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The Satyam Scam causes the Supreme Court to permit previously concealed facts to set aside an arbitral Award

The Supreme Court in Venture Global Engineering V. Satyam Computer Services Ltd. & Anr, on August 11, 2010, delivered a significant decision analyzing whether facts that come to light after an arbitral Award, which could have impacted the Award, can be used to set aside the Award writes Vivek Vashi.
Brief Background

Venture Global Engineering (“Venture”) and Satyam Computer Services Ltd. (“Satyam”) entered into a Joint Venture Agreement and a Shareholders Agreement to establish a company called Satyam Venture Engineering Services (the “Company”). Thereafter the Company entered into an agreement with TRW Inc. for IT services.  Subsequently, a dispute on the quantum of the retained receipts arose and the dispute were referred to arbitration. The arbitrator, by an Award dated April 3, 2006, directed Venture to transfer its entire shareholding in the Company to Satyam. Satyam filed a Petition for the recognition and enforcement of the said Award before the U.S. District Court in Michigan. Following Satyam’s Petition, Venture filed a Suit inter alia seeking a declaration to set aside the Award under Section 34 of the Arbitration and Conciliation Act of 1996 (the “Act”). The Trial Court dismissed the Suit on the grounds that the Award being a foreign Award could not be challenged under Section 34 of the Act.

Venture challenged the Trial Court’s Order before the Andhra Pradesh and which challenge came to be dismissed. Venture preferred a Special Leave Petition wherein the Supreme Court by its Judgment held that a foreign Award could be challenged under Section 34 of the Act and remanded the case to the City Civil Court at Hyderabad, directing the parties to maintain status quo in relation to the transfer of shares.  In or around 2008/09 Satyam’s Chairman confessed to forging its Balance Sheets; PWC, Satyam’s Auditors also declared that Satyam’s financial statements could no longer be considered reliable or accurate. Venture filed an interim application before the Trial Court to bring certain facts on record under the provisions of Order VIII Rule 9 of the Civil Procedure Code of 1908. The Trial Court allowed Venture’s application which Satyam impugned before the Hon’ble Andhra Pradesh High Court.

The High Court held in terms of that Section 34(1) and (3) of the Act a party could only set aside an arbitral Award if an application for the same is made within a period of 3 months from the date of making the Award However, in the instant case was attempting to bring forward new grounds to challenge the Award were the expiry of such prescribed period and proceeded to  hold that such an application under Order VIII Rule 9 for bringing additional facts on record  did not lie. Venture once again approached the Supreme Court. The Supreme Court was to consider whether additional facts that were brought to the notice of Venture after the delivery of the arbitral Award could at all be used to challenge the Award.

Analysis of the Judgment
Particularly, the additional facts that Venture sought to introduce inter alia included (a) details of exaggeration of the financial statements and accounts; (b) extracts of investigations by SEBI and CBI into the “Satyam Scam”; (c) government ordered inspections of Satyam affairs; (d) confessions of Mr. Raju on the diversion of funds and other such criminal activities in relation to Satyam’s business. The Supreme Court was pleased to held that an amendment to bring additional suppressed facts on record would be allowed as long as the following conditions were must:-:

  1.  The facts concealed must have a causative link with the passing of the Award.

If the concealed facts, disclosed after the passing of the award, have a causative link with the facts constituting or inducing the Award, such facts will be considered pertinent in a setting aside proceeding and the Award may be set aside as affected or induced by fraud.

  1. The expression ‘the making of the award’ has to be read in conjunction with whether the Award ‘was induced or affected by fraud’;

After considering the legislative intent of the Act, the Court observed that it could not be the intention of the Legislature to shut out amendments and determined to construe the provisions of the Act, in particular Section 34, liberally and not narrowly. While taking into account Section 34 of the Act, leave to amend grounds may be granted by a Court as long as an application under Section 34 has been made within the stipulated time and if the peculiar circumstances of the case and the interests of justice so demand. The Court observed that while praying for an amendment, substance should be preferred to form and techniques; however the most relevant consideration should be interests of justice. If a party is entitled to amend its pleadings, this right cannot be defeated due to a technical mistake.

The Court rejected Satyam’s contention that the expression “making of the award” must be narrowly confined to mean any fraud committed before the Arbitrator in the course of the proceedings, anterior to the delivery of the Award and not what transpired subsequently. The Court instead held that because such facts were suppressed and not in the public domain, they could not have been included in the original pleadings by Venture, thus such facts, which would have been relevant to the arbitrator’s final determination, should now be allowed to be used to set aside the Arbitral Award. The Court therefore observed that the expression “making of the award” will have to be read in conjunction with whether the Award “was induced or affected by fraud”.

  1. The concealment of relevant and material facts, which should have been disclosed before the arbitrator, is in itself an act of fraud;

The Court looked at the facts as set forth in the additional pleading to determine if the Award was induced or affected by fraud. After considering all such facts, the Court found that they would have been relevant to the deliberation of the Arbitrator prior to delivery of the Award Therefore, these new materials which if allowed to be incorporated by way of an amendment, would show that the very basis of the fiduciary duties of Satyam to Venture were breached and hence went to the way heart of the dispute that was being arbitrated and should have been permitted by the High Court.

The Court commenced an in-depth discussion on fraud, noting that the term has wide implication, encompassing different levels of criminal behavior with concealment of information falling within one of those categories. The Court looked to Kerr on Fraud and Mistake, 7th Edition which stated, “Fraud, in the contemplation of a civil court of justice, may be said to include properly 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 unconscientiously advantage is taken of another.” Additionally, the Court found its support in the Indian Contract Act, Section 17(2) of which described fraud as active concealment of a fact by one who has knowledge or belief of that fact. Therefore, the Court looked to the facts and found that the concealment / suppression of such facts about Satyam’s financial records and books constituted fraud and that the Award was induced and / or affected by such fraud.

  1. The interests of justice and the concept of an award being contrary to Indian public policy are important considerations in allowing such new materials;

The Court further considered the principles of justice and public policy in allowing the additional facts to come on record.  The Court held that adopting a construction whereby a party would not be permitted to rely on facts that would have been central to the Award which have surfaced subsequently would defeat the principle of due process and would be contrary to the concept of public policy. The importance of an arbitral award being in harmony with public policy is so significant that it is referenced in Section 34(2)(b)(ii) and its relevant Explanation herein:

34. Application for setting aside arbitral award.-


2)

b. the Court finds that-
      1. the subject-matter of the dispute is not capable of settlement by arbitration under the law for the time being in force, or
      2. the arbitral award is in conflict with the public policy of India.

Explanation.- Without prejudice to the generality of sub-clause (ii) it is hereby declared, for the avoidance of any doubt, that an award is in conflict with the public policy of India if the making of the award was induced or affected by fraud or corruption or was in violation of section 75 or section 81.”

The Court acknowledged that the legislative intent thus suggested that any award that is induced or affected by fraud or corruption would be contrary to the public policy of India. In the present case, it seemed that the Award was contrary to the interests of justice because certain vital information was concealed from the Arbitrator and therefore, was not taken into consideration in the making of the Award. The concept of public policy is incapable of a precise definition and is a rather vexed notion. The Court, citing the renowned Redfern and Hunter on International Arbitration, observed that an attempt should be made to arrive at a somewhat acceptable standard by construing that something is opposed to public policy where there is an excess of jurisdiction and a lack of due process.

Any award induced or affected by fraud will fall within the grounds of excess of jurisdiction and a lack of due process and thus be against public policy. Hence, the Award in the present case was fraudulently derived as the relevant facts which were concealed from the Arbitrator, ran counter to Indian public policy. The aggrieved party, in this case Venture, must thereafter be allowed to challenge the Award when such suppressed information came to his knowledge. Accordingly, in the interest of justice and considering the fairness of procedure, the Court allowed Venture to bring the new materials on record as those materials are not irrelevant and they may have a bearing on Venture’s plea for setting aside the Award.

Conclusion

The Supreme Court has brought to light a more clear definition of fraud and its interrelatedness with the concept of public policy in the interests of justice where it concerns additional facts in setting aside an arbitral award. Hereafter, if there are concealed facts, which come to light after the passing of an arbitral award, it must first be examined if such facts have a causative link with the facts constituting or inducing the arbitral award and if they would have been material or central to the passing of an award. Second, it should be determined if the award was induced by fraud or corruption. If the additional relevant facts were not in the public domain during the delivery of the award and were intentionally suppressed, this constitutes an act of fraud. Finally, the Court should look to the Indian public policy and determine if it would be contrary to the generally accepted standard of public policy to bar the additional facts from being permitted. Therefore, if the new facts are relevant and material, the concealment of which constitutes fraud, it opposes general public policy principles and a party attempting to set aside an arbitral award will be allowed to introduce the new facts and materials.

VIVEK VASHI is the mainstay of Litigation at Bharucha & Partners.
 
 
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