Bombay High Court: Arbitrator Cannot Apply Principles of Equity when Parties have not Expressly Authorized

Bombay High Court: Arbitrator Cannot Apply Principles of Equity when Parties have not Expressly Authorized

The Bombay High Court by its single judge Justice Manish Pitale observed, that there is no scope for applying the principles of equity, more so when the parties had not expressly authorized the learned arbitrator to decide the matter ex aequo et bono or as amiable compositeur under Section 28(2) of the Arbitration and Conciliation Act, 1996 (the Act).

In the present case, the petitioner- John Peter Fernandes, entered into an agreement with respondent Nos.1 and 2, whereby Mr. Fernandes agreed to purchase from the respondents the subject property with the intention of opening a restaurant. The agreed consideration was Rs.35,00,000.

After a dispute arose between the parties regarding the amount of consideration paid by the petitioner under the agreement, the same was referred to arbitration.

The learned arbitrator passed the impugned award on 31st March 2022, rejecting the prayer of Mr. Fernandes for granting specific performance of the agreement dated 16th October 2003, but directed the respondent to pay an amount of Rs. 6,50,000 with simple interest at the rate of 8% per annum to Mr. Fernandes.

The learned arbitrator found that Mr. Fernandes had failed to prove readiness and willingness to perform his part of the contract and further that an amount of Rs. 5,00,000, alleged to have been paid by cash to the respondents, was not proved by cogent evidence. The Learned Arbitrator deducted the aforesaid amount of Rs. 5,00,000 from the amount of Rs. 11,50,000/- and directed the respondents to pay Rs. 6,50,000 with simple interest at the rate of 8% per annum to Mr. Fernandes. Aggrieved by the said award, the rival parties have filed the petitions before the High Court.

The respondent contended that the first finding/ direction in the award, rejecting the petitioner’s prayer for specific performance, deserves to be upheld. However, by applying the doctrine of severability, the award can be partly set aside to the extent it directs the respondents to refund the amount to the petitioner along with interest.

He further contended that the Arbitrator’s direction for refund of money was in violation of the terms of the agreement and thus, the Arbitrator had travelled beyond his jurisdiction.

The Court while referring to the facts of the case, was convinced that the respondents were justified in invoking the principle of severability to partially set aside the impugned award. This would not amount to modification or correction of errors of the learned arbitrator, stated the Court.

The Court noted that the learned arbitrator had found that Mr. Fernandes in cross-examination admitted that other than his word, there was no evidence on record to prove or establish payment of Rs. 5,00,000 by cash to the respondents. The learned arbitrator had found that the evidence on record showed an admission on the part of Mr. Fernandes that he was not in a position to pay the balance consideration at the stage of recording of evidence also.

The Court opined that in such a situation, the findings rendered by the learned arbitrator against Mr. Fernandes cannot be said to be giving rise to any ground for interference either on the touchstone of the test of ‘public policy of India’ or ‘patent illegality.’

While perusing the agreement between the parties, the Court observed that as per the relevant clause, if the purchaser, Fernandes, is at default, and the transaction is not completed, the respondents could either seek specific performance of the agreement or forfeit the amount towards earnest money or deposit.

The Court held, “a perusal of the impugned award shows that the learned arbitrator, having found that Mr. Fernandes had defaulted and did not deserve specific performance of the said agreement, could not have granted the direction for refunding the said amount. The said direction could have been granted only within the four corners of the clauses of the agreement.”

Further, the Court found that in the teeth of the quoted terms of the agreement dated 6th October 2003, there was no scope for applying the principles of equity, more so when the parties had not expressly authorized the learned arbitrator to decide the matter ex aequo et bono or as amiable compositeur under Section 28(2) of the Act.

In this regard, the Court referred the judgement passed in the case of Vilayati Ram Mittal Pvt. Ltd. vs. Reserve Bank of India, wherein it was held that if a clause of an agreement mandates a specific consequence and if the arbitrator issues a direction in the teeth of the same, he travels beyond his jurisdiction, for the reason that the learned arbitrator is a creature of the contract between the parties and he cannot ignore specific terms contained therein.

The Court concluded, that the Arbitrator did transgress his jurisdiction, which he derived as per the terms of the agreement, the Court upheld the award rejecting specific performance of the agreement, and set aside the award to the extent it directed refund of money to the petitioner.