Gujarat High Court Flags Arbitrator Bias, Confirms Setting Aside Arbitral Award On Grounds Of Patent Illegality

The Gujarat High Court division bench, comprising Chief Justice Sunita Agarwal and Justice Pranav Trivedi, has held that agreements for the sale of agricultural land to non-agriculturists are invalid under Section 63 of the Gujarat Tenancy Act unless necessary permissions from the Collector are obtained. The court observed that the agreement, executed through a Power of Attorney, was a contingent contract, conditional on securing this sanction. The bench noted that specific performance could still be decreed. However, if such permissions were not obtained, the contract would be rendered unenforceable. The court also addressed the apprehension of bias of the arbitrator, holding that the arbitrator's prior association with a key stakeholder in the claimant company raised 'justifiable doubts' regarding independence and impartiality.

Background Facts:

Sentinel Properties Private Limited (the claimant, herein, the appellant) is a major developer engaged in housing and commercial projects across India. The claimant had entered into 16 agreements to purchase lands from four different Respondents between 2007 and 2008. The respondents were required to convert the properties from agricultural to non-agricultural lands, which had not been done to date. The respondents executed in the form of agreements to sell, an irrevocable Power of Attorney (PoA), appointing the claimant as the true and lawful person to transfer the said property. The dispute arose when the respondents issued public notices on 30.06.2012 and 29.06.2012 to cancel the irrevocable PoA. An application under Section 9 of the Arbitration and Conciliation Act, 1996, was then moved by the claimants and before the civil court at Viramgam.

Procedural History:

Arbitration Proceedings

By the award dated 24.10.2016, the learned sole arbitrator ruled in favour of the claimant, declaring that the PoA was irrevocable and could not be revoked by the respondents. The award directed the appellant to deposit a sum of Rs. 3,63,825 in a nationalized bank as part of the remaining sale consideration for the land. The respondents were ordered to apply for the conversion of the land from agricultural to non-agricultural use once the claimant had made the required deposit. The arbitral award also included a provision for the respondents to execute a registered sale deed after receiving the necessary permissions for land conversion. In the event of non-compliance, the parties were allowed to take legal action to enforce the award. The respondents were also directed to pay Rs. 14,10,000, including the arbitrator's fees, administrative costs, and legal expenses.

The claimants had filed an application under Section 12(2) of the Arbitration Act, challenging the competency of the arbitrator. The arbitrator disposed of this application in a common order dated 20.10.2016. The claimants had contended that the sole arbitrator, Justice Soni, had a close association with Mr. Mahendra G. Lodha, a director in a company which held 51% stake in the claimant company. It was alleged that Mr. Lodha's involvement raised justifiable doubts about the arbitrator's independence and impartiality. It was revealed that Mr. Lodha was a trustee of the "Justice on Trial" Trust, alongside the arbitrator, and they shared a personal relationship.

The arbitrator, however, dismissed the application, recording that he had not been in contact with Mr. Lodha since his resignation from the trust in 2010. The arbitrator also stated that the respondent, Mr. Ajay Patel, was aware of this association as early as 2014, when both attended a family function organized by Mr. Lodha, yet failed to raise the issue of bias until two years later.

The arbitrator held that the PoA, executed as part performance, was valid and irrevocable. More than 50% of the sale consideration had been paid. The court thus found that the contract was not affected by Sections 43 and 63 of the Gujarat Tenancy Act, 1948.

The Appellant then filed the appeal under Section 37 of the Arbitration and Conciliation Act, 1996, challenging the award dated 24.10.2016.

Civil Court's Judgment

The civil court set aside the arbitral award, finding it contrary to statutory provisions and public policy. It was held that Section 63 of the Gujarat Tenancy Act, 1948, invalidates agreements for the sale of agricultural land to non-agriculturists. The sale deed could not be executed without obtaining necessary sanctions under Sections 43 and 63 of the Gujarat Tenancy Act. Rule 36 restricts the grant of permission for the sale of agricultural land to non-agriculturists unless the conditions prescribed are met.

The court further held that specific performance is an equitable remedy and cannot be enforced if it requires supervision of the court or permission of a third-party. The court may grant damages if performance becomes impossible or is prohibited by statute.

It was noted that the claims were time-barred under Article 54 of the Limitation Act due to delays in filing after the expiry of stipulated periods.

The court examined the validity of rejecting the application to challenge the appointment of an arbitrator under Section 12/13 of the Arbitration Act, 1996. It was held that arbitrators must disclose any circumstances affecting their independence or impartiality, and challenges should be raised within 15 days of becoming aware of such circumstances.

The civil court assessed the impartiality of the arbitrator following revelations about his associations with Mr. Mahendra G. Lodha. The court noted that the connection between Mr. Mahendra G. Lodha and the learned arbitrator surfaced during the arbitral proceedings, where it was disclosed that both had served as co-trustees of a public charitable trust, 'Justice on Trial,' from 27.09.2004 to 13.10.2010. With these findings, the civil court determined that the arbitrator's prior professional and social associations with Mr. Mahendra G. Lodha created 'justifiable doubts' regarding his impartiality.

The court also addressed the procedural aspects of challenging the arbitrator's appointment under Section 13(2) of the Arbitration Act. The court observed that the time limit for challenging an arbitrator is directory, and upheld the applicants' right to raise the issue despite the delay. The court ruled that upon failure of the learned arbitrator to make mandatory disclosure, the arbitral award is liable to be set aside, as laid down by the Supreme Court in Vinodbhaiyalal Jain & Ors. v. Wadhwani Parmeshwari Cold Storage Pvt. Ltd. [(2020) 15 SCC 726].

Arguments:

By the Counsel for the Appellant:

While exercising jurisdiction under Section 34 of the Arbitration and Conciliation Act, 1996, civil courts cannot act as a court of appeal. The scope of Section 34 is limited to setting aside arbitral awards only on specific grounds, such as violations of public policy or patent illegality. Judicial intervention is not meant to re-appreciate evidence or revisit the merits of the arbitral award. Reliance was placed on the decision of the Supeme Court in National Higways Authority of India vs. M. Hameem [(2021) 9 SCC 1] and Reliance Infrastructure Ltd. vs. State of Goa [(2024) 1 SCC 479]. In this case, there is no evidence that the award was either perverse or in violation of public policy.

Reliance was placed on the decision in Deceased Shaikh Ismailbhai Hushainbhai vs. Vankar Ambalal Dhanabhai [2024(1) GLH 222] to submit that Section 63 of the Gujarat Tenancy Act, 1948 bars transfer to non-agriculturist sans permission of the Collector or an officer authorized by the State Government in that behalf by sale, gift, etc. as an instrument for transfer, including agreement.

The civil court had erroneously set aside the arbitral award on the ground that the agreement was in violation of Sections 43 and 63 of the Gujarat Tenancy Act. The arbitrator had correctly directed the respondents to apply for conversion of the land from agricultural to non-agricultural use upon deposit of the sale consideration.

The civil court had overstepped its jurisdiction by reappreciating the evidence and acting as a court of appeal. The decision to set aside the arbitral award was a grave error of law, as the civil court failed to note the limited scope of its powers under Section 34 of the Arbitration Act.

The arbitrator must disclose any relationship with the parties that could give rise to justifiable doubts about their impartiality. Reliance was placed on the decisions in State of Haryana vs. G.F. Toll Road (P) Ltd. [(2019) 3 SCC 505] and Himanshu Shekhar vs. Prabhat Shekhar [2022 SCC Online Del 1651]. Mere apprehension of the party pleading bias against the learned arbitrator would not be sufficient to raise any doubt so as to accept its claim of disqualification of the arbitrator by virtue of provisions of Section 12(5) of the Arbitration Act. The test for bias is whether a fair-minded and informed observer would conclude that there is a likelihood of bias.

By the Counsel for the Respondent:

The award was contrary to public policy due to the arbitrator's close family ties with Mr. Mahendra G. Lodha, who held 51% of the claimant company, violating Section 12(5) and the Fifth Schedule of the Arbitration Act. Relying on Voestalpine Schienen BMBH v. Delhi Metro Rail Corporation Ltd. [(2017) 4 SCC 665], it was submitted that the arbitrator must remain impartial and disclose conflicts of interest. In Bharat Broad Band Network Ltd. v. United Telecoms Ltd. [(2019) 5 SCC 755], it was held that the ineligibility of an arbitrator can only be waived with an express agreement in writing after the disputes arise.

The claim for specific performance was barred by limitation under Article 54 of the Limitation Act. There was no expression of readiness and willingness on the part of the claimant for over three years, which is the prescribed period for seeking a decree of specific performance under Article 54 of the Limitation Act.

The arbitrator erred in holding that the limitation period began from the date of cancellation of the PoA in 2012. Under Article 54, limitation starts from the date fixed for performance or when the plaintiff notices that performance is refused. The cancellation of the PoA cannot be considered the trigger date for limitation.

Section 63 prohibits the transfer of land to a non-agriculturist without permission from the Collector. The agreement for sale to the claimant, who was not an agriculturist, was invalid under Section 63(1)(c).

The claimant was granted a PoA to seek necessary permissions from the Collector. Since the claimant did not secure permission within the six-month period stipulated in the agreements, the agreements became determinable and unenforceable under Section 14(1)(c) of the Specific Relief Act, 1963.

Observations by the High Court:

1. Regarding Restraint on Land Transfer to Non-Agriculturist Appellant Under Tenancy Act and Its Effect on Specific Performance Decree

The court observed that the agreements were hit by Section 63 of the Gujarat Tenancy Act, since the transfer of agricultural land to a non-agriculturist is barred. The court stated that an agreement for sale executed in favour of a non-agriculturist is invalid. However, the Collector has the authority to grant permission for such an agreement under prescribed conditions. In this case, the agreement is an MoU, which is not a final sale deed but a preliminary document that indicates a future intent to execute a sale upon satisfying the necessary conditions. The court thus determined that the agreements in question are contingent upon obtaining permission from the Collector for the transfer of land to a non-agriculturist. Therefore, the court classified these agreements as contingent contracts, where the execution of the sale deed was dependent on obtaining the required permission.

The court considered the issue of whether the court or arbitrator has jurisdiction to issue a decree for specific performance that requires the vendor to obtain this permission and execute the sale deed. The court referred to the case of Rojasara Ramjibhai Dahyabhai vs. Jani Narottamdas Lallubhai [1986 (3) SCC 300], where the Supreme Court held that: “there is always in such a contract implied covenant on the part of the vendor to do all things necessary to give effect to the agreement including obtaining permission for the transfer of the property.” Reference was also made to Govindbhai Gordhanbhai Patel & Ors vs. Gulam Abbas Mulla Allibhai [1977 3 SCC 179], where it was held that refusal of permission by an authority does not necessarily render the contract impracticable if such refusal is not conclusive or based on technical grounds.

The court observed that in Mrs. Chandnee Widya Vati Madden [AIR 1964 SC 978], the Court upheld that if a vendor is required to obtain permission, the Court can decree specific performance with a direction to obtain such permission. In contrast, in Hasvantbhai Chhanubhai Dalal vs. Adesinh Manshin Raval [2019(2) GLH 357], it was held that agreements requiring prior permission from the Collector, if not obtained, are invalid, being hit by Section 43 of the Tenancy Act and unenforceable, as explained under Section 23 of the Contract Act.

The court held that the transaction herein though is invalid in view of Section 63 of the Tenancy Act, but can be validated with the permission of the Collector for transfer to a non-agriculturist before executing the deed of transfer.

The court also highlighted the radical differences between Sections 43 and 63 of the Tenancy Act. Section 43, being of a mandatory character, imposes a complete prohibition on transferring land without prior sanction of the Collector, whereas, the first proviso to Section 63(1) attaches validity to such transfer on the permission being granted by the Collector or an authorized officer, on such conditions as may be prescribed.

2. Regarding the Limitation prescribed in Article 54 of the Limitation Act seeking decree of specific performance of agreement

The court noted that a PoA was executed on 31.08.2007. The PoA allowed the claimant to seek necessary permissions under the Gujarat Tenancy Act. The agreement stipulated a six-month period for obtaining this permission, which the claimant failed to pursue before the PoA was cancelled in 2012. The claimant approached the arbitral tribunal five years later, resulting in the claim being time-barred under Section 54 of the Limitation Act. The claimant did not show readiness or willingness to perform their contractual obligations, thereby abandoning the contract. The court, thus held that the claimant's discovery, through a public notice in June 2012, regarding the vendors' actions (i.e., executing a sale deed to a third party) did not retroactively affect the limitation period for the suit, which was already expired due to previous inaction.

3. Regarding Independence and impartiality of the arbitrator

The court noted that the arbitrator failed to disclose his relationship with Mr. Lodha, including their shared history as trustees of the Trust "Justice on Trial." Further, Mr. Lodha's substantial financial interest (51% shareholding) in the claimant company was also not disclosed. The court held that the arbitrator ought to have recused himself as the circumstances that existed had an effect giving rise to 'justifiable doubts' as to his independence and impartiality.

4. Regarding the scope of interference under Sections 34 and 37 of the Arbitration Act

The court observed that the law pertaining to the scope of challenge to the arbitral award under Section 34 and the scope of appeal under Section 37 of the Arbitration Act is fairly well settled by the Supreme Court's Judgment in Reliance Infrastructure Ltd., where the court has observed as follows:

a. The court does not sit in appeal over the arbitral award and may interfere on merits on the limited grounds provided under section 34(2)(b)(ii), i.e. if the award is against the public policy of India.

b. According to Explanation 1 to Section 34(1)(b)(ii), an award can be challenged on the grounds of public policy if:

• It was influenced by fraud or corruption or violates Sections 75 or 81 of the Act;
• It contravenes the policy of Indian law; or
• It conflicts with basic notions of justice or morality.

c. Section 34(2A) allows the court to set aside an award if it is vitiated by patent illegality. However, an award shall not be set aside merely on the grounds of an erroneous application of the law or by re-appreciation of evidence.

d. Interference with an arbitral award is limited to situations where the findings are deemed arbitrary or perverse so as to shock the conscience of the Court.

e. Mere contravention of statutes not related to public policy or public interest is not a valid ground for setting aside an award. A simple breach of substantive law, without more, does not vitiate the award.

f. An award where the arbitrator fails to provide reasons, contrary to Section 31(3) of the Act, is considered patent illegality. If the arbitrator exceeds their jurisdiction or addresses matters outside the scope of the contract, it constitutes an error of jurisdiction and falls under the patent illegality ground.

g. An award based on no evidence or one that disregards critical evidence is perverse and can be set aside on grounds of patent illegality. Findings based on documents considered behind the back of the parties are also characterised as perverse.

h. A finding that ignores or excludes relevant material, or considers irrelevant material, or defies logic to an extent of irrationality is considered perverse.

i. The High Court's power to interfere under Section 37 is even more limited than under Section 34. The Court cannot delve into the merits of the claim but can only review whether the award contravenes fundamental policies, justice, morality, or is patently illegal. The High Court, in its exercise under Section 37, should not re-evaluate the merits.

The court held that the award of the arbitrator was vitiated by patent illegality appearing on the face of the record conflicting with the basic notions of justice and morality and, thus, conflicting with the public policy of India. The court further went on to hold that the interference made by the court in setting aside the award in terms of Section 34(2)(b)(iii) and Sub-section (2A) was justified. Thus, the appeals were dismissed.

Case Title: Sentinel Properties Private Limited vs. Legal Heir of Deceased Atul Dhirajlal Amin Viral Atulbhai Amin s/o Late Atulbhai Amin

Case Number: Civil Application (for Stay) No. 1 of 2023

Appearance: Mr. Mihir Joshi, Sr. Advocate with Mr. Vaibhav Goswamy, Mr. Anuj K Trivedi for the Appellant; Mr. Dhruv Agarwal, Sr. Advocate with Mr. Vibhore Vardhan, Mr. Rutul P. Desai, and Mr. Pavan Godiawala for the Defendant.

Date of Judgment: 13.09.2024

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