Court’s decision
The Madras High Court dismissed a petition filed under Section 34 of the Arbitration and Conciliation Act, 1996, challenging an arbitral award passed against a guarantor in a commercial film distribution dispute. The Court held that the arbitral award did not suffer from perversity or patent illegality and that none of the grounds for interference under Section 34 were made out.
The Court upheld the findings of the sole arbitrator enforcing the guarantee deed and directing payment of ₹1.23 crore with interest. It further imposed costs on the petitioner, observing that the challenge was devoid of merit and amounted to an impermissible attempt to re-argue factual findings already settled by the arbitrator.
Facts
A distribution arrangement was entered into for theatrical release of a feature film in Karnataka. Due to civil unrest, the distributor invoked the force majeure clause and sought refund of amounts already paid. At that stage, a third party intervened and executed a guarantee deed assuring compensation if the distributor failed to recoup the minimum guarantee amount.
Relying on the guarantee, the distributor proceeded with release of the film. The film suffered commercial failure, resulting in financial loss. When the guaranteed amount was not paid, arbitration was invoked. The sole arbitrator passed an award holding the guarantor liable to compensate the distributor for unrecovered amounts.
Issues
The primary issue before the High Court was whether the arbitral award enforcing the guarantee deed suffered from perversity or patent illegality warranting interference under Section 34 of the Arbitration and Conciliation Act.
Ancillary issues included whether the guarantor could deny liability by contending that it was not a party to the original distribution agreement, whether the guarantee deed had lapsed, whether the requirements of a valid contract of guarantee were satisfied, and whether the quantification of loss by the arbitrator was unsupported by evidence.
Petitioner’s Arguments
The Petitioner contended that it was not a party to the original distribution agreement containing the arbitration clause and therefore could not be bound by the arbitral proceedings. It was argued that the guarantee deed was merely a comfort letter and not an enforceable contract of guarantee under Section 126 of the Contract Act.
The Petitioner further submitted that the guarantee was limited to a specific version of the film and stood discharged once another version was released. It was also argued that the arbitral award suffered from perversity as the loss allegedly suffered by the distributor was not proved through cogent evidence.
Respondent’s Arguments
The Respondent contended that the guarantee deed was unconditional and expressly referred to the distribution agreement. It was argued that the guarantor had actively intervened, mediated the dispute, and induced continuation of distribution by executing the guarantee.
The Respondent submitted that the guarantor had earlier invoked the arbitration clause to seek reference of disputes and could not later deny its applicability. It was further argued that detailed documentary evidence had been produced before the arbitrator to establish loss and that the award reflected a plausible and reasoned view.
Analysis of the law
The Court reiterated the limited scope of interference under Section 34, emphasising that it does not sit as an appellate forum over arbitral awards. Interference is permissible only where the award suffers from patent illegality, perversity, or contravention of fundamental policy of Indian law.
The Court analysed the law relating to contracts of guarantee under Sections 126 and 145 of the Contract Act. It reiterated that a guarantee need not be in writing and that the existence of an implied understanding between the principal debtor and guarantor is sufficient where circumstances so establish.
Precedent Analysis
The Court relied upon Supreme Court precedent recognising that guarantees may be oral, written, or partly both, and that rigid formal requirements are not mandated by law. Reference was made to authoritative rulings explaining the nature of guarantee as an accessory contract and the principle that findings based on appreciation of evidence cannot be re-opened under Section 34.
The Court also applied settled arbitration jurisprudence that a “possible view” taken by an arbitrator, even if another view is possible, cannot be interfered with by the court.
Court’s Reasoning
The Court found that the guarantee deed expressly referred to the distribution agreement and that the guarantor had earlier relied on the same agreement to seek arbitration. It held that the guarantor could not be permitted to approbate and reprobate by invoking arbitration and later denying its applicability.
The Court accepted the arbitrator’s finding that the guarantee had not lapsed and that there was no clause limiting its operation. It further upheld the quantification of loss, noting that documentary evidence was produced and not effectively rebutted. The findings were held to be reasoned, coherent, and free from perversity.
Conclusion
The Madras High Court dismissed the Section 34 petition and upheld the arbitral award enforcing the guarantee deed. The Court held that the award was based on proper appreciation of evidence and application of law and did not warrant judicial interference.
By imposing costs, the Court reaffirmed that Section 34 proceedings cannot be used as a disguised appeal against arbitral findings, particularly in commercial disputes involving guarantees and negotiated risk allocation.
Implications
This judgment reinforces the enforceability of guarantee deeds in commercial transactions and clarifies that guarantors cannot escape liability by taking inconsistent stands. It underscores the finality accorded to arbitral awards and the narrow confines of Section 34 review.
The ruling is significant for arbitration jurisprudence, particularly in disputes involving film distribution, commercial guarantees, and force majeure-driven renegotiations, where courts are often invited to revisit factual determinations under the guise of legality.