Indian Supreme Court upholds ability of arbitrators to decide issues of fraud

In another pro-arbitration decision emanating from the Supreme Court of India in the case of World Sport Group (Mauritius) Ltd v MSM Satellite (Singapore) Pte Ltd,¹ the court referred to arbitration a dispute involving allegations of fraud. In doing so, the court read restrictively its previous decision in N Radhakrishnan v Maestro Engineering² – where it had held that issues of fraud fell more properly to be determined by courts. The court held that the interpretation given in Radhakrishnan applied only to domestic arbitration. The recent decision further reduces the risk of interference by courts in foreign-seated arbitrations.

Background

The facts giving rise to the various proceedings in World Sport Group (Mauritius) Ltd v MSM Satellite (Singapore) Pte Ltd are slightly complex. Following a tender process, the Board of Control for Cricket in India (the BCCI) awarded media rights for broadcasting a cricketing tournament to MSM Satellite (Singapore) Pte Ltd (MSM) to run over many years.

After the first year of the tournament, the BCCI terminated the agreement with MSM and entered into a new agreement with World Sport Group (Mauritius) Limited (World Sports Mauritius). Shortly thereafter, World Sports Mauritius entered into an agreement with MSM (the Facilitation Deed) under which it agreed to relinquish its media rights and facilitate MSM to re-acquire these rights from the BCCI directly. As part payment of this agreement, MSM paid 1.25 billion Rupees (approximately US$30 million) to World Sports Mauritius.

MSM alleged that at the time of entering into the Facilitation Deed, World Sports Mauritius' rights were due to lapse and that World Sports Mauritius, through fraudulent misrepresentation, purported to relinquish rights it did not have.

MSM filed a suit in the Bombay High Court against World Sports Mauritius and the BCCI claiming, inter alia, a declaration that the Facilitation Deed was illegal, null and void. Shortly thereafter, relying on the arbitration clause in the Facilitation Deed, World Sports Mauritius referred disputes to arbitration in Singapore under the ICC Rules. MSM then applied to the Bombay High Court seeking an injunction preventing the arbitration proceedings.

A two judge bench of the Bombay High Court (in a decision we reported here) granted an injunction against the arbitration proceedings in Singapore, on the basis that the court was a more appropriate forum to consider issues involving public funds and allegations relating to fraud. World Sports Mauritius appealed to the Supreme Court and requested the court to reverse the decision of the Bombay High Court and refer the matter to arbitration.

Decision of the Indian Supreme Court

A key issue before the Supreme Court was whether it was appropriate to refer to arbitration claims involving allegations of fraud. Counsel for MSM, arguing against a reference to arbitration, relied on the Supreme Court decision in Radhakrishna, which had held that proof of fraud and criminal misappropriation involved elaborate production of evidence that cannot adequately be dealt with by an arbitrator and therefore had to be submitted to the court.

In considering whether it was appropriate to refer the matter to arbitration, the Supreme Court started by referring to Section 45 of the Indian Arbitration and Conciliation Act, 1996 (the Arbitration Act). Section 45 states, in essence, that where the court is presented with a matter in respect of which parties have entered into an arbitration agreement, it shall refer the parties to arbitration at the request of one of the parties unless it finds that the arbitration agreement is "null and void, inoperative or incapable of being performed."

The court recognised that this language in Section 45 of the Arbitration Act was derived from the New York Convention on the Enforcement of Foreign Arbitral Awards and therefore the interpretation accorded to the corresponding provision in the New York Convention internationally should be adopted.

The court held that the a reference may be rejected on the grounds that an arbitration agreement was "null and void" where there was an "attack on the arbitration agreement" as opposed to an attack on the underlying contract which may not necessarily impact on the arbitration agreement.

On the facts of the case the court held that the allegation of fraudulent misrepresentation went to the question of whether World Sports Mauritius acted lawfully in assigning its rights to MSM but, even if such an allegation was accepted, it did not impact the validity of the arbitration agreement – which was separable from the rest of the contract. On that basis, the court refused to hold that the arbitration agreement was "null and void".

The court then considered what amounts to "inoperative or incapable of being performed". The court recognised that there were different interpretations given to the term by different commentators, but held that irrespective of the interpretation adopted, an "arbitration agreement does not become 'inoperative or incapable of being performed' where allegations of fraud have to be inquired into and the court cannot refuse to refer the parties to arbitration as provided in Section 45 of the Act on the ground that allegations of fraud have been made by the party which can only be inquired into by the court and not by the arbitrator."

The court referred to the decision in Radhakrishnan but held that it only applied in the context of domestic arbitrations.

The various other contentions raised by MSM, including the contention that a public body such as the BCCI was involved and therefore it was in public interest for the courts to consider the matter – which contention was accepted by the Bombay High Court – were rejected. The Supreme Court categorically held that such a ground did not fall within the exceptions in Section 45 of the Arbitration Act and therefore cannot form the basis for refusing to refer a matter to arbitration.

Analysis

The decision of the Supreme Court is another welcome step that will serve to reduce the risk of court interference in foreign-seated arbitrations. The court's willingness to consider the position adopted internationally and to confine its jurisdiction on that basis is a positive sign and consistent with the pro-arbitration jurisprudence recently emanating from the Supreme Court, in particular in the context of foreign seated arbitrations. Parties must, however, be mindful that where an allegation of fraud goes to the arbitration agreement itself, a reference to arbitration may still be refused. Parties must also be mindful that the decision of the Supreme Court in World Sport Group only extends to foreign-seated arbitration. In an India-seated arbitration the position is still governed by the decision in Radhakrishnan and issues of fraud are less likely to be referred to arbitration.

For further information, please contact Nick Peacock, Partner, Vikas Mahendra, Associate, or your usual Herbert Smith Freehills contact.

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¹ Decision of the Supreme Court dated 24 January 2014 in Civil Appeal No. 895 of 2014.

² (2010) 1 SCC 72.