2023 (8) TMI 1487 - HC - Indian Laws

Railways arbitral award stayed after prima facie fraud found in Rs 4000 crore claim under Section 36(3)

Union of India and Ors. Versus Rashmi Metaliks Limited.

Calcutta HC granted unconditional stay on arbitral award dated May 10, 2021 pending Section 34 challenge under Arbitration and Conciliation Act, 1996. ... Seeking stay on the entire arbitral award - fraud and corruption - Section 34 of the Arbitration and Conciliation Act, 1996 - HELD THAT:- Coming to the instant case at hand, this Court considers it prudent to discuss fraud and corruption first since these are the only two grounds outlined in the Act on which the Court may grant an unconditional stay on the arbitral award. Fraud - HELD THAT:- The Hon'ble Supreme Court in SP CHENGALVARAYA NAIDU VERSUS JAGANNATH [1993 (10) TMI 315 - SUPREME COURT] gave the definition of fraud as 'an act of deliberate deception with the design of securing something by taking unfair advantage of another. It is a deception in order to gain by another's loss. It is a cheating intended to get an advantage.' Corruption - HELD THAT:- The amendment to the Arbitration and Conciliation Act, 1996 by way of Act 3 of 2021 (w.r.e.f. 23.10.2015) permits this Court, provided Section 34 challenge to the arbitral award is pending, to grant unconditional stay on an application under Section 36 (2) of the Act if the court is prima facie satisfied that the making of the arbitral award has been induced or effected by fraud or corruption. In the present case, with respect to the conduct of the parties, this Court observes a disconcerting trend where the hallowed principles of honesty, integrity and probity seem to have gone up in smoke. It shocks the conscience of this Court to observe that the Railways, in defending a claim valued above Rs. 4000 crores, declined to present any witness and refrained from leading any evidence. Subsequently in the arbitral proceedings, the lackadaisical and indifferent attitude of the Railways during the cross examination of the claimant witnesses, as also noted in the arbitral award, leaves much to be said about the sordid state of affairs and absolute apathetic approach of the Railways which happens to be a Government of India public sector undertaking dealing with funds of the public exchequer. Given that fraud has a very wide connotation in legal parlance, it is egregiously absurd to suggest that any award which may be fraudulently obtained is limited and restricted to the above instances cited by him in the preceding paragraph. The Court cannot overlook fraud being perpetuated in the making of the award by way of collusion between the parties. In any event, as at this juncture this Court is not coming into any conclusion on setting aside of the arbitral award, the case laws cited by the learned Advocate General can be comprehensively considered by the Court at the stage of adjudicating the section 34 application. Using the power conferred under section 36 (3) of the Arbitration and Conciliation Act, 1996, as amended by Act 3 of 2021, this Court grants an unconditional stay on the operation of the Arbitral Award dated May 10, 2021 read with the corrections order dated August 18, 2021, pending disposal of the challenge under Section 34 of the Arbitration and Conciliation Act, 1996. Application allowed. Issues Involved:1. Application under Section 34 of the Arbitration and Conciliation Act, 1996 to set aside the arbitral award.2. Application under Section 36 of the Act for stay on the arbitral award.3. Allegations of fraud and corruption in the making of the arbitral award.4. Execution application seeking enforcement of the arbitral award.5. Amendment of pleadings and grounds in Section 34 application.Detailed Analysis:1. Application under Section 34 of the Arbitration and Conciliation Act, 1996:The Union of India, through South Eastern Railways, filed an application under Section 34 to set aside the arbitral award dated May 10, 2021, with corrections dated August 18, 2021. The petitioner argued that the award was illegal, arbitrary, and against public policy, lacking evidence, and induced by fraud or corruption. The respondent, Rashmi Metaliks Limited, sought enforcement of the award through an execution application.2. Application under Section 36 for Stay on Arbitral Award:The petitioner filed an application under Section 36 seeking a stay on the entire arbitral award pending adjudication of the Section 34 application. The court dealt only with this interlocutory application in the judgment. The respondent argued that fraud must be distinctly pleaded and proved, and the Railways had not done so in their applications.3. Allegations of Fraud and Corruption:The court observed glaring irregularities and palpable impropriety in the conduct of the Railways during the arbitral proceedings, including reluctance to present evidence, inadequate cross-examination, and failure to submit documentary evidence. The court found the corrections to the arbitral award to be suspicious and indicative of foul play. The court concluded that there was prima facie evidence of fraud and corruption, warranting an unconditional stay on the arbitral award.4. Execution Application Seeking Enforcement of the Arbitral Award:The respondent filed an execution application seeking enforcement of the arbitral award. The court noted that post the 2015 amendment to the Act, there is no automatic stay on the enforceability of an arbitral award upon filing a Section 34 application. Therefore, a separate application for stay is required.5. Amendment of Pleadings and Grounds in Section 34 Application:The petitioner also moved an application seeking amendment of the grounds filed in its Section 34 petition. The court did not consider this application in the present judgment but indicated that it would be addressed at a later stage.Observations and Analysis:The court meticulously examined the arbitral award and the corrections order, identifying multiple instances of irregularities and potential fraud. The court highlighted the Railways' failure to present witnesses or evidence, inadequate cross-examination, and lack of documentary evidence. The court found the arbitral tribunal's rationale for corrections to be unconvincing and indicative of possible collusion.The court emphasized the importance of maintaining the integrity of the arbitration process and condemned the Railways' conduct. The court granted an unconditional stay on the arbitral award, pending disposal of the Section 34 challenge, and directed the Ministry of Finance to constitute a high-level enquiry committee to investigate the conduct of the Railways and other stakeholders.Conclusion:The court allowed the application for stay under Section 36, granted liberty to mention the Section 34 application and execution application after three months, and directed the Ministry of Finance to conduct an enquiry. The court stressed the need for public sector entities to uphold the highest standards of conduct in arbitration proceedings.