Jackie Kukubhai Shroff V. Ratnam Sudesh Iyer
Jackie Kukubhai Shroff V. Ratnam Sudesh Iyer
Arbitration Petition no. 167 of 2015
Date of Judgment: 19 May 2020 Bench: S.C. Gupte, J.
The challenge before the High Court of Bombay (“HC”) was to an award passed on 10 November 2014 in an international commercial arbitration by a learned sole arbitrator (“Award”) under the unamended section 34 of the Arbitration and Conciliation Act, 1996 (“Act”). The HC while setting aside the Award unequivocally observed that the Award does not measure up to the minimal judicial scrutiny within the restricted parameters of Section 34 of the Act. “It is completely unreasonable, impossible, and perverse. It is partly based on no evidence, partly on non-application of mind, and partly, by a wholesale misapplication of law resulting into miscarriage of justice.” All in all, the Award shocks the conscience of the court and cannot be sustained as it is falls foul of integral facets of the fundamental policy of Indian law.
FACTUAL BACKGROUND
The petitioner and the respondent were shareholders of an Indian company by the name of Atlas Equipfin Pvt. Ltd. (“Atlas”). Around the year 1995, Atlas entered a joint venture with Sony group for setting up Sony TV channel in India. The joint venture company was named Sony Entertainment Television India Pvt.Ltd. (“SET India”), later renamed as Multi Screen Media Pvt. Ltd. (“MSM”).
The shareholders of Atlas looking for an exit opportunity from MSM, decided to sell the shares held by Atlas in MSM. Sometime around 2005, the Petitioner and others claimed to have visited Respondent’s office at Inhouse Productions Pvt. Ltd. in Andheri. Respondent made telephonic request to give mandate to Standard Chartered Bank (“SCB”) for sale of shares of MSM held by Atlas along with an authority to apply such sale proceeds for repayment of a loan of USD 93 million taken by a company called Grandway Global Holdings Limited (“Grandway”). The Petitioner refused to sign the document as he had no direct or indirect interest in Grandway.
The Petitioner filed a complaint with Economic Offences Wings (‘EOW’) against the Respondent and others complaining about forgery in respect of a Placement Instruction purported to bear the signature of the Petitioner sometime in 2010. Subsequently, the Respondent approached the Petitioner’s chartered accountant with a proposal to settle the disputes.
On 3 January 2011, a deed of settlement was drawn and executed between the parties. Clause 4.1 of the deed of settlement (“Deed”) provided for keeping of a sum of USD 1,500,000 in escrow to be released to the Petitioner upon closure/withdrawal of the EOW complaint. Clause 4.2 of the Deed provided for an additional sum of USD 2,000,000 to be held in escrow and to be released in favour of the Petitioner within seven days of receipt of sale proceeds by Grandway and/or Atlas in respect of sale of their shares in MSM.
On 10 January 2011, the Petitioner proceeded to perform all his obligations under the Deed. As such, the escrow agent released unto the Petitioner the first escrow cheque of USD 1,500,000. The escrow agent continued to hold the other undated cheque of USD 2,000,000 pending sale of shares of MSM by Atlas.
Subsequently, Petitioner’s advocate called upon the Respondent to complete the sale of shares of MSM. However, Respondent claimed that the Petitioner had committed a breach of the Deed by sending an e- mail on 15 June 2011. (By this e-mail, the Petitioner’s wife had called the Respondent a ‘forger’.) The Respondent, however, stood by his obligation to pay the Petitioner’s dues under the Deed upon completion of sale of MSM shares held by Atlas and/or Grandway.
In May 2012, the Petitioner signed an agreement, by which Atlas sold its shareholding in MSM to SET India in terms of clause 5.1(b) of the Deed. Whilst the Petitioner was awaiting release of the second escrow cheque of USD 2,000,000 upon completion of the sale of shares held by Grandway and Atlas in MSM and receipt of sale consideration by Grandway/Atlas, the Respondent proceeded to file an arbitration petition, invoking Section 9 of the Act. The Respondent prayed for an interim injunction against release of the undated escrow cheque of USD 2,000,000 by the escrow agent. A consent order was passed therein referring the parties to arbitration by the learned sole arbitrator.
The Award
The Award stipulated that Petitioner had committed breach of the Deed as it was not validly terminated and the arbitrator awarded damages of USD 3.5 million to the Respondent by, firstly, directing the Petitioner to return the sum of USD 1.5 Million and, secondly, declaring that the Petitioner was not entitled to USD 2,000,000 lying in escrow and thirdly, directing the escrow agent to return the escrow cheque in the sum of USD 2,000,000 to the Respondent. The Award was passed on the reasoning that:
Emails dated 9 June 2011 and 15 June 2011 addressed by the Petitioner’s wife constituted breach of clause 3 of the deed of settlement, since clause 3 inter alia forbade the Petitioner from writing any letter or communication to any person or entity complaining about the subject matter of the Deed, and the said emails calling the Respondent a “forger” amounted to such forbidden communication. The learned arbitrator treated the Petitioner’s wife as his agent.
The sum of USD 3,500,000 referred to in the Deed was a sum named by the parties as liquidated damages for its breach; and Respondent, as a party aggrieved by the breach, referred to above, was entitled to receive the entire sum of liquidated damages on account of the breach.
JUDGMENT
The HC thus proceeded to determine: 1) whether emails dated 9 and 15 June 2011 constituted a breach of the Deed? 2) whether the arbitrator was right in treating the petitioner’s wife as his agent? 3) whether the Respondent was entitled to a sum of USD 3,500,000 as damages?
The Hon’ble HC systematically delved into each issue and concluded that, “the award was not just plainly wrong, but exhibits an unmitigated perversity and is shocking to the conscience of the court, to say the least.”
On the issue of breach, the HC noted that although the concerned emails could very well be said to be arising out of the same transaction which the Deed was concerned with, they do not refer to the subject matter of the Deed. The Court observed that subject matter of the Deed referred to in clause 3 could only mean and include the complaint made by the Petitioner to EOW. Such a clause could not be reasonably construed to place a blanket restriction on the Petitioner to complain about any future conduct of the Respondent. The HC observed scathingly in this regard, “Can such award be ever sustained as something a fair and judiciously minded person could have made. In my humble opinion, it is the very opposite of justice; it would be a travesty of justice to uphold such award.”
The Court, after delineating the meaning and scope of agency under the Indian Contract Act, observed that the wife of the petitioner did not have either express or implied authority to act on behalf of the petitioner. The Court further remarked that the particular circumstances considered by the sole arbitrator to be indicative of implied authority (such as her presence as an invitee in Minutes of Meeting of the shareholders, proof reading of the draft settlement etc.) were not conclusive enough to hold that the wife had any authority to deal with the Respondent and that in pursuance of or in matters arising out of the settlement or involving others to whom the two subject emails were copied.
On the issue of damages, the Court observed that damages practically amounting to the returning of the whole consideration (as in the instant case) could only be awarded on the footing, either that the so-called breach had resulted into failure of consideration so far the promisee is concerned or that the breach was so fundamental that it invited award of damages in full measure of the consideration paid. The sum named in the Deed as ‘liquidated damages’ cannot be awarded in the instant case as the same is unreasonable. The award of such liquidated sum, or any compensation for that matter, is within the discretion of the Court and such discretion must be exercised on sound principles applicable under Section 73 of the Indian Contracts Act with particular reference to the injury or loss resulting from the breach of contract complained of.
In this light, the Court held that such damages could not have been awarded in the instant case as the petitioner had fulfilled all his obligations under the Deed. The Court further observed that clause 6 of the Deed could not be treated as a stipulation of liquidated damages. The Court referred to the judgment of the Hon’ble Supreme Court in Punj Lloyd Ltd. vs. IOT Infrastructure and Energy Services Ltd. to hold that even if Clause 6 were to be treated so, there is no proof here whatsoever that the Respondent has suffered any loss or damage as a result of the alleged breach. More so, considering the reasonability of such stipulation, the Court observed that:
“It could never be suggested, at least by the standards of a reasonable man the law expects in a judicial scrutiny of an award, that return of whole consideration of USD 3,500,000 was a genuine pre-estimate of damages flowing from a reference to the original subject matter of the EOW compliant in a communication made to a couple of private parties. It is too much to say that what the parties contemplated was that any such private communication would entail a loss of reputation and the measure of damages of USD 3,500,000 was a genuine pre-estimate made towards such loss of reputation.”
The HC concluded by holding that although “patent illegality” in no longer available as a ground for setting aside an award passed in an international commercial arbitration after 2015 amendment to the Act as observed by the Supreme Court in Ssangyong Construction and Engineering Co. Ltd. vs. National Highways Authority of India (2019) SCC ONLINE SC 677, the impugned Award is being interfered on the grounds that it is an impossible award; it is an award based on conclusions which no fair or judiciously minded person could have arrived at; and it shocks the conscience of the court; which undoubtedly contravenes the fundamental policy of Indian law and therefore, liable to be set aside Section 34 of the Act.