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Avitel Post Studioz Limited and Ors. v. HSBC PI Holdings (Mauritius) Limited

Civil Appeal · 2020 INSC 498Decided 19 Aug 2020
Civil Appeal No. 5145 of 2016
Justice Rohinton Fali Nariman · Justice Navin Sinha

Background

HSBC had invested USD 60 million to buy a stake in Avitel India based on representations about a lucrative BBC broadcasting contract, which later turned out to be fraudulent: the Jain family promoters allegedly siphoned off the invested funds instead of using them for the represented project. HSBC won a foreign arbitration award against Avitel and sought to protect the award amount by asking Indian courts, under Section 9 of the Arbitration Act, to direct that USD 60 million be kept aside pending enforcement proceedings. Avitel resisted, including by arguing that allegations of fraud take the dispute outside the scope of what arbitration can resolve. A related, separate dispute involving another investor's share-purchase agreement with similar fraud allegations was also before the Court.

Decision Breakdown

The Supreme Court held that the fraud alleged here was a private dispute between the contracting parties (fraudulent inducement and diversion of funds) rather than fraud with a "public flavour" affecting third parties or the public at large, so it did not fall within the narrow "fraud exception" that makes a dispute non-arbitrable. The Court found HSBC had made out a strong prima facie case of fraudulent misrepresentation and upheld the direction that USD 60 million (the principal invested amount) be set aside for enforcement of the award, while rejecting a lower court's reduction of that amount. Accordingly, it dismissed Avitel's appeal, allowed HSBC's cross-appeal restoring the full amount, and in the related third appeal (concerning the other investor), set aside the lower courts' orders and sent that dispute back for fresh decision.

Lesson Learnt

Allegations of fraud between contracting parties do not automatically block arbitration or associated interim relief in Indian courts, only fraud that has serious implications for the public or third parties, beyond the private dispute between the contracting parties, takes a matter outside the scope of arbitration.

Official source (sci.gov.in)View Judgment (PDF)

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