Delhi High Court: “The Plea of Fraud Goes to the Validity of the Entire Contract”; Appeal Dismissed on Grounds of Non-Arbitrability
Sanchayita Lahkar
The Delhi High Court ,Single Bench of Justice Subramonium Prasad, dismissed an appeal filed under Section 37(2)(a) of the Arbitration and Conciliation Act, 1996, upholding the Sole Arbitrator's conclusion that serious allegations of fraud rendered the dispute non-arbitrable.
The dispute concerns a tender floated by the Airport Authority of India (AAI) on 2 November 2017 for the “Supply and Comprehensive Annual Maintenance Contract (CAMC) of 4000 Nos. Passengers Baggage Trolleys” at various airports across India. The appellant, Bentwood Seating System (P) Ltd., participated as the Indian Associate of Suzhou Jinta Metal Working Co. Ltd. (SJM), a company based in China.
To establish eligibility under Clause 1.2.4 of the tender, the appellant submitted two Satisfactory Performance Certificates (SPCs) allegedly issued by Heathrow Airport, United Kingdom, and Noi-Bai International Airport, Vietnam. The appellant also submitted an authorization letter dated 4 May 2017 purportedly issued by SJM, authorizing the appellant as its Indian Associate.
Following evaluation, AAI issued a Letter of Intent on 30 June 2017 and subsequently issued a Purchase Order dated 13 July 2017. A formal agreement was executed on 20 August 2017, accompanied by bank guarantees totaling ₹17,30,124.31 provided by the appellant.
Subsequently, a complaint was submitted by M/s GILCO Exports India on 31 October 2017, alleging that the documents submitted by the appellant were forged and fabricated. AAI initiated an internal inquiry and, on 28 March 2018, received an email from Heathrow Airport stating that it did not recognize SJM, any product supplied by SJM, or any individual named “Segun Jones” who was listed as the contact person on the submitted SPC.
Further communication was received from Noi-Bai International Airport, Vietnam, which confirmed that the SPC attributed to it was fabricated. The Ministry of External Affairs, Government of India, informed AAI that SJM verbally admitted authorizing the appellant but refused to meet with consular officials to confirm this in writing.
Consequently, AAI invoked Clause 14 of the Purchase Order and Clause 2.3.1 of the tender conditions to blacklist the appellant and terminate the contract. The appellant initiated arbitration under the Delhi International Arbitration Centre (DIAC) Rules. A Sole Arbitrator set aside the blacklisting and termination through an award dated 13 March 2019. AAI challenged this award under Section 34 of the Act.
The Single Judge set aside the award on 27 May 2021, noting that the Sole Arbitrator had failed to adjudicate the issue of fraud. The Division Bench of the Delhi High Court upheld this decision on 11 August 2021. The appellant’s subsequent Special Leave Petition (SLP (C) No. 12657/2021) was dismissed by the Supreme Court on 26 August 2021. A fresh Sole Arbitrator was appointed to decide the matter.
The arbitral tribunal framed ten issues (Issues A to J), including whether the disputes were non-arbitrable due to serious allegations of fraud, and whether res judicata applied. The tribunal concluded that the matter involved fraud impacting the core of the contract, rendering the dispute non-arbitrable.
Justice Prasad recorded that the appellant allegedly submitted fabricated SPCs from Heathrow Airport and Noi-Bai International Airport and a forged authorization letter from SJM to qualify for the tender. The Court noted, “These documents are therefore the heart of the matter and if these documents are proved to be forged/fabricated then the Appellant has committed a fraud on the Respondents as defined under Section 17 of the Indian Contract Act, 1872.”
The Court observed, “The Civil and Criminal Courts have to adjudicate the issue. Undoubtedly, both the proceedings can go on simultaneously and one is not necessarily dependent on the other. But in both the civil and criminal proceedings, these documents will have to be tested.”
Justice Prasad also recorded, “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.”
The Court further stated, “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.”
After examining the precedents, including Ayyasamy, Rashid Raza, Avitel, and Vidya Drolia, the Court found that the tribunal applied the correct legal standards in reaching its conclusion.
Justice Prasad held, “The conclusion of the Ld. Sole Arbitrator that a Court is better equipped to adjudicate these issues therefore, does not call for any interference.” The Court also stated, “The issues that arise are complicated and complex in nature involving production of witnesses outside the country and also documents from outside the country.”
The Court further held, “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.”
Justice Prasad also recorded, “Considering the entire gamut of facts and the law laid down by the Apex Court, this Court is of the opinion that the present Appeal is of such a nature that it would make the entire dispute non-arbitrable, as laid down by the Apex Court in A. Ayyasamy (supra), Rashid Raza (supra), Avitel Post Studioz (supra) and Vidya Drolia (supra).”
The appeal and all pending applications were dismissed accordingly.
Advocates Representing the Parties
For the Appellant: Mr. S.D. Singh, Mr. Kamla Prasad, Mrs. Meenu Singh, Mr. Siddharth Singh.
For the Respondents: Mr. Digvijay Rai, Mrs. Chetna Rai, Mr. Archit Mishra, Mr. Raghib Ali Khan with Mr. Gagan Kochar, Senior Manager (Law), AAI
Case Title: Bentwood Seating System (P) Ltd. v. Airport Authority of India & Anr.
Neutral Citation : 20205: DHC: 1636
Case Number: ARB. A. (COMM.) 55/2023
Bench: Justice Subramonium Prasad
[Read/Download order]
