INTRODUCTION
‘Fraud vitiates all’ is a legal principle firmly embedded in the Indian jurisprudence. An iteration of this principle also finds place in the provisions of the Arbitration and Conciliation Act, 1996 (“Act”), in Section 34(2)(b)(ii), whereunder an arbitral award can be challenged for being in ‘conflict with public policy of Indian Law’, inter alia if “the making of the award was induced or affected by fraud”.
However, could a fraud perpetrated at the very outset of an underlying commercial transaction between parties, which was discovered after the award was passed, be the basis for setting aside an award, especially in view of the restricted grounds for setting aside an award under the Act?
In this article, we consider the judgement of the Hon’ble Delhi High Court in Devas Employees Fund US LLC v Antrix Corporation Limited[1] (“Division Bench Judgement”), wherein the Hon’ble High Court upheld the setting aside of an arbitral award, when faced with just this scenario. Notably, the special leave petition against this judgement was recently dismissed by the Hon’ble Supreme Court[2].
FACTUAL OVERVIEW
Arbitration proceedings between parties
Devas Multimedia Private Limited (“Devas”) and Antrix Corporation Limited (“Antrix”), the commercial arm of Indian Space Research Organization (“ISRO”), entered into an agreement dated January 28, 2005, titled “Agreement for the lease of space segment capacity on ISRO/ Antrix S-Band spacecraft by DEVAS” (“Agreement”).
The Agreement was terminated by Antrix, vide communication dated February 25, 2011, leading to Devas invoking arbitration, as provided under the Agreement. An award dated September 14, 2015 (“Award”), was passed by a tribunal comprising 3 (three) Learned Arbitrators, whereunder Antrix was held liable to inter alia pay to Devas a sum of $562.5 million and 18% interest thereon.
Initiation of criminal proceedings by Central Bureau of Investigation
During the pendency of the arbitration proceedings, the Central Bureau of Investigation (“CBI”) lodged a first information report (“FIR”) dated March 16, 2015, against Devas and its officers inter alia in respect of offences alleging cheating, criminal conspiracy, etc. The CBI also filed a charge sheet dated August 11, 2016, and a supplementary charge sheet dated January 8, 2019.
Challenge to the Award by Antrix and winding up proceedings in respect of Devas
Antrix filed a petition under Section 34 of the Act on November 19, 2015, before the Ld. Additional City Civil and Sessions Judge, Bengaluru. This was subsequently transferred to the Hon’ble Delhi High Court, pursuant to orders passed by the Hon’ble Supreme Court, and was numbered as O.M.P. (COMM) 11/2021 (“Section 34 Petition”).
Notably, subsequent to the criminal investigation by the authorities, Antrix moved two applications to amend its Section 34 Petition- , wherein fraud perpetrated by Devas was canvassed as a ground for the very first time.
During the pendency of the Section 34 Petition, Antrix had also parallelly preferred a petition for the winding up of Devas before the Ld. National Company Law Tribunal, Bengaluru Bench (“NCLT”), inter alia on the ground that Devas had been incorporated for fraudulent and unlawful purposes and its affairs had been conducted in a fraudulent manner.
Vide order dated May 25, 2021[3], the Ld. NCLT allowed the winding up of Devas. This order was upheld by the Hon’ble National Company Law Appellate Tribunal, Chennai (“NCLAT”), vide order dated September 8, 2021[4] (“NCLAT Order”).
The NCLAT Order , in turn, was also upheld by the Hon’ble Supreme Court[5], vide judgement dated January 17, 2022 (“SC Winding Up Order”), wherein it was inter alia held that:
“9.9 For the very same reason, the failure of Antrix to plead fraud in the ICC arbitration proceedings, cannot also operate as estoppel. The arbitral proceedings commenced in the year 2013 and the award itself was passed on 14.09.2015. Antrix cannot be expected to plead fraud in the arbitral proceedings, even before the discovery of fraud.
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13.5 We do not find any merit in the above submission. If as a matter of fact, fraud as projected by Antrix, stands established, the motive behind the victim of fraud, coming up with a petition for winding up, is of no relevance. If the seeds of the commercial relationship between Antrix and Devas were a product of fraud perpetrated by Devas, every part of the plant that grew out of those seeds, such as the Agreement, the disputes, arbitral awards, etc., are all infected with the poison of fraud. A product of fraud is in conflict with the public policy of any country, including India. The basic notions of morality and justice are always in conflict with fraud and hence the motive behind the action brought by the victim of fraud can never stand as an impediment.”
ORDER IN THE SECTION 34 PETITION
Vide order dated August 29, 2022, a Learned Single Judge of the Hon’ble Delhi High Court (“Single Judge Order”) was pleased to set aside the Award on the ground of public policy, relying on the aforesaid observations of the SC Winding Up Order that “A product of fraud is in conflict with the public policy of any country, including India.” It was also noticed that the Award, which erroneously disregarded the ‘evidence’ of ‘pre-contractual negotiations’, was also patently illegal.
Thus, the Award was set aside based on a fraud which, though perpetuated much earlier, was ultimately uncovered, after the passing of the Award. Relying on the aforesaid findings of the Hon’ble Supreme Court, the Learned Single Judge also negatived the argument that Antrix was estopped from assailing the award on the ground of fraud since fraud was not pleaded before the Ld. Tribunal, nor did it form the basis for the termination of the Agreement.
THE DIVISION BENCH JUDGEMENT
Contentions against the Single Judge Order
The Single Judge Order was assailed before a division bench of the Hon’ble Delhi High Court inter alia on the grounds that:
- Observations relied on from the SC Winding Up Order are obiter dicta and not the ratio decidendi. The observations were rendered in the context of ‘winding up’ under the Companies Act and cannot be considered res judicata for adjudication under the Act.
- The issue of fraud was not raised before the tribunal, neither was it raised at the time of filing of the Section 34 Petition, but only raised for the first time in the amendment applications. The issue of fraud cannot be considered without pleadings and material facts;
- The facts in relation to fraud were in the knowledge of Antrix, and were still never raised before the Arbitral Tribunal.
- The court under Section 34 cannot Suo motu consider the issue of fraud, especially without allowing the amendment applications wherein the ground of fraud is pleaded;
- Fraud vitiates all solemn acts. cannot override express legal provisions (Section 34(2)(b)(ii) of the Act, in the present facts)
Findings by the Division Bench
The Hon’ble Division Bench, vide the Division Bench Judgement, upheld the Single Judge Order inter alia holding that:
- The findings on fraud by the Hon’ble Supreme Court in the SC Winding Up Order would bind the parties based on the principle of res judicata.
- The finding in the SC Winding Up Order that the commercial relationship between Devas and Antrix was “a product of fraud” is the ratio decidendi,given that the order could not have been passed sans such a finding.
- The court can consider the issue of fraud in Section 34(2)(b) even without specific pleading. Section 34(2)(b) of the Act uses the words “If the court finds”,contrasted with Section 34(2)(a) which states “establishes on the basis of the record of the arbitral tribunal”.
- The court is empowered under Section 34(2)(b) to suo motu “discover grounds of public policy or fraud and set aside an arbitral award on this basis”;
- The principle ‘fraud vitiates all solemn acts’is applicable to the primary proceedings (the Agreement) and also to collateral proceedings arising from the same facts (the arbitration proceedings).
Special Leave Petition against the Division Bench Judgement
The special leave petition against the Division Bench Judgement was dismissed by the Hon’ble Supreme Court vide order dated October 6, 2023.[6] As such, the Division Bench Judgement remains valid law.
ANALYSIS
The 2015 and 2019 amendments to the Act have sought to minimalise and streamline the scope for judicial intervention in arbitral awards. Illustratively, the 2015 amendment brought in an explanation to Section 34(2)(b)(ii), delineating a very narrow basis for a challenge to an award for being in conflict with the ‘Public Policy of India’.
Similarly, the 2019 amendment inter alia replaced the words “furnishes proof” in Section 34(2)(a) of the Act with “establishes on the basis of the record of the arbitral tribunal”, further confining the challenge to the ‘record’ of the tribunal, rather than ‘proof’, which may be furnished.
Moreover, the Hon’ble Supreme Court’s judicial pronouncements[7] have been in keeping with the legislative intention guiding the amendments and have been loathe in undertaking expansive review of awards or traversing beyond the limited grounds under Section 34 of the Act.
Resultantly, the door to challenge the award, which was often left wide ajar through interpretative exercises and a slightly broad provision, has since been turned to a narrow window. A challenge to an arbitral award now lies only within the bounds of these restricted parameters. The Division Bench Judgement is to be considered against the backdrop of this shift in approach.
CONCLUSION
The Antrix-Devas case isn’t a matter where the Award is the outcome of fraud on the tribunal, or any fraud in the course of the arbitral proceedings. Rather, the Award is set aside on the basis of a fraud, which was perpetrated much prior to the arbitration, in fact, right at the inception, i.e. at the very start of the commercial transaction between the parties.
Notably, this fraud was uncovered upon subsequent investigation and agitated as a ground only after the arbitration was complete and the Award rendered. Even so, this fraud at the outset is held to vitiate every subsequent occurrence, including the arbitral proceedings and the eventual Award, relying on the principle that “fraud vitiates all solemn acts”.
In fact, the Division Bench Judgement emphasised on the words ‘the court finds’ in Section 34(2)(b) and Section 34(2A) to hold that the provisions are enabling provisions, which empower the court to Suo Motu “discover” aspects relating to fraud.
As such, the Division Bench Judgement isn’t an expansion of the limited grounds. It merely illuminates another facet of the existing ground of ‘fraud’, under which an arbitral award can be challenged on the grounds of ‘public policy’.
For further information, please contact:
Kapil Arora, Partner, Cyril Amarchand Mangaldas
kapil.arora@cyrilshroff.com
[1] FAO(OS) (COMM) 289/2022; March 17, 2023
[2] Devas Employees Fund US LLC v Antrix Corporation Limited and Ors; SLP (C) No. 22622 of 2023
[3] CP No. 06/BB/2021
[4] CA (AT)(CH) No. 17 of 2021
[5] Devas Multimedia Pvt Ltd v. Antrix Corporation Ltd. & Anr.; Civil Appeal No. 5766 of 2021
[6] Supra Note 3
[7] Associated Builders v. Delhi Development Authority, (2015) 3 SCC 49; Ssangyong Engg. & Construction Co. Ltd. v. NHAI, (2019) 15 SCC 131
