2023 (7) TMI 1434 - HC - Indian Laws

Award-debtor fails to prove fraud under Section 36(3) for unconditional stay of arbitral award

The Calcutta HC rejected an application for unconditional stay of an arbitral award under section 36(3) of the Arbitration and Conciliation Act, 1996. The ... Seeking unconditional stay of the operation of an Award - making of the award was induced or effected by fraud or corruption - section 36(3) of The Arbitration and Conciliation Act, 1996 - HELD THAT:- The second proviso to section 36(3) 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. 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, it would be profitable to refer to a few decisions where the concepts of fraud and corruption were considered and dealt with. In Venture Global Engineering vs. Satyam Computer Services Ltd. [2010 (8) TMI 1171 - SUPREME COURT], the Supreme Court considered a case for setting aside of an award under Explanation 1 to section 34(2)(b)(ii) which provides for the circumstances when an award would be in conflict with the public policy of India and includes the making of the award being induced or affected by fraud or corruption in one of the three sub-clauses under Explanation 1(i) - the Supreme Court in Venture Global held that concealment of relevant and material facts, which should have been disclosed before the arbitrator, would amount to an act of fraud. Russell on Arbitration, 23rd Edition, reiterates the position that an award will be obtained by fraud if the consequence of deliberate concealment is an award in favour of the concealing party. Fraud and corruption - HELD THAT:- The discussion on 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 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 - The admitted facts in the present case do not breach the twin benchmarks of either fraud or corruption as contemplated under the second proviso to section 36(3) of the Act. The reason is as follows. The impugned Award records that the Arbitrator allowed the claimant/respondent award-holder to disclose the photocopy of the document subject to the petitioners verifying the Progress Report from the copy disclosed and that the petitioner also filed a set of objections with regard to the relevance of the document which have been dealt with in the impugned Award. The Arbitrator has come to a specific finding with regard to the evidentiary value of the document. 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 application is disposed of by directing the petitioner award-debtor 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. 50% of the said amount shall be provided by way of cash deposit which shall be invested by the Registrar in an interest-bearing account with a reputed Bank and the remaining 50% by way of a Bank guarantee which the petitioner will furnish within the time directed. Issues Involved:1. Unconditional stay of the arbitral award.2. Application of the second proviso to section 36(3) of The Arbitration and Conciliation Act, 1996.3. Allegations of fraud and corruption in the making of the award.4. Admissibility and evidentiary value of the internal note-sheet.5. Compliance with procedural fairness and principles of natural justice.Detailed Analysis:1. Unconditional Stay of the Arbitral Award:The petitioner sought an unconditional stay of the arbitral award dated 22nd April, 2019, which directed the petitioner to pay approximately Rs. 13.06 crores to the respondent. The request was based on the second proviso to section 36(3) of The Arbitration and Conciliation Act, 1996, which allows for an unconditional stay if the award was induced or affected by fraud or corruption.2. Application of the Second Proviso to Section 36(3):The second proviso to section 36(3) was inserted by the Amendment Act of 2021, with retrospective effect from 23rd October, 2015. It mandates that if the court is satisfied, prima facie, that the making of the award was induced or affected by fraud or corruption, it shall stay the award unconditionally pending the disposal of the challenge under section 34.3. Allegations of Fraud and Corruption:The petitioner argued that the award was based on an internal note-sheet, which was taken on record improperly, constituting fraud under section 36(3). The petitioner claimed that the note-sheet was admitted without proper cross-examination and was not duly proved under the Indian Evidence Act, 1872. The respondent countered that the petitioner had concealed the document and had not disputed its contents or authenticity.4. Admissibility and Evidentiary Value of the Internal Note-Sheet:The court examined whether the internal note-sheet, which recorded that the respondent had executed approximately 87.6% of the work, was admitted properly. The petitioner argued that the note-sheet was not mentioned in the statement of claim or affidavit of evidence and was not presented during arguments. The respondent maintained that the petitioner had the document all along and was given the opportunity to file objections, which were considered by the arbitrator.5. Compliance with Procedural Fairness and Principles of Natural Justice:The court noted that the arbitrator allowed the respondent to disclose a photocopy of the note-sheet, and the petitioner was given an opportunity to verify and object to the document. The arbitrator's findings on the evidentiary value of the document were also considered. The court found that the petitioner was not kept in the dark about the note-sheet being taken on record and had the opportunity to dispute its contents.Conclusion:The court concluded that the facts did not meet the stringent requirements of fraud or corruption as outlined in the second proviso to section 36(3) of the Act. The petitioner failed to establish a prima facie case warranting an unconditional stay of the award. The court directed the petitioner to secure the awarded amount with the Registrar, Original Side, within four weeks, with 50% as a cash deposit and 50% as a bank guarantee. The award would be stayed upon compliance with these directions, failing which the respondent could enforce the award. The court also addressed the dispute regarding the calculation of interest on the awarded amount.The judgment highlights the high threshold for proving fraud or corruption to obtain an unconditional stay of an arbitral award, emphasizing the need for clear and convincing evidence of such misconduct.