Satyam Ltd-Venture Global Arbitration Dispute Referred To Larger Bench Due To Divergence Of Opinion [Read Order]

The high profile arbitration dispute between the erstwhile Satyam Computer Services Ltd (now Tech Mahindra Ltd, after acquisition) and Venture Global Engineering LLC has been referred to a larger bench of the Supreme Court in view of divergent opinions expressed by Justice Jasti Chelameswar and Justice Abhay Manohar Sapre.

The two-member bench of the Supreme Court was dealing with the legality of the order of high court by which the order of trail court setting aside the arbitration award passed in favour of Satyam Ltd was reversed.

Background Facts

Satyam Ltd and Venture Global Engineering LLC(incorporated in USA) entered into a joint-venture and incorporated a joint venture company. The clause in the JV agreement enabled either of the parties to buy the shares of the other party at book value in the event of default. The JV agreement listed bankruptcy as one of the events of default.  Venture group of companies was declared as bankrupt in a bankruptcy proceeding in a court of the USA. Thereupon, Satyam Ltd invoked arbitration clause and arbitration proceedings were initiated in the USA. The arbitrator passed award in favour of Satyam, enabling Satyam to purchase the shares of Venture Global in the joint venture company at book value. After several rounds of litigations in various fora in the USA and India, the foreign arbitration award came to be challenged in India under Section 34 of the Arbitration and Conciliation Act. The appeal was allowed and award was set aside. In further appeal, the high court reversed the trial court verdict, and restored the award.

The revelations made by Ramalinga Raju, chairman and founder of Satyam Ltd that the balance books of the company were manipulated to inflate profits was taken as an instance of fraud by the trial court. It was further held by the trial court that such instances of fraud would have entitled Venture Global to terminate the agreement prior to the event of default on their part. It was also held that the direction in the award enabling Satyam Ltd. to buy shares of Venture Global LLC would result in violation of provisions of the Foreign Exchange Management Act, and hence the award was held to be violative of public policy of India. The high court, however, did not agree with the findings of trial court and restored the award.

Conclusion of Justice J Chelameswar

The entire exercise undertaken by the trial court only demonstrates the unfortunate trend in the legal system where without settling the facts in issue first and identifying the questions of law relevant in the context for determining the controversy between the parties, case law is dumped upon and examined by the courts- Justice J Chelameswar criticised the approach of the trial court in these words while dealing with the issue. It was observed that there was no basis for the findings of the trial court that the buying of shares of Venture Global at book value would result in violation of the FEMA. The trial court had noted that shares had to be purchased at the fair value and not the book value. Regarding this, it was observed as follows:  The trial court did not even indicate the number of the regulation which mandates (if at all) that the transfer such as the one directed by the AWARD is required to be only at “fair value’ of the shares. The trial court simply accepted the submission of VENTURE.

The findings regarding fraud were also held to be unsustainable on the ground that there was no causative link between the alleged fraud and the dispute at hand. It was observed that no reference was there in the pleadings of Venture Global as to how they believed that the concealed facts were material for the adjudication of the dispute by the arbitrator. Equally absent is the discussion by the trial court as to how the concealed facts would become material facts in the context of the arbitration. It was observed that except mechanically repeating the words of this Court that the non-disclosure or concealment of the material facts before the arbitrator is an act of fraud, there is no discussion as to how the concealed facts are material facts whose concealment resulted in inducing the making of the award by fraud or affected by fraud. On these grounds, Justice Chelameswar dismissed the appeals, upholding the restoration of award.

Views of Justice AM Sapre

Justice AM Sapre, however, took a totally divergent view. It was held that the concealment of facts by Ramalinga Raju amounted to fraud. The gist of the reasoning of Justice Sapre’s judgment was that the act of fraud related to concealment of events which occurred prior to the event of default on part of Venture, and the prior fraud would have enabled Venture to terminate the agreement if they had known the concealed facts then. Therefore, the award obtained by Satyam on the ground of event of default of Venture was unsustainable. It also deprived Venture from exercising their contractual right for want of knowledge of these acts of Raju against Satyam at appropriate stage in court of law in terms of agreement. All this occurred due to Satyam concealing these major events at all relevant time from Venture. It was observed as hereunder:

It is, therefore, liable to be set aside for the reasons that it is proved that the Award was obtained by Satyam against Venture by misrepresentation and suppression of material facts having bearing over the proceedings; second, the acts of Mr. Raju, in the affairs of Satyam, as its Chairman violated several sections of IPC, Companies Act and FEMA; and third, the arbitral proceedings in question due to this reason, which came to knowledge to all stakeholders of Satyam including Venture subsequent to passing of the Award could not be said to have been held fairly or reasonably but were concluded to the detriment of the interest of Venture causing them prejudice while defending their interest before the learned Arbitrator .

 Due to the difference in opinion amongst the judges, the matter has been referred to a larger bench.