Mere Silence Affecting Willingness Of Person To Enter Contract Not Fraud Unless It Amounts To Active Concealment: Calcutta HC

The Calcutta High Court has recently held that the mere silence of a party affecting the willingness of a person to enter into a contract is not fraud unless the circumstances of the case are such that it is the duty of the person keeping silence to speak or unless the silence is in itself equivalent to speech.

A single bench of Justice Moushumi Bhattacharya referred to Section 17(2) of the Indian Contract Act, and held:

Fraud also takes within its fold active concealment of a fact by the party having knowledge of the fact or a promise made without the intention of performing it or any other act which is fitted to deceive. It is relevant that section 17(2) contemplates “active concealment” which points to deliberate non-disclosure with a pre-meditated intention to deceive the other party or induce him to enter into the contract.

Brief Facts

The petitioner in the case sought an unconditional stay on an arbitral award under Section 36(3) of the Arbitration Act.

The respondent had invoked the arbitration proceedings after the petitioner terminated the contract, seeking specific performance of the Gas Supply and the Purchase Agreement (GSPA) and damages.

The Arbitral Tribunal held that the termination of the GSPA was wrongful and illegal, and awarded a sum of approx Rs 58.5 crores to the respondent along with interest as damages. The respondent claimed an amount in excess of Rs 101 crores as damages.

The petitioner prayed for unconditional stay of the award because the arbitration agreement was induced by fraud. 

It was argued that the agreement was executed in violation of an order passed by the Petroleum and Natural Gas Regulatory Board (PNGRB) and an order dated 25.3.2011 passed by the Delhi High Court.

It was argued that the GSPA was vitiated by fraud, and being executed in violation of court orders was bad in law. The respondent had deliberately failed to disclose show-cause notices which were issued to stop any activity till the matter was decided by the PNGRB, it was argued.

It was argued that the petitioner was fraudulently induced into entering the FSPA with the respondent, which was voidable on the ground of fraud, for which there was no straightjacket formula.

Counsel for the respondent submitted that there was no violation of the PGNRB or Delhi High Court orders.

It was argued that the records of the respondents were available in the public domain, and the question of fraud depends on the verdict to be reached by the PNGRB and Delhi High Court.

Court's Verdict

Upon hearing the parties, the Court framed the following issues:

(i) was there any restraint on the respondent, at the material point of time, to execute the agreement with the petitioner or proceed with the same, and

(ii) If yes, whether the respondent suppressed the orders of the PNGRB or the Delhi High Court for the purpose of inducing the petitioner to execute the Agreement?

It was held that the PNGRB had passed an order asking the respondent to stop incremental activity, but not restrain them from supplying CBM gas.

It was observed that, on appeal, this order was set aside by the Delhi High Court, which directed the PNRGB to hear the matter afresh.

In the meantime, it was noted that the parties executed the GSPA, during the time the order of the PNGRB had been stayed, and there was no direction on the respondent to stop the supply of CBM, except for a monetary penalty, which the respondent had deposited.

It was further observed that the further order of the PNGRB had allowed the respondents to continue supplying CBM, signifying that there was no restraint on the supply of CBM by the respondent by any adjudicatory forum. 

Court observed that the petitioner was aware of the orders of the PNGRB and the Delhi High Court, and that these orders were not only in the public domain, but also on the balance sheet of the respondents.

"For a contract to be treated as voidable at the option of one of the parties to the contract, it must be shown that the consent to the agreement was obtained by coercion, fraud or misrepresentation. The petitioner's argument of the Arbitration Agreement being induced or effected by fraud is hence without substance and is accordingly rejected," it held. 

In dealing with the second proviso to Section 36(3) of the Arbitration Act, the Court noted that it requires there to be a prima facie case for fraud for an unconditional stay.

It read into the definition of fraud in Section 17 of the Contract Act, and held that in the present case, there was no instance of "active concealment" which would tantamount to fraud.

Accordingly, it rejected the prayer for unconditional stay, and directed that the petitioner can stay the award by securing Rs 70 crores, out of the total sum of Rs 89.71 crores, and furnish the same to the Registrar of the High Court.

Citation: 2023 LiveLaw (Cal) 61

Case: SRMB Srijan Limited v Great Eastern Energy Corporation Limited

Case No: A.P.- COM 281 of 2024

Click here to read order