Development Corporation Limited ... vs Kaushalya Infrastructure
2023 Latest Caselaw 1698 Cal/2

                      IN THE HIGH COURT AT CALCUTTA
                      Ordinary Original Civil Jurisdiction
                              Original Side
                            (Commercial Division)


Present :-
The Hon'ble Justice Moushumi Bhattacharya

                             AP 174 of 2022

                     The West Bengal Small Industries
                Development Corporation Limited WBSIDC
                                       Vs.

                         Kaushalya Infrastructure
                Development Corporation Limited KIDCO


For the petitioner                 :          Mr. Swarnendu Ghosh, Adv.
                                              Mr. Kamal Kr. Chattopadhyay, Adv.
                                              Ms. Suchismita Ghosh, Adv.
                                              Mr. Tanjir Ali, Adv.


For the respondent                :           Mr. Jaydip Kar, Sr. Adv.
                                              Ms. Manju Bhuteria, Adv.
                                              Ms. Shreya Choudhury, Adv.


Last Heard on                     :           13.07.2023


Delivered on                      :           26.07.2023

Moushumi Bhattacharya, J.

1. The petitioner seeks unconditional stay of the operation of an Award

dated 22nd April, 2019. By the said Award, the learned Arbitrator directed the

petitioner (respondent in the arbitration) to pay Rs. 13.06 crores (approx) to the

respondent in respect of the claims made by the respondent in the arbitration.

2. The prayer for unconditional stay of the impugned Award is on the

ground of the second proviso to section 36(3) of The Arbitration and

Conciliation Act, 1996, which empowers the Court to unconditionally stay an

award where the Court is satisfied, prima facie, that the making of the award

was induced or effected by fraud or corruption.

3. According to learned counsel appearing for the petitioner, the manner in

which the impugned Award was made fits in within the requirements of the

second proviso to section 36(3) which contemplates unconditional stay of an

award.

Facts urged by the petitioner for unconditional stay of the Award

4. According to counsel, two of the claims of the respondent (claimant in

the arbitration) were adjudicated on the basis of an internal note-sheet which

recorded inter alia that the respondent had executed approximately Rs. 87.6%

of the work which translated to Rs. 18.26 crores. Counsel submits that several

of the claims were awarded on the basis of the note-sheet which constitutes

about 70% of the awarded sum. Counsel places documents to show that the

internal note-sheet was taken on record in the arbitration proceedings in a

manner which would fall under the fraud and corruption exception contained

in the second proviso to section 36(3). Counsel submits that the document was

disallowed from being tendered during the cross-examination of the claimant's

witness but was taken on record after conclusion of arguments. Counsel

submits that although the petitioner was given leave to file its written objection

to the internal note, the impugned Award does not deal with such objection.

Counsel submits that the document could only have been admitted as evidence

after being duly proved under the provisions of the Indian Evidence Act, 1872.

According to counsel, the facts in the present case would support the prayer for

unconditional stay of the Award.

The respondent's/claimant's objection to the prayer for unconditional stay

5. Learned counsel appearing for the respondent/claimant in the

arbitration urges that the petitioner has not made out any case for

unconditional stay of the Award. Counsel submits that the petitioner had

concealed the document despite the claimant making several requests to the

petitioner to disclose the original document which was all along in the

possession of the petitioner. Counsel submits that the question of fraud can

only come in where a party had knowingly suppressed a document to the

detriment of the other; whereas in the present case the petitioner (respondent

in the arbitration) has suppressed the document. It is also submitted that the

petitioner has not disputed the contents of the documents or alleged that the

document is a manufactured document. It is further submitted that the

petitioner had also been given an opportunity to file its objection to the

documents/note-sheet which was considered by the arbitrator made the

award. Counsel submits that none of the facts placed would substantiate the

petitioner's claim of the Award being vitiated by either fraud or corruption.

The second proviso to section 36(3) of the 1996 Act

6. Section 36 of the Act deals with enforcement and enables an award-

holder to enforce an award in accordance with the provisions of The Code of

Civil Procedure, 1908 as a decree of Court. Section 36(2) requires the Court to

grant an order of stay of the operation of the arbitral award on an application

being made for such and clarifies that the mere filing of an application for

setting aside of the award under section 34 will not render the award

unenforceable. Section 36(3) empowers the Court to stay the operation of the

arbitral award subject to conditions which the Court may deem fit to impose

for stay of the award and for reasons which are to be recorded in writing.

7. The first proviso to section 36(3) requires the Court to consider the

provisions of the CPC for grant of stay of a money decree where the arbitral

award is for payment of money. The second proviso, which is relevant for the

present adjudication, was inserted by the Amendment Act of 2021 but with

retrospective effect from 23rd October, 2015. The second proviso reads as

under:

"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.

Explanation.- For the removal of doubts, it is hereby clarified that the above proviso shall apply to all court cases arising out of or in relation to arbitral proceedings, irrespective of whether the arbitral or court proceedings were (Amendment) Act, 2015 (3 of 2016)."

8. The second proviso to section 36(3) hence requires a prima facie case to

be made out by the award-debtor and the Court being satisfied of the case

made out that the arbitration agreement/contract or the making of the award

was induced or effected by fraud or corruption. The petitioner in the present

case is concerned with clause (b) of the second proviso to section 36(3), i.e., the

making of the award was induced or effected by fraud or corruption.

(underlined for emphasis).

9. 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.

10. 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.

Fraud

11. Kerr on the Law of Fraud and Mistake, Seventh Edition, describes fraud

as understood by Civil Courts of Justice, to include all acts, omissions and

concealments which involve a breach of legal or equitable duty, trust or

confidence, justly reposed and are injurious to another or by which an undue

or unconscientious advantage is taken of another. The description proceeds to

include :

"All surprise, trick, cunning, dissembling and other unfair way that is used to cheat any one is considered as fraud.

Fraud in all cases implies a wilful act on the part of any one, whereby another is sought to be deprived, by illegal or inequitable means, of what he is entitled to."

12. In Venture Global Engineering vs. Satyam Computer Services Ltd; (2010) 8

SCC 660, 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 held

that fraud cannot be put in a straitjacket as it has wide connotation in legal

parlance and referred to a decision of the House of Lords in Reddaway (Frank)

& Co. Ltd. vs. George Banham & Co. Ltd.; 1896 AC 199 where "fraud" was

described in the words of Lord Macnaghten as :

"But fraud is infinite in variety; sometimes it is audacious and unblushing; sometimes it pays a sort of homage to virtue, and then it is modest and retiring; it would be honesty itself if it could only afford it. But fraud is fraud all the same; and it is the fraud, not the manner of it, which calls for the interposition of the Court."

13. Directing the gaze to India, section 17 of the Indian Contract Act, 1872,

defines fraud as-

"17.- "Fraud" means and includes any of the following acts committed by a party to a contract, or with his connivance, or by his agent, with intent to deceive another party thereto or his agent, or to induce him to enter into the contract- (1) the suggestion, as a fact, of that which is not true, by one who does not believe it to be true;

(2) the active concealment of a fact by one having knowledge or belief of the fact;

(3) a promise made without any intention of performing it; (4) any other act fitted to deceive;

(5) any such act or omission as the law specially declares to be fraudulent.

Explanation.- Mere silence as to facts likely to affect the willingness of a person to enter into a contract is not fraud, unless the circumstances of the case are such that, regard being had to them, it is the duty of the person keeping silence to speak, or unless his silence is, in itself, equivalent to speech"

The Explanation to section 17 clarifies that mere silence as to facts likely to

affect the willingness of a person to enter into a contract is not fraud, unless

the circumstances of the case are such that regard being had to the

circumstances, it is a duty of a person keeping silence to speak.

14. Considering the legal and factual position, 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.

15. The words used in the second proviso to section 36(3) are that

"... (b) the making of the award, was induced or effected by fraud or

corruption...".

The operative words are hence ".....making of the award...." which would also

cover the conduct of the arbitration as well as the decision-making process

culminating in the award.

16. The words "making of the award" was also considered by the Court in

Elektrim SA vs. Vivendi Universal SA; (2007) 2 All ER (Comm) 365, which held

that an award must be obtained by the fraud of a party to the arbitration or by

the fraud of another to which the party to the arbitration was privy. The Court

in Vivendi Universal SA elaborated the concept further in the following words :

"an award will only be obtained by fraud if the party which has deliberately concealed the document has, as a consequence of that concealment, obtained an award in its favour. The party relying on Section 68(2)(g) must therefore also prove a causative link between the deliberate concealment of the document and a decision in the award in favour of the other successful party"

17. The definition of fraud, as settled in the decisions referred to above,

substantially point to a consensus that the facts concealed or suppressed must

have a causative link with the facts constituting / culminating in the award or

inducing the making of the award. The Supreme Court in Venture Global was of

the view that disclosure of the concealed facts post-award would become

relevant for setting aside of the award on a causal connection being found

between the concealment and the award.

Corruption

18. Stroud's Judicial Dictionary, Fourth Edition defines 'corruption' as;

"Corruption; in an arbitrator means moral obliquity: it is a false and misleading metaphor to speak of an arbitrator's honest mistake, whether it be of excess or defect as 'constructive corruption".

19. In Bibhuranjan Gupta vs. The King; ILR 1949 2 Cal 440, a learned Single

Judge of this Court opined that "corruptly" was different from "dishonestly" or

"fraudulently" and explained that, although the user may not be dishonest or

fraudulent, it may nevertheless be corrupt if the user is designed to curb or

prevent the course of justice.

20. In Emperor vs. Rama Nana Hagavne; AIR 1922 Bom 99, a Division Bench

of the Bombay High court, presided over by Chief Justice Macleod, also

differentiated between the words "corruptly" and "dishonestly" as used in

section 24 of the Indian Penal Code, 1860 but included the intention of causing

wrongful gain or wrongful loss. The Court dwelt on using false evidence and

defined "corrupt" as anything which has been changed so as to become putrid,

vitiated, tainted and further opined that bribery is not the only cause which

leads to corruption. In M. Narasappa vs. V. Krishna Reddy; 1984 SCC OnLine

AP 5, the learned Single Bench of the High Court of Andhra Pradesh at

Hyderabad explained the word "corruption" to be a wider concept which

includes but is not limited to bribery and involves any conduct which is

immoral, improper, blameworthy and any act of misappropriation.

21. The above 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.

22. Section 36(3), in its present form, was brought in by the amendment of

2016 by a pro-enforcement addition to the pre-amendment position where the

award-holder was entitled to enforce the award upon expiry of the time period

for setting aside of the award or where such plea had been refused. The

amendment of 2016 (w.e.f. 23.10.2015) made the enforcement of an award

subject to the award-debtor succeeding in applying for stay of the award upon

suitable conditions being imposed on the award-debtor. The recent amendment

of 2021 (but w.r.e.f 23.10.2015) is an exception to the enforcement-momentum

by giving space to the award-debtor for stay of the award without any

conditions being imposed under section 36(3) read with the proviso thereto.

The price for this must however be paid in the form of an irrefutable case of

fraud or corruption.

23. The burden which must be discharged would include that the award was

obtained by the award-holder by concealment of material facts, which if

disclosed, would have persuaded the arbitrator not to pass the award in favour

of the award-holder at all. The facts concealed must also have a causal

connection with the award; namely that the disclosure of such facts would

have a significant bearing on the award. The concealment on the part of the

award-holder must also be deliberate, pre-meditated and with an intention to

gain an advantage over the award-debtor. The concealment must also amount

to deception such as the award-debtor being led to believe a certain set of facts

which the award-holder knew to be false and untrue at the time of presenting

the facts. The arbitrator's role in the making of the award is the other limb

which must be established, prima facie, as an additional/alternative argument

on fraud or corruption.

24. Fraud, as is commonly understood, has the potential to vitiate and undo

all attendant and consequent happenings as a ripple-effect of unraveling the

layers of cover and concealment of the truth. The fraud must be plain and

indefensible on the face of the record so that the Court is not required to

venture into the depths of the facts presented. The Court must be alarmed and

taken aback, even at first blush, of the extent of deception and cunning. The

act must be so flagrant so as to undo and upend the award on the

egregiousness alone.

25. In a similar vein, the expression "corruption", as used in the second

proviso to section 36(3), would not only be a case of the arbitrator being

dishonest. It would require something of a moral turpitude or an unjust

departure from ethical standards where the purity of the decision-making is

sullied resulting in an unjust advantage being given to the award-holder.

26. 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.

27. The petitioner complains that the entire Award is based on a note-sheet

which was taken on record without sufficient notice to the petitioner or giving

the petitioner opportunity to deny or dispute the document. The petitioner says

that a substantial part of the impugned Award is based on the note-sheet. The

petitioner also says that the note-sheet was not mentioned in the statement of

claim or the affidavit of evidence and the document was not put to any of the

witnesses in evidence or presented in arguments by the counsel appearing for

the parties. Counsel for the petitioner also submits that the respondent did not

give any notice to produce the document and that the petitioner had objected

to the respondent producing the note-sheet during cross-examination of the

respondent's witness which led to the document not being taken on record.

28. The other objection taken on behalf of the petitioner and indicated in the

submissions impinged on the merits of the Award is hence not being

considered since that would be a matter for adjudication under section 34 of

the Act which is ready for hearing.

29. Contrary to the stand of the petitioner, the relevant part of the impugned

Award however records that the respondent Award-holder (claimant in the

arbitration) called upon the petitioner (respondent in the arbitration) to

produce the document on several occasions including by a notice dated

20.2.2017. The questions put by the respondent/claimant on the note-sheet

and the answers thereto would also show that the note-sheet was always in the

possession of the petitioner before this Court. The evidence would also show

that the note-sheet was a crucial document and indicated the detailed value of

work done by the respondent / award-holder which had been accepted and

certified by the petitioner / award-debtor. The work done amounted to

approximately Rs. 18.25 crores. The answer of the claimant's witness would

further show that the witness wanted to disclose a copy of the note-sheet and

had made several such attempts to do so but had not been permitted on the

earlier occasions. The arbitrator thus concluded that there was no dispute as

to the existence of the document and that the petitioner / award-debtor was

hesitant to disclose the document.

30. Significantly, 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.

31. This Court refrains from any further reference to the impugned Award

since that would be a matter to be considered for setting aside of the Award.

32. The only question which arises from the above is whether the petitioner /

award-holder was kept in the dark as to the note-sheet being taken on record.

Admittedly, this is not so, as the petitioner's advocate-on-record was present

on the date when a copy of the note sheet was taken on record. It is also

incorrect to even suggest that the petitioner did not get an opportunity to

respond to this document or did not have a chance to dispute the contents of

the document.

33. The undisputed facts are also of significance. The original document was

always in the possession of the petitioner and the petitioner refused to disclose

the document by alleging that the document was not traceable. The respondent

/ claimant was hence compelled to make over a copy of the said document in

the arbitration. The petitioner has also not disputed the document as would

also be evident from the pleadings on record. It is also not the case of the

petitioner that the document is manufactured or procured or has been relied

upon by the Arbitrator to give an undue and unfair advantage to the

respondent Award-holder.

34. The complaint of the petitioner with regard to the note-sheet being

admitted as part of records by no means touches (or even brushes) the

threshold of the award being liable to be unconditionally stayed on the ground

of fraud or corruption (or more likely being dragged down to the depths) as

envisaged under the second proviso to section 36(3) of the Act. Granting stay of

an award without imposing conditions on the award-debtor is a departure from

the scheme of the Act and must be established within the strict vocabulary

used in the second proviso. Any act which falls short of a certain kind of

conduct on the part of the arbitrator or of the proceedings will not amount to

fraud or corruption. The failing must be brought within the sharpness and

intensity of the parameters as decided in the case-law together with the causal

nexus with the award.

35. 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 above discussion accounts for the view of the Court.

36. AP 174 of 2022 is accordingly 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. The Award shall be stayed from the date on which the

award-debtor complies with these directions. In the event of default the award-

holder shall be at liberty to take steps for enforcement of the Award.

Later

Learned counsel appearing for the award-debtor prays for some more

time to comply with the directions passed in the judgment.

Learned counsel appearing for the award-holder submits that the award

was stayed some time in 2019 but that the award-holder was unable to take

any steps for enforcement of the award due to the change in law at that time.

Counsel further submits that the award was with 10% interest and the amount

would hence come to about Rs.18 crores as on date.

Since there is a dispute between counsel as to the time and manner in

which the interest has been calculated, the directions in the judgment shall

remain and the award-debtor will pay the principal amount as indicated in the

preceding paragraphs of this judgment within the time directed.

Urgent photostat certified copies of this judgment, if applied for, be

supplied to the parties upon fulfillment of requisite formalities.

(Moushumi Bhattacharya, J.)