Calcutta High Court: Any Act Which Does Not Breach ‘Twin Benchmark’ Will Not Amount to Fraud/Corruption Under Section 36(3) of A&C Act, 1996

Calcutta High Court: Any Act Which Does Not Breach ‘Twin Benchmark’ Will Not Amount to Fraud/Corruption Under Section 36(3) of A&C Act, 1996

The Calcutta High Court 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 and Conciliation Act, 1996 (for short Act).

The single judge Justice Moushumi Bhattacharya while considering the present facts and submissions of the case was of the view, that the complaint by the petitioner could not satisfy the twin threshold of fraud or corruption under Section 36(3) of the Arbitration and Conciliation Act, 1996.

The petitioners in the present case had prayed 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 submitted 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 vehemently contended 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.

Per contra, the respondents urged that the petitioner had failed 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 had suppressed the document.

The respondents submitted that the petitioner had not disputed 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.

The Court while examining the contentions raised by the parties and the provisions under Section 36(3) of the Act, 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. The petitioner in the present case is concerned with clause (b) of the second proviso to section 36(3), i.e., the making of the award was induced or effected by fraud or corruption.”

Since the Act does not provide any clarity or explanation on the circumstances which would escalate matters to the level of fraud or corruption in the making of the award, the Court deemed that it would be profitable to refer to a few decisions where the concepts of fraud and corruption were considered and dealt with.

In the context of ‘fraud’, the Court observed, “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 High Court referred to the decision passed by the Supreme Court in Venture Global Engineering vs. Satyam Computer Services Ltd; (2010) 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.

With respect to ‘corruption,’ the judge discerned, “the definition of fraud and corruption 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 on grounds of fraud or corruption.”

The Court remarked that 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.

It was highlighted by the Court that 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 favor of the award-holder at all.

Moreover, the Court elucidated that, 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,” added the Court.

Averting to the present case, 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.

While holding that there had not been a case made out for unconditional stay under Section 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.