Author: Shalaka Patil*
The Supreme Court in its recent decision in Avitel Post Studioz Ltd. And Ors. v. HSBC Pl Holdings Mauritius Ltd. put to rest some questions surrounding the controversy of whether fraud is arbitrable in India. The short answer to this question is – yes.
Why then have there been concerns around this issue in Indian jurisprudence? An early reason is the Supreme Court’s previous case of N. Radhakrishnan v. Maestro Engineers and Ors. in which it found that since the dispute involved serious questions of fraud and malpractice, it was more fit to be decided by a trial in court. In making its decision, the Supreme Court relied upon an earlier decision in Abdul Kadir Shamsuddin Bubere v. Madhav Prabhakar Oak where it held that when a dispute involves serious questions of fraud and the party accused of such fraud wishes for the matter to be tried in court, the matter should be so tried. It is apposite to add here that Abdul Kadir was decided under the erstwhile Arbitration Act, 1940 which afforded courts much wider discretion to continue a matter in court instead of in arbitration. The present Arbitration and Conciliation Act, 1996 (“Act”) makes a reference to arbitration mandatory under Section 8, in the face of an arbitration clause, unless the Court finds that prima facie no valid arbitration agreement exists.
A subsequent decision of the Supreme Court in Swiss Timing Limited v. Commonwealth Games 2010 Organising Committee found N. Radhakrishnan to be per incuriam but since this decision was made in the exercise of the Court’s power under Section 11(6) of the Act it was subsequently held to have no precedential value. Even though other decisions of the Court have attempted to clear the air around the issue of arbitrability of fraud, nothing explained the standard in more detail than Avitel.
In Avitel, the Court reiterated the general standard of law in India, that fraud was arbitrable. However, the Court also detailed what constitutes “serious allegations of fraud”: (1) that the fraud is such that it can be said that the arbitration agreement itself ceases to exist; or (2) the fraud touches upon matters in the public domain. As to the first requirement, an arbitration agreement would be inexistent if it was vitiated by fraud and would be voidable at the option of the party defrauded. This the Court distinguished from a situation of where the performance of the contract was vitiated by fraud. In such a case a remedy of damages would be available to the defrauded party. Matters in the public domain comprise actions of the State or its instrumentalities involving “arbitrary, fraudulent or malafide conduct” thus raising issues of public law rather than those merely pertaining to the contract itself.
There are a number of important issues that arise from this circumscribing of serious fraud.
- There may be questions of fraud that touch upon a public domain (such as cases of investor fraud) but which may also result in contractual breach. Then why may a party be denied the option of choosing arbitration as its form of remedy if it has a valid contract in place instead of choosing to approach courts? There may be parties within a group who have individual agreements with arbitration clauses and others that may not. Will a broad standard of this nature put the parties with an arbitration agreement at a disadvantage, in that they will also be forced to approach courts merely because the fraud is one that has a public flavour?
- The Court in Avitel itself recognised that fraud vitiating the very making of an arbitration agreement is usually rare. Therefore, in limiting serious fraud to this standard, the Court widened the sphere of those matters of fraud that may be arbitrated.
- If the Abdul Kadir standard is to be followed, it allows for a matter to be tried in court if the party against whom the allegation of fraud is made so desires. It may be argued that this option is no longer available as a result of the Avitel
- One excellent takeaway from the Avitel case is that a party can no longer argue the bogie of an existing criminal proceeding on the same subject matter as evidence of “serious fraud.” The Court explained this position succinctly in the following words in paragraph sixteen, “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.” 
- It may still be argued that the standard of “simple fraud” versus “serious fraud” continues to remain somewhat nebulous, in that matters which touch upon a public domain may also be between some parties. Would that then by itself turn such matters into simple fraud? This seems to be a somewhat simplistic standard.
- There may be other issues that impact the public at large that may have no element of fraud. If the standard of “public domain” is to be applied, it may also be argued that all issues that impact the public at large would not be arbitrable. While this, of course, is not the intent of the case, the same standard can be said to apply to cases outside of fraud as well.
In conclusion, while the Avitel case clarifies a number of issues and raises several interesting questions, the intent of Indian courts is clear – they want to restrict the kind of cases that may not be arbitrable. In doing so, they uphold the bargain of the parties to submit their dispute and resolve it through arbitration, as the Court did in Avitel.
 Avitel Post Studioz Ltd. And Ors. v. HSBC Pl Holdings Mauritius Ltd., Civil Appeal No. 5145 of 2016, decided on August 19, 2020, Sup. Ct. India.
 N. Radhakrishnan v. Maestro Engineers and Ors., Civil Appeal No.7019 of 2009, decided on Oct. 22, 2009, Sup. Ct. India.
 Id. at 10.
 Abdul Kadir Shamsuddin Bubere v. Madhav Prabhakar Oak, AIR 1962 SC 406.
 N. Radhakrishnan v. Maestro Engineers and Ors., Civil Appeal No.7019 of 2009, decided on Oct. 22, 2009, at 12, Sup. Ct. India.
 Section 8 – Power to refer parties to arbitration where there is an arbitration agreement – “1[(1) A judicial authority, before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party to the arbitration agreement or any person claiming through or under him, so applies not later than the date of submitting his first statement on the substance of the dispute, then, notwithstanding any judgment, decree or order of the Supreme Court or any Court, refer the parties to arbitration unless it finds that prima facie no valid arbitration agreement exists.;]
(2) The application referred to in sub-section (1) shall not be entertained unless it is accompanied by the original arbitration agreement or a duly certified copy thereof.
2[Provided that where the original arbitration agreement or a certified copy thereof is not available with the party applying for reference to arbitration under sub-section (1), and the said agreement or certified copy is retained by the other party to that agreement, then, the party so applying shall file such application along with a copy of the arbitration agreement and a petition praying the Court to call upon the other party to produce the original arbitration agreement or its duly certified copy before that Court.]
(3) Notwithstanding that an application has been made under sub-section (1) and that the issue is pending before the judicial authority, an arbitration may be commenced or continued and an arbitral award made.
 Swiss Timing Limited v. Commonwealth Games 2010 Organising Committee, (2014) 6 SCC 677, ¶ 21 (India).
 State of West Bengal v. Associated Contractors, (2015) 1 SCC 32 (India).
 See A. Ayyasamy v. A. Paramasivam, (2016) 10 SCC 386; Rashid Raza v. Sadaf Akhtar, (2019) 8 SCC 710.
 Avitel Post Studioz Ltd. And Ors. v. HSBC Pl Holdings Mauritius Ltd., Civil Appeal No. 5145 of 2016, decided on August 19, 2020, Sup. Ct. India, ¶ 14.
 Id., ¶ 17-18.
 Id., ¶ 14.
 See id., ¶ 11.
 Id., ¶ 16.
*Shalaka Patil is a lawyer based in Mumbai, India. Her work focusses on international arbitration and commercial litigation. Views expressed are personal.