such fraud as would vitiate the arbitration
clause in the SSA entered into between the parties as it is clear that this
clause has to be read as an independent clause. Further, any finding that
the contract itself is either null and void or voidable as a result of fraud
or misrepresentation does not entail the invalidity of the arbitration clause
which is extremely wide, reading as follows:
“Any dispute, controversy or claim arising out of or in connection
with this Agreement, including any question regarding its
existence,
validity, interpretation, breach or termination ……”
(emphasis supplied)
(ii) That the impersonation, false representations made, and
diversion of funds are all inter parties, having no “public flavour”as
explained in paragraph 14 so as to attract the “fraud exception”.
22. Thus, a reading of the Foreign Final Award in this case would
show that a strong prima facie case has indeed been made out as the
Award holds the BBC transaction as a basis on which the contract was
entered into and the USD 60 million paid by HSBC, which would clearly
fall within fraudulent inducement to enter into a contract under section
17 of the Contract Act. Such a contract would be voidable at the instance
of HSBC. Also, the findings on the siphoning off of monies that were
meant to be allocated for the performance of the BBC contract would
attract the tort of deceit. The measure of damages for such fraudulent
misrepresentation is not the difference between the value of the shares
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on the date of making the contract and the value HSBC would have
received, if it had resold those shares in the market, after the purchase.
As has been held in the judgments stated hereinabove, the measure of
such damages would be to put HSBC in the same position as if the
contract had never been entered into, which is, the entitlement to recover
the price paid for the shares and all consequential losses. This being the
case, it is difficult to accede to the Division Bench’s finding as to the
measure of damages in such cases.
23. So far as the other points raised by M/s. Mukul Rohatgi and
Saurabh Kirpal are concerned, we wish to say nothing, as any finding on
these points even prima facie would prejudice the section 48 proceedings
pending in the Bombay High Court. So far as the appeal of HSBC is
concerned, we are of the view that it has substance in that the USD 60
million that was to be kept aside vide the Single Judge’s order, was fair
and just in the facts of the case in that it is only the principal amount
without any interest or costs that is ordered to be kept aside. Further, the
reduction of USD 60 million to USD 30 million by the Division Bench is
not justified given our finding on the measure of damages in the facts of
this case.
24. It is clarified that any finding made on facts in this judgment is
only prima facie for the purpose of deciding the section 9 petition. We
have held that HSBC has made out a
strong prima facie case
necessitating that USD 60 million, being the principal amount awarded
to them, is kept apart in the manner indicated by the learned Single
Judge of the Bombay High Court. The balance of convenience is also in
its favour.It is clear that in case HSBC was to enforcethe Foreign Final
Award in India in accordance with section 48 of the 1996 Act, irreparable
loss would be caused to it unless at least the principal sum were kept
aside for purposes of enforcement of the award in India. Accordingly,
we dismiss Civil Appeal No.5145 of 2016filed by Avitel India and the
Jain family, and allow Civil Appeal No.5158 of 2016 filed by HSBC.
Civil Appeal No. 9820 of 2016
25. In this case, the Appellant is an angel investor in the shares of
Avitel India. By a letter dated 04.07.2016, the Appellant herein expressed
his concern on the observations and the freezing of the company’s bank
account by the Bombay High Court vide orders dated 22.01.2014 and
31.07.2014. The Appellant attended a meeting of the Board of Directors
of Avitel India on 11.07.2016, in which the Chairman of the company,
i.e., Mr. Pradeep Jain, explained to the Appellant in some detail as to the
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proceedings filed by HSBC against the company and the orders passed
by the Arbitrators and Courts therein. The Chairman expressed a view
that, ultimately, they were likely to succeed in this litigation. The Appellant
stated that he was not satisfied with this point of view and asked for the
return of the money invested along with interest at the rate of 12% per
annum. The Chairman stated that the amounts invested by the Appellant
were in equity shares, which were the fixed capital of the company, and
any return of such investment is not permissible in law. The Appellant
then stated the following, which is recorded in the Minutes of the Board
Meeting dated 11.07.2016:
“Mr. Savla stated that he would like to peruse the documents in
detail and would not rest content till full justification is made
available, if need so arises for redressal of issues involved. He
requested that the disputes be decided by an Arbitrator. The Board
unanimously consented that any disputes raised by Mr. Ravindra
Savla, so long as they are arbitrable under law, shall be referred
to arbitration in accordance with Indian law. Mr. Ravindra Savla
stated that he would examine the papers provided to him and
determine his further course of action. 
Mr. Ravindra Savla further requested that a copy of the Minutes
of this Meeting of the Board of Directors be made available to
him. The Chairman accepted the said request.”
26. Almost immediately, the Appellant filed a section 9 petition
under
the 1996 Act before the learned ADJ, Mohali, which was decided
by a judgment dated 03.08.2016, in which the learned ADJ held that the
Board Resolution dated 11.07.2016 only showed that any disputes raised
by the Appellant shall be referred to arbitration in accordance with Indian
law, provided they are arbitrable disputes. It was then held that as serious
allegations of fraud were raised by HSBC in the dispute between HSBC
and the Avitel Group/Jain family, such dispute would not be arbitrable as
per Indian law. Even otherwise, according to the learned ADJ, this dispute
(i.e., the dispute between HSBC and the Avitel Group/Jain family) is
pending adjudication before the Supreme Court of India, and any decision
made by that Court shall have a direct bearing on the dispute between
the parties in this case also. It was, therefore, held:
“11. In view of the detailed discussion made above, this court can
safely conclude that the petitioner is a shareholder and has no
specific separate arbitration agreement, so no arbitrable dispute
arises, as per Indian law, which may be referred to arbitration or
AVITEL POST STUDIOZ LIMITED & ORS. v. HSBC PI
HOLDINGS (MAURITIUS) LIMITED [R. F. NARIMAN, J.]
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SUPREME COURT REPORTS
[2020] 10 S.C.R.
for which, provisions of section 9 of Arbitration and Conciliation
Act can be involved for protection of his interest qua the shares
purchased by him. Therefore, I do not find that any prima-facie
case is made out in favour of applicant. Even balance of
convenience is not in favour ofthe applicant and no irreparable
loss will be caused to the applicant, if this application is not
allowed. Thus no ground is made out for grant of relief under
section 9 of the Act and section 151 of CPC and the application
stands dismissed accordingly. File be consigned to the record
room.”
27. An appeal was filed against this judgment to the Punjab and
Haryana High Court. A learned Single Judge of the High Court, by the
impugned judgment dated 02.09.2016, held that the final relief sought for
is the return of an invested amount with interest together with cancellation
of the shares. Such disputes would be governed by the Companies Act,
2013. Therefore, following some of the judgments of the Supreme Court,
the remedy for arbitration sought by the Appellant would be barred by
implication in view of the provisions of the Companies Act, 2013. After
discussing the “fraud exception” in some detail and stating that serious
allegations of fraud and impersonation are not arbitrable, the High Court
concluded:
“For the foregoing reasons, I am of the view that primarily, the
appellant is trying to make out a case of parity with the case of
HSBC,
which is already a matter sub-judice before the Competent
Court, but as per the facts narrated above, I am of the view that
the prima facie allegation of fraud, as already noticed above, would
not fall in the realm of arbitrable dispute and therefore, rightly so,
the court below has declined to grant the interim relief as sought.
I do not intend to differ with the order under challenge. No ground
for interference is made out.
The appeal is dismissed.”
28. In view of the judgment in Civil Appeal No.5145 of 2016 and
Civil Appeal No.5158 of 2016, we set aside the judgments of the learned
ADJ and the learned Single Judge that are impugned in this appeal, and
remand the matter for adjudication afresh by the ADJ, Mohali. This civil
appeal is, accordingly, allowed, the judgments dated 03.08.2016 and
02.09.2016 are set aside, and the matter is remanded to the ADJ, Mohali
for fresh disposal in accordance with law.
Ankit Gyan
Appeal disposed of.