Judgment:
Chandrachud D.Y., J.
1. The challenge in these petitions is to the award of a sole arbitrator dated 18th May, 2006, under Section 34 of the Arbitration and Conciliation Act, 1996. The third respondent is a company incorporated under the Companies Act, 1956 with a total paid up share capital of Rs. 24.5 lacs divided into 24,500 equity shares each of Rs. 100/. At the material time the petitioners and the fourth and fifth respondents were the shareholders of the company with a share holding respectively of 45% and 10%. The company, it is stated, was entitled to ownership and development rights over land admeasuring 4036.4 square meters, bearing C.T.S. 230 and 231, situated at Sahar, Mumbai.
2. On 28th April, 1996 an agreement for the sale and transfer of shares was entered into between the petitioners and the fourth and fifth respondents on one hand and the first respondent on the other, by which the former agreed to sell to the latter 12,250 equity shares of the company for a total consideration of Rs. 5,34,95,750/. Fifty percent of the shareholding of the aforesaid three shareholders was hence to be transferred to the first respondent. Clause 2 of the Share Purchase Agreement provided that an amount of Rs. 1.10 Crores was paid to the transferors in a stated proportion. A balance of Rs. 4.25 crores was to be paid by the transferee to the transferors, out of their 50% share of the first sale proceeds of the built up area of a commercial office building that was to be constructed by the company on the land owned by it. Simultaneously, with the Share Purchase Agreement a Development Agency Agreement was entered into on the same day between the third respondent herein and a third party by the name of HMG Engineering Pvt. Ltd. The first respondent, it is an admitted position before the Court, paid an amount of Rs. 2.75 crores in pursuance of the Share Purchase Agreement. The agreement was not performed. This led to the institution of a suit for specific performance by the first respondent on the Original Side of this Court.
3. During the pendency of the suit when a Motion for interim relief was taken out, parties to the suit agreed to a reference of their disputes for arbitration to a Senior Advocate of this Court. The scope of arbitration was defined to be as follows:
The scope of the arbitration will be limited as follows:Viz. to determine as to how much shareholding Cherish is entitled to (if any) in Regency on account of payments made by Cherish to the Shareholders of Regency under the agreement of July, 1996. The arbitrator will also decide the issue as to how much space Cherish would be entitled to in the proposed construction of the site on the basis of the shareholding that they are entitled to (if any) determined by this arbitration process. Only the matters incidental to above two issues will fall within the scope of arbitration.
4. The first respondent was the claimant to the Arbitral Proceedings. The prayers before the learned arbitrator were (i) For a refund of an amount of Rs. 2.75 crores paid by the first respondent together with interest at 24% per annum; (ii) For an award of damages in the amount of Rs. 15 crores; and (iii) In the event that the award was in terms of built up area in the project then the rate to be applied should be on the basis of the actual project cost and not the market rate.
5. The sole arbitrator made and delivered his award on 23rd January, 2004. The award of the arbitrator allotted a built up area of approximately 14,500 square feet to the first respondent together with parking space. The Award was challenged in an arbitration petition before this Court under Section 34. On 10th July, 2005, the award was set aside with the consent of the parties. With the consent of the parties the following issues were referred to the arbitration of Mrs. Justice Sujata V. Manohar:
(i) To determine as to how much shareholding Cherish is entitled to (if any) in Regency on account of payments made by Cherish to the Shareholders of Regency under the agreement of July, 1996. The arbitrator will also decide the issue as to how much space Cherish would be entitled to in the proposed construction of the site on the basis of the shareholding that they are entitled to (if any) determined by this arbitration process. Only the matters incidental to above two issues will fall within the scope of arbitration.
6. In the State of claim that was filed before the learned Arbitrator, the relief that was sought was for specific performance of the agreement dated 28th July, 1996. Besides a declaration that the agreement was valid, subsisting and binding, the first respondent sought a declaration that he was entitled to 50% of the shareholding in the third respondent and to 50% of the constructed area on the plot of land owned by the third respondent at Sahar.
7. In the reply filed by the petitioners to the Statement of Claim, a specific defence was raised to the effect that the suit for specific performance was withdrawn after a settlement was reached between the parties whereby the only question that was referred to arbitration was how much shareholding the claimants were entitled to, if any, on account of the payments made to the shareholders and if so, whether they were entitled to any space in view of those shares in the building to be constructed on the land. This defence, it may be noted, was raised in paragraphs 1, 22 and 26 of the written statement.
8. The learned arbitrator delivered the Arbitral Award on 18th May, 2006 by which the claim for specific performance was decreed. The award contains (i) A declaration that the first respondent is entitled to specific performance of the contract dated 28th July, 1996; (ii) A declaration that the first respondent is entitled to 50% of the shares in the third respondent under the agreement; (iii) A direction to the respondents to the arbitral proceedings including the petitioners herein to hand over 28,500 sq. ft. of constructed property to the first respondent-claimant together with 25% of the car parking area in the basement. Consequential directions have been issued.
9. In assailing the Arbitral Award, the submission which has been urged on behalf of the petitioners is that the arbitrator has plainly acted outside the terms of reference and has consequently delivered an award which is without jurisdiction. The submission is that (i) There was no finding by the arbitrator on the contention specifically raised on behalf of the petitioners that the scope of the reference to arbitration was limited to the shares, if any, to which the first respondent was entitled on the basis of payments made and the arbitrator could only have awarded shares/space in accordance with the payments made. In the present case, it is urged that the arbitrator exceeded the terms of reference and therefore the jurisdiction conferred under the terms of refer-once by allowing and decreeing the entire claim in the suit for specific performance; (ii) The suit for specific performance was withdrawn and the consent terms under which a reference was made to arbitration limited the jurisdiction of the arbitrator to the two issues spelt out therein. There was no reference to arbitration of the wider claim for specific performance and if parties had intended to refer it, the terms of reference would have said so; (iii) The reference contemplates a determination of the shares, if any, to which the claimants were entitled on the basis of payments made and not payments to be made. If payments to be made were to be comprehended within the reference, the reference would cover the entire claim for specific performance, something which was expressly given up; (iv) The award will show that the arbitrator has decreed the entire claim for specific performance and it is impossible to effect a severance of the declaration for specific performance from the directions consequentially given for specific performance. In fact, even a perusal of the award will show that according to the Arbitrator the ingredients in a case for specific performance were established.
10. On the other hand, it has been urged on behalf of the first respondent that Clause (b) of the share purchase agreement contemplated the mode of payment and the balance of the purchase price was required to be paid out of the 50% share of the first respondent by the sale of the area of commercial space in the constructed area. The submission was that if that is the only mode for the payment of the balance, then the entitlement of the first respondent cannot be restricted only to payments which were actually made. In the circumstances, it was submitted that insofar as the agreement contemplates only one mode for the payment of the balance and the occasion had not arisen for the payment of the balance, the reference could not be restricted to the entitlement of the first respondent to shares on the basis of payments made. It was urged that the agreement constitutes a business document which must be considered fairly in accordance with the terms of the agreement.
11. Counsel appearing for the first respondent urged that the declaration for specific performance that has been granted by the learned arbitrator in Clause (i) of the operative directions does not add anything further to the directions which were issued in Clauses (ii), (iii) and (iv) of the Award. Clause (i) of the Award, it is urged, is merely a declaration and is purely incidental to Clauses (ii), (iii) and (iv). On the other hand, it was submitted that in the alternative, Clause (i) of the Award is severable and the arbitrator was within jurisdiction in awarding the claim with reference to Clauses (ii), (iii) and (iv) independently.
12. Apart from the jurisdictional challenge, it has been urged on behalf of the petitioners that even if the first respondent was entitled to specific performance of the agreement, the agreement did not contemplate giving the first respondent constructed space. The contention was that the agreement only contemplated the allotment of shares. Moreover, it was submitted that the company itself was not a party to the share purchase agreement and could not be bound by a direction for the allotment of constructed space in the property which belongs to the company. The challenge on merits was sought to be repelled on behalf of the respondents by submitting that the terms of reference contemplate a determination on their entitlement to space since the entitlement to space flows out of the entitlement to shares and the sale price was to be paid out of the sale of the constructed area. The Arbitral Award, it was urged, construed the transaction and the agreement and arrived at the conclusion that parties did not merely treat the agreement as an agreement only for the sale of shares but the sale of shares translated into the allotment of constructed space in the actual construction. Finally, the first respondent has contested the submission that it was impossible to handover the constructed space and it was urged that the executability of the award is an issue which is completely independent of the legality of the award in a proceeding under Section 34.
13. In considering the rival submissions which have been urged on behalf of the learned Counsel, it would be necessary to emphasise that the proceedings before the Court which ultimately culminated in a reference to arbitration arose out of a suit for specific performance instituted by the first respondent. At this stage, it would be necessary to note that in the suit which was instituted before this Court originally, the specific contention of the first respondent was that the payment of the balance consideration of Rs. 4.25 Crores was only one of the modes contemplated by the agreement for the payment of the balance and it was not the only mode. The averments in that regard are to be found in paragraphs 3 and 15 of the plaint, from which it would be instructive to extract the relevant portions:
In view thereof, the parties had intended as a mode of payment that the balance consideration of Rs. 4.25 crores under the agreement would be paid out of the profit or share coming to the plaintiffs as the intended holders of the 50% share capital of the company. However, the plaintiffs say and submit that the mode of payment of the balance consideration as set out in Clause 2 of the said agreement was only one of the modes by which payment of the balance consideration for the shares was to be made by the plaintiffs to defendant Nos. 1, 2 and 3. The plaintiffs say and submit that it was not the only mode prescribed for payment. The fundamental provision and subject-matter of the agreement was/is the sale and transfer of 12250 shares by defendant Nos. 1, 2 and 3 and the payment of consideration therefore by the plaintiffs. The plaintiffs say and submit that on a true and proper interpretation of the agreement, it was/is open to the plaintiffs to make payment in any mode, even otherwise than out of the sale proceeds of development of the 4th defendant's property.
The plaintiffs say and submit that the said agreement is valid, subsisting and binding on defendant Nos. 1, 2 and 3. The said agreement is not void or illegal for the reasons alleged or otherwise or at all. Without prejudice to the aforesaid and in any event the plaintiffs say and submit that the agreement only specified a mode of payment. The plaintiffs submit that on a true and proper construction of the agreement that is not the only mode of payment of consideration to defendant Nos. 1, 2 and 3. The plaintiffs submit that consideration could be paid and can be paid in any other manner or mode that the plaintiffs have always been and are still ready and willing to do. The plaintiffs say and submit that the agreement Exhibit 'A' hereto is valid, subsisting and binding on defendant Nos. 1, 2 and 3. The said Agreement is in respect of shares of a private limited company which are not generally/easily saleable or available in the market. Also, subject-matter of the Agreement is of special value and interest to the plaintiffs. The damage and loss that may be caused to the plaintiffs by reason of non-performance of the agreement by defendant Nos. 1, 2 and 3 cannot be ascertained in money and in any event monetary compensation for breach of the Agreement by defendant Nos. 1, 2 and 3 will not afford adequate compensation or relief to the plaintiffs. The plaintiffs therefore submit that they are entitled to have the agreement specifically enforced against defendant Nos. 1, 2 and 3.
14. During the pendency of the suit, when a Motion for interim relief was taken out, parties arrived at Consent Terms before a learned Single Judge of this Court. The Consent Terms specifically record that in view of the agreement to refer the disputes to a sole arbitrator, the first respondent would withdraw the suit for specific performance:
In view of the above agreement, Cherish Investments Pvt. Ltd. will withdraw the suit with no order as to costs.
15. The terms of reference in the first instance expressly stipulate that the scope of the arbitration 'will be limited' and insofar as is material provided as follows:
The scope of the arbitration will be limited as follows:Viz. to determine as to how much shareholding Cherish is entitled to (if any) in Regency on account of payments made by Cherish to the Shareholders of Regency under the agreement of July, 1996. The arbitrator will also decide the issue as to how much space Cherish would be entitled to in the proposed construction of the site on the basis of the shareholding that they are entitled to (if any) determined by this arbitration process. Only the matters incidental to above two issues will fall within the scope of arbitration.
16. Parties were clearly therefore conscious of the fact that there was a wider claim for specific performance of the entire agreement dated 28th July, 1996. The suit for specific performance was, however, to stand withdrawn and the terms of reference to arbitration were to be limited to (i) a determination of how much shareholding the first respondent was entitled to (if any) on account of payments made by the first respondent to the shareholders of the company under the agreement; (ii) A determination of how much space the first respondent would be entitled to in the proposed construction on the site on the basis of the shareholding to which they were held to be entitled by the arbitration process. Matters only incidental to the above issues were to fall within the scope of the arbitration. The Arbitral Award which resulted upon the reference to arbitration was set aside by consent when a challenge came up before this Court on 10th February, 2005. Once again, the reference was made by the consent of parties. The terms of reference once again spelt out that the jurisdiction of the arbitrator was (i) To determine as to how much shareholding the first respondent was entitled to, if any, in the company on account of payments made by the first respondent to the shareholders under the agreement of 28th July, 1996 and (ii) To determine as to how much space the first respondent would be entitled to in the proposed construction on the site on the basis of the shareholding determined in the arbitral process. Once again there was a reiteration that only matters incidental to the above issues would fall within the scope of the arbitration. Before the learned arbitrator the specific defence of the petitioners was that the first respondent was not entitled to specific performance of the entire agreement and as noted earlier the defence was taken up in paragraphs 1, 22 and 26 of the written statement. The learned arbitrator did not deal with this defence at all and there is no adjudication whatsoever on the defence that the scope of the reference was limited to payments made; the expression 'payments made' meaning those payments which had been made as on the date of the reference to arbitration.
17. In ground F of the petition, the point has been specifically pleaded that the submission to the effect that the claim for specific performance did not fall within the scope of the reference and was not within jurisdiction was raised in the pleadings and evidence and was urged during the course of the hearing before the arbitrator. The ground is to the following effect:
F. The above mentioned submissions to the effect that the claim for specific performance of the agreement did not fall within the scope of the reference and that it was not within the learned arbitrator's jurisdiction to adjudicate on the same, were specifically raised in the petitioner and 3rd respondent's pleadings and the evidence of the petitioner recorded by the learned arbitrator. They were also made in detail during the oral arguments on behalf of the petitioner and the 3rd respondent. However, the learned Arbitrator has not dealt with, and has completely ignored the same in the award. It is submitted that the said award, apart from being without/beyond the jurisdiction of the learned arbitrator, is also patently illegal and untenable as it does not deal with or take into account the submissions of the petitioner on this vital issue.
18. The reply to this ground contains no traverse of the principal submission that such a defence was pleaded, raised and urged in the course of the oral submissions before the learned arbitrator. For convenience of reference it would be appropriate to extract the reply to ground F of the arbitration petition.:
With reference to ground V of the petition, I deny that respondent Nos. 1 and 2 herein i.e. the claimants in the arbitration had prayed for specific performance of the Share Purchase Agreement dated 28th July, 1996. This is evident from the perusal of the prayers set out in the Statement of Claim. I deny that the learned arbitrator had not dealt with or had completely ignored any questions raised by the petitioners in the said award. I deny that the award is without scope or beyond the jurisdiction of the learned arbitrator or is patently illegal or untenable or it does not deal with or take into account the submissions by petitioners on any issues as alleged.
19. The jurisdiction of an arbitrator is structured by the terms of reference. An arbitrator, it is trite law, has an authority and jurisdiction which is traceable to the agreement of contracting parties. The jurisdiction of the arbitrator is limited by the parameters to which parties have agreed in the terms of reference. An arbitrator who transgresses the limitations upon his jurisdiction acts outside the fold of his authority. Such an award is consequently liable to be set aside. In the present case, the course of events clearly show that the suit for specific performance as originally filed, was withdrawn and the reference to arbitration was limited to the two issues spelt out in the terms of reference. When the first Arbitral Award was set aside by consent and a fresh reference to arbitration was made on the agreement of parties, the jurisdiction of the arbitrator was circumscribed by the same two issues which had been referred to arbitration in the earlier proceedings. There was no reference to arbitration of the wider claim for specific performance. If the parties were to intend to refer the wider claim of specific performance, there was indeed no reason not to include it in the terms of reference. The reference contemplates a determination by the arbitrator of the entitlement of the first respondent, if any, to the shares on the basis of 'payments made'. Counsel appearing for the first respondent has sought to submit that the reference to payments made 'under the agreement' would include the allotment of shares on the basis of payments which were yet to be made under the agreement. Such a construction would run contrary to the plain language used by the parties in the terms of reference. Payments made would refer to payments already made. Comprehending payments which would be made in the future would result in the revival of the wider claim for specific performance which was expressly given up by the withdrawal of the suit and obliterate the confining of the terms of reference to the two specific issues that were referred to arbitration.
19-A. But it was urged on behalf of the first respondent that the payment of the balance of Rs. 4.25 crores was to be effected by the sale of 50% of the constructed space that would fall within the share of the first respondent and consequently there was no reason to restrict the jurisdiction of the arbitrator to the entitlement of the first respondent to shares and space on the basis of payments already made. It was urged that the condition precedent to the making of the balance payment had still to arise. This submission cannot be accepted because that is indeed not the interpretation which was placed by the first respondent itself on the terms of reference. It must be noted that the case of the first respondent in the suit as originally filed was to the effect that the amount which was spelt out in Clause (2)(b) of the agreement was only one of the modes for effecting payment. The relevant averments in that regard which are contained in paragraphs 3 and 15 of the Plaint have already been extracted earlier. In the statement of claim which was filed before the learned arbitrator, the same contention was reiterated in paragraph 8 which reads as follows:
In view thereof, the parties had intended as a mode of payment that the balance consideration of Rs. 4.25 crores under the Agreement would be paid out of the profit or share coming to claimant No. 1 as the intended/ beneficial holder of the 50% share capital of the respondent No. 4 company. The claimants say and submit that the mode of payment of the balance consideration as set out in Clause 2 of the said Agreement was only one of the modes by which payment of the balance consideration for the shares was to be made by claimant No. 1 to respondent Nos. 1 to 3. The claimants say and submit that it was not the only mode prescribed for payment. The fundamental provision and subject-matter of the Agreement was/is the sale and transfer of 50% share in the land at Sahar owned by respondent No. 4 through the route of transfer of shares by respondent Nos. 1 to 3 and the payment of consideration therefore by claimant No. 1. The claimants say and submit that on a true and proper interpretation of the Agreement, it was/is open to claimant No. 1 to make payment in any mode, even otherwise than out of the sale proceeds of development of the respondent No. 4's property.
The submission therefore cannot be accepted in view of the consistent position of the first respondent both in the pleadings in the suit and before the learned arbitrator.
20. The arbitrator has decreed the entire claim for specific performance by holding that the first respondent claimant is entitled to specific performance of the contract dated 28th July, 1996. The directions contained in the Arbitral Award insofar as they are material are to the following effect:
i) It is declared that the claimants are entitled to specific performance of the contract dated 28th July, 1996.
ii) It is declared that the claimants are entitled to 50% of the shares in respondent No. 4 company under the agreement of 28th July, 1996; it is ordered accordingly.
iii) The respondents are ordered to transfer 50% of the shares of respondent No. 4 to the claimants.
iv) The respondents are ordered to hand over 28500 sq. ft. of the constructed property in question to the claimants together with 25% of the basement car parking area.
21. On behalf of the first respondent it has been urged that the declaration granting specific performance in Clause (i) extracted hereinabove is only incidental to the declaration and the directions issued by the Arbitrator in Clauses (ii), (iii) and (iv). Hence, it was urged that the declaration in Clause (i) can be sustained, even if this Court comes to the conclusion that the claim for specific performance lay outside the terms of reference, as an incidental matter upon which the arbitrator had jurisdiction to adjudicate. The submission cannot be accepted. The essence and substance of the Arbitral Award is a decree for specific performance. The claim for specific performance has not been regarded as an incidental issue but is the principal basis and foundation of the award. That indeed is evident from the findings of the learned arbitrator in paragraphs 18 and 27 of the award which read as follows:
There is no material before me to indicate that the agreement of 28th of July, 1996 was ever validly terminated. The claimants have been throughout been ready and willing to perform their part of the agreement as provided therein. The respondents have wrongfully repudiated the same.
The claimants have been throughout ready and willing to perform their part of the agreement of 28th of July, 1996. They have paid the amounts which they were required to pay in terms of the contract. They are required to pay the balance amount of Rs. 4,25,00,000/ with interest as stipulated from out of the first sale proceeds of 50% of the constructed property coming to their share. They have expressed their readiness and willingness to make the balance payment including the stipulated interest in terms of the contract. In the alternative they are ready and willing to pay the balance amount with interest as stipulated. The respondents have at no point of time called upon the claimants to pay the said amount, and have wrongfully repudiated the contract after receiving substantial amounts under it. The claimants are therefore entitled to specific performance of the contract of 28th July, 1996.
The declaration in regard to the entitlement of the first respondent to specific performance forms the basis and foundation of the award. Once it is held that the arbitrator had no jurisdiction to award specific performance of the contract, the award is outside jurisdiction.
22. In the alternative, it was urged on behalf of the first respondent that even if the declaration in regard to the grant of specific performance were to be regarded as outside the jurisdiction of the arbitrator, it is sever-able and the directions which have been issued in Clauses (ii), (iii) and (iv) can be independently sustained.
23. Now, in view of the judgment of the Division Bench of this Court in (Pushpa P. Mulchandani v. Admiral Radhakrishnan Tahiliani (Retd.) Appeal 981 of 2001 in Arbitration Petition 432 of 1998 decided on 4th October, 2007 by a Division Bench of this Court consisting of Hon'ble Mr. Justice D.K. Deshmukh and Hon'ble Mr. Justice J.K. Bhatia), it has been settled that a part of an Arbitral Award can be set aside under the proviso to Clause (iv) of Sub-section (2) of Section 34 of the Arbitration and Conciliation Act where a Court finds that a part of the award made by the arbitrator deals with a dispute not contemplated by or not falling within the terms of submission to the arbitrator, or where it contains a decision on matters beyond the scope of the submission to arbitration and the decision on matters submitted to arbitration can be severed from the rest. That, the Division Bench held is the only contingency under which a part of the award can be set aside.
24. The Division Bench has held thus:
Perusal of Sub-section (2) shows that power is conferred on the Court only to set aside an Award. Perusal of proviso to Clause (iv) of Sub-section (2) of Section 34 shows that in case the Court finds that part of the award made by the learned arbitrator deals with dispute not contemplated by or not falling within the terms for submission to arbitrator, or it contains decision on matters beyond the scope of submission to arbitration, if the decision on matters submitted to the arbitration can be separated from those not so submitted, then only that part of the Arbitral Award can be set aside. Thus, power to set aside only part of the award is conferred on Court by Section 34 only in one contingency which is to be found in Clause (iv) of Sub-section (2) of Section 34 of the Act.
25. In the present case, the issue of sever-ability does not arise at all for the reason that the claim of the first respondent has been decreed on the foundation that the claim was for specific performance and that the first respondent was entitled to specific performance. The declaration in Clause (i) of the Award is the foundation and the basis of the award. Clauses (ii), (iii) and (iv) of the Award constitute directions to implement the declaration for specific performance. A severance of the declaration from the directions for specific performance is impermissible when both form the foundation of the claim and of the Arbitral Award.
26. In these circumstances, the conclusion which results is that the Arbitral Award is beyond the terms of the reference to arbitration. The learned Arbitrator has exceeded the jurisdiction which was conferred by the terms of reference as recorded in the order passed by this Court by consent on 10th February, 2005. The award is, in the circumstances, unsustainable and will have to be quashed and set aside. In view of the findings which have been arrived at on the question of jurisdiction, it is not necessary for the Court to entertain the challenge to the merits of the award. Rule shall according stand absolute in terms of prayer Clause (a) of both the petitions.
27. The petitioners shall be entitled to costs.
In the view of the disposal of the Arbitration Petitions, the interim orders shall stand vacated. Stay refused.