KARUR VYSYA BANK   [petitioner]  VS  SREI EQUIPMENT FINANCE LIMITED   [respondent]

AP-COM/947/2024

(Delivered by Shampa Sarkar, J.)

The Calcutta High Court, in a recent ruling, established that the threshold for proving fraud and corruption by an arbitrator in the making of an award is significantly higher than merely criticizing the arbitrator’s findings. This observation was made in an application filed by a bank under Section 36(2) of the Arbitration and Conciliation Act, 1996 (A&C Act).

A Single Bench of Justice Shampa Sarkar held that the petitioner had failed to meet the burden of proving that the arbitral award was vitiated by fraud and corruption. The Court emphasized that proving such allegations requires demonstrating unethical behavior by the arbitrator that surpasses all moral standards. Mere errors in judgment or misinterpretation of contractual terms do not amount to fraud or corruption.

The dispute arose from an Agreement for Assignment (AFA) and a Designated Account Agreement (DAA) between the parties. The respondent, who had obtained a credit facility from the petitioner-bank, assigned the right, title, and interest of rent payable by Mahalaxmi Infra Contract Limited under the Master Lease Agreement to the bank. As per the DAA, Mahalaxmi was required to deposit lease rentals, including applicable GST, directly into an escrow account managed by the bank. The bank was responsible for transferring the GST amount to the respondent’s account.

The respondent alleged that the bank had unlawfully withheld a portion of the GST amount. Despite sending multiple letters and demand notices, the petitioner did not address the issue, leading the respondent to invoke the arbitration clause in the agreement. The Sole Arbitrator initially appointed withdrew, after which the respondent nominated another arbitrator, who passed the final award in its favor. The bank subsequently challenged this award before the High Court.

The High Court noted that an honest mistake or misinterpretation of contract terms does not constitute fraud or corruption. It also found that the petitioner failed to provide sufficient evidence that the respondent had intentionally suppressed or concealed documents to mislead the arbitrator. The petitioner was granted an opportunity to submit relevant documents, such as the sanction letter and an RBI circular, but failed to do so.

Additionally, after arguments had concluded, the petitioner attempted to introduce a unilateral statement of account, which the arbitrator rightfully refused to consider. The Court held that for a claim of fraud and corruption to succeed, it must be established that the arbitrator was deliberately misled or acted with an intention to grant an undue advantage. Since the petitioner could not establish this, the Court refused to set aside the arbitral award. The Court ruled that the award debtor must secure the entire awarded amount, including both principal and interest. The bank was directed to furnish a bank guarantee of Rs. 8,40,52,832/- to the satisfaction of the Registrar Original Side, Calcutta, with a requirement to renew the guarantee periodically.

The Court granted an unconditional stay of the award for four weeks and allowed the stay to continue until the disposal of the application under Section 34 of the A&C Act, provided the bank complied with the order. If the bank failed to furnish the guarantee, the stay would be vacated.

The High Court directed all parties to act based on the server copy of its judgment, reinforcing the principle that allegations of fraud and corruption in arbitration must be backed by concrete evidence, not mere dissatisfaction with the arbitrator’s findings.