Threshold To Prove Fraud & Corruption In Arbitral Award Is Much Higher Than Merely Criticising Findings Of Arbitrator: Calcutta High Court

Background Facts

The dispute referred to arbitration arose out of an agreement for assignment (“AFA”) dated September 29, 2020 and a designated account agreement (“DAA”) dated September 29, 2020. The Petitioner had extended a credit facility to the Respondent. The Respondent assigned the right, title and interest of the rent payable by Mahalaxmi Infra Contract limited (“Mahalaxmi”), under Master Lease Agreement (hereinafter referred to agreement) dated December 31, 2016, to the petitioner, under the AFA dated September 29, 2020.

The Respondent alleged that as on March 31, 2023, the Petitioner had illegally and unlawfully withheld a sum of Rs.5,95,93,332/- out of the GST amount received from Mahalaxmi. Several letters and demand notices were issued to the Petitioner, but the Petitioner did not revert. The outstanding dues were not transferred to the account of the Respondent. On account of the alleged breach, the Respondent by a letter dated December 12, 2023, and corrigendum letter dated January 2, 2023, terminated the agreements and referred the aforementioned dispute to arbitration.

The Sole Arbitrator passed the arbitral award on May 26, 2024. The present application under Section 36(2) of the Arbitration and Conciliation Act, 1996 was filed praying for unconditional stay of the said award.

Contentions

The Counsel for the Petitioner submitted that the award deserved to be set aside on various grounds. The learned Arbitrator did not allow the petitioner to place vital evidence in support of its contention that, the respondent had waived its right to claim the GST component from the receivables of the rental agreement with Mahalaxmi. Various clauses of the DAA were ignored. The learned Arbitrator wrongly and illegally accepted the fictitious demand and computations thereof, made by the respondent towards payment of GST charges.

It was argued that the making of the award was vitiated on the ground that the same was based on illegal demands made by the respondent, which were not corroborated by evidence and the learned Arbitrator proceeded to pass the award, in the absence of any evidence at all. Thus, the making of the award and the publication thereof, were induced by fraud and corruption. Inadmissible claims were allowed by the learned Arbitrator, causing unjust enrichment to the respondent.

The Counsel for the Petitioner further submitted that there was adequate indication that the learned Arbitrator had transgressed all moral and ethical standards and had intentionally denied justice to the petitioner. The learned Arbitrator had hurriedly published the award, by pre-judging the claim. This was contrary to the fundamental policy of India.

The Counsel for the Respondent submitted that the merits of the award should not be a consideration while deciding a prayer for unconditional stay of the award. The prayer for unconditional stay of the award could be allowed only if the requirements of the second proviso to Section 36(3) of the Arbitration and Conciliation Act, 1996 were met. The Respondent relied on various documents before the court and the minutes of the meetings before the learned Arbitrator, in order to show that opportunities were given to the Petitioner to produce relevant documents, which had not been appended to the pleadings

Reference was made to the various findings of the learned Arbitrator which were elaborately discussed in the award along with the submissions and documents produced by the respective parties. The contentions of the Petitioner that, the adjustment of the GST amount prior to the insolvency proceeding would indicate that the Respondent was well aware of such process of adjustment, had not raised any objection at the relevant stage.

Observations

The Court observed that the second proviso to Section 36(3) required a primary satisfaction on the part of the court that the making of the award was induced or affected by fraud or corruption. The award-debtor could seek stay of operation of the award upon discharging the burden of at least, prima facie, showing that the award was induced by fraud or corruption. The Court made reference to Venture Global Engineering LLP v. Tech Mahindra Limited (2018) 1 SCC 656 to discuss the meaning of fraud.

The Court further observed that the threshold to prove fraud and corruption on the part of the learned Arbitrator in the making of the award would be much higher than a criticism of the findings of the learned Arbitrator. The petitioner would have to demonstrate unethical behaviour of the Arbitrator, which surpassed all moral standards. An honest mistake or the incorrect appreciation of the terms of the contract cannot be either fraud or corruption.

Applying the law to the facts of this case, the Court observed that both the Petitioner and the Respondent were allowed adequate opportunity to produce their documents in support of their contentions. Moreover, the Petitioner also failed to substantiate that the Respondent had intentionally withheld documents in order to mislead the learned Arbitrator and had obtained the award by unfair means. The Petitioner was permitted to produce documents and calculations, which the Petitioner failed to do.

Thus, the Court concluded that the Petitioner had failed to discharge the onerous duty to prima facie, satisfy from the records that the making of the award was vitiated by fraud or corruption. Accordingly, the Court disallowed the petition for grant of unconditional stay of the award. The Court further directed that there shall be an unconditional stay of the award for a period of four weeks which shall continue till the disposal of the application under Section 34, Arbitration and Conciliation Act, 1996.

Case Title: Karur Vyasa Bank v. SREI Equipment Finance Limited

Case Number: AP-COM 947/2024

Appearance:

Petitioner – Mr. Rupak Ghosh, Sr.Adv. Ms. Sweta Gandhi, Adv.

Respondent - Mr. Swatarup Banerjee, Adv., Mr. Sariful Haque, Adv., Mr. Rajib Mullick, Adv., Mr. Biswaroop Ghosh, Adv.

Date: 06.03.2025

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