Bombay High Court Upholds Arbitral Award on Share Valuation and Compensation: “Minimal Judicial Interference, Arbitrator’s Findings Cannot Be Reopened Unless Perversity is Established”

Court’s Decision

The Bombay High Court dismissed the appeal filed under Section 37 of the Arbitration and Conciliation Act, 1996 (ACA), challenging the arbitral award dated 5 April 2016. The appellants had filed a petition under Section 34 ACA, seeking to set aside the arbitral award, which was rejected by the Single Judge on 12 July 2024. The Division Bench upheld the findings, ruling that the scope of judicial review in arbitration is limited and interference is justified only in cases of patent illegality or perversity.

The Court reiterated the importance of minimal judicial interference in arbitration and held that the arbitrator’s interpretation of contractual terms and factual findings cannot be reviewed unless completely baseless. The key issue was the valuation of shares and compensation awarded in lieu of specific performance under a shareholders’ agreement.

Facts of the Case

• The dispute arose between two groups of shareholders of E-Square Leisure Pvt. Ltd., where the respondents initially sought specific performance of a share transfer agreement but later agreed to receive compensation in lieu of specific performance.
• The appellants had challenged the arbitral award on several grounds, including claims that the award was against public policy, suffered from patent illegality, and exceeded the jurisdiction of the arbitrator.
• The arbitral tribunal had directed the appellants to pay compensation for 7,71,650 shares at ₹94.43 per share, along with compensation for 5,00,050 shares and 1,79,770 shares.
• The arbitral award also granted ₹1 crore for land valuation and awarded interest at 10% per annum from 31 March 2007.

The appellants argued that the arbitral tribunal erred in awarding compensation for the 5,00,050 shares, which were allegedly given as security and not part of the original share transfer agreement.

Issues Before the Court

1. Whether the arbitral award was perverse and suffered from patent illegality under Section 34 ACA?
2. Whether the respondents were ready and willing to perform their contractual obligations?
3. Whether the arbitrator had jurisdiction to award compensation for 5,00,050 shares, which were allegedly not part of the arbitration agreement?
4. Whether the valuation of shares at ₹94.43 per share was arbitrary and lacked reasoning?
5. Whether the award of ₹1 crore for land valuation was valid or constituted double compensation?
6. Whether the interest award of 10% per annum from 31 March 2007 was justified?

Petitioner’s Arguments

The appellants (petitioners) raised the following arguments:

1. Arbitral Award is Contrary to Law & Public Policy
   • The award was in conflict with public policy, violated contractual terms, and contained findings without any evidence.
   • It suffered from patent illegality and contradicted fundamental principles of Indian law.
2. Valuation of Shares is Arbitrary & Perversely High
   • The arbitrator did not base the valuation on any evidence.
   • The valuation of ₹94.43 per share was not explained or justified.
   • The arbitrator ignored evidence presented by both parties and relied on subjective guesswork.
3. Respondents Were Not Ready & Willing to Perform Their Obligations
   • The respondents did not have financial capacity to pay for the shares.
   • The respondents’ letter dated 8 July 2000 sought extension of time, which allegedly showed their lack of readiness.
   • The arbitrator wrongly concluded that the respondents were ready and willing, despite evidence to the contrary.
4. Award for 5,00,050 Shares is Without Jurisdiction
   • These shares were given as security, and there was no agreement requiring their transfer.
   • The arbitrator exceeded his jurisdiction by awarding compensation for these shares.
5. Award for 1,79,770 Shares Was Already Settled in an Interim Award
   • These shares were already dealt with in a consent award.
   • The arbitrator wrongly revisited this issue, violating principles of res judicata.
6. Award of ₹1 Crore for Land is a Duplication
   • The arbitrator had already accounted for the land value in the share valuation.
   • Awarding additional compensation for land resulted in double payment.
7. Interest at 10% Per Annum from 31 March 2007 is Unjustified
   • There was no demand for interest before the arbitration.
   • Interest should not be retrospectively applied from 2007.

Respondent’s Arguments

The respondents countered the petitioners’ arguments as follows:

1. Limited Scope of Judicial Review Under Section 34 ACA
   • Courts cannot interfere with arbitral awards unless there is perversity or patent illegality.
   • Arbitral tribunals are final fact-finders, and their interpretation should not be substituted by courts.
2. Respondents Were Ready & Willing to Perform Their Obligations
   • The arbitrator correctly assessed readiness and willingness based on the entire evidence.
   • The delay in payment was due to the petitioners’ own actions.
3. Award for 5,00,050 Shares Was Within Jurisdiction
   • The arbitrator had the authority to determine all disputes related to shareholding.
   • The agreement dated 26 July 2007 empowered the arbitrator to assess all shares.
4. Valuation of ₹94.43 Per Share Was Justified
   • The valuation report submitted by the petitioners themselves suggested a similar valuation.
   • The arbitrator corrected minor errors and adopted a reasonable approach.
5. Award of ₹1 Crore for Land Was Justified
   • The valuation of land was part of the overall compensation package.
   • No double counting occurred.
6. Interest Was Within Arbitrator’s Discretion
   • Under Section 31 ACA, an arbitrator can award interest from the date of accrual.
   • The interest rate of 10% per annum was reasonable.

Analysis of the Law

The Court analyzed the legal principles governing judicial interference in arbitration:

1. Scope of Section 34 ACA
   • Courts cannot reappreciate evidence or substitute their views for those of the arbitrator.
   • Findings of fact are binding, unless they suffer from perversity.
2. Jurisdiction of Arbitral Tribunal
   • The tribunal had jurisdiction over all disputed shares based on the agreement dated 26 July 2007.
3. Valuation of Shares
   • The arbitrator had the discretion to determine valuation without leading oral evidence.
4. Award of ₹1 Crore
   • The amount was correctly calculated and not an overlapping claim.
5. Award of Interest
   • No legal requirement for prior demand for interest under Section 31 ACA.

Court’s Conclusion

• The appellants failed to prove perversity or patent illegality in the arbitral award.
• The respondents were ready and willing to perform their contractual obligations.
• The valuation of ₹94.43 per share was reasonable and based on existing evidence.
• The compensation for 5,00,050 and 1,79,770 shares was within jurisdiction.
• The award of ₹1 crore for land was not duplicative.
• Interest was correctly awarded from 31 March 2007.

Final Holding: Appeal dismissed; arbitral award upheld.

Implications

1. Reinforces the principle of minimal judicial interference in arbitration.
2. Limits the scope of appellate review under Section 37 ACA.
3. Establishes that valuation disputes should not be reopened unless manifestly arbitrary.
4. Clarifies that arbitrators have discretion to award interest without prior demand.

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