Award In Which Serious Allegations Of Fraud Are Not Decided Must Be Set Aside On Grounds Of Patent Illegality: Gujarat High Court
The Gujarat High Court Bench of Chief Justice SUNITA AGARWAL and Justice PRANAV TRIVEDI affirmed that if serious allegations of fraud are raised that the arbitration agreement was entered into by fraud and collusion and such allegations are not decided by the Arbitrator while passing an award, such an award is liable to set aside on the ground of patent illegality under section 34 of...
The Gujarat High Court Bench of Chief Justice SUNITA AGARWAL and Justice PRANAV TRIVEDI affirmed that if serious allegations of fraud are raised that the arbitration agreement was entered into by fraud and collusion and such allegations are not decided by the Arbitrator while passing an award, such an award is liable to set aside on the ground of patent illegality under section 34 of the Arbitration Act
Brief Facts
The present appeal under Section 37 of the Arbitration and Conciliation Act' 1996 (for short, “the Act' 1996”) is filed challenging the judgment and order dated 13.09.2024 passed by the Special Judge, Commercial Court and the 3rd Additional District Judge, Ahmedabad (Rural) under Section 34 of the Act' 1996 as also the arbitral award dated 26.11.2021 passed by the learned Arbitrator, adjudicating the dispute between the parties arising out of the alleged lease agreement dated 14.09.2012, entered into between the parties.
The lease agreement was executed between the parties, i.e. the claimants and the respondents herein on 14.09.2012 whereunder, the claimants are shown as lessors and the respondent MEGA (Metro Link Express for Gandhinagar and Ahmedabad) Company Ltd. is the lessee.The property in question admeasuring 11,941 sq.mts (super built-up area) along with common parking plot for vehicles was let out to the appellants herein for the period of five years from 01.09.2012.
The agreement was subject to payment of monthly rent of Rs.5,37,345/- to be paid in advance on or before seventh date of each month. Other terms and conditions of the lease deed such as increase of rent by 10% every year and other charges as specified therein are binding on the parties.
It was further agreed upon between the parties that the respondent shall handover the vacant possession of the subject property to the claimants on the expiry of the lease period, i.e. 31.08.2017 and in event of failure, the respondent shall be liable to pay penalty to the tune of 1.5 times of the lease rent amount as determined at the time of expiry of the contract, without prejudice to other remedies available to the appellants / lessor.
Inspite of repeated reminders, neither rent had been paid nor the possession of the property was restored to the claimants and the respondent continued to use the property in question in breach of the conditions of the lease agreement. Even after expiry of the lease period on 31.08.2017, the possession of the property was not restored back and the respondent continued to use the tenament after the expiry of the lease period in total breach of the contract.
The arbitration proceedings were initiated by the claimants by filing a petition under Section 11 of the Act' 1996 before the High Court, wherein dispute was referred to the arbitrator under the order dated 27.04.2018. It is contended that, at the fag end of the arbitral proceedings, the possession of the property in question was restored back to the claimants on 31.12.2020.
Contentions
The appellant submitted that the learned Arbitrator has committed patent illegality in referring the dispute to an unnamed authority, stated to be competent authority having power to decide reasonable rent under Government resolution / circulars / policy decisions as in force at the relevant point of time.
- That it is absolutely beyond the jurisdiction of the learned Arbitrator to refer the dispute to any third party, inasmuch as, the learned Arbitrator is mandated by the Referral order passed by this Court dated 27.04.2018 for adjudication of the disputes between the parties arising out of the lease agreement dated 14.09.2012.
- That once the allegations of collusion in signing the lease agreement dated 14.09.2012 were not adjudicated by the learned Arbitrator, it could not have taken exception to the terms and conditions of the lease deed, which bind the parties.
- Reliance was placed upon the decision of Calcutta High Court in the case of M/s Usha Martin Limited Vs. M/s Eastern Gases Limited [2017] and in the case of Eastern Gases Limited Vs. Usha Martin Limited [2017] to submit that the principles, when it comes to delegation of power by an Arbitrator, are settled to the extent that the Arbitrator cannot delegate his power to make an award, inasmuch as, when people go to arbitration, they bind themselves to abide by the decision of the arbitrator of their choice.
Per contra, the respondent submitted that the interference by Courts in an arbitral award will not entail review on the merits of the dispute and has to be limited only to the situations, where it is found that the findings of the learned Arbitrator are arbitrary, perverse, shocking the conscience of the Court and where the illegality goes to the root of the matter.
- That commercial court also noted that the learned Arbitrator was not competent to decide the question of fixation of rent and hence, the necessary order has been passed to examine the claim of the claimants about fixation of the rent, in a just and proper manner.
- Reliance was placed on the decision of the Apex Court in the case of OPG Power Generation (P) Ltd. v. Enexio Power Cooling Solutions India (P) Ltd., (2024), to submit that Insufficiency of reasons cannot be a ground to set aside the award as a court of appeal. If the conclusion of the learned Arbitrator is based on a possible view of the matter, the court should not interfere.
- That howsoever, short or little the reasons given by the arbitral tribunal, the Court, under Section 34 or the appellate Court under Section 37 of the Act' 1996 are empowered to supplement the reasons of the arbitral tribunal by explaining the existence of the underlying reasons, where omission on the part of the arbitral tribunal was trivial and did not travel to the root of the award, but it cannot supplant the reasons provided in the award.
- That the learned Arbitrator has relegated the matter for fixation of rent by the competent authority under relevant Government resolutions cannot be a reasons to set aside the arbitral award on the premise that it is against the public policy or is bereft of reasons. Infact, the conclusion in the findings arrived at by the learned Arbitrator, are based upon the detailed discussion and weighing the evidence on record.
Court's Analysis
The court at the outset noted the factual matrix of the present case and observed that the learned Arbitrator, in our considered opinion, was required to address the issue of the legality / validity of the lease agreement while dealing with the contentions of the respondent Company that it was an outcome of fraud and collusion between the claimants and the then Executive Chairperson of the Company.
The court further noted that in light of the above discussion, we find that the learned Arbitrator has digressed itself from the scope of dispute before it revolving around the alleged lease agreement dated 14.09.2012, in forming the opinion that the competent authority having power to decide reasonable rent under the Government resolutions circulars / policy decisions is required to take the decision in the case of the claimants for fixation of rent of the leased property.
The court further noted that thus the arbitrator straightway jumped to the conclusion that the respondent is right in submitting that while taking immovable property on lease from private property, Government resolutions / circulars / policy decisions were required to be followed, without adjudicating the questions of validity of the lease agreement.
Based on the above, the court while rejecting the respondent reliance on the Supreme Court judgment in OPG Power Generation (supra) observed that in our considered opinion, the present is not a case where it can be said that the reasons given by the learned Arbitrator are inadequate or insufficient, which can be discerned from the careful reading of the entire award coupled with the documents recited/relied therein.
The court further observed that the present is a case, where omission on the part of the arbitral tribunal is not trivial rather it travels to the root of the award and the reasons are found to be absolutely lacking in the arbitral award.
The court further referred to the Supreme Court judgment in A. Ayyasamy v. A. Paramasivam, (2016) wherein a broad discussion on allegations of fraud which render the arbitration agreement void was conducted and two tests were laid down.
The court observed that the principles of law laid down in this appeal make a distinction between serious allegations of forgery/fabrication in support of the plea of fraud as opposed to “simple allegations”. Two working tests laid down in para 25 are : (1) does this plea permeate the entire contract and above all, the agreement of arbitration, rendering it void, or (2) whether the allegations of fraud touch upon the internal affairs of the parties inter se having no implication in the public domain.”
The court further observed that as held in A.Ayyasamy (supra), affirmed in Rashid Raza (supra) and relied in Avitel (supra), “serious allegations of fraud” arise only if either of the two tests laid down therein are satisfied.
The court further observed that if the first test with the plea of fraud permeate the entire contract and above all the agreement of arbitration rendering it void, is satisfied, it can be said that the arbitration clause or the agreement itself cannot be said to exist in a clear case in which the court finds that the party against whom breach is alleged cannot be said to have entered into the agreement relating to arbitration at all.
While applying the above ratio to the facts of the present case, the court observed that having noted the above, atleast, it is evident that the allegations of fraud and collusion in arriving at the contract namely the lease agreement dated 14.09.2012 were required to be examined by the learned Arbitrator so as to examine the question of arbitrability or non-arbitrability of the dispute, to arrive at the conclusion as to whether the pleas of fraud permeate the entire contract and the agreement of arbitration, rendering it void. That was not done by the Arbitrator.
The court concluded that we find that the award passed by the learned Arbitrator suffers from patent illegality and is against the substantive law regulating the contract namely the Indian Contract Act. The award, therefore, is liable to be set aside within the limited scope of Section 37 of the Arbitration.
Accordingly, the judgment and order dated 13.09.2024 passed by the learned Special Judge, Commercial Court and 3rd Addl. District and Sessions Judge, Ahmedabad (Rural) at Navrangpura as also the award dated 26.11.2021 passed by the learned Arbitrator were set aside.
Case Title: SHAILESH ANILKUMAR AMIN & ANR. Versus GUJARAT METRO RAIL CORPORATION (GMRC) LTD.
Citation : 2024 LiveLaw (Guj) 166
Judgment Date: 14/10/2024