2017 (1) TMI 1856 - HC - Indian Laws

Challenge to Award passed by the sole Arbitrator in the disputes between the parties arising out of a contract - Entitlement to claim of Rs. 11.05 Crores under the Agreement dated 4th September 2011 - HELD THAT - The contract required the Petitioner to find a purchaser. It made the commission contingent upon confirmation of the transaction. In the circumstances it was not open to the learned Arbitrator to have varied the amount payable to the Petitioner towards brokerage and assistance rendered by him. In terms of the contract the Petitioner could not have retained even the Rs. 50 lakhs paid to him if he did not fulfill his obligations. There was no basis in law for the learned Arbitrator to permit the Petitioner to retain Rs. 50 lakhs payable only for some services rendered. Either the Petitioner was entitled to the entire sum in terms of the agreement or he was not. If indeed he had rendered those services and if in fact the deal went through as it did in the present case the Petitioner would be entitled to the entire sum as agreed. The agreement does not contemplate that the Petitioner would not be entitled to the balance sum of Rs. 11.05 crores if he did not render assistance after the date of the agreement. In deciding to the contrary the learned Arbitrator appears to have not only deviated from the express terms of the contract but re-written it in a manner of speaking by fastening on to the Petitioner further obligations which were not spelt out therein. In that view of the matter the Court is of the opinion that in the present case the impugned Award cannot be sustained as it is opposed to the fundamental policy of Indian law inasmuch as it does not abide by the mandate of Section 28(3) of the Act. Petition allowed.

Summary

The core legal questions considered by the Court in this matter were:

1. Whether the letters dated 15th and 17th June 2011 had any effect on the claim of the Petitioner and to what extent.

2. Whether the Petitioner was entitled to claim and receive the sum of Rs. 11.05 crores in terms of the agreement dated 4th September 2011, and if not, the reasons therefor.

3. Whether the Petitioner was entitled to interest on the claimed amount, and if so, at what rate and for which period.

4. Whether the Respondents were entitled to claim any amount by way of counter-claim, and if so, the quantum thereof.

5. Whether the Respondents were entitled to interest on any counter-claim amount, and if so, at what rate and for which period.

6. The relief and costs, if any, to be granted.

Issue-wise Detailed Analysis:

Effect of Letters dated 15th and 17th June 2011

The agreement recited that the Respondents had acknowledged and confirmed the efforts of the Petitioner by letters dated 17th June and 28th July 2011, and had made an on-account payment of Rs. 50 lakhs. The Court noted that these letters and the payment evidenced the Respondents' recognition of the Petitioner's role in identifying companies with land in Goa and assisting in due diligence. The letters were relevant in establishing the Petitioner's initial performance and the Respondents' acknowledgment thereof.

Entitlement to Rs. 11.05 Crores under the Agreement dated 4th September 2011

The agreement provided for a total commission and brokerage sum of Rs. 11.55 crores, payable upon completion of the transaction, subject to deduction of applicable taxes. The transaction contemplated was either the takeover of the company owning the land or the sale of the land itself. The Petitioner claimed the balance Rs. 11.05 crores after adjusting the Rs. 50 lakhs already paid.

The Respondents contended that the Petitioner did not render any assistance after the agreement date, that due diligence revealed defects in title, and that the share purchase agreement was terminated due to non-performance by the seller company. Subsequently, the Respondents negotiated directly with the sellers and completed the transaction without the Petitioner's involvement, and thus denied liability.

The learned Arbitrator had found that the Petitioner failed to render assistance after the agreement and that the Respondents had to act independently to complete the transaction, concluding the Petitioner was not entitled to the balance amount. However, the Court observed that the Arbitrator read into the agreement obligations not expressly stated, such as ongoing assistance post-agreement, and disregarded the recitals acknowledging prior due diligence and assistance by the Petitioner. The Court held that the Petitioner had discharged his obligations by introducing the companies and assisting in due diligence prior to the agreement, and the contract made the commission contingent on completion of the transaction.

Relying on precedent, the Court referred to the Supreme Court's ruling on brokerage contracts, which recognized three types of commission contracts: (i) authorizing the broker to conclude a binding contract; (ii) promising commission for introducing a ready, willing, and able buyer regardless of completion; and (iii) making commission contingent on consummation of the transaction. The present contract fell within the third category. Since the transaction was completed, the Petitioner was entitled to the full agreed commission.

Entitlement to Interest

The Petitioner claimed interest at 24% per annum from the date of transaction completion. The Arbitrator did not grant interest, as he denied the principal claim. The Court did not specifically address interest entitlement in detail but implied that since the principal claim was upheld, interest claims could be pursued in accordance with the contract and law.

Counter-claims by Respondents

The Respondents' counter-claims, including demand for refund of Rs. 50 lakhs, were rejected by the Arbitrator and the Court found no error in this regard. The Court upheld the finding that the Rs. 50 lakhs paid on account was justified and not refundable given the services rendered by the Petitioner.

Application of Arbitration and Conciliation Act, 1996

The Court emphasized that under Section 28(3) of the Act, an arbitrator must render an award consistent with the terms of the contract and applicable trade usages. The arbitrator cannot rewrite or vary the contract terms based on notions of fairness or equity unless expressly authorized under Section 28(2) to decide ex aequo et bono. The Court cited multiple precedents underscoring that an arbitrator's jurisdiction is confined to the contract's terms, and manifest disregard of the contract amounts to jurisdictional error.

The Court held that the Arbitrator had exceeded his jurisdiction by imposing additional obligations on the Petitioner not found in the contract and by denying the balance commission despite the transaction's completion. This was a fundamental error warranting setting aside the award.

Treatment of Competing Arguments

The Petitioner argued that the agreement was a classic brokerage contract where commission is payable upon introduction of a ready buyer and completion of the deal, regardless of further assistance. He relied on established legal principles that such contracts may not require ongoing assistance post-agreement. The Respondents argued that the large commission sum implied ongoing assistance obligations, which the Petitioner failed to fulfill, thus disentitling him from the balance payment.

The Court sided with the Petitioner's interpretation, holding that the contract's express terms and recitals acknowledged prior assistance and made the commission contingent on completion, not on further assistance. The Respondents' attempts to impose additional conditions were unsupported by the contract language.

Conclusions

The Court concluded that the Arbitrator's award was unsustainable as it failed to adhere to the contract's express terms and the legal framework governing arbitration. The Petitioner was entitled to the entire commission sum agreed upon, subject to applicable taxes and adjustments. The Rs. 50 lakhs already paid was rightly retained by the Petitioner. The award was set aside, and the matter was remitted for fresh arbitration consistent with the Court's findings.

Significant Holdings

The Court held:

"It was not open to the learned Arbitrator to have varied the amount payable to the Petitioner towards brokerage and assistance rendered by him. In terms of the contract the Petitioner could not have retained even the Rs. 50 lakhs paid to him if he did not fulfill his obligations. There was no basis in law for the learned Arbitrator to permit the Petitioner to retain Rs. 50 lakhs payable only for 'some' services rendered. Either the Petitioner was entitled to the entire sum in terms of the agreement or he was not."

"An arbitrator derives his authority from the contract and if he acts in disregard of the contract, he acts without jurisdiction. A deliberate departure from contract amounts to not only manifest disregard of his authority or a misconduct on his part, but it may tantamount to a mala fide action."

"The arbitrator is bound to implement the contractual clauses and cannot go contrary to them. He cannot decide on the basis of his notions of equity and fairness, particularly in such a manner that it goes contrary to the specific contractual terms."

"The impugned Award cannot be sustained as it is opposed to the fundamental policy of Indian law inasmuch as it does not abide by the mandate of Section 28(3) of the Act."

These principles reaffirm the binding nature of contractual terms in arbitration and the limits on arbitral discretion, emphasizing that arbitral awards must conform strictly to the contract and applicable law.