Serious Allegations Of Fraud Must Not Be Adjudicated In Arbitral Proceedings & Are Best Left To The Courts: Delhi High Court
The Delhi High Court dismissed an Appeal filed under Section 37(2)(a) of the Arbitration and Conciliation Act, 1996 (A&C Act).
The Delhi High Court reiterated that serious allegations of fraud must not adjudicated in arbitral proceedings and are best left to the Courts.
The Court reiterated thus in an Appeal filed under Section 37(2)(a) of the Arbitration and Conciliation Act, 1996 (A&C Act) read with Section 13 of the Commercial Courts Act, 2015 against the Orders of the Arbitral Tribunal.
A Single Bench of Justice Subramonium Prasad observed, “The Bench of three-Judges therefore held that serious allegations of fraud ought not to be adjudicated in arbitral proceedings and are best left to the Courts. The Arbitral Tribunal, after applying the law laid down by the Apex Court in A. Ayyasamy (supra), Rashid Raza Studioz (supra) and Vidya Drolia (supra), Avitel Post (supra), came to the conclusion that the facts of the present case are complex in nature. The Arbitral Tribunal would have to examine witnesses who are officers from governmental authorities and/or those outside the country, and therefore, it is difficult to summon those witnesses before the Ld. Sole Arbitrator.”
Advocate S.D. Singh represented the Appellant while Advocate Digvijay Rai represented the Respondents.
Facts of the Case
The dispute between the parties arose out of “Supply and Comprehensive Annual Maintenance Contract (CAMC of 4000 Nos. Passengers Baggage Trolleys (PBTs)) Stainless Style type for various airports”. The Appellant was a private company while the Respondent was the Airport Authority of India (AAI). The Arbitral Tribunal had held that the said dispute was not arbitrable on the ground of alleged fraud played by the Appellant. The Respondents had invited bids for the said Contract and the Appellant had submitted its bid claiming itself to the Indian Associate of the Foreign Original Item Manufacturer i.e. Suzhou Jinta Metal Working Co. Ltd, Cheluba Industry Zone, Shanghu Town, Changshu City, Jiangsu Province, China (SJM). The Appellant was permitted to bid as being eligible under a clause and thereafter, it submitted the Satisfactory Performance Certificate (SPC), as having been issued by Heathrow Airport, United Kingdom and Noi-Bai International Airport, Vietnam to SJM.
The disputes regarding delay and the satisfactory working of the PBTs escalated, resulting in issuance of a Show Cause Notice (SCN) issued by the AAI as to why the Appellant should not be blacklisted. Subsequently, a Blacklisting Order (BO) was passed and the contract was terminated. The Appellant then filed a Petition apprehending encashment of the bank guarantee on account of the BO. The arbitration was invoked and the matter was referred to the Delhi International Arbitration Centre (DIAC). A Sole Arbitrator was appointed and fraud allegations were pointed out. The Tribunal held that the dispute is not arbitrable due to the allegations of fraud. This was challenged before the High Court.
Reasoning
The High Court after hearing the arguments of the counsel, noted, “The Apex Court was of the opinion that cases where serious frauds are involved that has to be treated as non-arbitrable and it is only the Civil Court which take such matters. However, where the allegations of fraud simplicitor and such frauds are merely alleged then it is not necessary to nullify the affect of the Arbitration Agreement of the parties and such issues can be determined by the Tribunal.”
The Court was of the view that Sole Arbitrator would have to take the assistance of the Ministry of External Affairs to summon those witnesses which can be more expediently handed over by the Civil Courts than by the Arbitral Tribunal. It added that the allegations of fraud are not of forgery but fabrication of documents of foreign companies/authorities and therefore this could be more conveniently adjudicated by the Civil Courts than by the Arbitral Tribunal.
“The facts of the present case reveal that it took substantial amount of time by the Respondents to unearth the fraud of the Appellant. The Respondents had to send repeated e-mails to the Heathrow Airport, United Kingdom and Noi-Bai International Airport, Vietnam, take the assistance of the Ministry of External Affairs and contact the Indian Consulates. The Indian Consulates had to take steps to contact the SJM, whose e-mails reveal that SJM was reluctant even to come to the Indian Consulate for a meeting”, it further said.
The Court remarked that though the Arbitral Tribunal has been conferred with powers under Section 27 of the A&C Act to call for witnesses, the view taken by the Sole Arbitrator that it would be more easy for the Civil Court to summon witnesses, that is, officials at the Heathrow Airport, United Kingdom and Noi-Bai International Airport, Vietnam and officials of the SJM to give evidence for unearthing the core issue which is as to whether the SPCs which has been produced by the Appellant is fabricated or not.
“If the documents are fabricated then the Appellant has taken the benefit by the forged and fabricated documents and the Appellant cannot be permitted to get a premium on fraud which is alleged to have been committed by them and Courts cannot be mute spectator to such fraud which is alleged to have been committed”, it observed.
The Court said that the issues are complicated and complex in nature involving production of witnesses outside the country and also documents from outside the country and, therefore, the finding of the Sole Arbitrator that the issue is not an internal matter of the Appellant and the Respondents, is correct.
“The documents and witnesses outside the country are necessary to be examined to unearth the issues. … This Court is therefore of the opinion that the present case is not on the ground of fraud simplicitor. The facts of the case are extremely serious and they do make out a case for criminal offence. The plea of fraud is of such a nature that it permits the entire contract including the agreement to arbitrate as the issue goes to the validity of the entire contract which contains the Arbitration Clause itself”, it concluded.
Accordingly, the High Court dismissed the Appeal.
Cause Title- Bentwood Seating System (P) Ltd. v. Airport Authority of India & Anr. (Neutral Citation: 2025:DHC:1636)
Appearance:
Appellant: Advocates S.D. Singh, Kamla Prasad, Meenu Singh, and Siddharth Singh.
Respondents: Advocates Digvijay Rai, Chetna Rai, Archit Mishra, and Raghib Ali Khan.
