Tuesday, August 31, 2010

Fraud and the amendment of a section 34 application

In an important fallout of the Satyam controversy, the Supreme Court, earlier this month, reiterated the law on the amendment of section 34 applications, and also clarified the kinds of fraud that would justify the setting aside of arbitral awards on grounds of public policy. After the fraud perpetrated Mr. Raju, Venture Global sought to amend its section 34 and bring the facts about the fraudulent conduct on record. Before the AP High Court, Satyam successfully contended that the amendment of the pleadings was hit by the limitation period prescribed under section 34, and could not be allowed. Venture’s appeal against this decision fell for the Supreme Court’s consideration.

Section 34 of the Act, in its relevant part, reads-

34. Application for setting aside arbitral award.

(1) xxx

(2) xxx

(a) xxx

(b) the Court finds that-

(i) the subject-matter of the dispute is not capable of settlement by arbitration under the law for the time being in force, or

(ii) 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.

(3) An application for setting aside may not be made after three months have elapsed from the date on which the party making that application had received the arbitral award or, if a request had been made under section 33, from the date on which that request had been disposed of by the arbitral tribunal:

Provided that if the court is satisfied that the applicant was prevented by sufficient cause from making the application within the said period of three months it may entertain the application within a further period of thirty days, but not thereafter. [emphasis supplied]

Based on the language of the provision, there were two arguments available to the Satyam- (a) that the extended period of 30 days, contained in the proviso to clause (3), had expired and it was not open to the Court to allow any further extension; and (b) that the fraud in question had not induced or affected the award, and was not relevant for the purposes of section 34. The first of these arguments had been considered and rejected by the Supreme Court in State of Maharashtra v. Hindustan Construction Company. In this case, the Apex Court had been called on to consider whether the limitation period applied only to fresh applications for setting aside awards, or also to amendments to existing section 34 applications. The Court held that amendments to existing applications, if necessary in the interests of justice, and not amounting to a fresh application, would not be barred by the proviso to section 34(3). (A more detailed discussion of the decision is available here).

That then left only the question of whether the fraud perpetrated by Mr. Raju could be said to have induced or affected the impugned award. Mr. Salve contended for Satyam that the phrase ‘making of the award’ had to be read narrowly, and that events subsequent to the award had no bearing on a section 34 application. Mr. Venugopal, for Venture Global, contended that since the facts were not revealed by Mr. Raju until after the award, there was no way they could have been made part of the original section 34 application. Also, since the concealment had materially affected the passing of an award in Satyam’s favour, it was material for the purposes of setting aside the award. Accepting the Respondent’s contentions, the Supreme Court overturned the decision of High Court and allowed the amendment of the application. The Court observed that the phrase ‘making of the award’ could not be read narrowly, especially since the scope of the provision was widened by the phrase ‘induced or affected’. Further, the Court went on to elucidate on its conception of public policy in the following words-

The concept of public policy in ABC, 1996 as given in the explanation has virtually adopted the aforesaid international standard, namely if anything is found in excess of jurisdiction and depicts a lack of due process, it will be opposed to public policy of India. When an award is induced or affected by fraud or corruption, the same will fall within the aforesaid grounds of excess of jurisdiction and a lack of due process. Therefore, if we may say so, the explanation to Section 34 of ABC is like `a stable man in the saddle' on the unruly horse of public policy. [emphasis supplied]

Thus, the Court concluded that the amendment of the section 34 application could not be barred by limitation in the interests of justice, and that the fraud alleged was such as to fall within the scope of fraud which had ‘induced or affected the making of the award’. On this basis, the decision of the High Court was overturned. (Another exhaustive discussion of the decision is available here).

On a concluding note, one issue discussed earlier seems to be interesting in the context of the discussion above. In Moore Stephens, the House of Lords had held that fraud by the ‘directing mind and will’ of a company will be attributable to the company is all cases, except when the company itself is a victim (as opposed to a vehicle) of the fraud. In the case of Satyam, whether the company was a vehicle or a victim of the fraud is open to argument. Hence, in a case like this, it may be possible to argue that the fraud perpetrated by Mr. Raju is not attributable to Satyam. However, on the text of section 34, there is no requirement that the fraud which ‘induced or affected the making of the award’ be attributable to a party to the arbitration proceedings. It is probably for this reason that the question of attribution was not argued before or considered by the Court. It is instructive to contrast the Indian language with that of the English Arbitration Act, 1996, which talks of an award ‘being obtained by fraud’. The use of the word obtained (as opposed to influenced or affected) can be taken to signify that under English law, the fraud in question should be attributable to a party.

On this reading of the provision, it seems that the question of attributability of the fraud is not relevant for the purposes of section 34(3). However, on a closer examination of the decision of the Supreme Court, there are a couple of observations which can be taken to be assumptions by the Court that fraud under section 34 is fraud attributable to a party. First, the Court cites and approves the provision in the English Arbitration Act, which, as seen above, can be interpreted as containing the requirement of attribution. Secondly, there is the observation of the Court that “If the argument advanced by the learned counsel for the respondents is accepted, then a party, who has suffered an award against another party who has concealed facts and obtained an award, cannot rely on facts which have surfaced subsequently even if those facts have a bearing on the facts constituting the award ... Such a construction would defeat the principle of due process and would be opposed to the concept of public policy incorporated in the explanation” [emphasis supplied]. Admittedly, neither of these instances are authority for the proposition that attribution of the fraud to a party has been read into section 34 by the Court. This is especially so given broad observations like “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”. However, since the Court only decided that the application may be amended to make fraud a ground, and did not dispose of the question of whether the award may be set aside on grounds of fraud (which being a question on merits, is still to be decided by the lower courts), there is always the possibility that this question comes up for consideration in future.

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