2026 (1) TMI 1006 - HC - Indian Laws

Validity of contract and arbitral procedure defects resulted in award being set aside for procedural irregularities and lack of evidence

Arbitral award set aside due to procedural infirmities: the tribunal refused to permit amendment of defence and counterclaim despite contention that ... Validity of Award of the learned sole Arbitrator - application filed under Section 17 of the Arbitration Act seeking interim measures of status-quo at the project site - purchase order, letter of Award, Arbitration Agreement and the Arbitral Award are vitiated by fraud allegedly committed by the Respondent in not disclosing initiation of CIRP - error in allowing claims of Respondent in absence of any evidence on record - denial of opportunity of leading evidence to the Petitioner - Arbitral Tribunal was biased against the Petitioner, or not - HELD THAT:- The application for amendment of statement of defence and counterclaim was rejected by holding that parties had unconditionally completed the pleadings and that Petitioner had time upto 15 August 2023 for filing amendment application as per procedural order dated 20 July 2023. However, while holding so, the Arbitral Tribunal did not decide the contention of the Petitioner that it acquired knowledge of suppression only by the end of August 2023. The Tribunal also referred to Procedural Order No. 10 dated 25 October 2023, in which it had not permitted the Petitioner to amend the pleadings. The Arbitral Tribunal also referred to prayer clause (g) in the Writ Petition, in which it had prayed for amendment of Statement of Defence and held that the Petition was dismissed in the entirety. The manner in which the Arbitral Tribunal proceeded to decide Petitioner’s request for amendment of statement of defence and counterclaim shows complete irrationality and lack of judicial approach. It is not that the Arbitral Tribunal has recorded a finding that Petitioner was aware of initiation of CIRP against Nice Projects Ltd. before filing of statement of defence. It has not questioned correctness of Petitioner’s contention that it acquired such knowledge towards the end of August 2023. Once this contention of the Petitioner is not rejected, the application for amendment of statement of defence and counterclaim ought to have been allowed by the Arbitral Tribunal. Dismissal of Writ Petition including prayer for amendment did not pose a hurdle in granting amendment by the Tribunal. This Court merely decided the issue of challenge to order dated 16 September 2023 and even that issue was kept open to be decided while challenging the award. Therefore it cannot be assumed that the prayer for amendment of statement of defence was rejected by this Court. Also of relevance is the fact that the issue of validity of contract goes to the root of the matter as it also reflects on the validity of arbitration agreement. If contract itself is declared as void for having been secured by fraud, Petitioner’s liability to pay under a void contract becomes questionable. The issue of validity of contract determines the entitlement of Respondent to claim amounts from Petitioner. If the contract is declared valid, Respondent’s claims towards work performed, material purchased, damages, compensation, loss of profits etc. can be adjudicated - the issue of suppression of initiation of CIRP against Nice Projects Ltd. having effect on validity of contract goes to the root of the matter and was one of the most vital issues which ought to have been adjudicated by the Arbitral Tribunal. Since suppression and misrepresentation about pendency of CIRP against the lead consortium member was writ large, the Tribunal has egregiously and patently erred in refusing to decide the said issue by not permitting Petitioner to amend the pleadings. The Arbitral Tribunal has erroneously closed the doors on the Petitioner by rejecting application for amendment of statement of defence and counterclaim. The manner of dealing with request for amendment and the reasons recorded for rejection of Petitioner’s amendment application clearly reflects non-judicious approach on the part of Arbitral Tribunal. The claims of the Respondent are adjudicated by the Arbitral Tribunal by skirting the vital issue of validity of contract in the light of suppression of pendency of CIRP against Nice Projects Ltd. Adjudication of claims of claimant by not permitting the opposite party to raise a valid defence, going to the root of the matter, is clearly in conflict with public policy of India. It is clearly against the most basic notions of justice to disallow a party to raise the defence of validity of contract after it discovers the act of suppression - the conduct of arbitral proceedings by the Tribunal exhibits lack of judicious approach and objectivity on the part of the Arbitral Tribunal. In my view, therefore the impugned Award cannot be sustained for this reason. Award of claims of respondent in absence of oral evidence - HELD THAT:- Even if the issue of validity of the contract in the light of suppression of CIRP initiated against Nice Projects Ltd. is to be momentarily ignored and some leeway is granted to the Respondent in the matter by holding that Respondent’s claims could be adjudicated on the basis of unamended pleadings, it is seen that claims are awarded by the Arbitral Tribunal in absence of oral evidence by any of the parties. Respondent did not lead evidence even a single witness. It took the chance of pressing claims for damages, loss of profits, etc without leading oral evidence. Though it produced various documents, which included third party documents and unilateral documents, it did not lead evidence of any witness to prove them. The Tribunal has awarded claims in favour of the Respondent in absence of oral evidence. The effect of absence of evidence on fingings recorded by the Arbitral Tribunal is discussed in the latter part of the judgment. Directing parties to file evidence before framing of issues - HELD THAT:- The Tribunal adopted unusual course of action by directing parties to file evidence before framing of issues. After noticing that parties had not filed evidence, it then proceeded to frame issues on 16 September 2023. Thus, the parties were not given liberty to lead evidence on issues framed. The Respondent admittedly did not lead evidence of any witness and after some time was spent on adjudication of application for amendment etc, the Arbitral Tribunal straightaway proceeded with final arguments. Whether findings of Tribunal are supported by evidence - HELD THAT:- The Tribunal has proceeded to award the claim mainly on account of failure on the part of the Petitioner to proceed with joint verification. Petitioner is held responsible for avoiding joint verification. The quantity of structural steel is determined mainly on the basis of Inward Material Receipts (IMR). No document is discussed for recording existence of alleged admission of consumption of all the steel at the site. The purchase and supply of claimed quantity of steel is presumed on the basis of failure on the part of Petitioner in writing any letter to Respondent about not procuring required quantity of steel. This is clear from the finding that ‘Moreover, respondent has not brought out any letter to AT's notice where he has written to claimant for having failed to procure required quantity of steel.’ This finding is in the nature of a conjecture in absence of any direct documentary evidence of claimed quantity of steel purchased and brought at the site by the Respondent. The Arbitral Tribunal has not discussed any invoices of purchase of claimed quantity of steel by the Respondent. Accordingly, it is concluded that in absence of oral evidence, none of the claims of the Respondent could have been granted. Though documents were filed before the Tribunal, the same were not proved. Also, various findings, as discussed above, are recorded without referring to any document produced on record. The findings in the Award are thus patently perverse. Non-grant of opportunity of leading evidence to petitioner - HELD THAT:- By order dated 16 September 2023 the Arbitral Tribunal recorded that all procedural formalities were completed and final arguments shall commence on the next date of hearing. In view of these peculiar circumstances, though initially an opportunity was granted by the Arbitral Tribunal on 3 August 2023 for filing of evidence, the Arbitral Tribunal appears to have shown some haste in directing the parties to commence arguments simultaneously with deciding application of jurisdiction under Sections 16 and 32 of the Arbitration Act. Petitioner's objection of bias - HELD THAT:- So far as the allegation of bias levelled by the Petitioner against the learned Arbitrator is concerned, the High Court is not inclined to delve deeper into the said allegation since I have arrived at a conclusion that the Arbitral Award is not sustainable, both, on account of the manner in which the arbitral proceedings are conducted as well as the findings of the Tribunal being perverse. Suffice it to observe that the Tribunal has conducted the proceedings in such a manner that has given room for Petitioner to allege bias against it - those allegations are however not consdered, as there are better reasons for setting aside the Award. Lack of judicious approach - HELD THAT:- The Petitioner has contended that the Arbitral Tribunal insisted upon the Petitioner submitting a signed statement certifying/ confirming that full opportunity was extended to the Petitioner and all procedures specified in the Arbitration Act were followed. Ordinarily seeking such statement from parties, by itself, would not be a reason for criticizing the Tribunal as such statements, if submitted, would obviate the challenges to the procedures before Section 34 Court. The present case however depicts departure from set principles of law and procedures. The Petitioner has refused to submit any such statement and recorded detailed reason for refusing to do so. It is already held that the Petitioner has been erroneously denied an opportunity of amending the statement of defence. Having conducted the arbitral proceedings by following procedures unknown to law, the Tribunal expected Petitioner to certify that full opportunity was granted and all procedures were followed. The impugned Award is unsustainable and liable to be set aside. The Arbitral Tribunal has adopted procedure unknown to law while conducting the arbitral proceedings. It has erroneously treated mere emails for deferment of proceedings as applications and has prevented the Petitioner from filing proper applications. It has erroneously prevented the Petitioner from raising the issue of validity of the contract in the light of suppression of CIRP against Nice Projects Ltd. prior to issuance of tender. This Court is not interfering in the impugned Award because another view is also possible. The manner in which arbitral proceedings are conducted by the Tribunal as well as findings recorded by it are such that no fair-minded person would ever conduct the proceedings in such manner or record such findings - the Tribunal has not discussed even a single document and had no oral evidence before it. The Tribunal cannot record conclusions by stating that the same are reached ‘from material on record’, without actually referring to the exact document it seeks to rely on. Court exercising powers under Section 34 is not expected to go through the documents on record of the tribunal and certify that the conclusions of the Tribunal are otherwise supportable by evidence on record. One of the reasons for setting aside the Award is the manner in which the proceedings are conducted resulting in non-decision of vital issue of validity of contract. Therefore, if advised, the Respondent can invoke arbitration once again. Parties would have full opportunity to raise all issues. Petitioner can raise the issue of validity of contract based on its contention of suppression of pendency of CIRP against Nice Projects Ltd. while procuring the contract. In fresh arbitration proceedings, what can be decided is not just the claims raised in present proceedings, but also possible alternate claim for payment for work done, even if the contract is declared invalid. The Respondent would also get an opportunity to lead oral evidence to prove its claims. In my view therefore, setting aside of the impugned Arbitral Award would be the right course of action to be adopted in the present case. The impugned Award dated 18 June 2024 passed by the Arbitral Tribunal is set aside - Petition allowed. Issues: (i) Whether the arbitral award dated 18 June 2024 is vitiated by suppression of initiation of CIRP / fraud and procedural irregularities and therefore liable to be set aside under Section 34 of the Arbitration and Conciliation Act, 1996; (ii) Whether the Arbitral Tribunal wrongly decided its jurisdiction (Sections 16/32), refused amendment of pleadings and prevented the Petitioner from leading evidence; (iii) Whether the Tribunals grant of substantial monetary reliefs to the Claimant in absence of oral evidence and without discussing documentary evidence is sustainable.Issue (i): Whether the Award is vitiated by fraud/suppression of CIRP and procedural irregularities.Analysis: The Tribunal proceeded despite partial and unclear disclosure about initiation of CIRP against a lead JV member and treated requests/emails for deferment as jurisdictional applications, and then refused to permit proper pleading/amendment to raise fraud and suppression. The Tribunal did not adjudicate the core contention on validity of the contract (and hence existence of a valid arbitration agreement) after allowing the Petitioner an opportunity to raise that defence; instead it foreclosed the issue by procedural orders. Those procedural steps barred adjudication of a defence going to the root of the parties rights.Conclusion: The Award is set aside on the ground that the Arbitral Tribunal erroneously prevented adjudication of the central defence of fraud/suppression, producing procedural unfairness that vitiates the award. This conclusion favours the Appellant.Issue (ii): Whether the Tribunal erred in rejecting jurisdictional objections, refusing amendment of pleadings and denying opportunity to lead evidence.Analysis: The Tribunal treated emails as formal Section 16 applications and relied on a series of procedural rulings (including refusal to allow amendment after pleadings) without resolving the Petitioners factual contention that it discovered the suppression only later. The Tribunal also directed filing of evidentiary affidavits before framing issues and thereafter closed the door to oral evidence, creating a procedural sequence that prevented the Petitioner from properly presenting its case on jurisdiction and merits.Conclusion: The Tribunals orders on jurisdiction and amendment/leading evidence were procedurally unjust and unsustainable; the conclusion is in favour of the Appellant.Issue (iii): Whether the Tribunal could lawfully award substantial claims in the absence of oral evidence and without discussing documentary proof.Analysis: The Tribunal awarded damages and large claims without any witness testimony from the Claimant, and in many findings did not refer to specific documentary evidence relied upon. Established principles require credible evidence, particularly for loss of profits and major monetary claims; absent such proof, the awards are unsupported. The Tribunals methodology frequently relied on arithmetic or conjecture rather than demonstrated evidence.Conclusion: The findings and monetary awards made in favour of the Claimant in absence of oral evidence and without adequate documentary reasoning are unsustainable; this conclusion is in favour of the Appellant.Final Conclusion: The impugned arbitral award dated 18 June 2024 is unsustainable on account of procedural unfairness (denial of opportunity to amend and lead evidence), perverse findings lacking evidentiary foundation, and failure to adjudicate the core defence of fraud/suppression; consequently the award is set aside and the matter may be re-opened by fresh arbitration permitting full opportunity to both parties. No order as to costs was made by the Court.Ratio Decidendi: Where an arbitral tribunal prevents a party from raising and proving a defence going to the validity of the contract (including by refusing amendment and excluding opportunity to lead evidence) and proceeds to grant substantial reliefs without admissible evidence or reasoned reference to documents, the resultant award is vitiated for breach of procedural fairness and is liable to be set aside under Section 34 of the Arbitration and Conciliation Act, 1996.