Case Note & Summary
The dispute arose from high seas sales of raw materials and pharmaceutical drugs. The Respondent, as vendor, had filed a summary suit for recovery of amounts due on dishonoured cheques aggregating to about Rs. 1,59,00,400. The Petitioner, as purchaser, had filed a separate suit for recovery of dues on account of defective goods. At the hearing of the summons for judgment in the Respondent's summary suit, the parties agreed to refer their disputes to a sole arbitrator. The Respondent's summary suit was treated as the statement of claim, and the Petitioner's affidavit-in-reply and its plaint were treated as a written statement and counterclaim respectively. There were two sets of invoices: R-series invoices (aggregating Rs. 86,19,570) and C-series invoices (aggregating Rs. 1,93,19,829). The Respondent claimed that the cheques were issued towards the purchase price as per the C-series invoices, while the Petitioner contended that the correct invoices were the R-series invoices, which it alleged the Respondent issued at the Petitioner's instance to understate the import value for customs duty purposes. The Petitioner raised the defence of ex turpi causa non oritur actio, arguing that the Respondent, having been party to a fraud, should not be allowed to recover any amount based on such transaction. The sole arbitrator allowed the Respondent's claims and rejected the Petitioner's counterclaims, holding that the claim was based on dishonoured cheques and not on the fraudulent invoices, and that the true agreed price was reflected in the C-series invoices. The Petitioner challenged the award under Section 34 of the Arbitration and Conciliation Act, 1996. The core legal issues before the High Court were whether the arbitral award suffered from patent illegality or violated public policy because it allegedly enforced a claim founded on a fraudulent transaction, and whether the arbitrator erred in admitting evidence that contradicted the written agreements. The Petitioner relied on the maxim ex turpi causa non oritur actio and on Sections 91 and 92 of the Indian Evidence Act. The court analyzed the legal maxims and the nature of the Respondent's claim. It held that the Respondent's cause of action was based on dishonoured cheques and not on the allegedly fraudulent invoices. The court emphasized that under Section 118 of the Negotiable Instruments Act, 1881, there is a presumption that every negotiable instrument was drawn for consideration, shifting the burden onto the Petitioner. Consequently, the defence of ex turpi causa was not attracted. The court found no patent illegality in the arbitrator's award and upheld it, dismissing the arbitration petition. (The final operative part is not explicitly recorded in the extracted text, but the reasoning indicates dismissal of the petition.)
Headnote
A) Arbitration - Challenge to Award - Scope of Interference under Section 34 - Arbitration and Conciliation Act, 1996, Section 34 - The court examined whether the arbitral award was liable to be set aside on the grounds of violating public policy or patent illegality. The Petitioner contended that the award enforced a claim tainted by fraud. Held that the award was not perverse as the Respondent's claim was based on dishonoured cheques and not on the allegedly fraudulent invoices, and the arbitrator's findings did not breach the fundamental policy of Indian law. (Paras 1-3, 5) B) Law of Evidence - Admissibility of Oral Evidence to Vary Written Contract - Sections 91 and 92, Indian Evidence Act, 1872 - The Petitioner argued that the high seas sale agreements were written contracts and no extrinsic evidence could contradict or vary their terms. The arbitrator held against the Petitioner on both Sections 91 and 92 and estoppel. The court considered this submission but found no patent illegality in the arbitrator's view, noting that the claim was on dishonoured cheques and not on the terms of the written agreements. (Paras 2-3) C) Negotiable Instruments - Presumption of Consideration - Section 118, Negotiable Instruments Act, 1881 - The court observed that the Respondent's claim was based on dishonoured cheques, which carry a statutory presumption under Section 118 that every negotiable instrument was made or drawn for consideration until the contrary is proved. The defence of ex turpi causa was thus held inapplicable because the cause of action arose from the dishonoured cheques and not from the alleged fraudulent documentation. (Para 5)
Issue of Consideration
Whether the arbitral award is liable to be set aside under Section 34 of the Arbitration and Conciliation Act, 1996 on the ground that the claim was based on a fraudulent transaction, thereby violating public policy of India and suffering from patent illegality, particularly in light of the ex turpi causa non oritur actio maxim and the admissibility of evidence under Sections 91 and 92 of the Indian Evidence Act, 1872 when the claim is founded on dishonoured cheques.
Final Decision
Decision not clearly stated
Law Points
- Legal points not extracted
- ex turpi causa non oritur actio
- in pari delicto portior est conditio possidentis
- dishonour of cheques
- negotiable instruments
- public policy
- patent illegality
- Section 91 and 92 of Indian Evidence Act
- 1872
- Section 118 of Negotiable Instruments Act
- 1881
- scope of interference under Section 34 of Arbitration and Conciliation Act
- 1996
