Arbitrability of fraud in India – a postscript

Following a post last month regarding the Supreme Court’s decision in World Sport, it is interesting to note that the question of the arbitrability of fraud has also been considered in great detail by the Bombay High Court in HSBC v Avitel Post Studios, in a judgement delivered just two days before the Supreme Court’s judgment in World Sport.

In the previous post, we argued that the previous jurisprudence of the Supreme Court is unclear as to whether fraud is unarbitrable under Indian law, or whether the Indian Courts merely retain the discretion to not grant a stay under section 8 of the Arbitration Act 1996, although in principle, fraud is arbitrable in India. Although this point wasn’t considered in detail in World Sport, we argued that the distinction drawn by the Court between its power under section 8 and under section 45 worked only if it was of the view that fraud, in principle, is arbitrable under Indian law.

This arbitrability question was considered by the Bombay High Court more directly in HSBC v Avitel, in the context of the section 9 application in relation to arbitration proceedings in Singapore. The respondents opposed the application on the basis that, since fraud is not arbitrable under Indian law, the ultimate arbitration award would not be enforceable in India under section 48; and since section 9 allows interim relief to be granted only in aid of final relief, it cannot be granted in a case where the final award would unenforceable in India. On the facts of the case, the arbitral tribunal had held, and the Bombay High Court affirmed, that the law governing the arbitration was not Indian law, and therefore the question of the arbitrability of fraud under Indian law did not strictly fall to be decided. However, given the detailed arguments on the point by both sides, the High Court went on to consider the question obiter.

On a close examination of the Supreme Court’s decision in N Radhakrishnan, the High Court concluded that fraud is arbitrable under Indian law. The Court observed:

the N.Radhakrishnan judgment cannot be read to imply that every allegation of fraud for  malpractice being made, there can no longer be adjudication of such matters in an arbitration reference. N.Radhakrishnan has to be read to imply that an exception may be made to the general rule when it appears to court that a matter involving serious charges with heavy  documentary and oral evidence may not be referred to arbitration notwithstanding the dispute being covered thereby.

In arriving at this conclusion, the Bombay High Court placed heavy reliance on the Calcutta High Court’s interpretation of N Radhakrishnan in Ram Kishan Mimani v Goverdhan Das Mimani. It concluded that the rationale underlying decisions like N Radhakrishnan is that the power of Indian courts under section 34 of the 1940 Act continues under section 8 of the 1996 Act and therefore, Indian courts may refuse to refer a matter to arbitration under section 8 ‘if satisfied that there is a sufficient reason why the matter should not be referred to arbitration’.

This decision is therefore a helpful clarification of the Indian position, and together with World Sport and Ram Kishan Mimani, undermines any interpretation of N Radhakrishnan which suggests that fraud is not arbitrable under Indian law. It does, however, leave unanswered the questions as to the statutory basis for the discretionary exercise of section 8, and the factors which an Indian court will consider in exercising this discretion.