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Arbitration is a mode of alternate dispute resolution that emerges out of a contractual arrangement between consenting parties who agree to resolve all disputes without approaching the courts or fora to achieve a timely and cost-effective resolution.
Recourse to the judicial courts in India under the Arbitration & Conciliation Act, 1996 has intentionally been restricted and the scope of interference can be broadly divided into three stages:
First stage (Prior to the constitution of the Arbitral Tribunal): Courts seeking referral of a dispute to arbitration, on existence of a valid arbitration clause under Section 8 of the Arbitration Act; seeking interim relief in arbitral proceedings under Section 9; and appointment of arbitrator/s under Section 11.
Second stage: Post the constitution of, and during the subsistence of the arbitral tribunal, appeals provided for under Section 37(2) of the Act.
Third stage: Post passing of the arbitral award, challenging its validity under Part-I of the Arbitration Act, on grounds mentioned under Section 34 of the Act; restraining the enforcement of the award granted under Part-I of the Arbitration Act, under Section 37; and enforcement of foreign awards under Section 48.
With parties increasingly adopting arbitration as a mechanism to settle disputes, the legislature and judiciary in India have made great efforts to ensure that party autonomy under arbitration is not hampered by recurring judicial intervention. The courts have time and again reiterated the position of minimal judicial intervention in arbitral proceedings at all stages.
Section 34 of the Arbitration Act: Setting aside of the arbitral award
The post-arbitration stage is where parties approach the courts for setting aside of the arbitral award or to challenge the enforcement of the award in India. Section 34 sets down the parameters within which parties may challenge the validity of an award.
Section 34 of the Arbitration Act can essentially be divided into two parts. The first provides the grounds which are fundamental for the conduct of an arbitration proceeding in accordance with terms of the contract i.e. the formation of the contract, principles of natural justice etc. The second part of Section 34 deals with the grounds to assail the arbitral award - if the dispute is not arbitrable either by an express bar under any statue or if the proceedings are in rem, or the award is in conflict with the public policy of India. An arbitral award is considered to be in conflict with the public policy of India if induced or affected by fraud or corruption.
Fraud
Fraud is one of the inbuilt grounds to sustain a challenge under Section 34 of the Arbitration Act. In cases where fraud is alleged by any party, at the time of invocation of the arbitration proceedings, the courts attempt to examine the dispute before referring it to the arbitral tribunal. The prevailing interpretation propounded by the courts is that if a dispute involves questions of fraud or misrepresentation, which can be the subject matter of such proceeding under Section 17 of the Contract Act, then the mere fact that criminal proceedings can or have been instituted in respect of the same subject matter would not lead to the conclusion that a dispute which is otherwise arbitrable, ceases to be so.
The threshold for courts to refuse referring disputes for arbitration is when the allegation of fraud is so serious that it vitiates the arbitration clause along with the substantial contract, and has an adverse effect not only on the parties, but also on the public at large.
When a dispute is referred to arbitration, the independent arbitral tribunal will adjudicate the dispute in terms of the contract and impart reasons for either sustaining or rejecting the allegation of fraud in its arbitral award. If the arbitral award faces a challenge under Section 34 of the Arbitration Act, the reason given and evidence recorded by the arbitral tribunal will add and assist the court to decide on the validity of the award.
The present article attempts to address and clarify the law in relation to sustaining a challenge where the allegation of fraud is made for the first time - at the third stage as enumerated above - that is at the stage of enforcement of the arbitral award and not before.
Position under Indian Law
There are a limited number of cases where the Indian Judicial system has dealt with allegations of fraud post passing of the arbitral award. The judicial precedent on the same is the judgment passed in Venture Global Engineering v. Tech Mahindra Ltd & Anr. Etc.
Brief Facts of the Dispute
Venture Global Engineering, an American company, entered into a share subscription agreement with Satyam, an entity incorporated in India. Disputes arose between the parties and it was referred for arbitration to the London Court of Arbitration. In the year 2006, an arbitral award was passed in Satyam’s favour, who sought to enforce the award in the United States of America. Since the dispute was before the Supreme Court judgment in Bharat Aluminium Company v. Kaiser Aluminium Technical Services Ind (Balco), Part-1 was applicable to the foreign award.
Venture Global challenged the arbitral award in India under Section 34 of the Arbitration Act, before a trial court in Secunderabad, primarily on the ground that award was induced by fraud, in light of the disclosure made by Satyam Chairman Ramalingam Raju about manipulation of the company's accounts to inflate the profit.
The trial court set aside the award, holding that the same is induced by fraud and was in conflict with public policy of India, as the accounts of Satyam were manipulated and misrepresented as disclosed by its Chairman. In an appeal, the High Court set aside the order of the trial court and reinstated the validity of the award. Venture Global then appealed against this order before the Supreme Court.
A Division Bench of the Supreme Court considered the issue and passed diverging opinion as discussed below:
Justice Chelameswar
Section 34 of the Arbitration Act declares that if the making of the award, is induced or affected by fraud, the same is liable to be set aside. Whether the facts relating to the fudging of the accounts of Satyam and the non-disclosure of those facts by Satyam before the arbitrator would amount either (i) to inducing of the award by fraud; or (ii) to the award being made in ignorance of those facts by virtue of non-disclosure of the same by Satyam would be an ‘award affected by fraud’, would be relevant to decide whether the award is required to be set aside.
The trial court judgment neither identified the legal parameters for recording a conclusion that the making of the award was induced by fraud, nor did it explain how the non-disclosure of the facts relating to the true financial status of Satyam was actually an inducement for making the award.
Justice Abhay Manohar Sapre
Delivering a dissenting opinion, Justice Sapre held that the fudging of accounts as disclosed by Raju will certainly have a direct bearing over the rights of Venture Global before the arbitral tribunal. Since the facts disclosed by Raju were known to everyone, and especially those in the trade, the courts could take judicial notice of such evidence as held by the Supreme Court in Onkar Nath & Ors. v. Delhi Administration.
If the facts disclosed by Raju were brought to the notice of Venture Global, the situation might be different from the present. Venture Global may have terminated the contract and invoked arbitration against the breaches committed by Satyam. This non-disclosure of facts by Satyam deprived Venture of the opportunity to exercise its legal and contractual rights against Satyam, for no fault of its own. Venture also lost its right to defend Satyam’s claim before the arbitrator on these grounds.
Once the fraud, misrepresentation or suppression of fact is found to have been done by the party in any judicial proceedings and is later discovered or disclosed, it would relate back to the date of its actual commission and would necessarily result in vitiating such judicial proceedings. Therefore, the order of the High Court was set aside, and the trial court’s order was upheld.
On account of divergent opinions of the judges, the matter was referred to the Chief Justice of India for setting up a larger bench.
Since the matter is still pending before the Supreme Court of India and the position of law has not yet been crystallised, it would be relevant to make reference to the position of law in the jurisdiction of Singapore as Section 34 of the Arbitration Act and Section 48 of the Singapore Arbitration Act, prescribe similar grounds for setting aside of an arbitral award. One of the common grounds for setting aside an arbitral award found in both Acts is if making of the award is induced or affected by fraud and corruption.
Position under Singaporean Law
In this case, the question before the High Court of Appeal of Singapore was whether after the conclusion of an arbitration and the issuance of the final award, if a losing side makes allegations of fraud and misrepresentation for non-disclosure of essential documents in arbitration proceedings, does it render the award liable to be set aside on grounds of fraud or public policy?
The Court opined that it is uncontroversial that a high threshold has to be met for an award to be set aside for fraud or contravention of public policy. The party alleging fraud must produce evidence that is “cogent and strong”, otherwise fraud is not inferred. The Court set our three principles to be satisfied for setting aside an award for suppression or non-disclosure of evidence:
First, it must show that there was deliberate (as opposed to innocent or negligent) concealment aimed at deceiving the arbitral tribunal.
Second, there must be a causative link between the deliberated concealment and the decision in favour of the concealing party (i.e. concealment must have substantially impacted the making of the award).
Third, there must not have been a good reason for the non-disclosure.
The Court held that if fraud concerned the non-disclosure of a material document, the document must be so material that earlier discovery would have prompted the arbitrator to rule in favour of the applicant/the losing side.
In this case, the applicant sought to set aside an arbitral award and resist its enforcement, on the basis that the award was induced and affected by fraud and was thus contrary to the public policy of Singapore.
The Court of Appeal of Singapore, relying upon the dictum of Swiss Singapore Overseas Enterprise Pts v. Exim Rajathi Pvt Ltd, ascertained the guiding principles to assuage the fraudulent conduct of a party for concealing any document from the arbitral tribunal and committing perjury. The Court observed that the matter of concealment of documents and perjury must have three core principles:
(a) Dishonest Intention or Bad Faith;
(b) Materiality of the new evidence to the decision of the tribunal;
(c) Non-availability of the evidence during the arbitration proceedings.
To prove fraud, dishonest or unconscionable conduct is essential, but not sufficient, and there must be an additional causative link between the fraudulent conduct and the claim for enforcement of the award to justify the interference of the Court on public policy grounds.
To return a finding that an arbitral award is induced by fraud, the contesting party must establish a link between any concealment aimed at deceiving the arbitral tribunal and the decision in favour of the concealing party. The word ‘inducement’ must necessarily cover different and likely broader situations such as where an award in ‘tainted’ by fraud either in relation to the arbitration; or whether there is potentially fraud in performance of the underlying contract. Further, the word ‘affected’ must not be given a wide interpretation. It would not suffice to show that some peripheral fraud in the circumstances relating to a case or the parties, notwithstanding that that fraud played no part in the conduct of the arbitration or the making of the award.
In Singapore, the courts have taken a pro-arbitration stance with a strict adherence to the principle of minimal judicial interference with arbitral awards. The arbitral award be set aside if a party commit perjury, conceals material information and/or supresses the evidence that would have a substantial effect on the making of the award. The party challenging the award on grounds of fraud must show a connection between the alleged fraud and the making of the arbitral award. If no allegation of fraud in performance is made by either party, then fraud would play no part in the proceedings at all.
Unconditional stay on enforcement of award if fraud is alleged
Keeping in mind the lack of clarity on the remedies available to parties when allegations of fraud are made at the time of enforcement of the award, the Indian Parliament recently introduced an amendment to Section 36 of the Arbitration Act, with retrospective effect, by adding sub-section (3) to Section 36 of the Arbitration Act:
“Provided further that where the Court is satisfied that a prima facie case is made out that— (a) the arbitration agreement or contract which is the basis of the award; or (b) the making of the award, was induced or effected by fraud or corruption, it shall stay the award unconditionally pending disposal of the challenge under section 34 to the award.”
With the introduction of the aforesaid amendment, the court enforcing the award under Section 36 of Arbitration Act, on having a prima facie view that the arbitral award is induced or affected by fraud, may grant an unconditional stay on the enforcement of the award.
Prior to the introduction of the 2021 amendment to the Arbitration Act, if any party was to challenge the arbitral award on an allegation of fraud, they were required to file an application for stay along with the petition under Section 34 of the Arbitration Act.
The amendment adds an extra layer of judicial scrutiny at the stage of enforcement of the arbitral award under Part-1 of the Arbitration Act. It could certainly be the case that if any party is unsuccessful in getting the stay on enforcement of the arbitral award under Section 34 of Arbitral Act on grounds other than fraud, it could at a belated stage take benefit of the amended portion of Section 36 of Arbitration Act, for seeking stay on enforcement of the arbitral award, on the ground that the arbitral award is induced or effected by fraud.
By taking undue advantage of the proposed amendment to Section 36 of the Act, an unsuccessful party may attempt to delay the enforcement of an arbitration award on superficial grounds by alleging fraud, thereby fixing the parties into protracted litigation and undermining the very objective of the Arbitration Act.
Conclusion
On an analysis of the stand taken by courts in other jurisdictions, it comes to the fore that the existence of a “causative link” between the alleged concealment of facts and the decision in favour of the concealing party is necessary for setting aside an award on the ground of it being induced and affected by fraud. A mere allegation of fraud which did not attain the degree of proof in absence of proper judicial adjudication cannot be relied upon to establish the allegation of fraud.
It must be kept in mind that it is not uncommon for the losing side to resist the enforcement of the arbitral award by challenging its validity on grounds of fraud. The courts, while hearing such pleas for setting aside an arbitral award or restraining its enforcement, must only do so in cases where a “causative link” has been established.
Angad Sandhu is a Partner and Love Kumar Gupta is an Associate at PSL Advocates & Solicitors.