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Arbitration - Disputes alleging ‘fraud’ and ‘misrepresentation’ capable of resolution

22 August, 2014

Bombay High Court on 31-7-2014  has held that ‘fraud’ and ‘misrepresentation’ as defined under Sections 17 and 18 of the Contract Act are well accepted grounds which would vitiate ‘free consent’ and consequently the contract itself and therefore, as a general rule, it cannot be said that once fraud and misrepresentation are alleged in the context of a contract, the subject matter of the dispute would be rendered incapable of resolution by arbitration.

The respondent had initiated arbitration proceedings against the petitioner (Avitel Post Studioz Ltd. ) seeking relief in relation to Share Subscription Agreement (SSA) alleged to be vitiated due to fraud and misrepresentation made by the petitioner. Holding that if the subject matter of dispute has an eminently civil profile, then it may not be proper to conclude that the subject matter of dispute is incapable of settlement by arbitration, merely because parties have initiated criminal actions for fraud or misrepresentation, the court noted that the parties were unable to prove the existence of any general or peremptory rule that allegations of fraud, in all cases, are incapable of settlement by arbitration under the law of India. Petitioner’s submission of non-enforceability of any award that may eventually be made by the Arbitral Tribunal at Singapore, upholding allegation of fraud and misrepresentation leveled by the respondent (HSBC PI Holdings (Mauritius) Ltd.) against the appellants, was hence rejected by the Court.

While determining the applicable law governing arbitration proceedings, the court noting various clauses of agreements, also held that parties either expressly or in any case by implication had intended to exclude applicability of Part-I of the Act of India (except Section 9 of the Arbitration and Conciliation Act, 1996). It was held that even if the entire decision in the case of Bharat Aluminium is to be regarded as having only prospective effect, principle as laid down in cases of National Thermal Power Corporation and Sumitomo Heavy Industries would apply.
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