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Ambiguity in the position of arbitrability of fraud post-Avitel: When will it settle?

Abhilasha Pant & Shiv Verma[i]



On August 19th, 2020, the Supreme Court of India in Avitel Post Studioz Ltd. vs. HSBC PI Holdings (Mauritius) Ltd. (2020) (“Avitel”), laid down a concrete test to determine which cases of fraud are amenable to arbitration. However, the test so laid down not only creates more ambiguity but also restricts the scope of arbitration while increasing judicial involvement in the Indian arbitration regime.

This article discusses the Avitel case and analyses how it compares with the past cases on arbitrability of fraud. It also examines if Avitel further augments arbitration in India in comparison to other jurisdictions.


Facts and Findings-

HSBC entered into a share subscription and shareholder agreement with Avitel India for a total consideration of $60 million to finance the latter’s contract with BBC. However, it was later found that Avitel Dubai (subsidiary of Avitel India) was non-existent and the transferred funds were siphoned off to companies in which the promoters had a stake in. Pursuant to the arbitration clause, arbitration was instituted under the auspices of the Singapore International Arbitration Centre. The Supreme Court noted that ‘fraud’ includes both fraud in performance and fraud in conception of the contracts. The Court found that the fraudulent act did not vitiate the arbitration agreement, and, in any case, any findings of the contract as void or voidable would be immaterial due to severability.

The Apex Court laid down two conditions, fulfilling either of which would amount to a ‘serious allegation of fraud’, thereby making a dispute non-arbitrable:

· when the arbitration agreement is void due to fraud in conception; or,

· when an allegation is made against the State (or its instrumentalities) on grounds of arbitrariness, fraud or mala fide conduct thus compromising public interest.

It noted that since neither of the two conditions were fulfilled, the dispute was arbitrable.


The Avitel judgment not only deviated from the previous jurisprudence (explained ahead) but the test for determining ‘serious allegation of fraud’ suffers from major loopholes. The first condition restricts the arbitral tribunal to determine jurisdiction only on the touchstone of the arbitration agreement. This means that parties now need to determine the validity of the arbitration agreement in a court of law (through a Section 8 of the Indian Arbitration and Conciliation Act, 1996 (“Act”) application) and proceed to arbitration only if the arbitration agreement is valid. Adding to the concern, the first condition inhibits arbitration, since parties have to approach a court of law at first instance even when the arbitral tribunal itself is capable (as per Section 16 of the Act) to determine the validity of the arbitration agreement and dismiss the case at the preliminary stage, in case the agreement is void.

Moreover, the second condition poses another problem, since it assumes that disputes against all state instrumentalities have consequences to the public. Not necessarily this will always be true, as it would depend on the terms, consideration, objective and performance of the contract between parties to see its implications on the public at large and many contracts between private entities can have implications on the public (such as mergers & acquisitions, licensing agreements, etc.). Putting a blanket protection to all state instrumentalities without delving into the crux of the contract, presents a restrictive approach from the courts and puts a blanket protection to all state instrumentalities.

Other reasons include the judgment’s failure to clear classification of fraud against the public and fraud against an individual, determining fraud through evidences, standard of proof and implication on parallel criminal proceeding. Cumulatively, these reasons highlight Avitel brought in more ambiguity in the present position in India.


Arbitrability is generally a go-to grounds for challenging arbitration in India. The Arbitration and Conciliation Act brought more independence to arbitral tribunals in deciding its jurisdiction by wresting power from courts. First significant step was taken by the Supreme Court in Booze Allen where it distinguished between disputes in rem and in personam. The Court employed a three-prong test which required examination of: the arbitration agreement to cover the alleged dispute, possible adjudication of dispute through arbitration and if the parties have commenced arbitration. However, the court did not specifically rule on fraud in the earlier cases and further restricted the scope of disputes amenable to arbitration in next cases. This was changed in Swiss Timing Ltd. when the Supreme Court dismissed fraud as ground to oust the jurisdiction of the arbitral tribunal. However, while the case could not be regarded as a binding precedent for courts since it was instituted for the appointment of arbitrator nevertheless, its ‘strong persuasive’ value was understood by the courts. Finally, the issue was simplified in A. Ayyasamy where ‘serious allegations of fraud’ and ‘fraud simpliciter’ were differentiated. The latter refers to a mere allegation of fraud with no effect to the public and thus arbitrable while the former goes into the root of the agreement or of the arbitration clause itself and is thus inarbitrable. The Supreme Court held that a ‘serious allegation of fraud’ would exist when the following three conditions are fulfilled: where the allegation requires scrutiny of voluminous evidences, where the act permeates the entire contract, including the arbitration agreement and, where the allegations have no implication on the public.

Ayyasamy was partly affirmed in Rashid Raza, such that the first condition in Ayyasamy was ignored and the Court relied on the other conditions. This meant that gravity of the allegation need not necessarily be determined by the amount of evidences which must be scrutinised. Avitel not only did not acknowledge Ayyasamy’s first condition, but also replaced the last condition with its own ambiguous test. So, where Rashid Raza deviated from Ayyasamy, Avitel deviated from both these judgments, therby complicating the situation. In the author’s opinion, while Rashid Raza cannot be a binding precedent (since it was based on an application under Section 11 of the Act), it is more much more flexible and wider than Avitel and should be affirmed over and above Avitel.


Other advanced jurisdictions have already moved past arbitrability as a challenge to arbitration in most cases. In the U.K., the English Arbitration Act, 1996 imposes no bar on arbitral tribunals to adjudicate disputes of fraud. Section 7 itself recognizes separability of arbitration agreement in case the encompassing contract is invalid as per Heyman. The Court of Appeal in Fiona Trust further empowered arbitral tribunals to adjudicate all disputes as a ‘one-stop’ forum. This was affirmed in Premium Nafta where the House of Lords stated that in case an arbitrator can hear the merits of a dispute and decide whether the contract is void, he is equally eligible to determine whether the contract is a result of misrepresentation or fraud.

Another advanced jurisdiction is Singapore, where the judicial trend is also pro-arbitration. Section 6 of the International Arbitration Act, 1995 (“IAA”) requires courts of Singapore to refer the parties to arbitration except when the arbitration agreement is flawed. Section 11 of the IAA brings the caveat that an arbitrable dispute must not be contrary to public policy. In Larsen Oil and Gas, the Singapore Court of Appeal (“SCA”) while relying on Premium Nafta, gave a liberal interpretation to the arbitration clause to cover all manners of claims unless there are cogent reasons to conclude otherwise. Larsen Oil and Gas was relied on in Tomolugen Holdings Ltd, in which the SCA noted a presumption of arbitrability of any dispute, rebuttable only by proving that the Parliament intended to exclude certain disputes from arbitration and when arbitration is contrary to public policy.

In comparison, the position in India post-Avitel is precarious. As discussed, Avitel is restrictive towards arbitration by failing to recognise the capability of arbitral tribunals and enforcing the flaw which Fiona Trust and Larsen remedied since if an arbitrator can pass an award on the merits of a dispute, it is equally capable to determine the validity of the contract or acts of misrepresentation or fraud in it. Moreover, the situation is further complicated with the blanket protection which is provided to all state instrumentalities. Therefore, Avitel instead of augmenting the position in India, further hampers it.


Recently, the President of India promulgated the Arbitration and Conciliation (Amendment) Ordinance, 2020 which further affirms the first condition of Avitel and provides that an award which is pursuant to an arbitration agreement induced by fraud will be unconditionally stayed. This further complicates the situation and would requires substantial intervention to undo the changes. The issue of arbitrability of fraud would have been remedied long back if only the Legislature had incorporated the recommendation of the 246th Law Commission Report which specifically recommended disputes of fraud to be arbitrable. Avitel poses a bigger challenge than its predecessors. However, due to its flexible nature, Rashid Raza can be a better precedence on a very complicated issue and must be recognised so. The judiciary and the legislature must realise that more arbitral independence and less restrictive tests can substantially improve the position of arbitration in India. Additionally, the Legislature must bring in a presumption of arbitrability for disputes similar too Singapore which can be rebutted on select conditions. These changes can help India in its endeavour to become the next major hub for arbitration in South-Asia.


[[i]] Abhilasha Pant is an LLM Candidate from the University of York, UK, where she is studying International Corporate and Commercial Law. An Avid reader, she is often updated about the changes brought about in the legal field and will often be seen imparting knowledge about the same on Twitter. Shiv Verma is skilled in Moot Court, Legal Document Preparation, Public Speaking, Legal Writing, and Academic Writing. He is a strong legal professional with a B.A., LL.B. Hons. focused in Business Law from National Law University, Jodhpur. Preferred Citation Abhilasha Pant and Shiv Verma, Ambiguity in the position of arbitrability of fraud post-Avitel: When will it settle?, Arbitration & Corporate Law Review, Published on 6th November 2020.

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This article is reviewed by Shebani Bhargava and Vridhi Mathur.

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