Arbitral Award With Internal Contradictions Is Perverse And Patently Illegal; Delhi High Court allows Section 34 Petition

Brief Facts:

Samtel Colors Limited (“Respondent”) obtained an Inter-Corporate Deposit (ICD) facility of Rs. 1,70,00,00,000/- from Morgan Securities & Credits Pvt Ltd. (“Petitioner”). The facility was granted with the condition that the Respondent would provide a surety/pledge of 11 lakh shares held by the Respondent in the borrower company as security for the repayment of the outstanding amount under the ICD.

The Respondent claimed that it repaid the ICD on 19.11.2007. Consequently, the Respondent, being the surety, asserted that with automatic discharge, and the Petitioner was obligated to return the pledged shares. Allegedly, the Petitioner unlawfully retained the shares, leading the Respondent to invoke arbitration. The claims made by the Respondent in the arbitration proceedings included the return of pledged shares, a claim for Rs. 44,00,000/- based on market value loss, a claim of Rs. 1,24,74,000/- as interest, a claim for future loss on shares, and a direction for the return of shares.

Parallel to these proceedings, the Petitioner initiated arbitration against the borrower for unpaid dues under a bill discounting facility, resulting in an arbitral award. The Petitioner challenged the arbitral award under Section 34 of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”) in the Delhi High Court (“High Court”). The Petitioner challenged the impugned arbitral award primarily on the grounds of inconsistency in findings concerning claim no.2 & 3, where the value of pledged shares was disputed. The Petitioner argued that despite the finding that the Respondent failed to prove the market value, claim no.3 was adjudicated on the assumption that the value was Rs. 17 per share.

Observations by the High Court:

The High Court, while exercising jurisdiction under Section 34 of the Arbitration Act, acknowledged the limited scope of interference with arbitral awards. It emphasized that an arbitrator is the final arbiter on factual issues, and the interpretation of contract terms lies within the arbitrator's domain. It held that interference is only allowed if the award is palpably perverse, where no reasonable person could arrive at the arbitrator's conclusion.

The High Court referred to specific findings in the arbitral award regarding claim no.2, where it is held that the Respondent failed to prove the market value of the concerned shares as claimed. It noted that the value of shares was asserted to be Rs. 21/- per share on 26.04.2007 and Rs. 17/- per share at the time of filing the statement of claim. Additionally, it highlighted that neither the value of shares at the time of pledge nor at the time of filing the claim petition was proved. It noted the inherent contradiction in the award, where it assumed the value of pledged shares to be Rs. 17/- per share for claim no.3, despite rejecting this value for claim no.2.

Therefore, the High Court held that there was an inherent inconsistency and internal contradiction within the award regarding claim no.3.

Case Title: Morgan Securities & Credits Pvt Ltd. vs Samtel Display Systems Ltd.

Citation: 2024 LiveLaw (Del) 205

Case Number: O.M.P. 476/2012 & IA No. 5379/2023.

Advocate for the Petitioner: Mr. Simran Mehta, Mr. Ankur Chawla and Mr. Shivam Tandon.

Advocate for the Respondent: Mr. Jay Savla, Sr. Adv. alongwith Mr. Sanjay Chhabra, Mr. Satish Choudhary and Mr. Dhruv Chawla.

Click Here To Read/Download Order