SC Lays Down Tests to Identify ‘Serious Allegations of Fraud’ with respect to Arbitrability of Fraud

SC in the case of Avitel Post Studioz Limited v. HSBC PI Holdings (Mauritius) Ltd.^[1] specified two tests to identify what ‘serious allegations of fraud’ mean when determining arbitrability of a dispute:

Test 1: When the arbitration clause or agreement itself cannot be said to exist. E.g., where the party against whom breach is alleged cannot be said to have entered into the agreement relating to arbitration at all; and

Test 2: In cases where 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.’

It further held that the earlier two decisions by SC – Afcons Infrastructure Ltd. v. Cherian Varkey Construction Co. (P) Ltd.^[2] and Booz Allen & Hamilton Inc. v. SBI Home Finance Ltd.^[3] which held that: (i) cases involving prosecution for criminal offences, or (ii) disputes which give rise to or arise out of criminal offences, are non arbitrable must now be read with a caveat that:

i.     the same set of facts may lead to both, civil and criminal proceedings; and

ii.   if it is clear that it is a civil dispute which involves questions of fraud, misrepresentation, etc. (such as under Section 17 of the Indian Contract Act, 1872 and/or the tort of deceit), then the mere fact that criminal proceedings have also 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.

AZB & Partners successfully represented HSBC PI Holdings (Mauritius) Ltd. in this matter.

 

[1] Avitel Post Studioz Limited & Ors. v. HSBC PI Holdings (Mauritius) Ltd; 2020 SCC Online SC 656.

[2] Afcons Infrastructure Ltd. v. Cherian Varkey Construction Co. (P) Ltd; (2010) 8 SCC 24 at para 27 (vi)

[3] Booz Allen & Hamilton Inc. v. SBI Home Finance Ltd ;(2011) 5 SCC 532 at para 36 (i).