In the case of Avitel Post Studioz Limited and Ors v. HSBC PI Holdings (Mauritius) Limited, (Previously named HPEIF Holdings 1 Limited [2024 SCC OnLine SC 345]., the Hon’ble Supreme Court (“Hon’ble Apex Court”) has clarified that the enforcement of foreign awards may be refused for bias only in exceptional circumstances.

Factual Background

HSBC PI Holdings (Mauritius) Limited (“HSBC”) which is a company incorporated under the laws of Mauritius and Avitel Post Studioz Limited (“Avitel”) which is a company incorporated under the laws of India entered into a Share Subscription Agreement (“SSA”) by which HSBC made an investment of USD 60 million (USD Sixty Million) to acquire 7.8% (seven point eight percent) of Avitel’s paid-up capital (“SSA”). The SSA contained an arbitration clause which provided that the disputes shall be finally resolved at the Singapore International Arbitration Centre (“SIAC”) and since Singapore was designated as the seat for Arbitration, Part-I of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”) was excluded except for Section 9 of the Arbitration Act (“Arbitration Clause”). Thereafter, HSBC and Avitel entered into a Share Holders Agreement (“SHA”) dated May 6, 2011 which contained an identical arbitration clause as set out in the SSA.

After the investment was made by HSBC, Avitel had informed HSBC that the investment of USD 60 million (USD sixty million) was required by Avitel to service a significant contract with the British Broadcasting Company (“BBC”). However, Avitel failed to provide any information to HSBC regarding the contract with BBC despite numerous follow up attempts. In view of the same, HSBC engaged its independent investigation agency which discovered that the purported contract with BBC was non-existent and that the invested amount of USD 60 million (USD sixty million) was siphoned off to different companies by Avitel.

On May 11, 2012, HSBC invoked the Arbitration Clause under the Singapore International Arbitration Centre Rules (“SIAC Rules”) and claimed damages of USD 60 Million (USD sixty million) from Avitel on account of the fraudulent misrepresentations made to it. Thereafter, on May 14, 2012, Mr. Thio Shen Yi was appointed as an Emergency Arbitrator by the SIAC (“Emergency Arbitrator”). This appointment of the Emergency Arbitrator was challenged by Avitel on May 17, 2012 which was duly considered and rejected by the SIAC.

Subsequently, on May 28, 2012 and May 29, 2012, the Emergency Arbitrator passed two interim awards in favour of HSBC inter alia directing Avitel to refrain from disposing/diminishing the value of their assets upto USD 50 million (USD fifty million) (“Interim Award”). Thereafter, on July 27, 2012, the Emergency Arbitrator amended the Interim Award by granting a further relief in favour of HSBC rejecting to desist investigations against Avitel Dubai and Avitel Mauritius.

The Arbitral Tribunal consisted of three members, Mr. Christopher Lau (“Chairman”), Justice F.I. Rebello (retired) and Dr. Michael Pryles (“Arbitral Tribunal”). On May 27,2014, the Arbitral Tribunal rendered its final award and directed Avitel to pay USD 60 Million as damages to HSBC for the fraudulent misrepresentations made by it to HSBC (“Final Award”).

HSBC filed a Petition under Section 9 of the Arbitration Act before the Hon’ble Bombay High Court. The Bombay High Court issued a direction to Avitel to deposit the amount of USD 60 Million (USD sixty million) for the purpose of enforcement of the Final Award.

Aggrieved by this direction of the Hon’ble Bombay High Court, Avitel filed a Special Leave Petition before this Hon’ble Court challenging the direction of the Hon’ble Bombay High Court wherein Avitel contended that the dispute was non arbitrable under Indian Law as it involved allegations of fraud which included serious criminal offenses such as forgery and impersonation.  The Hon’ble Apex Court held that the dispute was arbitrable and HSBC had a strong prima facie case in the enforcement proceedings.

On July 11, 2022, the Hon’ble Apex Court found that Avitel had wilfully and deliberately disobeyed an Order of the Hon’ble Apex Court directing them to deposit the entire claim amount and as such, a contempt proceeding was initiated against Avitel and its directors to remain present before it. However, this direction was also ignored by Avitel and its directors. Subsequently, warrants and look out notices were issued against the directors of Avitel with a further direction for the Ministry of External Affairs to issue Red corner Notices to the directors of Avitel for evading the directions of the Hon’ble Apex Court. Ultimately, the directors of Avitel surrendered but were sentenced to imprisonment by the Hon’ble Apex Court.

In the meantime, by an Order dated April 25, 2023 passed by the Hon’ble Bombay High Court in the Section 9 Petition filed by HSBC, the Hon’ble Bombay High court rejected the objections raised by Avitel and held that the Final Award was enforceable against Avitel (“Impugned Order”). Accordingly, Avitel filed the present Appeal challenging the Impugned Order.

Contentions of the Parties

Avitel contended that the Chairman of the Arbitral Tribunal had failed to make a full and frank disclosure of material facts and circumstances concerning a conflict of interest and therefore the Final Award could not be enforced since it was against public policy in terms of Section 48 (2) (b) of the Arbitration Act.

In support of this contention, Avitel relied on the IBA Guidelines on Conflict of Interest in International Arbitration, 2004 (“IBA Guidelines”) along with the Red, Orange and Green lists appended thereto covering matters concerning disclosure and conflict of interest to argue that the Hon’ble Bombay High Court ought to have refused to enforcement of the Final Award. This is because, the Chairman failed to disclose his conflict of interest to adjudicate the dispute.

In response thereto, HSBC contended that HSBC is a subsidiary of HSBC Holdings PLC ( United Kingdom). The other subsidiary is HSBC (Singapore) Nominees Private Limited which is alleged to have a contractual association with Wing Tai which has no relationship with HSBC.

HSBC further contended that the Chairman was an independent non-executive Director of Wing Tai since October 28, 2013 but he is not an employee with Wing Tai and therefore, it is incorrect to say that he could not discharge his responsibility as an independent Arbitrator or was incapacitated in any manner in rendering the Final Award.

Issue

1. Whether the Hon’ble Bombay High Court was correct in its decision to reject the objection under Section 48 (2) (b) of the Arbitration Act against enforcement of the foreign award on the grounds of arbitral bias and violation of public policy.
2. Whether the ground of bias could be raised at the enforcement stage under Section 48 (2) (b) for being violative of “public policy of India” and the “most basic notions of morality of justice”.

Legal Analysis

The Hon’ble Apex Court observed that India was one of the earliest signatories to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958 (“New York Convention”) which superseded the Geneva Convention of 1927 to facilitate the enforcement of foreign Arbitral Awards which stated that recognition and enforcement of an arbitral award may be refused if the competent authority in the country where recognition and enforcement is sought finds that the subject matter of the difference is not capable of settlement by Arbitration under the law of that country or that the recognition or enforcement of the award would be contrary to the public policy of that country.

Examining the decision of Parsons & Whittemore Overseas Co. v. Societe Generale de L’Industrie du Papier where the United States Courts of Appeals, Second Circuit, the Hon’ble Apex Court noted inter alia that Enforcement of foreign arbitral awards may be denied on the basis of violation of public policy only where enforcement would violate the forum states most basic notions of morality and justice. The Hon’ble Apex Court further observed that this decision was followed in Renusagar Power Co. Ltd v. General Electric Co., [1994 Supp (1) SCC 644], wherein it was concluded by the Hon’ble Apex Court that the articulation of forum State’s most basic notions of morality and justice” has been legislatively adopted in the Arbitration Act.

Further, the Hon’ble Apex Court while examining the decision of Vijay Karia v. Prysmian Cavi E. Sistemi,[2020 11 SCC 1] had noted that the party resisting enforcement can only have “one bite at the cherry” and when it loses in the High Court, the limited scope for interference could be merited only in exceptional circumstances of “blatant disregard of Section 48 of the Arbitration Act”.

Upon examining the principle laid down in the case  of Shri Lal Mahal Ltd. v. Progetto Grano Spa, [(2014) 2 SCC 433] where the Hon’ble Apex Court held that the wider meaning given to “public policy in India” in the domestic sphere under Section 34 (2) (b) (ii) of the Arbitration Act would not apply where there is an objection raised to the enforcement of the award under Section 48 (2) (b) of the Arbitration Act, the Hon’ble Apex Court observed that this would indicate that the grounds for resisting foreign enforcement are much narrower than the grounds for challenging a domestic award under Section 34 of the Arbitration Act.

Lastly, the Hon’ble Apex Court examined the decision of Ssangyong Engineering & Construction Company Limited v. National Highways Authority of India, [ (2019) 15 SCC 131] wherein the Hon’ble Apex Court had noted that the ground of most basic notions of morality or justice can only be invoked when the conscience of the court is shocked by infraction of fundamental notions or principles of justice.

Analysis on International Law

The Hon’ble Apex Court observed that India, being a signatory to the New York Convention must adopt an international approach with respect to public policy and not just a domestic one. Further, the Hon’ble Apex Court took note that what follows from this is that there is a clear distinction between the standards of public policy applicable for domestic arbitration and international commercial arbitration.

The Hon’ble Apex Court observed that even though “bias” is not mentioned in the New York Convention, Courts across the world do not adopt a uniform test while dealing with allegations of bias. This is because the standards for determining bias would vary across various different legal systems. The Hon’ble Apex further observed that embracing international standards in arbitration would foster trust, certainty and effectiveness in the resolution of disputes on a global scale.

The Hon’ble Apex Court concluded that there could be no difficulty in holding that the most basic notions of morality and justice under the concept of public policy would include bias. However, Courts must endeavour to adopt international best practices instead of domestic standards whilst determining bias and it is only in exceptional circumstances that enforcement should be refused on the ground of bias.

Analysis on the Implication of the IBA Guidelines

The Hon’ble Apex Court observed that the since the Final Award is dated September 27, 2014, the IBA Guidelines of the year 2004 would be applicable. The Hon’ble Apex Court further observed that the working group of IBA had determined the standards/guidelines to bring about clarity and uniformity of application and accordingly the Red, Orange and Green lists were appended to the guidelines to ensure consistency and to avoid unnecessary challenges, withdrawals and removal of Arbitrators. It was further observed that the Arbitrator is also expected to disclose such facts or circumstances to the parties which might compromise the Arbitrator’s impartiality or independence. In the event of any doubt on whether an Arbitrator should disclose certain facts and circumstances, the issue should be resolved in favour of the disclosure. This is because an Arbitrator is not expected to serve in a situation of conflict of interest and also has a duty to make reasonable enquiry to investigate any potential conflict of interest.

The Hon’ble Apex Court went on to observe that in the Impugned Order, the Hon’ble Bombay High Court adverted to the IBA Guidelines in some detail and rightly observed the following with respect to the contention raised by Avitel for arbitral bias:

1. The basis of Avitel’s contention is the business interaction between one group of companies of HSBC with independent private companies i.e. Wing Tai and Neptune where the Chairman was an independent non-executive director and neither Wing Tai or Neptune fall under the definition of “affiliate” of the award holder as per the IBA Guidelines.
2. The reasonable “reasonable third person” test is the measure for assessing “conflict of interest”. Avitel has not been able to establish that the Chairman was an impartial observer, aware of all facts would doubt the Chairman’s impartiality or independence and consequently the likelihood of bias of the Chairman is not discernible.
3. HSBC has provided ample evidence countering Avitel’s claim about it’s affiliates alleged role as book-runners and underwriters with Wing tai and Neptune by showing joint participation of various other banks.
4. In case the circumstances fall under the Green List, no duty of disclosure is owed to the Arbitrator.

What was held by the Hon’ble Apex Court

Dismissing the Appeal, the Hon’ble Apex Court passed upheld the findings of the Hon’ble Bombay High Court that the Chairman neither had a duty to disclose nor did he fail to discharge his legal duty of disclosure in accepting the assignment as the Chairman. The Hon’ble Apex further held that there is no bias factor operating against the Chairman that would violate the most basic notions of morality and justice or shock the conscience of the Court. Lastly, it was held that the direction of the Bombay High court for enforcement of the Final Award stands approved.

Author’s view

The Hon’ble Apex Court in this decision has set a legal precedent for the need of early enforcement of foreign Awards in India. In this case, even though HSBC has won the battle, it just goes to show that an Award Holder seeking  to enforce a foreign Award in India is always in a vulnerable position and may not reap the benefits of the Award for years to come.

Please find attached a copy of the judgement here. 

This update has been contributed by Ranjit Shetty (Senior Partner) and Arjun Amin (Associate).

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