Bombay High Court Sets Aside Arbitral Award Due To Arbitrator Relying On Non-Executed Agreement, Adopting Non-Judicial Approach

The Division Bench of B.P. Colabawalla and Somasekhar Sundaresa were considering a commercial appeal filed by the appellant against Bottom of Forma Single Judge Bench's decision to set aside the Arbitral Award under Section 34 of A&C Act.

The appellant, a developer, had agreed to develop immovable property owned by respondents based on a Development Agreement and a Memorandum of Understanding (MoU). The appellant claimed that a non-executed 'Draft Supplemental Agreement' document the oral agreement among the parties regarding the property's development.

The arbitral award passed by a Sole Arbitrator concluded that the Draft Supplemental Agreement amended the Development Agreement and MoU, thus lending the respondents to specific performance. However, the Single Bench quashed the award for being patently illegal and manifestly arbitrary.

The appellant contended that the Sole Arbitrator was the last authority for findings of fact and that his conclusion on the Draft Supplemental Agreement was final. The appellant contended that as Section 34 of A&C Act allows the challenge of arbitral awards only under limited circumstances, the arbitrator's decision should not be interfered with.

The High Court noted that the Supplemental Agreement was merely a draft and was not executed. It observed that even assuming there was an oral agreement reduced to writing without signature, the blank spaces in some of its material contents indicate that the parties were not in agreement with each. It observed that the Draft left out specifics such as sizes, floor numbers, and demarcations on plans. Therefore, the court opined there was no mutually agreed bargain between the parties which could be enforced.

It held that there was no Supplemental Agreement among the parties and the arbitral award based on it is unjustified. It noted thar the arbitral award “…escapes qualification as a measure of judicial application of mind to appreciate the evidence” and that the arbitrator “…failed to meet the basic standard of appreciation of evidence…”

The Court observed that the Single Judge's order was in accordance with the Act as it did not review evidence but merely noticed the record.

Remarking that the Arbitrator did not follow a judicial approach to arrive at the conclusion, it said that the Single Bench was correct in quashing the arbitral award passed by the Arbitrator. It stated “The manifestly arbitrary and non-judicial approach adopted by the Learned Sole Arbitrator is in conflict with basic notions of adjudication and justice that it is in conflict with fundamental policy of Indian law. Without reviewing the merits, and merely by noticing the record, it is apparent that the Arbitral Award was deservedly set aside by the Learned Single Judge.”

The Court noted that it can interfere with an arbitral award if the interpretation of the agreement/contract by the arbitrator in unreasonable and not based on any evidence.

“Construction of a contract is primarily the domain of the arbitrator, unless the arbitrator were to construe a contract in a manner that no fair-minded or reasonable persons could do. Put differently, if the view taken by the arbitrator is not even a possible view to take, the award would be liable to be set aside. So also, a finding based on no evidence at all or an award that ignores vital evidence in arriving at its decision, would be perverse and liable to be set aside on the ground of patent illegality.”

The Court thus upheld the decision of the Single Judge in setting aside the arbitral award. It directed the appellant to pay Rs. 20,00,000 to each of the respondents.

Case title: Ivory Properties & Hotels Private Limited vs. Vasantben Ramniklal Bhuta & Ors. (OS-COMAP-90-2020 and COMAP-91-2020)

Citation: 2024 LiveLaw (Bom) 342