Arbitrator Can’t Apply Principles Of Equity In Absence of Authorization of Parties: Bombay High Court

The Court added that if the award is partially set aside by applying the doctrine of severability, the same would not amount to modification or correction of the errors of the arbitrator.

The bench of Justice Manish Pitale further held that the Arbitral Tribunal cannot decided an issue in violation of the terms of the agreement between the parties, by applying the principles of equity. This is so especially when the parties have not expressly authorized the arbitrator to decide the matter ex aequo et bono or as amiable compositeur under Section 28(2) of the Arbitration and Conciliation Act, 1996 (A&C Act), the bench added.

The petitioner, John Peter Fernandes, entered into an agreement with the respondents, including Saraswati Ramchandra Ghanate, where he agreed to purchase the property owned by the latter.

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 Arbitral Tribunal rejected the claim of the claimant/ petitioner, Fernandes, for specific performance of the agreement, holding that the petitioner had failed to prove readiness and willingness to perform his part of the contract.

The Tribunal directed the respondents to refund the amount paid under the agreement, along with interest, to Fernandes. The Arbitrator, however, deducted an amount, alleged to have been paid by cash to the respondents, on the ground that the same was not proved by cogent evidence.

The petitioner as well as the respondents challenged the award by filing a petition under Section 34 of the A&C Act before the Bombay High Court.

The respondent, Ghanate, 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 pleaded 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.

Referring to the facts of the case, the High Court reckoned that in his cross-examination, the petitioner, Fernandes, had admitted that other than his word, there was no evidence on record to prove or establish payment of the balance amount in cash, as alleged by him.

Further, the Arbitrator found that the evidence on record showed an admission on part of the petitioner that he was not in a position to pay the balance consideration at the stage of recording of evidence also, the Court observed.

Therefore, the deduction made in the refund amount by the Arbitrator, cannot give rise to any ground for interference, either on the ground of ‘public policy of India’ or ‘patent illegality’, the Court ruled.

Referring to the findings of the Arbitrator that the petitioner, Fernandes, had defaulted under the agreement, the Court concluded, “This Court finds no reason to interfere with the said finding and hence the first direction / conclusion in the operative portion of the award, rejecting specific performance of the registered agreement dated 6th October 2003 at the behest of Mr. Fernandes, cannot be interfered with.”

Dealing with the Section 34 petition filed by the respondent, Ghanate, the bench observed that the principle of severability can apply to arbitral awards, so long as the objectionable part can be segregated.

The Court thus said, “This Court is convinced that the respondents are justified in invoking the said principle and contending that if their contentions are accepted, the impugned award could be partially set aside.” The bench added that if the award is partially set aside, the same would not amount to modification or correction of the errors of the arbitrator.

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 bench thus concluded that the Arbitrator, after having found that Fernandes had defaulted under the agreement and that it did not deserve specific performance of the agreement, could not have directed refund of money. “The said direction could have been granted only within the four corners of the clauses of the agreement,” it added.

While ruling that the said direction for refund of money was in teeth of the relevant clause of the agreement, the Court held that the award, to the extent it directed refund of money to Fernandes, suffered from patent illegality and must be set aside.

Referring to the arbitral award, the Court further noted that the Arbitrator had adopted the principles of equity while directing the refund of money to Fernandes.

The Court held that the Arbitrator could not have decided an issue in violation of the terms of the agreement by applying the principles of equity, especially when the parties have not expressly authorized the Arbitrator to decide the matter ex aequo et bono or as amiable compositeur under Section 28(2) of the A&C Act.

“But, in the teeth of the above 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 said Act,” the bench remarked.

Referring to Bombay High Court’s decision in Vilayati Ram Mittal Pvt Ltd. vs. Reserve Bank of India (2017), the Court observed that the arbitrator is a creature of the contract between the parties and thus, he cannot ignore the specific terms of the contract. If the arbitrator issues a direction in violation of the same, he travels beyond his jurisdiction, the Bombay High Court in Vilayati Ram Mittal (2017) had held.

While concluding 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.

Case Title: John Peter Fernandes vs. Saraswati Ramchandra Ghanate (since deceased) & Ors.

Citation: 2023 LiveLaw (Bom) 160

Dated: 23.03.2023

Counsel for the Petitioner: Mr. Santosh Paul, Senior Advocate a/w. M. Shetty and Ms. Anjali Gupta i/. Raval Shah & Co.

Counsel for the Respondents: Mr. Amrut Joshi a/w. Mr. Nikhil Mishra

Click Here To Read/Download Order