Arbitration Act | Admitted Facts Don’t Breach ‘Twin-Benchmark’ Of Fraud Or Corruption: Calcutta High Court Declines Stay Of Award
The Calcutta High Court has recently dismissed a plea filed by petitioners West Bengal Small Industries Development Corporation Limited (“WBSIDC”) for unconditional stay of an arbitral award passed against it in 2019, on the grounds of fraud and corruption, under Section 36(3) of the Arbitration & Conciliation Act, 1996 (“Act”).In holding that the facts of the case, along with...
The Calcutta High Court has recently dismissed a plea filed by petitioners West Bengal Small Industries Development Corporation Limited (“WBSIDC”) for unconditional stay of an arbitral award passed against it in 2019, on the grounds of fraud and corruption, under Section 36(3) of the Arbitration & Conciliation Act, 1996 (“Act”).
In holding that the facts of the case, along with the arguments made by the petitioners would not satisfy the twin threshold of fraud or corruption under Section 36(3), a single-bench of Justice Moushumi Bhattacharya held:
The complaint of the petitioner…by no means touches (or even brushes) the threshold of the award being liable to be unconditionally stayed on the ground of fraud or corruption (or more likely being dragged down to the depths) as envisaged under the second proviso to section 36(3) of the Act. Granting stay of an award without imposing conditions on the award-debtor is a departure from the scheme of the Act and must be established within the strict vocabulary used in the second proviso. Any act which falls short of a certain kind of conduct on the part of the arbitrator or of the proceedings will not amount to fraud or corruption. The failing must be brought within the sharpness and intensity of the parameters as decided in the case-law together with the causal nexus with the award. This Court is not satisfied, prima facie, as to the existence of facts which warrant unconditional stay of the operation of the Award.”
Brief facts of the case
The petitioners herein, had moved a prayer for unconditional stay of the impugned Award under the second proviso to section 36(3) of The Arbitration and Conciliation Act, 1996, “which empowers the Court to unconditionally stay an award where the Court is satisfied, prima facie, that the making of the award was induced or effected by fraud or corruption.”
It was argued that the sole-arbitrator had adjudicated on two of the claims of made by the respondent on the basis of an “internal note-sheet” which was taken on record during the arbitration proceedings, “in a manner that would satisfy the benchmark of ‘fraud’ and ‘corruption’ under the second proviso to Section 36(3) of the Act”
The petitioners submitted that they had been disallowed from tendering the document during cross-examination of the respondent’s witness, but that it was taken on record after the conclusion of arguments.
It was further argued that though the petitioner had been given liberty to file their written objection to the internal note, the impugned Award did not deal with any objections, and that the document could only have been admitted as evidence “after being duly proved under the provisions of the Indian Evidence Act, 1872.”
The respondents, on the other hand, argued that the petitioner had not been able to make out any case for unconditional stay, and that the petitioner had earlier concealed the aforesaid document, even after multiple requests by the respondent for its disclosure.
It was argued that the question of fraud would only come in where “a party had knowingly suppressed a document to the detriment of the other; whereas in the present case the petitioner has suppressed the document.”
The respondents further argued that the petitioner did not dispute the contents of the document, or claim that the document was fake or had been manufacture, and that they were even given liberty to file their opposition to the document after it had been taken on record.
Findings of the Court
In examining the contentions raised by the parties and the provisions under Section 36(3) of the Act, the Court discussed the ingredients of unconditional stay of an arbitral award on grounds of fraud and corruption, under its second proviso, while individual examining each ingredient. It was observed:
“The second proviso to section 36(3) hence requires a prima facie case to be made out by the award-debtor and the Court being satisfied of the case made out that the arbitration agreement/contract or the making of the award was induced or effected by fraud or corruption. It is a significant addition made to the Act in 2021. Before the 2021 amendment, the award-debtor could seek stay of the operation of an award and pass such an order without imposing any conditions for stay of the award. Post-amendment, the award-debtor must however, discharge the onerous task of showing, at least prima facie, that the award was induced by fraud or corruption.”
Due to the absence of any statutory explanations for the terms of ‘fraud’ or ‘corruption’ within the Act, the Court looked at several settled decisions of the Supreme Court as well as other statutes such as the Indian Contract Act, 1872, and the works of legal scholars in order to ascertain what fraud and corruption under the Act meant. On the threshold for fraud, it was held:
“The definition of fraud, as settled in the decisions referred to above, substantially point to a consensus that the facts concealed or suppressed must have a causative link with the facts constituting / culminating in the award or inducing the making of the award. The Supreme Court in Venture Global was of the view that disclosure of the concealed facts post-award would become relevant for setting aside of the award on a causal connection being found between the concealment and the award. Fraud, as is commonly understood, has the potential to vitiate and undo all attendant and consequent happenings as a ripple-effect of unravelling the layers of cover and concealment of the truth. The fraud must be plain and indefensible on the face of the record so that the Court is not required to venture into the depths of the facts presented. The Court must be alarmed and taken aback, even at first blush, of the extent of deception and cunning. The act must be so flagrant so as to undo and upend the award on the
egregiousness alone.”
On corruption, the Court held:
“The above discussion…makes it evident that an award-debtor, who seeks unconditional stay of an award, must discharge the onus of establishing a case, prima facie, that the procedure resulting in the making of the award warrants undoing of the award altogether. The burden on the party is onerous; it is simply not enough to show that the party was kept in the dark on the appointment of the arbitrator or of the proceedings thereafter, that the party was not given adequate or effective hearing or even that there has been a breach of the principles of natural justice…“corruption”, as used in the second proviso to section 36(3), would not only be a case of the arbitrator being dishonest. It would require something of a moral turpitude or an unjust departure from ethical standards where the purity of the decision-making is sullied resulting in an unjust advantage being given to the award-holder.”
In conclusion, the Court observed that the petitioners had not managed to discharge their burden under the statute, and that there was no fraud or corruption in the present case, which would satisfy the twin-benchmark under the second proviso to Section 36(3) of the Act. It was observed that the note sheet that the petitioners were aggrieved with, had indeed been in their own possession the entire time, and they had not disclosed it even after repeated requests and notices sent by the respondents.
It was further held that the note-sheet was an important part of the adjudication in the arbitral proceedings, and contrary to the petitioners claims that the same had been taken on record without notice to them, its presence and contents were undisputed. The Court observed:
The burden which must be discharged would include that the award was obtained by the award-holder by concealment of material facts, which if disclosed, would have persuaded the arbitrator not to pass the award in favour of the award-holder at all. The facts concealed must also have a causal connection with the award; namely that the disclosure of such facts would have a significant bearing on the award. The concealment on the part of the award-holder must also be deliberate, pre-meditated and with an intention to gain an advantage over the award-debtor. The concealment must also amount to deception such as the award-debtor being led to believe a certain set of facts which the award-holder knew to be false and untrue at the time of presenting the facts. The arbitrator’s role in the making of the award is the other limb which must be established, prima facie, as an additional/alternative argument on fraud or corruption.
Contrary to the stand of the petitioner, the respondent Award-holder called upon the petitioner to produce the document on several occasions. The questions put by the respondent/claimant on the note-sheet and the answers thereto would also show that the note-sheet was always in the possession of the petitioner before this Court. The evidence would also show that the note-sheet was a crucial document and indicated the detailed value of work done by the respondent / award-holder which had been accepted and certified by the petitioner / award-debtor.
The arbitrator thus concluded that there was no dispute as to the existence of the document and that the petitioner / award-debtor was hesitant to disclose the document. The Arbitrator has come to a specific finding with regard to the evidentiary value of the document.
The only question which arises from the above is whether the petitioner/award-holder was kept in the dark as to the note-sheet being taken on record. Admittedly, this is not so, as the petitioner’s advocate-on-record was present on the date when a copy of the note sheet was taken on record. It is also incorrect to even suggest that the petitioner did not get an opportunity to respond to this document or did not have a chance to dispute the contents of the document.
Upon holding that there had not been a case made out for unconditional stay u/s 36(3) of the Act, the Court took note of some contrarian facts regarding the petitioner’s case, and directed them to deposit the secured amount with the Registrar (Original Side) Calcutta High Court. It concluded:
“The original document was always in the possession of the petitioner and the petitioner refused to disclose the document by alleging that the document was not traceable. The respondent was hence compelled to make over a copy of the said document in the arbitration. The petitioner has also not disputed the document as would also be evident from the pleadings on record. It is also not the case of the petitioner that the document is manufactured or procured or has been relied upon by the Arbitrator to give an undue and unfair advantage to the respondent Award-holder.
This Court is not satisfied, prima facie, as to the existence of facts which warrant unconditional stay of the operation of the Award dated 22nd April, 2019. The above discussion accounts for the view of the Court. [Petitioner is directed] to secure the awarded amount of Rs. 13,06,16,243.00/- with the Registrar, Original Side within a period of 4 weeks from date.”
Case: The West Bengal Small Industries Development Corporation Limited WBSIDC Vs. Kaushalya Infrastructure Development Corporation Limited KIDCO
Coram: Justice Moushumi Bhattacharya
Citation: 2023 LiveLaw (Cal) 204