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Treading the Line Between Arbitrability and Serious Fraud: Avitel Post Studioz Ltd. v HSBC

– Parul Kumar*

The judgment in Avitel Post Studioz Ltd.v. HSBC PI Holdings (Mauritius) Ltd. is the latest in a series of judgments delivered by the Supreme Court of India in recent years engaging with the question of arbitrability of fraud. The recent judgment of a two-judge bench comprising Justices R.F. Nariman and Navin Sinha, can be seen to complement an earlier two-judge bench decision on the issue in A. Ayyasamy v. A. Paramasivam & Ors, which held that cases involving serious allegations of fraud are not arbitrable. The central issue is certainly a contentious one, because it is intrinsically tied to the permissible degree of judicial intervention in an arbitral dispute requiring engagement with issues of fraud. This article discusses the thematization of the arbitrability of fraud by the Supreme Court in this judgment, analyzing its contribution to the jurisprudence on the topic.

The first part of this post will discuss the factual background of the disputes between the parties in this case, and briefly outline the chronology of arbitral proceedings leading to the case before the Supreme Court. The second part of this post will delve into four themes that the Supreme Court engaged with, while delivering this judgment. The third and last part of the post analyzes the judgment in the context of its reiteration of the current legislative framework for arbitration in India, and the test based on the seriousness of fraud which it applies.

I. The Factual Background of the Case

A. Disputes between HSBC and the Avitel appellants

The underlying disputes in this case pertained to an investment of USD 60 million made by HSBC in Avitel India, relying on representations made by Avitel India and its promoters (collectively, the appellants in this case) that the Avitel Group was at an advanced stage of finalizing a contract with the British Broadcasting Corporation (‘BBC’), which was expected to generate significant revenue.

The parties entered into a Share Subscription Agreement (‘SSA’) and a Shareholders’ Agreement (‘SHA’) providing for arbitration at the Singapore International Arbitration Centre (‘SIAC’), with the seat of arbitration at Singapore. Part I of the Arbitration and Conciliation Act, 1996 (‘the 1996 Act’) was excluded except for Section 9 (interim measures by a court).

About a year after the investment, on suspicions of misrepresentation by the Avitel Group, HSBC investigated the Avitel Group’s contract with BBC. HSBC found this contract to be non-existent and a mere projection by the Avitel Group merely to induce HSBC to invest. Further, about USD 51 million of HSBC’s investment was found to have been siphoned off to companies where Avitel India’s promoters had a stake.

B. Arbitration proceedings

HSBC invoked arbitration and was granted interim reliefs in two interim awards passed by the SIAC appointed emergency arbitrator. Further, HSBC filed a petition for interim reliefs under Section 9 of the 1996 Act before the Bombay High Court, and secured certain interim reliefs.

Meanwhile, the appellants challenged the jurisdiction of the three-member arbitral tribunal set up under the SIAC Rules, contending that allegations of fraud could not be arbitrated. The arbitral tribunal rejected this challenge on the ground that under Singapore law, which governed the arbitration, fraud was arbitrable. The single judge of the Bombay High Court also gave a prima facie finding in the Section 9 petition that the arbitrability of the dispute would be governed by Singaporean law.

In an appeal against this order, a division bench of the Bombay High Court confirmed this finding. It was also observed that since the allegations of fraud made by HSBC in this case were mainly in the context of fraud and misrepresentation, as defined in Sections 17 and 18 of the Indian Contract Act, 1872 (‘the Contract Act’), the disputes that had arisen between the parties had a civil character. The Supreme Court ruling discussed in this post was passed in appeals against this order of the division bench of the Bombay High Court.

Separately, in the arbitration proceedings under the SSA, the arbitral tribunal made an award in favour of HSBC, and also found the appellants liable for fraudulent representation under the Contract Act. The enforcement proceedings filed by HSBC under Section 48 of the 1996 Act are still pending at the Bombay High Court.

II. The Supreme Court’s Ruling on the Arbitrability of Fraud

The two-judge bench of the Supreme Court focused its analysis on the question of whether HSBC could be said to have a strong prima facie case in its pending enforcement proceedings. Within this framework, the key question before the Supreme Court was on the arbitrability of the dispute, in the specific context of the allegations of fraud that arose in this dispute. This issue was analyzed under the following pillars:

A. Scheme of the act

At the outset, the Supreme Court noted that various provisions of the 1996 Act are designed to give effect to the intention of the parties to arbitrate their disputes: Section 5 focusing on limited judicial intervention, Section 16 (which gives effect to the principle of Kompetenz Kompetenz), and Section 8 which mandatorily requires judicial authorities to refer actions subject to an arbitration clause to arbitration. This is in contrast to the Arbitration Act, 1940 (‘the 1940 Act’), governing precedents on fraud such as Abdul Kadir Shamsuddin Bubere v. Madhav Prabhakar Oak, where the court’s reference to arbitration was discretionary.

B. Non-inclusion of statutory provision on fraud

In the aftermath of the N. Radhakrishnan v. Maestro Engineers and Others judgment, the Law Commission of India proposed an amendment to the 1996 Act, with a view to negating the effect of the judgment. The amendment expressly included the arbitral tribunal’s power to arbitrate on a dispute which “…involves a serious question of law, complicated questions of fact or allegations of fraud, corruption, etc”.The Supreme Court rejected the appellants’ argument that the non-enactment of such an amendment could be read to negate the jurisprudence that had evolved on this issue. It observed that such non-enactment could be attributed to other factors, such as vague or clumsy drafting, or the Parliament’s decision to let courts decide the fraud exception on a case-to-case basis.

C. Serious allegations of fraud

Based on an examination of the judgment in Ayyasamy, and later judgments which followed its ruling, the Supreme Court concluded that “serious allegations of fraud” warranting the exclusion of arbitration could arise only on the satisfaction of two tests: (i) the party against whom breach is alleged could not have entered into an arbitration agreement in the first place, and therefore, the arbitration clause or agreement cannot be said to exist, and (ii) the allegations of arbitrary, fraudulent or mala fide conduct are made against the state or its instrumentalities, in which case, the questions lie in the public domain and must be entertained by a writ court.

D. Civil or criminal proceedings

Relying on established precedent in Afcons and Booz Allen, the Supreme Court ruled that the same issues of fraud and misrepresentation could give rise to both civil proceedings (e.g. under Section 17 of the Contract Act and under the tort of deceit) as well as criminal proceedings. The institution of criminal proceedings alongside the invocation of arbitration was held to be inconsequential to the arbitrability of these disputes.The issues raised in this arbitration were found to be in the domain of civil proceedings and without a “public flavor” that could attract the exception of fraud. The Supreme Court considered the absence of fraud that could have vitiated the arbitration clause in the SSA, and further, the broadly worded arbitration clause that included within its scope questions regarding its own existence and validity, to be relevant factors in its analysis.

III. Analyzing the Judgment’s Contribution to the Jurisprudence on Fraud

A. Giving recognition to the framework of the 1996 act is a pro-arbitration stance

Predecessors to the 1996 Act, such as the 1940 Act and even the 1899 Act, vested a certain degree of discretion in courts to decide the appropriateness of referring disputes to arbitration. This is no longer the case under the 1996 Act, one of whose objectives (as stated in its Statement of Objects and Reasons) is “…to minimize the supervisory role of courts in the arbitral process”.

As elaborated in my past writing on this topic, the judiciary’s deep-rooted skepticism of the competence of arbitral tribunals in the 19th and most of the 20th century also had to do with historical reasons: arbitrators in colonial India were very often not legal professionals, and lacked the competence to adjudicate on complex legal issues. Judgments such as Abdul Kadir and Russell v. Russell, routinely cited by parties to thwart the jurisdiction of arbitral tribunal to entertain questions of fraud, belong to an era where complex legal disputes were predominantly considered to be the domain of courts, rather than arbitration.

The Supreme Court in Avitel has correctly distanced itself from the position under the 1940 Act, including judgments such as Abdul Kadir pronounced within the framework of this Act, to give recognition to the vastly different framework envisaged by the 1996 Act. The recognition that the decision of parties to arbitrate disputes must be upheld in light of Sections 5, 8, and 16 of the 1996 Act is progressive and noteworthy.

This approach reflects the judgment of Justice D.Y. Chandrachud in Ayyasamy, which also noted the distinction between the referral of disputes to arbitration under the 1940 Act and the 1996 Act, acknowledging that the under the 1996 Act, such referral is not discretionary. Further, Avitelseeks to give effect to the spirit of the 1996 Act, somewhat in the manner that a single-judge bench of the Supreme Court had sought to do in 2014 in Swiss Timing Limited v. Commonwealth Games 2010 Organising Committee (an approach negated in Ayyasamy), but ultimately it does not go as far as comprehensively recognizing the principle of Kompetenz Kompetenz.

B. The steadfast adherence to the “serious allegations of fraud” test is inappropriate and undermines Kompetenz Kompetenz

The Supreme Court’s recognition of the arbitrability of fraud in cases where the allegations are of a civil or contractual nature, and the formulation of two tests to limit judicial intervention are commendable. However, there was no departure from using “serious allegations of fraud” as a threshold test, thus recognizing that courts could potentially determine what constitutes “serious allegations of fraud”, as well as their own degree of intervention, based on a case-to-case analysis. Such an approach is, in fact, antithetical to the well-established principle of Kompetenz Kompetenz (also recognized by the 1996 Act in Section 16), which empowers arbitral tribunals to determine their own jurisdiction.

As I have argued in much greater depth here, using “serious allegations of fraud” as a test or a threshold to allow courts to intervene in proceedings that parties have committed to arbitrating is unsatisfactory inappropriate and even anachronistic, and contrary to the spirit of modern-day arbitration. Following the judgment in Ayyasamy, courts have engaged with the characterization of “serious allegations of fraud”, with this expression lending itself to interpretations of varying amplitudes, and differing analyses of what such “seriousness” could be. Although the Supreme Court in Avitel is progressive for taking a narrow view of what could constitute “serious allegations of fraud”, it still considers this expression to be relevant. By choosing not to distance itself from the “serious allegations of fraud” criterion, and by recognizing that courts should engage with it on a case-by-case basis, the Supreme Court has in fact paved the way for further discretionary interpretation by judges in each case—an approach that does not necessarily minimize the scope for judicial intervention.

In 21st century arbitration proceedings, arbitral tribunals all over the world are routinely called upon to engage with complex issues of fact and law. Therefore, for the Supreme Court of India to carve out an exception for a seemingly esoteric category of disputes, where questions of “serious” fraud are involved, and further, to retain the jurisdiction to decide what exactly constitutes such serious fraud in every case, seems contrary to the spirit of modern-day arbitration.

The potential adjudication of such disputes in open court proceedings instead of the confidential arbitration proceedings that parties have consciously opted for, is anachronistic and unsatisfactory. As long as Indian courts continue to steadfastly adhere to this view, parties resisting enforcement of awards will always have room to delay or disrupt the conduct of arbitral proceedings and the enforcement of awards. It is hoped that a larger bench of the Supreme Court can give stronger recognition to the principles underlying the 1996 Act and do away with the “serious allegations of fraud” test in a future judgment.

* Parul Kumar is an experienced lawyer and public policy expert, currently on a research fellowship in Germany as a German Chancellor Fellow of the Alexander von Humboldt Foundation.


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