Bom HC | Arbitrator to strictly follow the contractual terms while determining rights and liabilities of parties, any deviation not permissible

Bombay High Court: S.C. Gupte, J. while setting aside an arbitral award for patent illegality, observed that “any forum, which adjudicates upon the rights and liabilities of the parties based on a contract, is enjoined upon to determine those rights and liabilities in accordance with the contractual terms, be it a court or an arbitral forum.”

The respondents were the borrowers of the Madhavpura Mercantile Coop. Bank Ltd. whose accounts were declared as non-performing assets (NPAs) for committing default in repayment of loans. To expedite the recoveries, the Bank formulated Compromise Scheme of Settlement (CSS-2013). As per the CSS, the NPA date in case of respondents was expressly stated to be 31-3-2001 and it was expressly stipulated that no conditional proposal for settlement or proposal disputing the NPA date would be accepted. The respondents accepted CSS unconditionally. Later, the respondents raised a dispute about the NPA date and therefore disputed their liability under the CSS. The matter went to arbitration and the Arbitral Tribunal accepted the respondents’ case on the applicable NPA date and made an award in their favour. Aggrieved thereby, the Bank filed the present petition.

The High Court was of the view that the arbitrator exceeded his jurisdiction by reformulating the contract between the parties contained in the CSS. It was noted that CSS-2013 was not a statutory scheme and nothing prevented the petitioner from naming any particular date as the NPA date, 31-3-2001 was treated as NPA date on the basis of statutory auditor’s report. It was made clear in CSS-2013 that the scheme could not be accepted conditionally. It was for the individual debtor to accept or reject the scheme. The respondents accepted it unconditionally which brought about a concluded contract substituting the original contract of loan between the parties. The Court said: “The arbitrator, who was to adjudicate the rights and liabilities of the parties, was expected to determine such rights and liabilities under such contract, namely, CSS2013. It was not open to him to question CSS-2013 or relieve any debtor from his obligations under it on some notion of equity or sympathy.” 

It was also observed: “The consensus between the parties to refer their dispute to arbitration merely implies that the parties are agreeable to have the dispute adjudicated by an arbitral forum as opposed to a court of law. The rights and liabilities, which are to be thereby determined, are the rights and liabilities arising under the contract. Such consensus does not in any way impinge upon these rights and liabilities.”

It was held that the impugned award, thus, deserved to be quashed, both on the grounds of patent illegality, since the declaration in it was in the face of a contract as well as for the reason of the arbitrator having taken an impossible view, or a view which no fair or judiciously mined person  would take. [Madhavpura Mercantile Coop Bank Ltd. v. Rasiklal D. Thakkar, Commercial Arbitration Petition No. 179 of 2016, decided on 25-03-2019]

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