Impact of fraud on arbitral award: Indian Supreme Court at divergence

Introduction

Before the recent pro-arbitration judgments, India was essentially seen as an arbitration-unfriendly jurisdiction.[1] Indian courts were criticised for interfering with the process of arbitration by over exercising jurisdiction in relation to arbitration, treating enforcement proceedings as appeals, analysing the award on merits, granting anti-arbitration injunction, etc.

One of the judgments that was long criticised as being anti-arbitration was that of Bhatia International[2]. In the said judgment, the Supreme Court (SC) held that Part 1 of the Arbitration and Conciliation Act, 1996 (1996 Act) would apply to international arbitrations held outside India, unless impliedly or expressly excluded by parties. The impact of the Bhatia International[3] judgment was that Indian courts retained jurisdiction in relation to international arbitrations outside India. Until Bhatia International[4] was finally overruled by the SC in the Balco judgment[5], the ratio of Bhatia International[6] extended to many subsequent judgments including the Venture Global judgment[7] before it was held to be incorrect law.

The present article endeavours to analyse firstly, the impact of Bhatia International[8] on the course that Venture Global-Satyam[9] dispute took. This article also seeks to examine the impact of allegations of fraud on the validity of an arbitral award during enforcement stage.

Venture Global-Satyam dispute

Venture Global (Venture) and Satyam (now Tech Mahindra) were joint venture partners. Disputes arose between the joint venture partners due to Satyam entering into a contract with a third party and 21 members of the group of companies of which Venture is a member filed bankruptcy proceedings in US courts and were declared bankrupt. Satyam invoked arbitration and London Court of International Arbitration appointed a sole arbitrator for adjudicating the disputes. The sole arbitrator passed an award in Satyam’s favour holding that an “event of default (bankruptcy)” on the part of Venture had occurred entitling Satyam to claim reliefs against Venture. The arbitrator also held that Venture violated the agreement by failing to provide business as stipulated in the agreement.

Proceedings in India

Venture filed a suit in India for challenging the award and sought an injunction against Satyam from enforcing the award. On Satyam’s application, the trial court rejected Venture’s plaint. This order of the trial court was upheld by the High Court in appeal. Thereafter, Venture moved the Supreme Court against the order[10] of the High Court.

Round one

The question that arose before the SC was whether the Indian courts would have jurisdiction to hear the challenge to an arbitral award passed outside India. Since the ratio in Bhatia International[11] continued to be a binding precedent, the SC held that Venture was entitled to challenge the award in Indian courts as the provisions of Part 1 of the 1996 Act will apply to the award. Without expressing any opinion on the merits, the SC directed that the matter may be remitted to the jurisdictional court for adjudication under Section 34 of the 1996 Act.

Disclosures by B. Ramalinga Raju

Meanwhile, on 7-1-2009, B. Ramalinga Raju, the Chairman and Founder of Satyam made a disclosure and confessed in writing that the balance sheets of Satyam had been manipulated inflating the profits to the tune of Rs 7080 crores. M/s Pricewaterhousecoopers (PwC), the auditors of Satyam were compelled to declare that the financial statements of Satyam could no longer be relied upon or considered accurate.

Round two

As per the direction of the SC in round one, the matter was remitted to the trial court. After the disclosures by Mr Raju, the question arose whether these additional facts can be brought on record by Venture before the trial court to resist enforcement of the arbitral award. The trial court allowed Venture’s application to bring the additional facts on record. The said decision of the trial court was reversed by the High Court on the ground of limitation. The High Court held that an application for setting aside of an award could be filed only within 3 months from the date of the award and a new ground of attacking the award cannot be permitted after the expiry of the period of limitation.

The Supreme Court, in an appeal against the High Court judgment[12], prima facie observed[13] that the facts disclosed after passing of the award have a causative link with the facts constituting or inducing the award and therefore without expressing any opinion on the merits of the award, allowed Venture to place additional documents on record and assail the award on the strength of disclosures by Mr Raju, as the same being misrepresentation and fraudulent.

Round three

After SC’s judgment[14] in round two, the trial court before which the challenge to the award was pending framed additional issues in relation to disclosures made by Mr Raju. The trial court finally set aside the award, inter alia on the ground that the facts revealed by the statements made by Mr Raju constituted fraud and misrepresentation played by Satyam on various stakeholders in Satyam including Venture and that it has causative link with the facts which formed the basis of the award. The trial court held that the award is against the public policy of India and hence not enforceable.

The said judgment of the trial court was appealed and the High Court reversed the trial court’s judgment, inter alia holding that the case of fraud and misrepresentation set up by Venture in additional pleadings is not in accordance with law, as these allegations neither satisfies the requirements of law nor were they proved by oral or documentary evidence.

In the round three before the SC, both Venture and Satyam filed cross?appeals. The question that arose for consideration was whether the subsequent disclosures by Mr Raju were relevant to the disputes between the parties and could be a ground to set aside the arbitral award.

Judgment in round three

The two Judges of the SC in its recent judgment dated 1-11-2017[15] have taken a divergent view on the legality of High Court judgment[16] setting aside the arbitral award. Justice Chelameswar held that the trial court order did not give any reasoning as to how the new facts i.e. disclosures by Mr Raju impact the validity of award and how the non-disclosure of the same would amount to fraud. He further questioned the trial court’s conclusion that the award was induced by fraud. On the other hand, Justice Sapre relied on Kerr on the Law of Fraud and Mistake (Seventh Edition) to explain the scope of fraud as a concept. Justice Sapre tested Mr Raju’s disclosure against the material facts/clauses of the agreement and concluded that Kerr’s explanation of fraud covers the disclosures by Mr Raju and the said disclosures are also “event of default” under the joint venture agreements. Justice Sapre observed that the impact of fraud was a direct consequence on the parties’ rights and obligations under the joint venture agreements. He observed that had Mr Raju disclosed the fraud, the same would have given a cause of action to Venture to terminate the joint venture agreement. Justice Sapre observed once the fraud and misrepresentation is proved, the whole arbitral process becomes void ab initio. Justice Sapre set aside the arbitral award on the ground that it was opposed to the public policy of India under Section 34(b)(ii) of the 1996 Act. Due to divergence of opinion between the two Justices, the matter has been referred to a larger Bench.

Conclusion

The divergence of opinion between the two Judges of the SC gives rise to some interesting questions which the larger Bench may be called upon to answer. The questions may include:

  1. Whether discovery of fraud at the enforcement stage could be a ground to set aside the award under Section 34 of the 1996 Act?
  2. Whether admission of fraud would be enough to set aside the arbitral award? Or irrespective of the admission, a court/adjudicating body is supposed to make a judicial determination to conclude commission of fraud?
  3. What should be the test to determine the effect of fraud upon the merits of the matter?
  4. Whether the appellate court is supposed to go into the merits of the case if fraud is alleged or restrict itself to test the validity of the judgment impugned by the party?

It is apparent from the case history that the ratio of Bhatia International[17] has had an impact on the course that the Venture-Satyam dispute took. The matter has witnessed multiple rounds of litigation before courts in India, apart from the proceedings before the Arbitral Tribunal. Even round three before the Supreme Court resulted in divergent opinions. It does beg the question — had the decision in the Venture-Satyam dispute been on the lines of that in the Balco case[18], arguably, there would be no difference in the outcome. The allegation of fraud at enforcement stage led to a virtual retrial before the Indian courts, with obvious appeals till Supreme Court.

The allegation of fraud, at any stage of an arbitral proceedings can have a serious impact on the credibility of the resultant arbitral award. Because of the pervasive impact that the allegation of fraud is capable of unfurling, one may argue that irrespective of the stage at which the proceedings are, the forum ought to test the allegations of fraud with help of cogent evidence. On the other hand, another view is also possible that a party may allege fraud only to buy time and to delay the proceedings, be it the proceedings before the Arbitral Tribunal or at the enforcement stage.

Fraud could encompass a wide range of acts for e.g., perjured testimony, tampered evidence, reliance on false documents, testimony of expert witness with doubtful credentials, bribery, undue influence, etc.

The court of first instance (COFI) plays a crucial role when the allegations with respect to fraud are being tested. A detailed and careful appreciation of evidence at this stage is likely to save judicial time later and may result in quick final decisions.

Suggestions

Firstly, the COFI ought to prima facie convince itself that allegations of fraud are not merely levied to delay the adjudicatory process. The COFI may pass a preliminary judgment limited to the issue of whether the allegation of fraud will be permitted as a ground to resist enforcement. Only if the COFI is prima facie convinced about the merits of the allegation surrounding fraud, discovery of new evidence, misrepresentations, etc., it should allow such pleadings to be raised in the enforcement proceedings.

Secondly, delay, if any, in bringing the fact of fraud/new evidence to its knowledge ought to be construed against the entity alleging fraud and the burden should only be discharged after seeking cogent explanation for delay. The question that should be posed is — whether the evidence in support of fraud was available during the arbitration proceedings? And whether after discovery of fraud, the affected party was prompt enough to point out the same to the relevant court. In view of the recent judgment in A. Ayyasamy v. A. Paramasivam[19], it has been held that the Arbitral Tribunal itself can decide on the allegations of fraud. The exception to the said rule in favour of Court is that if there are very serious allegations of fraud which make a virtual case of criminal offence or where allegations of fraud are so complicated that it becomes essential that such complex issues can be decided only by the civil court on the appreciation of the voluminous evidence that needs to be produced. Therefore, a party alleging fraud ought to raise it before the Tribunal unless it falls within the exception carved out by the SC in A. Ayyasamy[20] judgment.

Thirdly and most importantly, the COFI must test the impact of fraud on the disputes with the help of evidence and record clear findings to capture the causative link. The test to determine the causative link could be: Whether the Arbitral Tribunal would have reached a different conclusion had fraud being pleaded before it or whether the Tribunal would have rendered a more favourable award in favour of the party affected by fraud.

If the award in question is an international award arising from an international arbitration seated outside India, in such a case one relevant question would be whether the laws of the seat country permit parties to approach Arbitral Tribunal to raise issue of fraud after the final award is passed.

As an offshoot of discovery of fraud is initiation of criminal proceedings, any decision in such a proceeding could be a guiding factor for the court deciding the enforceability of award alleged to be tainted by fraud. To strike a balance, the party challenging the award on a new ground of fraud could be asked to give suitable security to be deposited with the COFI. The said deposit could be made refundable depending on the outcome of the allegation of fraud has on the award.

An amendment to the 1996 Act expressly providing for the process to be followed when fraud is alleged at the enforcement stage could further assist the courts in ruling on such requests. Such amendment is also likely to rule out the possibility of conflicting stands by various courts on the issue. The amendment could also specify the degree of proof required to reject enforcement of award alleged to be vitiated by fraud. Further, going forward, to bring parity and uniformity, the courts ought to apply uniform standards while dealing with a domestic arbitration and an international arbitration. It will not be a bad idea for parties to think through the implication of fraud in relation to the transaction, during the arbitration or at any stage thereafter. Parties are likely to benefit by expressly agreeing on such contingencies in the contracts at the negotiation stage.

 

*  BA (LLB), National Law Institute University, Bhopal, Senior Associate, Khaitan & Co., New Delhi.

[1] Report of the High Level Committee to Review the Institutionalisation of Arbitration Mechanism in India, available at <http://legalaffairs.gov.in/sites/default/files/Report-HLC.pdf>.

[2]  Bhatia International v. Bulk Trading SA, (2002) 4 SCC 105.

[3]  (2002) 4 SCC 105.

[4]  (2002) 4 SCC 105.

[5]  Bharat Aluminium Co. v. Kaiser Aluminium Technical Services Inc., (2012) 9 SCC 552.

[6]  (2002) 4 SCC 105.

[7]  Venture Global v. Satyam Computer Services Ltd., (2008) 4 SCC 190.

[8]  (2002) 4 SCC 105.

[9]  (2008) 4 SCC 190.

[10]  Venture Global Engg. v. Satyam Computer Services Ltd., 2007 SCC OnLine AP 148.

[11]  (2002) 4 SCC 105.

[12]  Venture Global Engg. v. Satyam Computer Services Ltd., 2007 SCC OnLine AP 148.

[13]  Venture Global case, (2008) 4 SCC 190.

[14]  Venture Global case, (2008) 4 SCC 190.

[15]  Venture Global Engg. Llc. v. Tech Mahindra Ltd., (2018) 1 SCC 656.

[16]  Venture Global Engg. v. Satyam Computer Services Ltd., 2007 SCC OnLine AP 148.

[17]  (2002) 4 SCC 105.

[18]  (2012) 9 SCC 552.

[19]  (2016) 10 SCC 386.

[20]  (2016) 10 SCC 386.

Join the discussion

Your email address will not be published. Required fields are marked *