Arbitral Award Directing Specific Performance Of Contract, Cannot Be Set Aside On Ground Of Inequitable Nature Of Contract: Madras High Court

The Division Bench of Justices Paresh Upadhyay and D. Bharatha Chakravarthy held that an arbitral award cannot be interfered on the ground that it directed specific performance of a contract which was inequitable in nature and which gave an unfair advantage to a party.

The appellant- M/s. Macro Marvel Projects Ltd., a property developer, and the respondents entered into a sale agreement, whereunder the respondents agreed to sell the property owned by them.

The appellant mortgaged the title deeds of the said property and obtained a loan so as to complete its project relating to the development of residential houses in the said property.

Subsequently, the respondents sold certain plots in the said property to the appellant vide a sale deed. Thereafter, the respondents refused to execute further sale deeds relating to the remaining plots contained in the said property. The respondents issued a legal notice to the appellant, barring it from dealing with the unsold plots in any way.

The appellant invoked the arbitration clause contained in the sale agreement. In the statement of claims submitted before the Arbitral Tribunal, the appellant/ claimant sought specific performance of the sale agreement, directing the respondents to execute and register the sale deeds relating to the unsold plots in its favour, including a claim for damages.

The respondents, in their counter claim, alleged that there was a manifold increase in the price of the relevant property, which was not contemplated by the parties at the time of entering into the sale agreement and hence, it would be inequitable to enforce the specific performance of the sale agreement.

The Arbitral Tribunal allowed the claim of the appellant and passed an award, directing the respondents to execute the sale deeds in favour of the appellant. The respondents filed an application under Section 34 of the A&C Act before the Madras High Court to set aside the arbitral award.

The respondents, including J. Vengatesh, submitted before the Single Judge that the sale agreement was inequitable and unfair, and that the arbitral award directing specific performance of the agreement was in violation of the principles governing the specific performance of contract under the Specific Relief Act, 1963. Hence, the respondents argued that the arbitral award was patently illegal and was in violation of the fundamental policy of India.

The Single Judge opined that the said agreement was not in essence in nature of a sale agreement and hence, it was not specifically enforceable. Further, the Court held that the said agreement gave an undue advantage to the appellant/developer. The Court noted that no investment was made by the appellant under the said agreement, and that the appellant, by paying only a small amount of consideration, gained an unfair advantage under the agreement. Thus, the Court ruled that the agreement was not specifically enforceable and that the arbitral award was in violation of the public policy of India. The Single Judge thus awarded a sum of money in favour of the appellant, in lieu of specific performance of the agreement.

Against this, the appellant filed an appeal under Section 37 of the A&C Act before the Division Bench of the Madras High Court.

The appellant- M/s. Macro Marvel Projects, submitted before the High Court that the transaction between the parties was not inequitable or unfair to the respondents. The appellant added that the Single Judge had set aside the arbitral award on the basis of findings which were beyond the grounds available under Section 34 of the A&C Act.

The respondents argued that the sale agreement inequitably created a windfall and unfair advantage to the appellant/claimant and thus, the same was not specifically enforceable.

The Court reiterated that no interference, variance or modification of the arbitral award can be made in an application under Section 34 of the A&C Act. The bench ruled that the Single Judge, by modifying the arbitral award and by ordering a sum of money in favour of the appellant in lieu of specific performance, had gone beyond the scope of powers under Section 34.

Noting that the petition under Section 34 to set aside the arbitral award was filed by the respondents/ award debtors prior to the amendment of Section 34, the Court referred to the provisions of Section 34, as they stood prior to their amendment by the Arbitration and Conciliation (Amendment) Act, 2015.

The Court observed that the Single Judge had set aside the arbitral award on the ground that the Arbitral Tribunal had failed to consider whether the agreement between the parties was in the nature of a sale agreement or in the nature of an agreement of agency/brokerage. The bench ruled that the said issue related to the construction of an agreement, which cannot be made a ground for interference of the award under Section 34.

The Court added that an arbitral award cannot be interfered on the ground that it directed specific performance of a contract which was inequitable in nature and which gave an unfair advantage to a party. While ruling that interference on the said ground would have the effect of sitting in appeal over the arbitral award, the Court held that it cannot interfere or set aside an arbitral award merely because an alternative view is possible.

"Thus, it can be seen that there are rival contentions between the parties which require appreciation of the evidence and taking into account the conduct of the parties during the transaction and when the Arbitral Tribunal had appraised the evidence and rendered its findings upon consideration of the facts that it is a case of specific performance, interference, once again on the ground of inequitable nature or unfair advantage would only be to sit on appeal over the arbitral award and therefore, was not possibly a ground available for the learned Judge to interfere with the award."

The Court thus allowed the appeal and set aside the order of the Single Judge.

Case Title: M/s. Macro Marvel Projects Ltd. versus J. Vengatesh & Ors.

Dated: 28.09.2022 (Madras High Court)

Citation: 2022 LiveLaw (Mad) 422

Counsel for the Appellant: Mr. S.R. Raghunathan, Mr. Vigneshwar Elango for Mr. P. Elango

Counsel for the Respondents: Mr. V. Raghavachari for Mr. R. Veeramani, Mr. P.L. Narayanan

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