Global Engineering Vs. Satyam Computer Services Ltd & ANR.  INSC 623
(11 August 2010)
SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL NO._____ OF
2010 (Arising out of SLP (Civil) No.9238 of 2010) Venture Global Engineering
..Appellant(s) Versus Satyam Computer Services Ltd. & Another
The judgment and order dated 19th February, 2010 of the Division
Bench of the High Court of Andhra Pradesh in Civil Revision No.5712/2009 has
been impugned in this appeal.
The material facts which are required to be considered to resolve
the controversy in this appeal, are as follows.
The appellant, Venture Global Engineering, having its principal
office in Michigan, USA, entered into a Shareholders Agreement and a Joint
Venture Agreement on 20th October, 1999 with the first respondent, for
establishing a company called Satyam Venture Engineering Services (hereinafter,
"the second respondent"). As per the terms of the agreement, the
appellant and the first respondent each held 50 per cent shareholding in the
Article VIII of the Shareholders Agreement contemplates certain
`events of default', and in the event of default, non-defaulting shareholder
has the option to purchase the defaulter's shares at book value or cause
immediate dissolution and liquidation of the second respondent.
In the year 2000, the second respondent entered into an agreement
with TRW, a manufacturer and supplier 2 of automotive equipments, to provide
engineering and IT services. They agreed to sub-contract the automotive
engineering works to the second respondent. The first respondent levied US $3
an hour towards administrative charges. According to first respondent, they
retained US $859,899 from the TRW receipts. The appellant disputed the same and
alleged that Satyam retained a total of US $2,188,000, and also alleged
concealment and dereliction of duty as a joint venture partner.
disputes cropped-up and were referred to arbitration.
The sole arbitrator gave his award on 3rd April, 2006 whereby the
appellant is to transfer its entire shareholding in the second respondent to
the first respondent. The first respondent filed a petition for the recognition
and enforcement of the award before the U.S. District Court, Eastern District
Court of Michigan.
On 28th April, 2006, the appellant filed a suit (O.S. No. 80/2006)
seeking a declaration to set aside the award and also prayed for a permanent
injunction 3 against the transfer of shares under the arbitral award, in the
Court of Ist Additional Chief Judge, City Civil Court, Secundrabad. The Trial
Court dismissed the suit of the appellant on the ground that a foreign award
could not be challenged under Section 34 of the Arbitration & Conciliation
Act, 1996 (herein after, ABC, 1996).
The appellant appealed against the order of the Trial Court before
the High Court of Andhra Pradesh at Hyderabad, and the said appeal was also
dismissed on 27th February, 2007.
Thereafter, the appellant filed a special leave petition before
this Court and this Court, vide its order dated 15th May, 2007, issued notice
to the respondents and passed an interim order restraining the transfer of
shares pending the disposal of the special leave petition.
This Court then finally heard the matter and allowed the special
leave petition vide its Judgment and Order in Venture Global Engineering vs.
Satyam Computer Services Ltd. and another (2008) 4 SCC 190 4 and held that a
foreign award could be challenged under Section 34 of ABC, 1996. In the light
of this finding, this Court remanded the case to the trial court and directed
that the parties were to maintain status quo with respect to transfer of
shares. Thus, the case of the appellant was transferred to the IInd Additional
Chief Judge, City Civil Court, Hyderabad.
Meanwhile, on 7th January, 2009, Mr. Ramalinga Raju, Chairman and
founder of the first respondent confessed that the balance sheets of the first
respondent had been fraudulently inflated to the tune of Rs.7,080/- crores. As
a result, Price Waterhouse Cooper (PWC), auditors of the first respondent,
declared that the financial statements could no longer be considered accurate
In the light of these developments regarding the first respondent,
the appellant filed an interim application before the Trial Court (I.A. No. 1331/2009
dated 12th June, 2009) to bring certain facts on record and also filed
additional pleadings 5 in respect of the same under Order VIII Rule 9 of the
Civil Procedure Code, 1908.
The Trial Court, vide its Order dated 3rd November, 2009, allowed
the application of the appellant. The first respondent challenged the said
order of the Trial Court by filing a civil revision before the High Court.
The High Court, vide its order dated 19th February, 2010, allowed
the revision petition of the first respondent. The High Court, inter alia, held
that a reading of Section 34(1) and (3) of the ABC, 1996 indicates that a party
could only set aside the arbitral award if an application for the same is made
within a period of 3 months (extendable by another 30 days) from the date of
making the award;
in the present case the new grounds of challenge are sought to be brought after
the limitation period.
Further, the High Court also held that an application under Order
VIII Rule 9 of the Civil Procedure Code, 1908 for bringing additional pleadings
on record would not lie. The High Court 6 held, relying on Rule 12(1) of the
Andhra Pradesh Arbitration Rules, 2000, that Rule VIII of Civil Procedure Code
is not applicable, so a petition for additional pleading is not maintainable
under Order VIII of Civil Procedure Code. Therefore, the High Court did not
allow the appellant to file additional pleadings on record.
Aggrieved by the impugned judgment and order of the High Court,
the appellant has approached this Court by way of filing a special leave
In the course of argument before this Court, Mr. Harish N. Salve,
learned senior counsel appearing for the respondents did not make any attempt
to defend the order of the High Court on the question of limitation as the
learned counsel was obviously conscious of the decision of this Court in the
State Company Ltd. - AIR 2010 SC 1299.
This Court In M/s. Hindustan Construction (supra) made it clear
that it cannot be the intention of the Legislature to shut out amendments, as a
result of 7 which incorporation of relevant materials in a pending setting aside
proceeding is prevented.
In M/s. Hindustan Construction (supra) this Court considered the
provision in Section 34(2)(b) of ABC, 1996 and while considering the ambit of
the expression "the Court finds that" in Section 34(2)(b), this Court
opined that where application under Section 34 has been made within the
prescribed time, leave to amend grounds, in such an application, if the
peculiar circumstances of the case and the interest of justice so warrant, can
In saying so, this Court in paragraph 25 of the report, relied on
the decisions of this Court in the Jardine Skinner and Co. - AIR 1957 SC 357
and and ors. - AIR 1957 SC 363 and held where it is required in the interest of
justice, the Court always has the power to grant leave to amend and this power
to grant an amendment is not affected under Section 34.
We are of the opinion that in dealing with a prayer for amendment,
Courts normally prefer substance to form and techniques and the interest of
justice is one of most relevant considerations. Therefore, if a party is
entitled to amend its pleadings, having regard to the justice of the case, the
right of the party to amend cannot be defeated just because a wrong Section or
a wrong provision has been quoted in the amendment petition. The approach of
the High Court in this case, in rejecting the appellant's prayer for amendment,
inter alia, on the ground that a wrong provision has been quoted in the
amendment petition, is obviously a very hyper technical one.
rightly did not even try to defend the impugned order on the aforesaid
technical ground adopted by the High Court.
Mr. Salve, learned senior counsel argued on a different line. The
learned counsel submitted that the grounds which are sought to be incorporated
by way of amendment are not relevant and do not come within the concept of
public policy which has been explained in the Explanation to Section 34 of ABC,
9 1996. The learned counsel took us through the award and tried to demonstrate
that the facts which are sought to be brought on record, even if they are
accepted to be true, have no bearing on the material facts on which the award
is based. The learned counsel urged that the Explanation under Section 34 of
ABC, 1996 has to be strictly construed and the expression "in the making
of the award" must be confined to mean any fraud committed before the
arbitrator in the course of the arbitral proceedings. According to the learned
counsel that expression will not take within its sweep anything which happened
after the making of the award. In other words the learned counsel repeatedly
urged that the expression "making of the award" must be confined to
facts anterior to the delivery of the award and not anything which happened
subsequent to that.
Mr. K.K. Venugopal, learned senior counsel appearing for the
appellant and contradicting the aforesaid contentions submitted that facts
which are sought to be incorporated by amendment are only those which have been
disclosed by the first respondent on its 10 own. Prior to such disclosure, they
were not in public domain and naturally could not be included in the original
petition to set aside the award.
disclosure of those facts by the first respondent, the appellant could not have
submitted that in any event those facts are relevant for the purpose of being
put on record by amendment.
Learned counsel further submitted that the award has been obtained
by the first respondent by suppressing those facts, which on disclosure show a
clear connection with the facts in issue, in the award.
In such a
case fraud as is understood in civil law, has been committed in the making of
the award. It was further submitted that the interest of justice in such a case
would demand that amendment should be allowed.
These are basically the rival contentions of the parties.
Now let us consider the facts which the appellant wanted to
incorporate by way of amendment in the 11 petition for additional pleading
filed in the Court of Additional Chief Judge, City Civil Court at Hyderabad
(I.A. No. 1331/2009). Those facts are:
a) On or
after 7th January, 2009, a letter was written by B. Ramalinga Raju, CEO of
respondent no. 1 to the Board of respondent no. 1, wherein Mr. Raju confessed
that the financial statements and books of accounts of respondent no. 1 were
exaggerated and overstated. Along with the application for additional pleading,
relevant paragraphs of Raju's statements have been enclosed.
7.1.2009, it was reported that the Securities and Exchange Board of India
(SEBI) directed an investigation in the entire matter. Along with the
additional pleadings were annexed extracts from press clippings about the said
investigation by SEBI.
8.1.2009, Government of India directed an inspection of the financial
statements and books of 8 subsidiaries of first respondent. Such inspection was
to be conducted in accordance with section 209A of the Companies Act, and the
second respondent is one of those subsidiaries in respect of which inspection
was thus ordered.
13.1.2009, Price Waterhouse Coopers (PWC), which acted as the statutory auditor
of the first respondent, wrote to the Board of the first respondent that in the
light of statements made by Mr. Raju, the financial statements for the period
from June 2000 to 30th September, 2008 could no longer be considered reliable.
Extracts from the said opinion of PwC are also enclosed with the additional
13.1.2009, the Government of India directed the Serious Fraud Investigation
Office (SFIO) to investigate the matter. SFIO is a multi-functional
investigating agency representing the Ministry of Home Affairs, Enforcement
Directorate and the Intelligence Department.
order by Government of India came on the basis of a report from the Registrar
of Companies, Hyderabad.
21.1.2009, Mr. Raju reportedly admitted diversion of funds from the first
respondent, which was widely published in newspapers across India. Mr. Raju
confessed diversion of funds of the first respondent to two real estate firms
held by his family and others.
being questioned by criminal investigation department of the Andhra Pradesh
police, Mr. Raju reportedly admitted to using Satyam (respondent no.1) money
for buying prime land in and around Hyderabad and Mr. Raju admitted in answer
to interrogation that funds of the first respondent were being diverted for the
last 4-5 years.
i) It was
reported on 25.1.2009, that partners of PWC (statutory auditors of the first
and second respondent) were arrested for their alleged role in the misstatement
of the accounts of the first respondent.
27.1.2009, the Income Tax department reportedly directed an investigation in
the operations of the first respondent. In this matter the Income Tax
department was making an independent probe about the alleged fraud of about Rs.
7800 crores in the first respondent.
8.2.2009, it was reported that a confession was made by PWC before the police
that Mr. Raju employed an elaborate scheme to exaggerate the accounts of the
Talluri Srinivas and S. Gopalakrishnan, two persons associated with PWC, and
arrested in connection with the Satyam scam, admitted to the 14 police that
meetings were arranged at the instance of the first respondent with the motive
of falsifying accounts, and such meetings were chaired by Mr. Raju himself.
17.2.2009, Central Bureau of Investigation (CBI) was asked to probe the Satyam
22.3.2009, it was reported that the extent of fraud relating to the first
respondent could be over Rs. 9600 crores.
5.4.2009, it was reported that the Enforcement Directorate also directed an
investigation in the matter for alleged money laundering.
7.4.2009, CBI filed its charge sheet against several persons, including Mr.
and Mr. Talluri.
Gopalakrishnan is alleged to be a partner of the firm PWC Bangalore.
13.4.2009, SFIO submitted its report to the Government of India.
17.4.2009, it was reported in the press that PwC is guilty of wrong doing in
the multi-crore Satyam scam.
20.4.2009, SFIO alleged to have found evidence that the first respondent
diverted foreign earnings even before they reached India. Such diversion was
made to tax havens like Mauritius before routing it back to Maytas
Infrastructure and other entities owned by Mr. Raju and his relations.
Relying on the aforesaid materials which were sought to be
incorporated by way of amendment, it was urged by the appellant that the
aforesaid materials go to show that the very basis of the fiduciary duties of
the first respondent to the appellant was breached, even prior to the
Shareholders Agreement between the parties. The first respondent on concealment
of these facts induced the appellant to enter into an agreement with it.
It appears that the first respondent did not make available to the
appellant verified financial statements to show the amount of TRW revenue which
was diverted, and the appellant was thus left to 16 assess such amount based on
various representations of the financial statements made by the first
respondent to the appellant. But the facts which the appellant wanted to bring
on record by way of amendment would show that the representations made by the
first respondent about its financial position were prima facie unreliable.
It was also urged that the valuation of the shares of the second
respondent is fundamentally important in the decision-making process relating
to the award. Such valuation is based on unreliable financial statements.
Under these circumstances, a prayer was made in the amendment
petition to bring the aforesaid facts on record in the pending proceeding for
setting aside the award.
Learned counsel for the appellants also urged that in the
statement of claim filed by the first respondent, it has been stated that the
first respondent is a "solvent shareholder" as defined in the
agreement, and on that statement, the first 17 respondent claimed that they
have either: (a) the right of purchasing the shares held by the appellants, or
(b) causing immediate liquidation of the second respondent.
Learned counsel contended that the aforesaid claim of the first
respondent that it is a solvent shareholder is based on concealment of the
facts stated above. He further submitted that any person, on a bonafide
consideration of the facts stated above would prima facie form an opinion that
the claim of the respondents as a solvent shareholder is fraudulent. The award
has been obtained by the first respondent on the basis of such fraudulent
in the interest of justice and having regard to the public policy of India, the
High Court should have allowed the appellant to bring those facts on record by
way of amendment, in the pending proceeding for setting aside the award.
In the context of the aforesaid issues involved in this appeal,
the provision of Section 34 of ABC, 1996, especially explanation to Section 18
34(2)(b)(ii), calls for interpretation by this court.
Section 34 of ABC, 1996, has four sub-sections.
case we are not concerned with sub-sections (3) and (4).
Sub-section (1) provides for an application for setting aside
arbitral award. Sub-section (2)(a) provides for the grounds for setting aside
an arbitral award as grounds (i) to (v).
Section 34(2)(b), with which we are concerned here, provides as
Application for setting aside arbitral award.- (1) xxx (2) xxx (a) xxx (b) the
Court finds that- (i) the subject-matter of the dispute is not capable of
settlement by arbitration under the law for the time being in force, or (ii)
the arbitral award is in conflict with the public policy of India.
prejudice to the generality of sub-clause (ii) it is hereby declared, for the
avoidance of any doubt, that an award is in conflict with 19 the public policy
of India if the making of the award was induced or affected by fraud or
corruption or was in violation of section 75 or section 81."
The explanation is very crucial in the context of the present
The concept of public policy, in view of century old decision of
Lord Justice Burrough in Richardson vs. Mellish (1824-34) All E.R. 258,
conjures up to our mind an equine image of a high and unruly horse. The
consensus of opinion amongst judges is that concept of public policy is
incapable of precise definition.
In Central Inland Water Transport Corporation Ltd. and another vs.
Brojo Nath Ganguly and another reported in AIR 1986 SC 1571 at 1612, this Court
discussed the concept of public policy elaborately in the context of Section 23
of the Contract Act.
discussion, however, was not confined to Section 23 of Contract Act alone but
was on a general jurisprudential concept of public policy, and it referred to
the opinion of Lord Denning, where the Master of Rolls said with characteristic
clarity- "With a good man in the saddle, the unruly horse can 20 be kept
in control. It can jump over obstacles."
Enderby Town Football Club Ltd. vs. Football Association Ltd. - 1971 Chancery
Division 591 at 606).
A three judge Bench in Renusagar Power Co. Ltd. vs. General
Electric Co. reported in AIR 1994 SC 860, after referring to Brojo Nath
(supra), dealt with the concept of public policy while construing the
provisions of Foreign Awards (Recognition and Enforcement) Act, 1961.
It may be mentioned in this connection that the present ABC, 1996
is a consolidating statute and it has also repealed the aforesaid 1961 Act
(Section 85 of ABC, 1996). Therefore, the discussion on public policy in
Renusagar (supra) is of some relevance in the present context.
In Renusagar (supra), after a fairly elaborate consideration of
concept of public policy in various jurisdictions, this Court came to hold that
an award is considered contrary to public policy if it is opposed to: (a)
fundamental policy of India law, (b) 21 interests of India and (c) justice or
morality (See paragraph 86 on page 888).
This concept of public policy, in the realm of arbitration law, is
a rather vexed concept, in the sense that different countries have different
concepts of public policy. Say for instance, some countries which do not
countenance gambling, an award arising out of a gambling dispute may be set
aside on the ground that it offends public policy of the State. But in a
country where gambling is legalized in some form, the award will not offend
public policy. Similarly, a dispute between a producer of wine and its
distributor is arbitrable in countries which are not governed by a strict
Islamic Code. But a country with such a Code may hold the award contrary to
In view of such varying standards of public policy in different
countries, an attempt is made to arrive at a somewhat acceptable standard by
construing that something is opposed to public policy where there is an excess
of jurisdiction and a lack of due process.
Redfern and Hunter on International Arbitration, 5th Edition, paragraphs 10-80
The concept of public policy in ABC, 1996 as given in the
explanation has virtually adopted the aforesaid international standard, namely
if anything is found in excess of jurisdiction and depicts a lack of due
process, it will be opposed to public policy of India. When an award is induced
or affected by fraud or corruption, the same will fall within the aforesaid
grounds of excess of jurisdiction and a lack of due process. Therefore, if we
may say so, the explanation to Section 34 of ABC is like `a stable man in the
saddle' on the unruly horse of public policy.
It is well known that fraud cannot be put in a strait jacket and
it has a very wide connotation in legal parlance.
In the decision of the House of Lords in Frank Reddaway and Co.
Ltd. vs. George Banham, 1896 Appeal Cases 199, Lord Macnaghten explained the
multifarious aspects of fraud very lucidly, and which we quote: "But fraud
is infinite in variety;
it is audacious and unblushing; sometimes 23 it pays a sort of homage to
virtue, and then it is modest and retiring; it would be honesty itself if it
could only afford it. But fraud is fraud all the same; and it is the fraud, not
the manner of it, which calls for the interposition of the Court."
of the report).
The aforesaid elucidation by the learned Law Lord has also been
accepted in celebrated treaties on fraud (see Kerr on Fraud and Mistake, 7th
Edition, pg. 1). Kerr has also referred to Story's Equity Jurisprudence and
defined fraud as: "Fraud, in the contemplation of a civil court of
justice, may be said to include properly all acts, omissions, and concealments
which involve a breach of legal or equitable duty, trust or confidence, justly
reposed, and are injurious to another, or by which an undue or unconscientious
advantage is taken of another."
In Indian law, namely the Indian Contract Act, the said common law
doctrine of fraud has been assimilated in Section 17 of the said Act. A very
wide definition of fraud has been given, which is as under:
"17. `Fraud' defined.-`Fraud' means and includes any of the following acts
committed by a party to a contract, or with his connivance, or by his agent,
with intent to deceive another party thereto or his agent, or to induce him to
enter into the contract:- (1) the suggestion, as a fact, of that which is not
true, by one who does not believe it to be true;
active concealment of a fact by one having knowledge or belief of the fact;
promise made without any intention of performing it;
other act fitted to deceive;
such act or omission as the law specially declares to be fraudulent.
silence as to facts likely to affect the willingness of a person to enter into
a contract is not fraud, unless the circumstances of the case are such that,
regard being had to them, it is the duty of the person keeping silence to
speak, or unless his silence, is, in itself, equivalent to speech.
Therefore, this Court is unable to accept the contention of the
learned counsel for the respondent that the expression `fraud in the making of
the award' has to be narrowly construed. This Court cannot do so primarily
because fraud being of `infinite variety' may take many forms, and secondly,
the expression `the making of the award' 25 will have to be read in conjunction
with whether the award `was induced or affected by fraud'.
On such conjoint reading, this Court is unable to accept the
contentions of the learned counsel for the respondents that facts which
surfaced subsequent to the making of the award, but have a nexus with the facts
constituting the award, are not relevant to demonstrate that there has been
fraud in the making of the award. Concealment of relevant and material facts,
which should have been disclosed before the arbitrator, is an act of fraud. If
the argument advanced by the learned counsel for the respondents is accepted,
then a party, who has suffered an award against another party who has concealed
facts and obtained an award, cannot rely on facts which have surfaced
subsequently even if those facts have a bearing on the facts constituting the
award. Concealed facts in the very nature of things surface subsequently. Such
a construction would defeat the principle of due process and would be opposed
to the concept of public policy incorporated in the explanation.
In English Arbitration Law, a somewhat similar provision for
challenging an award is contained in Section 68(2)(g) of the 1996 Arbitration
Act, which reads as follows:
The award being obtained by fraud or the way in which it was procured being
contrary to public policy."
Commenting on the said provision, Russell (Russell on Arbitration,
23rd Edition) stated that an "award will be obtained by fraud if the
consequence of deliberate concealment is an award in favour of the concealing
party." (P. 497, Para 8-100) 55. In Elektrim S.A. vs. Vivendi Universal
S.A. and Ors. (2007) EWHC 11 (Comm), Mr. Justice Aikens held that the words
`obtained by fraud' must refer to an award being obtained by the fraud of the
party to the arbitration or by the fraud of another to which the party to the
arbitration was a privy. The learned Judge at page 82 of the report held that
"an award will only be obtained by fraud if the party which has
deliberately concealed the document has, as a consequence of that concealment,
obtained an award 27 in its favour. The party relying on Section 68(2)(g) must
therefore also prove a causative link between the deliberate concealment of the
document and a decision in the award in favour of the other successful
In Profilati Italia S.R.L. vs. Painewebber Inc. and Anr. [(2001) 1
Lloyd's Law Reports 715], while construing Section 68(2)(g) of the English
Arbitration Act, it has been held that where an important document which should
have been disclosed has been deliberately withheld resulting in the party
withholding obtaining the award, the Court may consider that the award was
`procured' in a manner contrary to public policy and such conduct is not far
removed from fraud. (para 19, pg. 720)
This Court also holds that the facts concealed must have a
causative link. And if the concealed facts, disclosed after the passing of the
award, have a causative link with the facts constituting or inducing the award,
such facts are relevant in a setting aside proceeding and award may be set
aside as affected or induced by fraud.
The question in this case, is therefore one of relevance of the
materials which the appellant wants to bring on record by way of amendment in
its plea for setting aside the award.
Whether the award will be set aside or not is a different question
and that has to be decided by the appropriate Court. In this appeal, this Court
is concerned only with the question whether by allowing the amendment, as
prayed for by the appellant, the Court will allow material facts to be brought
on record in the pending setting aside proceeding.
Judging the case from this angle, this Court is of the opinion
that in the interest of justice and considering the fairness of procedure, the
Court should allow the appellant to bring those materials on record as those
materials are not wholly irrelevant or they may have a bearing on the
appellant's plea for setting aside the award.
Nothing said in this judgment will be construed as even remotely
expressing any opinion on the legality 29 of the award. That question will be
decided by the Court where setting aside proceeding is pending.
proceeding for setting aside the award may be disposed of as early as possible,
preferably within 4 months.
For the reasons aforesaid, this appeal succeeds. The order of the
High Court is set aside and that of the court below is restored. No order as to
.....................J. (P. SATHASIVAM)