BOMBAY HIGH COURT STAYS OPERATION OF ARBITRAL AWARD OWING TO LACK OF ORAL EVIDENCE SUPPORTING VALUATION REPORT

A single Judge Bench of Bombay High Court comprising of Justice Firdosh P. Pooniwalla passed a judgement dated 13.06.2024 in CFM Asset Reconstruction Pvt. Ltd and Anr. vs. M/s. SAR Parivahan Pvt. Ltd and Ors. Comm. Arbitration Petition (L)No.5565 Of 2024 wherein the Hon’ble Court held that the Arbitral Award passed on the basis of a Valuation Report submitted by the Respondents was patently illegal as the same was not supported by oral evidence thereof.

Facts

The present Arbitration Petition was filed in the High Court in order to challenge the Arbitral Award dated 23.11.2023 passed by the Ld. Arbitrator. As per the facts stated by the Petitioner, a Loan Agreement dated 29.01.2010 was executed between L & T Finance Company and the Respondent No.1, whereunder the Petitioner (Claimant) advanced a loan of Rs.2,85,70,000/-, for a term of 34 months, together with interest at the rate of 6.26% p.a. As per the Agreement, the Lender was entitled to sell/transfer/assign the hypothecated property (Hypothecated Property) as he may deem fit.

The Respondents committed default in repaying the loan and therefore, by Legal Notice dated 01.06.2011, the Claimant demanded payment of outstanding dues of Rs.2,82,49,868/- from Respondent Nos. 1 to 3 and later, invoked Arbitration and appointed Respondent No.4 as Sole Arbitrator.

The Claimant / Lender sold the Hypothecated Property for a sum of Rs. 1.10 Crores and thus reduced the outstanding amount to Rs.1,72,49,868/-. In the subsequent meetings with the Arbitrator, the Respondents were apprised about the sale of Hypothecated Property.

The Respondent No. 1 to 3 filed a Counter Claim seeking compensation of Rs.2,35,43,476/- from the Claimant for alleged undervalued sale of the Hypothecated Property.

After several meetings, the Impugned Award was passed by the Arbitrator on 23.11.2024.

The Claimant /Petitioner challenged the said Award stating that the Counter Claim filed by the Respondents was barred by limitation. Moreover, the Claimant contended that they did not receive the complete copy of the Counter Claim as it was without the annexures and thus they were unable to file their reply.

The Petitioners stated that the Award was passed in their absence and they were proceeded Ex-parte without any valid reason.

On the other hand, the Respondents contended that the Petitioners arbitrarily evaluated the price of the assets as 35% less than their original value. They claimed to have sold the Hypothecated Property for only Rs. 1.10 Crores, however, as per the Valuation Report submitted by the Respondents, the valuation of the Hypothecated Property was shown as Rs.2,35,69,788/-. Thus, there was a huge difference between the two values.

Therefore, the Ld. Arbitrator granted the Award partly in favor the Respondents based on the Valuation Report submitted by them. In the Impugned Award, the Ld. Arbitrator awarded a sum of Rs. Rs.59,97,210/- to the Petitioner (Claimant) and at the same time allowed the Counter Claim filed by Respondent No. 1-3 and awarded them a sum of Rs. 1,25,69,768/-.

Issues

I) Whether the Valuation Report filed by the Respondents was correct relying on which, the Ld. Arbitrator provided them compensation?

II) Whether the Arbitrator erred in passing the Award?

Decision by the High Court

The Hon’ble High Court relied on Section 25(2) of the Arbitration and Conciliation Act 1996 (Act) (Default of a Party) and provided that even if the Petitioners had not filed a reply to the Counter Claim, the Ld. Arbitrator was required to direct the Respondents to prove their Counter Claim and, especially, the Valuation Report, which was the opinion of a Valuer, and could not have been accepted without verifying the correctness thereof. The High Court also stated that there must be atleast some oral evidence from the Valuer who prepared the Report. The Court also provided that mere submission of a written document is not enough and would not be considered valid without proper oral evidence thereof.

The High Court of Delhi held that as per the circumstances of the present case, there was no oral evidence or deposition provided by the Valuer and nobody deposed about the correctness of the contents of the said Valuation Report. Therefore, the Hon’ble Court held that the said Report is, perverse and amounts to a patent illegality on the face of the Award.

The Hon’ble Bench was of the view that unconditional stay on a monetary award may be granted only in cases where the party satisfies the Court that the contract or the making of the award was induced by fraud or corruption as per the second proviso to Section 36(3) of the Act (Enforcement).

Thus, the Bench held that there was sufficient cause for granting an unconditional stay to the Award, failing which, the Petitioner would suffer substantial loss, as it would have had to make payment in respect of a claim which has been perversely granted by the Ld. Arbitrator.

Conclusion

Thus, the Hon’ble High Court provided an unconditional stay on the Award passed by the Arbitrator on the ground that the Valuation Report submitted by the Respondents was not supported by oral evidence and thus it cannot be relied upon. Therefore, the Petition filed by the Petitioners was allowed and the Arbitral Award dated 23.11.2023 was unconditionally stayed.

 

ARJAV JAIN

ASSOCIATE

THE INDIAN LAWYER & ALLIED SERVICES