Arbitral Award with Internal Contradictions Would Be Perverse and Patently Illegal: Delhi High Court

Arbitral Award with Internal Contradictions Would Be Perverse and Patently Illegal: Delhi High Court

Justice Sachin Datta of the Delhi High Court has ruled that an award suffering from internal contradictions is deemed perverse and patently illegal under Section 34 of the Arbitration and Conciliation Act, 1996.

The petitioner, Morgan Securities & Credits Pvt. Ltd., extended an inter-corporate deposit (ICD) facility of Rs. 170,000,000 to the respondent, Samtel Colors Limited. As a condition for granting the facility, the respondent was required to furnish a surety or pledge of 11 lakh shares held by them in the borrower company to secure the repayment of the outstanding amount under the ICD.

The respondent contended that it settled the inter-corporate deposit (ICD) on November 19, 2007. Subsequently, as the surety, the respondent argued that automatic discharge occurred and the petitioner was obligated to return the pledged shares. Allegedly, the petitioner unlawfully withheld the shares, prompting the respondent to initiate arbitration. The claims presented by the respondent in the arbitration proceedings included the restitution of pledged shares, a demand for Rs. 44,00,000/- based on market value loss, a claim of Rs. 1,24,74,000/- as interest, a request for future loss on shares, and a directive for the return of shares.

Concurrently, the petitioner initiated arbitration against the borrower for outstanding dues related to a bill discounting facility, resulting in an arbitral award. The petitioner contested the arbitral award under Section 34 of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”) in the Delhi High Court (“High Court”). The primary challenges raised by the petitioner against the arbitral award centred around the inconsistencies in findings concerning claims No. 2 and 3, where the disputed value of pledged shares was at issue. The petitioner contended that, despite the determination that the respondent failed to substantiate the market value, the claim was adjudicated based on the assumption that the value was Rs. 17 per share.

In its exercise of jurisdiction under Section 34 of the Arbitration Act, the High Court recognized the restricted scope of intervention with arbitral awards. It underscored that an arbitrator holds final authority on matters of fact, and the interpretation of contractual terms falls squarely within the arbitrator's purview. The court stipulated that interference is permissible solely in cases where the award is deemed palpably perverse, indicating a conclusion that no reasonable individual could reach.

The High Court referred to specific findings in the arbitral award concerning claim no. 2, where it was determined that the respondent had failed to substantiate the market value of the shares in question. The court noted that the claimed value of the shares was stated to be Rs. 21/- per share on April 26, 2007, and Rs. 17/- per share at the time of filing the statement of claim. However, it emphasized that neither the value of the shares at the time of pledging nor at the time of filing the claim petition was adequately proven. The court highlighted an inherent contradiction within the award, as it purportedly assumed the value of the pledged shares to be Rs. 17/- per share for claim no. 3, despite rejecting this value for claim no. 2.

Therefore, the High Court concluded that there existed an inherent inconsistency and internal contradiction within the award concerning claim no. 3.