WIS: ‘Fraudulent Conduct’ of Railways Has Shocked Our Conscience: Calcutta High Court
Unconditionally Stays Arbitral Award, Directs Probe By Union Government, Ministry of Finance
It shocks the conscience of this Court to observe that the Railways, [handling funds of the public exchequer] in defending a claim valued above Rs. 4000 crores, declined to present any witness and refrained from leading any evidence
This Court is at pains to re-emphasize that dishonesty is the cornerstone for fraud and that Railway’s reluctance in leading evidence, inept cross-examination, non-submission of documentary evidences, etc., does not fall short of actual and deliberate fraud and/or corruption which may have taken place in the present case
The magnitude of the claim and the consequent irreparable harm it shall have on the Railways and public exchequer cannot be ignored
Usually, much more due diligence is expected from the public sector companies given that they are the embodiment of taxpayers’ trust but the way Railways has belittled its responsibility in the present case makes this Court seriously doubt the utility of arbitration with respect to public sector companies
The Calcutta High Court on 8 August 2023, unconditionally stayed an award granted in favour of the South Eastern Railways (#SER) under the Arbitration & Conciliation Act, 1996 (Arbitration Act) on grounds of #fraud and corruption perpetrated by collusion between the parties in obtaining the impugned award.
In expressing his dismay and directing an investigation into the matter by a high-level committee of the Ministry of Finance, Government of India, a single-bench of Justice Shekhar B Saraf held:
“The Court cannot overlook fraud being perpetuated in the making of the award by way of collusion between the parties. In any event, as at this juncture this Court is not coming into any conclusion on setting aside of the arbitral award, the case laws cited by the learned Advocate General can be comprehensively considered by the Court at the stage of adjudicating the section 34 application.”
“Furthermore, I hereby also direct the Ministry of Finance, Union of India to immediately constitute a multi-member high-level #enquiry committee headed by a Secretary to the Government of India level rank officer to holistically inquire into the shocking conduct of the #Railways and its officials (both serving and retired) and the other stakeholders in the aforementioned matter. The #Committee shall be at liberty to take assistance of central investigation agencies as it may deem fit. The Committee is further requested to complete the enquiry and submit a report before this #Court within three months from the date of this order.”
Brief Facts of the Case
It was submitted that the Indian Railways had been running a “Wagon Investment Scheme” (#WIS), which allowed investors to buy rakes and transfer them to the railways, in return for which they would be given benefits such as rebates, concession, etc.
It was submitted that the initial agreement entered into in 2007 related to the supply of five rakes along with as many brake vans, to the East Coast Railways (#ECoR) by the claimant along with certain assurances that the claimant would receive certain benefits for such an investment.
It was argued that the claimant provided three of the five rakes to #ECoR in 2008, and that the balance two could not be provided at the time, due to certain factors that fell within the category of force majeure events, and were beyond the parties’ control.
It was submitted that upon further deliberations, a fresh #WIS was drafted between the claimant and the Railways, pursuant to which the rights and obligations in relation to the remaining two rakes came within the jurisdiction to the South Eastern Railways (#SER). As such, three rakes remained with the #ECoR, whereas two rakes were under the #SER.
By 2018, all five rakes supplied by the claimants had been transferred to the #SER, with mutually agreed changes in the loading and unloading stations, in pursuance of a tripartite agreement between all parties concerned.
In the interregnum, the #claimant alleged breach of #agreement due to differences with the #SER on denial of contractually agreed terms, such as denial of benefits, consequent loss of profits etc. This challenge was referred to arbitration in 2018.
The aforesaid arbitral proceedings had arisen out of the 2009 agreement between the #claimant and the #Railways. Accordingly, the tribunal passed an order in 2021, awarding the claimant a sum of more than Rs 325 crores. Subsequently it was shown that the impugned award had been amended to fix a “typographical error”, awarding the claimant a revised sum in excess of Rs 1301 crores.
The present dispute arose over the arbitral tribunal’s order, as well as the subsequent correction which increased the award to the claimants from Rs 325 crores to Rs 1,301 crores.
It was submitted by the petitioners that the award, as well as the subsequent corrections were illegal and arbitrary. It was argued that the respondent/claimant had misled the arbitral tribunal on the question of placing ‘indents’ under the agreement.
The petitioners argued that while it was the claimant’s case that that they had placed ‘indents’ for obtaining rakes under the #WIS agreement and the Railways had illegally failed to provide corresponding benefits, the claimants themselves had not furnished any evidence regarding the aforesaid indents in the form of money receipts for #Wagon Registration Fee, etc.
There not being any correspondence, indents or money receipts, the #petitioners argued the existence of a fraudulent exercise by the #respondents to establish their case before the tribunal, since without the placement of prior indents, there would be no allocation of rakes under the #WIS, and the respondent could not claim any loss on contractual freight or future profits.
It was argued that the tribunal had failed to consider that the cause of action had arisen within the jurisdiction of the #ECoR, whereas the statement of #claim was filed against the #SER which had no territorial jurisdiction over the issue, and that the respondent had filed another similar claim against the #ECoR, which was pending adjudication.
Finally, the petitioners argued that the tribunal in awarding a sum of Rs 1301 crores, had failed to consider their counterclaim and that the impugned award ought to be stayed on ground of #fraud and/or #corruption due to suspected #collusion between the parties during the proceedings, leading to the #RailwayBoard recommending disciplinary action against #serving and #retired railway officials “for their lapses and negligence in the instant matter.”
In reply, it was argued by the respondents/claimants, that the #Railways had never pleaded #fraud as a ground for unconditional stay in any of their previous applications, and that merely using the word ‘fraud’ would not satisfy its threshold, as held in various judgements.
It was argued that although it was the railways’ case that the respondent had misled the arbitral tribunal, they had not made any averments regarding the same during the arbitral process, as well as in their previous applications for stay/setting aside and thus they could not be allowed to improve their case through a supplementary affidavit.
It was submitted that the documents being relied upon by the petitioners, were always within their custody, and that if there was any suppression, it was on part of the railways who failed to produce their ‘best evidence’ during the arbitration proceedings thereby not being able to prove a causative link between the alleged concealment of documents and subsequent award.
Finally, the respondents argued that furnishing a security under Section 36 of the Arbitration Act would be a condition precedent for the petitioner to obtain an order of stay, as propounded in various rulings.
Findings of the Court
The #Court upon hearing both parties noted that during the arbitral proceedings, the claimant had claimed an amount in excess of Rs 4,000 crores, while the petitioners had submitted a counterclaim of approx. Rs 148 crores, which was rejected by the railways.
The Court noted that after the 2015 amendment to the Arbitration act, the Court was empowered to examine whether an award by induced by fraud, and where prima facie satisfied, the #Court could unconditionally stay the award, pending disposal of the setting aside application, or other challenges.
Upon a prima facie perusal of the arbitral award, the #Court observed, “glaring irregularities and palpable impropriety in the conduct of the Railways in defending their stance before the arbitral tribunal by way of their crystal-clear reluctance in presentation of any evidence or witness, inadequate and cursory cross-examination of claimant’s witnesses, and inexplicable failure to submit documentary evidences among others. Similarly, I have undertaken an extensive study of the arbitral tribunal’s order dated August 18, 2021 wherein corrections to the arbitral award were incorporated. The puzzling rationale put together by the arbitral tribunal in the corrections has left me baffled, and I began to question myself as to whether the unfathomable reasoning provided therein could be justified by any acceptable standard of interpretation and analysis.”
Upon an examination of the witnesses before the arbitral tribunal, the #Court observed that the #SER had failed to provide any evidence or witnesses contradicting the formula presented by the claimants for calculation of losses in profit, and that the Railways had not supported its counterclaim either.
The Court found further inconsistencies in the present stance taken by the railways and its conduct during the arbitral proceedings and observed that, as pointed out by the #tribunal, during the computation of loss and damage suffered by the claimant, the Railways did not contend that the method to compute the same was untenable or provide an alternate mechanism for calculation.
In perusing the corrections to the arbitral order, the Court noted:
“In my view, the purported ‘corrections’ appears to be an afterthought and not a genuine ‘typographical error’ as it is seemingly difficult or rather impossible for this Court to accept that both the placement of the paragraph as well as the amount mentioned, which upon calculation is approximately 25% of the total computed claims awarded to the claimant, were changed in the essential parts of the award owing to a ‘technical glitch’ or ‘typographical error’.”
Upon being satisfied that the order passed by the arbitral tribunal ought to be unconditionally stayed due to being induced by fraud and corruption, the Court expressed its sincere dismay and held:
“It shocks the conscience of this Court to observe that the Railways, [handling funds of the public exchequer] in defending a claim valued above Rs. 4000 crores, declined to present any witness and refrained from leading any evidence. This Court is at pains to re-emphasize that dishonesty is the cornerstone for fraud and that Railway’s reluctance in leading evidence, inept cross-examination, non-submission of documentary evidences, etc., does not fall short of actual and deliberate #fraud and/or #corruption which may have taken place in the present case. The magnitude of the claim and the consequent irreparable harm it shall have on the #Railways and public #exchequer cannot be ignored. Usually, much more due diligence is expected from the public sector companies given that they are the #embodiment of #taxpayers’ trust but the way #Railways has belittled its responsibility in the present case makes this Court seriously doubt the utility of #arbitration with respect to public sector companies.”
“Similarly, the ridiculous explanation provided by the arbitral tribunal in the corrections award in enhancing the award amount by 4 times under the garb of a #typographical error and/or #technical glitch is a bitter pill to swallow for this Court and the actual truth behind these purported corrections must be unearthed. The willing silence of the #petitioner is too loud to go neglected and prima facie leads to the conclusion that there is unseen foul play wherein collusion between the parties to the proceedings has led the arbitral tribunal into passing an #award which is deeply induced and effected either by fraud or corruption, or both.”
Accordingly, after retracing the purpose behind #arbitration proceedings and emphasising on the role of the #Court as the #Custodian of the #Constitution, the arbitral tribunals award was unconditionally stayed, and the Bench directed an enquiry report to be placed before it, after an investigation into the improprieties in this case by the Ministry of Finance, Government of India.
Case: Union Of India And Anr. vs Rashmi Metaliks Limited
Coram: Justice Shekhar B Saraf
Citation: 2023 LiveLaw (Cal) 216
Courtesy: