Bombay High Court Refuses to Set Aside Arbitral Award Directing ESOP Share Allotment; Holds Section 34 Cannot Reinterpret Contracts or Reappreciate Evidence
Bombay High Court Rejects Employer’s Challenge to ESOP Award; Holds Contract Was Interpreted, Not Rewritten
Facts
Waterfield Advisors Private Limited appointed the respondent as Director – Operations in 2011. Under the appointment letter, apart from salary, the respondent was promised equity shares to be allocated over the first three years and vested in stages during the fourth, fifth and sixth years of service. In March 2017, the company issued a Grant Letter confirming the respondent’s entitlement to 31,878 equity shares.
The respondent resigned in 2017. Subsequently, the company refused to allot the shares, contending that there was no ESOP policy and that the respondent’s entitlement stood extinguished upon cessation of employment. The respondent invoked arbitration. The sole arbitrator directed the company to specifically perform the appointment and grant letters by allotting 31,878 shares and awarded costs. The company challenged the award under Section 34 of the Arbitration and Conciliation Act, 1996.
Issues
- Whether the arbitral award directing allotment of 31,878 equity shares suffered from patent illegality or conflicted with the public policy of India.
- Whether absence of a formal ESOP policy under the Companies Act invalidated the employee’s claim.
- Whether the arbitrator rewrote the employment contract by holding that the employee’s share entitlement had vested before resignation.
- Whether the High Court could interfere with the arbitrator’s interpretation of the appointment letter and grant letter under Section 34.
Petitioner’s Arguments
The company argued that the arbitral award violated Sections 53 and 62 of the Companies Act, 2013 and Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014, since shares could not be allotted without a valid ESOP scheme approved in accordance with law.
It further contended that the arbitrator selectively interpreted the appointment letter, ignored the clauses dealing with termination, wrongly treated mere options as vested rights, effectively rewrote the contract, and improperly granted specific performance instead of awarding damages. The company also argued that the respondent never exercised the alleged options before resigning.
Respondent’s Arguments
The respondent submitted that both the appointment letter and the grant letter unequivocally established that the shares had already vested before resignation. The company’s subsequent reliance on the absence of an ESOP policy was an afterthought because similarly placed employees had been allotted shares despite there being no formal ESOP policy.
It was further argued that the arbitrator had merely interpreted the contractual documents and recorded findings of fact after appreciating evidence, which were immune from interference under Section 34.
Analysis of the Law
The High Court reiterated the settled principles governing interference under Section 34 of the Arbitration and Conciliation Act, 1996. Judicial review is confined to the limited statutory grounds of public policy and patent illegality. Courts cannot function as appellate forums, reappreciate evidence, or substitute their own interpretation merely because another view is possible.
The Court emphasised that interpretation of contractual terms primarily falls within the arbitrator’s jurisdiction. Even if another interpretation is possible, the award cannot be set aside unless the arbitrator’s construction is one that no reasonable person could adopt or amounts to rewriting the contract.
Precedent Analysis
The Court relied upon several Supreme Court decisions, including:
- Consolidated Construction Consortium Ltd. v. Software Technology Parks of India, reiterating the limited scope of Section 34 review.
- Associate Builders v. Delhi Development Authority, explaining the concepts of public policy, patent illegality and the prohibition against reappreciation of evidence.
- PSA Sical Terminals Pvt. Ltd. v. Board of Trustees of V.O. Chidambaranar Port Trust, clarifying that patent illegality must go to the root of the matter.
- Indian Railways Catering & Tourism Corporation Ltd. v. Brandavan Food Products, holding that rewriting a contract may justify interference, but only where the arbitrator actually substitutes contractual terms.
- McDermott International Inc. v. Burn Standard Co. Ltd., holding that interpretation of contractual terms lies primarily within the arbitrator’s domain.
Court’s Reasoning
The High Court held that the arbitrator had reasonably construed the appointment letter together with the grant letter and correctly concluded that the employee’s entitlement had already vested before resignation. The grant letter specifically quantified the respondent’s entitlement to 31,878 equity shares, removing any ambiguity regarding vesting.
The Court further held that the company could not rely upon its own omission to frame an ESOP policy in order to defeat contractual promises made to its employee. Permitting such a defence would allow the company to benefit from its own wrong.
The Court also rejected the argument that the arbitrator had rewritten the contract, observing that the award merely interpreted the contractual documents. Since the arbitrator’s interpretation was a plausible one, Section 34 did not permit judicial substitution of another view. The grant of specific performance was also upheld, as the equity shares formed part of the respondent’s agreed remuneration and growth incentive, making damages an inadequate substitute.
Conclusion
The Bombay High Court dismissed the Section 34 petition and upheld the arbitral award directing Waterfield Advisors Private Limited to allot 31,878 equity shares to its former employee. The Court held that the arbitrator’s interpretation of the employment documents was reasonable, the employee’s share entitlement had vested before resignation, the company could not rely upon its own failure to frame an ESOP policy, and none of the grounds of patent illegality or conflict with public policy were established.
Case Details
Case: Waterfield Advisors Private Limited v. Sridhar Kurpad
Court: Bombay High Court (Commercial Division)
Case Number: Commercial Arbitration Petition No. 1149 of 2025
Judge: Hon’ble Mr. Justice N. J. Jamadar
Date: 05 August 2026
Result: Arbitration Petition dismissed with costs; arbitral award directing allotment of 31,878 equity shares upheld.
