Calcutta High Court: No Unconditional Stay on Arbitration Award— ‘Fraud Must Involve Deliberate Deception’ and ‘Reciprocal Obligations Must Be Fulfilled’

Safiya Malik

The High Court at Calcutta, Commercial Division, has pronounced a judgement on an application seeking an unconditional stay of an arbitral award under Section 36(2) of the Arbitration and Conciliation Act, 1996. The petitioners, including government authorities, sought relief against an arbitral award directing them to pay a substantial sum to the respondent. The court refused to grant an unconditional stay, requiring the petitioners to secure the awarded amount before further proceedings.

In 2016, the railways issued a tender for leasing a Parcel Cargo Express Train (PCET) on a round-trip basis between Chitpur and Kalyan for six years. The respondent emerged as the highest bidder, and a formal agreement was executed in February 2017. The contract required a security deposit of Rs. 75,88,800 and stipulated a lump sum freight amount of Rs. 31 lakhs, along with applicable taxes and additional charges.

The respondent commenced operations on February 28, 2017, but alleged that the railway authorities failed to provide a structured timetable, which led to disruptions in operations. The respondent asserted that out of a total of fourteen rakes scheduled between February 2017 and November 2017, only two were dispatched, despite full payment having been made in advance.

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The respondent further alleged that due to the irregular schedule and lack of a fixed timetable, customers lost confidence in the cargo service, leading to financial losses. The inability to adhere to a fixed transit schedule caused consignments to be delayed at intermediate stations, resulting in customer dissatisfaction and a decline in business. The respondent sought damages for loss of business, loss of reputation, and loss of expected profits due to the railway’s failure to maintain a predictable schedule.

The dispute escalated when the respondent unilaterally terminated the agreement and invoked the arbitration clause. The arbitral tribunal, led by a sole arbitrator appointed by the Supreme Court, ruled in favor of the respondent and awarded damages amounting to Rs. 49,16,42,425. The award included compensation for losses suffered due to the railway’s alleged failure to meet its contractual obligations.

The petitioners challenged the arbitral award, arguing that it was beyond the scope of the contract and that the arbitrator had improperly relied on a railway circular that was not incorporated into the contractual framework.

The petitioners contended that the arbitral award was induced by fraud and corruption, asserting that the arbitrator improperly relied on a 2007 railway circular that was not a part of the agreement. They argued that the findings of the arbitrator were perverse and contrary to the express terms of the contract. The petitioners alleged that the arbitrator exceeded his jurisdiction by incorporating extraneous considerations, particularly the railway circular, into his reasoning.

The petitioners further alleged that the respondent failed to fulfil key contractual obligations, including non-payment of lease rentals and deviation from agreed terms. They argued that the respondent's insistence on a specific timetable was unwarranted, as the agreement did not explicitly provide for the preparation of a customized timetable for the leased trains.

The learned Additional Solicitor General, representing the petitioners, submitted that "reliance on extraneous materials that were not part of the record rendered the award perverse and unreasonable." The petitioners contended that the arbitrator had acted beyond the scope of the agreement and had rewritten the terms of the contract by imposing obligations on the railways that were not stipulated.

The respondent countered these claims by arguing that the arbitration tribunal had correctly found that the railway authorities had failed to discharge their reciprocal obligations under the contract. The respondent maintained that without a proper schedule, the transportation service became unreliable, affecting its ability to run a viable business. The respondent further argued that the arbitrator's reasoning was based on available evidence, including contractual provisions, correspondence between the parties, and witness statements.

The court analysed the petitioners' claims under established legal principles concerning fraud and corruption in arbitration. It observed that "fraud must involve deliberate deception to gain an unfair advantage over another." The court referred to legal precedents, holding that an arbitral award could only be stayed unconditionally if it was prima facie obtained through fraud or corruption.

The court found that the arbitrator’s reliance on the 2007 circular did not, in itself, amount to fraud or corruption. The court observed that "the arbitrator’s reasoning that the railway should have maintained a timetable as an essential part of performance was based on materials available in the record and contractual obligations." The court also stated that fraud or corruption must be evident on the face of the record, which was not established in this case.

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The court held that "the petitioners have not demonstrated that the award was obtained through concealment of material facts or by making false representations to the arbitrator." It further noted that there was no evidence to suggest that the arbitrator had deliberately disregarded the contractual framework in an attempt to benefit the respondent unfairly.

The request for an unconditional stay was not accepted. A conditional stay of the award was allowed for six weeks, requiring the petitioners to deposit ₹49,16,42,425 before the Registrar, Original Side, High Court, Calcutta. The amount would be placed in an interest-bearing fixed deposit in a nationalized bank. If the deposit was made, the stay would continue until the disposal of the application under Section 34 of the Arbitration and Conciliation Act, 1996. Failure to deposit the amount within the stipulated time would result in the automatic vacation of the stay.

No cost orders were issued, and both parties were directed to proceed in accordance with the judgment.