Serious fraud rules out arbitration

When there is an arbitration agreement and one party alleges "serious fraud" by the other, the dispute cannot be arbitrated; it should go before a civil court. However, if the alleged fraud is not serious and it is seen only as an allegation to wriggle out of the contract, arbitration can be invoked. The arbitrator can decide the allegation of simple fraud. This clarification was made by the Supreme Court in its judgment, A Ayyasamy vs A Paramasivam. In this case, five brothers disagreed over the running of a hotel which they had inherited from their deceased father. Four brothers alleged that the eldest fudged the accounts, and took him to the civil court. The eldest brother invoked the arbitration clause. The district court and the Madras High Court rejected his prayer as, according to them, allegation of fraud would bar arbitration. Reversing their views, the Supreme Court appointed a retired high court judge as the arbitrator. It observed that arbitration becomes impossible only when the alleged fraud borders on crime and too complex necessitating massive evidence, like forgery or fraud that permeates the entire contract.

Plea to oust arbitrators rejected
The Delhi High Court has rejected the request of Steel Authority of India (SAIL) that two of the three members of the arbitral tribunal dealing with its dispute with British Marine plc be terminated and substituted by two others as the present two members were "unable" to perform their functions. The public sector undertaking argued that the two members had been members of another arbitral tribunal in which similar issues were involved and they ruled against it. According to the agreement, the arbitrators will be chosen following the Maritime Arbitration Rules of the Indian Council of Arbitration out of its panel. SAIL had approached the council with its grievance but it was rejected. The issue was taken to the High Court, which also ruled against SAIL. The judgment said: "The parties have consciously agreed that the arbitration would be governed by the Marine Arbitration Rules in terms of which the decision of the Maritime Arbitration Committee on the challenge to the arbitrators is binding and final on the parties. The committee has negatived SAIL's challenge to both these arbitrators."

Wrong time to intervene in bids

The Supreme Court has expressed "immense pain" at the way a dispute over tender was conducted in the Madras High Court. After the bids were opened and the financial bids were finalised the party which lost the tender submitted a series of representations and documents before the high court. The court asked the corporation which called invited tenders to consider the representations and not to award the contract till then. Criticising the order, the Supreme Court observed: "We are disposed to think that the high court at that stage should have exercised caution. If the courts would exercise power of judicial review in such a manner it is most likely to cause confusion and also bring jeopardy in public interest. An aggrieved party can approach the court at the appropriate stage, not when the bids are being considered." In this case, Tamil Nadu Generation and Distribution Corporation vs CSEPDI - Trishe Consortium, the tender for building two thermal power projects was awarded to BHEL. The consortium, which was the only other bidder, challenged it alleging violation of the rules set by the Tamil Nadu Transparency In Tenders Act. The high court allowed the petition, but the Supreme Court has quashed the high court judgment.

Process decides sales tax on tiles
When a granite stone or slab is polished and made into tiles is there manufacture? The Karnataka sales tax authorities initially thought there was no new product. But on second thoughts, they called granite industry representatives and told them that they should be pay tax for tiles, which is a new product. This was contested by the industries and the Karnataka High Court ruled against the tax authorities. They appealed to the Supreme Court in the case, Commissioner of Commercial Taxes vs Ayili Stone Industries. The Supreme Court set aside the high court order in favour of the industries. It ruled that for imposing sales tax, the distinction between polished granite stone or slabs and tiles should be examined. If a polished granite stone is used in a building for any purpose, it would attract a different rate of tax but if it is a tile, which comes into existence by different process, a new and distinct commodity emerges and it has a different commercial identity in the market. The process involved is extremely relevant, the judgment stated, and asked the authorities to look into each case of the industrial units before imposing tax.

Sarfaesi prevails over state laws
The Bombay High Court last week ruled that the Maharashtra Relief Undertakings (Special Provisions) Act must give way to the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act ("Sarfaesi" Act). In this case, JM Financial Assets Reconstruction Co vs State of Maharashtra, a textile company defaulted in repayment of loan. When pressed for the amount, it invoked the Maharashtra law and got a notification issued by the state government stopping all proceedings against it. JM moved the high court arguing that Sarfaesi Act passed by Parliament will prevail over the state law. Allowing its appeal, the high court pointed out that "Parliament has expressly stated that the provisions of the Sarfaesi Act, which is a later enactment to the Maharashtra Act, shall have effect insofar as there is any inconsistency between the provisions of the Sarfaesi Act and any other law for the time being in force."

Petty compensation under govt scheme
The National Consumer Commission last week set aside the order of the Uttarakhand consumer commission directing the Agriculture Insurance Co of India to compensate farmers in Kashipur who suffered crop loss due to faulty weather prediction. The company had paid certain amounts according to the rules, but they were meagre. So the farmers moved the consumer forum which granted them around Rs 10,000. The company appealed to the national commission. It allowed the appeal but observed: "It can hardly be denied that the compensation paid to the farmers was very meagre and more or less nominal but the scheme, as framed by the government, does not envisage payment of a higher compensation or a compensation based upon the actual loss suffered by the farmers."