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 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.
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 5145 OF 2016
AVITEL POST STUDIOZ LIMITED Vs HSBC PI HOLDINGS (MAURITIUS) LIMITED
Dated:August 19, 2020.
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:-
“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.
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 hereunder.
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.
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)
4
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
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 threemember
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 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 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
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;
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)
11
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;
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;
12
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;
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
13
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
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 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, 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.
18
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:
19
“xxx xxx xxx
(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 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
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 situation
before the Court, the Court found that the appellant had made serious
23
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).
24
(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.”
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
25
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. 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
26
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.”
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
27
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
28
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 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
29
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 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
30
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 despite existence of arbitration agreement to that
31
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.
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 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 : (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:
35
“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 [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 wrongdoing 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 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
37
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].)”
Mr. Saurabh Kirpal took exception to Sikri, J.’s judgment in that Sikri, J.
did not refer to paragraph 52 of the 246th Law Commission Report and
its aftermath. Paragraph 52 of the 246th Law 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.”
38
[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:
“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
39
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)
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
40
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
41
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, “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.
1 This case is referred to in Lord Brandon’s judgment in La Pintada (supra) and
distinguished at p. 130 of his judgment.
42
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 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.”
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 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 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 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
46
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:
“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
47
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)
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
48
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 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
49
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.
50
Section 41 provides which judgment would be
conclusive proof of what is stated therein.”
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
51
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—
(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
2 Cf. S. 238, infra.
3 See S. 143, infra.
52
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 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
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)
53
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
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:
“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)
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
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 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)
55
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 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:
56
“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 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.
57
(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 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)
58
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.
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
59
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, 360G, 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)
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
60
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;
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?”
61
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) ("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];
62
(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
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
63
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 the following:
64
a. the Avitel Group did not have a direct
relationship with the BBC and was not
close to signing the BBC Contract;
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
65
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:
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
66
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 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
67
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 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
68
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
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
69
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 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
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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 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
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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)
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(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
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 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. Accordingly, we
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dismiss Civil Appeal No.5145 of 2016 filed 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 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:
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“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:
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“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 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 of
the 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.
…………..………………J.
(R. F. Nariman)
……..……………………J.
(Navin Sinha)
New Delhi
August 19, 2020.
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