Gujarat High Court Sets Aside Arbitral Award, Citing Arbitrator's Failure to Decide Core Issues and Unlawful Delegation

Ahmedabad: In a significant ruling concerning the scope of arbitral tribunals, the Gujarat High Court has set aside an arbitral award and a subsequent Commercial Court order that had upheld it. The High Court found that the arbitrator committed "patent illegality" by failing to adjudicate crucial issues related to the validity of a lease agreement and improperly delegating the task of determining rent to an external government authority.

The judgment was delivered by Chief Justice Sunita Agarwal in an appeal filed under Section 37 of the Arbitration and Conciliation Act, 1996, challenging the order dated September 13, 2024, passed by the Special Judge, Commercial Court, Ahmedabad (Rural), and the underlying arbitral award dated November 26, 2021.

Case Background:

The dispute originated from a lease agreement dated September 14, 2012, between the appellants (original claimants/lessors) and the respondent, Gujarat Metro Rail Corporation (GMRC), formerly known as MEGA Company Ltd. The agreement covered eight shops/showrooms in Gandhinagar, leased to GMRC for five years from September 1, 2012, at a monthly rent of Rs. 5,37,345 with an annual 10% escalation. The claimants alleged that GMRC stopped paying rent from January 2014 and failed to hand over possession after the lease expired on August 31, 2017. Possession was eventually restored on December 31, 2020, during the arbitration proceedings.

Arbitration and the Arbitrator's Approach:

Arbitration commenced after the High Court referred the dispute under Section 11 of the Act. The claimants sought recovery of rent arrears and damages for unauthorized possession.

GMRC, however, raised serious contentions before the arbitrator, arguing that the lease agreement was: * Vitiated by fraud and collusion between the claimants and the then Executive Chairperson of the company. * Unfair, unjust, unreasonable, against tender processes, and opposed to public policy. * Unregistered and unstamped, hence inadmissible. * Entered into without following due process, board approval, or evaluating other offers, despite GMRC being a Public Sector Undertaking requiring transparency.

The claimants denied these allegations.

The arbitrator framed 32 issues, including those related to the validity of the lease agreement, fraud, and the claimants' entitlement to rent and damages for breach. However, in the award, the arbitrator declined to enter into questions regarding the validity, registration, or stamping of the lease deed. Instead, the arbitrator concluded that GMRC, as a public sector undertaking, was required to follow government guidelines/circulars for fixing rent.

Crucially, the arbitrator directed an unnamed "Competent Authority" of the Government to determine the reasonable rent for the property from September 1, 2012, to December 31, 2020, based on prevalent government resolutions and policies. The arbitrator stated that the award was not an opinion on the merits and that parties were free to take further action after the authority's decision. The claimants' statement of claim was partly allowed "to the extent indicated above," while the counter-claim was not decided.

Section 34 Challenge and High Court Appeal:

The claimants challenged this award under Section 34, arguing it was patently illegal and beyond the arbitrator's jurisdiction as it failed to decide the referred dispute and delegated the core task.

The Commercial Court, however, dismissed the Section 34 application, finding that the arbitrator had provided reasons for directing the competent authority to fix rent and that the arbitrator was not competent to fix rent himself. The court concluded there was no patent illegality or contravention of public policy.

Aggrieved, the claimants appealed to the High Court under Section 37. They reiterated that the arbitrator's failure to decide the validity of the contract and the claims arising therefrom, coupled with the delegation of rent fixation, amounted to a fundamental failure of jurisdiction and rendered the award unintelligible and against public policy. They cited precedents holding that an arbitrator cannot delegate their power to decide the dispute to a stranger.

GMRC defended the Commercial Court's order, arguing that the scope of Section 34 and Section 37 review is limited and courts cannot re-appraise evidence or sit as an appellate court over the arbitrator's findings, citing Supreme Court judgments like OPG Power Generation (P) Ltd. v. Enexio Power Cooling Solutions India (P) Ltd. and Punjab State Civil Supplies Corpn. Ltd. v. Sanman Rice Mills .

High Court's Findings:

The High Court meticulously reviewed the arbitral award and the Commercial Court's order. Chief Justice Agarwal observed that the core dispute revolved entirely around the lease agreement dated September 14, 2012. GMRC's defence squarely challenged the very foundation of the claimants' case by alleging fraud, collusion, and illegality in the formation of the contract.

The court held that the arbitrator's refusal to "enter into those questions" (validity, fraud, registration, etc.) and instead direct a government authority to fix rent based on government resolutions (which were not part of the contract) was a "complete failure of jurisdiction."

The High Court noted: * The arbitrator was mandated to adjudicate disputes arising out of the lease agreement . * Ignoring the lease agreement and refusing to decide issues about its validity, enforceability, or breach was a abdication of duty. * Directing an external authority to fix rent was an unlawful delegation of the arbitrator's function to decide the monetary claims arising from the occupation of the property. This delegation is invalid as parties bargain for the decision of the chosen arbitrator, not a stranger. * The arbitrator's statement that no opinion was expressed on the merits further underscored the failure to adjudicate the referred dispute.

Referring to the Supreme Court's tests for arbitrability of fraud in A. Ayyasamy , Rashid Raza , and Avitel Post Studioz Ltd. , the High Court highlighted that serious allegations of fraud permeating the entire contract may affect the arbitrability of the dispute, requiring examination. The arbitrator failed to even consider this aspect or determine if the dispute was non-arbitrable, thereby avoiding the contentious issues.

The court concluded that the arbitrator's omissions were "not trivial" but "travel[led] to the root of the award" and that the reasons provided were "absolutely lacking" on the core issues. Therefore, the award suffered from patent illegality and was against the substantive law (Indian Contract Act).

The High Court also found that the Commercial Court erred in upholding the award, failing to appreciate the fundamental flaws in the arbitrator's approach.

Decision:

The Gujarat High Court set aside both the judgment and order of the Commercial Court dated September 13, 2024, and the arbitral award dated November 26, 2021.

The court granted the parties liberty to pursue their remedies available in law, either through fresh arbitration or by approaching the Civil Court, as they deem appropriate. All rights and contentions of the parties regarding the underlying dispute were left open for such future proceedings.