Arbitration Award and Fraud: Supreme Court Addresses Public Policy in Venture Global vs. Tech Mahindra (2017)

Introduction

Date of the Judgment: November 1, 2017
Citation: 2017 INSC 934
Judges: J. Chelameswar and Abhay Manohar Sapre, JJ. (The bench delivered a split verdict, with each judge authoring a separate opinion.)

Can an arbitration award be challenged if it is later discovered that the party who won the award committed fraud? The Supreme Court of India recently addressed this critical question in a dispute between Venture Global Engineering LLC and Tech Mahindra Ltd. This case revolves around an arbitral award that Venture Global sought to overturn, alleging fraud and a violation of public policy by Tech Mahindra. The Supreme Court judges had differing opinions on the matter, leading to a split verdict, with the matter being referred to the Chief Justice of India for further action.

Case Background

The dispute began with a Joint Venture Agreement between Venture Global Engineering LLC (VENTURE) and Satyam Computer Services Ltd (SATYAM), now Tech Mahindra Ltd, in 1999. This agreement led to the creation of Satyam Venture Engineering Services (SVES), a joint venture company. The agreement included clauses about events of default, such as bankruptcy, and what would happen if such an event occurred.

In 2005, SATYAM initiated arbitration against VENTURE, claiming that an event of default had occurred due to the bankruptcy of some of VENTURE’s affiliates. The arbitrator ruled in favor of SATYAM in 2006, ordering VENTURE to transfer its shares in SVES to SATYAM at book value.

Following the award, SATYAM sought enforcement in the US, which was granted. However, VENTURE challenged the award in Indian courts, claiming it was illegal and without jurisdiction. This led to a series of legal battles, including a significant event where the Chairman of SATYAM, Ramalinga Raju, admitted to manipulating the company’s accounts in 2009. VENTURE then sought to amend its challenge to the award, arguing that the fraud committed by SATYAM invalidated the award.

Timeline

Legal Framework

The case is primarily governed by the Arbitration and Conciliation Act, 1996 (the ACT), specifically Section 34, which outlines the grounds for setting aside an arbitral award. Section 34(2)(b)(ii) of the ACT states that an award can be set aside if it conflicts with the public policy of India. The explanation to this section clarifies that an award is against public policy if it was induced or affected by fraud.

The Foreign Exchange Management Act, 1999 (FEMA), is also relevant, as VENTURE argued that the award’s direction to transfer shares at book value violated FEMA regulations, which require transfers to be at fair value.

The court also considered Section 17 of the Indian Contract Act, 1872, which defines fraud in the context of contracts, although it was noted that this definition may not fully apply to the explanation under Section 34(2) of the ACT.

Arguments

VENTURE argued that the arbitral award should be set aside due to fraud, misrepresentation, and suppression of material facts by SATYAM, specifically by its chairman, Ramalinga Raju. They contended that Raju’s admission of manipulating SATYAM’s accounts constituted a fraud that directly impacted the arbitral proceedings. VENTURE also argued that the award violated the Foreign Exchange Management Act, 1999 (FEMA), as it directed the transfer of shares at book value, which was less than the fair value. They relied on the judgment in Venture Global Engineering v. Satyam Computer Services Ltd. & An other, (2010) 8 SCC 660 (Venture II), where the Supreme Court allowed VENTURE to amend its pleadings to include the fraud allegations.

Tech Mahindra (formerly SATYAM) argued that the allegations of fraud were not proven and were irrelevant to the arbitral proceedings. They contended that the award was valid and enforceable and that the transfer of shares at book value was in accordance with the agreement. They also argued that the principle of “issue estoppel” applied, preventing VENTURE from re-litigating issues that had already been decided by US courts.

Issues Framed by the Supreme Court

The Supreme Court framed the following key issues for consideration:

1. Whether the acts of Mr. Raju in the affairs of Satyam, as admitted by him in his letter dated 07.01.2009, amounts to misrepresentation/suppression of material facts and, if so, whether they could be made basis to seek quashing of an Award dated 03.04.2006 of the sole Arbitrator on the ground of it being against the public policy of India under Section 34(2)(b)(ii) read with Explanation (1)(i)(ii) and (iii) of the AAC Act?
2. Whether the acts of Mr. Raju, in the affairs of Satyam, has any causative link to the arbitral proceedings or/and to JVC affairs and, if so, whether such acts constitute an “event of default” under Section 8.01(b) read with Section 11.05(c) thereby entitling the Venture to terminate the Agreement I and claim relief as contemplated in Sections 8.03 and 8.04 against Satyam?
3. If the aforesaid questions are answered in affirmative then whether they constitute a ground to enable the Court to set aside the Award under Section 34 of AAC Act?

Treatment of the Issue by the Court

Authorities

The Supreme Court considered various cases and legal provisions to arrive at its decision. These authorities were categorized by the legal point they addressed.

Judgment

The court also analyzed how each authority was viewed in its reasoning:

• Bhatia International vs. Bulk Trading S.A. & Anr., (2002) 4 SCC 105* was used to establish the applicability of Part I of the ACT to foreign awards, which was crucial for determining the jurisdiction of Indian courts.
• Venture Global Engineering v. Satyam Computer Services Ltd. & An other, (2008) 4 SCC 190* and Venture Global Engineering v. Satyam Computer Services Limited & An other, (2010) 8 SCC 660* were relied upon to show that VENTURE had the right to challenge the award in India and to highlight the relevance of facts that surfaced after the award.
• Ram Chandra Singh vs. Savitri Devi & Ors., (2003) 8 SCC 319* was used to support the principle that fraud vitiates every solemn act.
• Associate Builders vs. Delhi Development Authority, (2015) 3 SCC 49* was used to understand the meaning of “public policy” in the context of arbitration.
• Masud Khan vs. State of Uttar Pradesh, (1974) 3 SCC 469* was used to conclude that the principle of “issue estoppel” does not apply to civil proceedings.

What weighed in the mind of the Court?

The sentiment analysis of the Supreme Court’s reasoning reveals a strong emphasis on the principles of justice and fairness. The court was particularly concerned with:

• The fact that the arbitral proceedings were potentially tainted by fraud and misrepresentation.
• The need to ensure compliance with the public policy of India, which includes preventing fraud.
• The importance of upholding contractual obligations and ensuring that parties are not deprived of their rights due to the actions of others.

The ratio of fact to law indicates that while the court considered the factual aspects of the case, such as the fraud committed by Mr. Raju, it also heavily relied on legal principles and precedents to arrive at its decision.

Logical Reasoning:

The court’s reasoning was based on the following points:

• The court emphasized that the non-disclosure of material facts before the arbitrator is an act of fraud. “Concealment of relevant and material facts, which should have been disclosed before the arbitrator, is an act of fraud.”
• The court highlighted that the award was in conflict with the public policy of India. “…an award is in conflict with the public policy of India if the making of the award was induced or affected by fraud…”
• The court noted that the facts concealed must have a causative link to the award. “This Court also holds that the facts concealed must have a causative link. And 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 are relevant in a setting-aside proceeding and award may be set aside as affected or induced by fraud.”

Key Takeaways

• Arbitral awards can be challenged if they are found to be induced or affected by fraud.
• Suppression of material facts by a party in arbitration proceedings can lead to the award being set aside.
• The public policy of India includes preventing fraud and ensuring fairness in judicial and quasi-judicial proceedings.
• The principle of “issue estoppel” may not apply in civil proceedings related to arbitration awards.
• The definition of “event of default” in a contract can include acts of fraud by a party that affect the other party’s rights.

The potential future impact of this case includes:

• Increased scrutiny of arbitration proceedings where fraud is alleged.
• Greater emphasis on the duty of parties to disclose all material facts.
• A broader interpretation of “public policy” to include fairness and justice in arbitration.

Directions

The Registry was directed to place the papers before the Hon’ble Chief Justice of India for appropriate further course of action due to the split verdict.

Development of Law

The ratio decidendi of the case is that an arbitral award can be set aside if it is found to be induced or affected by fraud, and that the suppression of material facts is considered an act of fraud. This case also clarifies that the principle of “issue estoppel” does not apply to civil proceedings like those under Section 34 of the Arbitration and Conciliation Act, 1996.

This case does not change previous positions of law but rather reinforces the importance of fairness and transparency in arbitration proceedings and the broad interpretation of “public policy” to include the prevention of fraud.

Conclusion

The Supreme Court’s split verdict in Venture Global Engineering LLC vs. Tech Mahindra Ltd highlights the complexities of arbitration law, particularly when allegations of fraud are involved. While the judges disagreed on the outcome, the case underscores the importance of transparency, fairness, and adherence to public policy in arbitration proceedings. The matter has been referred to the Chief Justice of India for further action.