Madras High Court Sets Aside 'Perverse' Arbitral Award for Ignoring Fundamental Evidence Law

CHENNAI: In a significant ruling on the scope of judicial review over arbitral awards, the Madras High Court has set aside an award for being "perverse and patently illegal." Justice N. Anand Venkatesh held that an arbitrator cannot disregard fundamental principles of the Evidence Act, such as the bar on using oral statements to contradict a registered written contract.

The court, while hearing a petition filed by H. Sunil Kumar under Section 34 of the Arbitration and Conciliation Act, 1996, quashed an award that had denied him specific performance of a property sale agreement, instead treating the transaction as a mere loan security.

Background of the Dispute

The case originated from a registered sale agreement dated June 18, 2018, between H. Sunil Kumar (the claimant) and two respondents, M Deepak Kumar Samdariya and B. Rasheetha, for a 2400 sq.ft. plot in Virugambakkam, Chennai. The total sale consideration was fixed at Rs. 64.32 lakhs, out of which Kumar had paid a substantial advance of Rs. 50 lakhs. The balance was to be paid within 36 months upon execution of the sale deed.

When the respondents failed to execute the sale deed, Kumar invoked the arbitration clause, seeking specific performance of the agreement or, alternatively, a refund of his advance with 24% interest.

Arguments and the Arbitrator's Award

Before the Sole Arbitrator, the parties presented conflicting narratives:

• The Claimant (Kumar): Argued that it was a straightforward and valid sale agreement and he was always ready and willing to perform his part of the contract.
• The Respondents: Contended that the agreement was a sham, executed only as security for a hand loan of Rs. 50 lakhs they had taken from Kumar, who was a cousin of the first respondent. They claimed they never intended to sell the property.

The Sole Arbitrator accepted the respondents' version, concluding the document was a security for a loan transaction. The arbitrator denied the relief of specific performance and directed the respondents to repay the Rs. 50 lakhs with interest. This award was challenged by Kumar before the High Court.

High Court's Scrutiny: A 'Perverse' and 'Unintelligible' Award

Justice N. Anand Venkatesh conducted a thorough review and found the arbitrator's award riddled with legal infirmities, primarily its disregard for established legal principles.

Ignoring the Sanctity of a Written Contract

The court's primary criticism was the arbitrator's failure to apply the principles of the Indian Evidence Act, 1872. While an arbitral tribunal is not strictly bound by the Evidence Act, the court clarified that its fundamental principles, which form the basis of Indian law, cannot be ignored.

The judgment emphasized the importance of Section 92 of the Evidence Act, stating:

> "When terms of a contract... have been reduced to the form of a document, no evidence of any oral agreement or statement will be admitted as between the parties to such document for the purpose of contradicting, varying, adding to or subtracting from its terms."

The court found that the arbitrator had erroneously allowed the respondents' oral claims to override the clear terms of a registered sale agreement without any proof of fraud, coercion, or other exceptions under Section 92. The finding was deemed to be based on "mere presumption and surmises."

Mutually Contradictory Findings

The High Court also highlighted a glaring contradiction in the arbitrator's reasoning. After concluding that the document was not a sale agreement but a loan security, the arbitrator went on to hold that the claimant was not "ready and willing" to perform his part of the contract.

The court noted, "These findings are mutually contradictory since the sale agreement and loan transaction cannot travel together and one has to exclude the other." Citing the Supreme Court's decision in Dyna Technologies Private Limited , the court labeled this part of the award "unintelligible" and therefore patently illegal.

Furthermore, the court pointed out that the first respondent, who was central to the loan narrative, never entered the witness box, yet the arbitrator failed to draw an adverse inference from his absence.

The Final Verdict

In light of these "perversity and patent illegality," the Madras High Court allowed the petition and set aside the entire arbitral award dated November 25, 2024.

Citing Supreme Court precedent in McDermott International Inc v. Burn Standard Co. Ltd. , the court refrained from modifying the award to grant specific performance, as the illegal portions were not severable. Instead, it annulled the award, leaving the parties at liberty to initiate arbitration afresh if they so choose.

Concluding the matter, the court imposed a cost of Rs. 5,00,000 on the respondents, payable to the petitioner.