Even Though Evidence Act Is Not Applicable To Arbitration, Tribunal Must Follow Its Core Principles: Madras High Court

The Madras High Court has recently observed that although arbitral tribunals are not bound by the Evidence Act, they must still follow its foundational principles when assessing evidence to avoid judicial scrutiny.

A single bench of Justice N Anand Venkatesh stated that “the fundamental principles of the Evidence Act which provides the basis for dealing with the case must be satisfied failing which the Arbitral Award will infract the fundamental policy of Indian law. It can also lead to perverse finding and suffer from patent illegality.”

The court made these observations while examining an award passed by a sole arbitrator who previously served as Vice Chairman of the Company Law Board in a property dispute between two parties in Chennai.

Justice Venkatesh observed that the arbitrator ignored basic evidentiary principles by accepting oral claims that contradicted a registered sale agreement, by overlooking the burden of proof that lay on the sellers, and by relying on circumstances that were irrelevant or legally inadmissible.

It also found that the arbitrator had assessed judicial precedents before analysing the facts, remarking that “It should have been the other way round where the facts must be first analsyed and to support the findings, a case law on similar facts or which brings out the principle of law can be relied upon. This process adopted by the Sole Arbitrator has virtually rendered many of the findings perverse since the Arbitrator was attempting to read the case laws into the facts of the present case.”.

The dispute arose out of a 2018 registered sale agreement for a 2,400 square feet plot in Virugambakkam. H Sunil Kumar had paid Rs 50 lakh out of the total sale consideration of Rs 64.32 lakh to M Deepak Kumar Samdariya and B Rasheetha, with the remaining amount payable at the time of execution of the final sale deed. When the sellers allegedly refused to complete the transaction, Kumar invoked the arbitration clause and sought execution of the sale or a refund of the amount already paid.

The arbitrator rejected the claim for specific performance. He accepted the sellers' claim that the registered agreement had not been meant to operate as a sale contract at all and had instead been executed only as security for a hand loan. Although the sellers asserted that they had repaid Rs 42 lakh in cash, the arbitrator found no proof of repayment. He nevertheless concluded that the underlying transaction was a loan and directed Samdariya and Rasheetha to repay Rs 50 lakh to Kumar with interest.

Before the High Court, Kumar argued that the arbitrator wrongly accepted the sellers' claim that the sale agreement was never intended to operate as a sale contract and had been executed only as security for a hand loan. The sellers asserted that they had no intention of selling the property and claimed to have repaid Rs 42 lakh in cash. Justice Venkatesh noted that only Rasheetha testified and that Samdariya, who was said to have borrowed the money and who was central to the alleged loan arrangement, chose not to give evidence.

The court held that “the very basis of the defence taken by the respondents… falls to the ground” when the person who claims to have borrowed the money does not enter the witness box.

The court found that the arbitrator relied on irrelevant material, accepted oral assertions that were legally barred from contradicting a registered sale agreement and reached contradictory findings about both the nature of the transaction and Kumar's readiness and willingness.

The court recorded that the arbitrator "has taken into consideration irrelevant and immaterial statements made and has presumed that Ex.C1 is not a sale agreement and it is only a security given towards the loan transaction”. Calling the award “unintelligible” and marked by “patent illegality”, the court held that the errors went to the root of the decision and could not be separated from any valid portion.

The High Court therefore annulled the award in full and asked the parties to resort to arbitration afresh and also directed the defendants to pay Rs 5 lakh cost to Kumar. 

Case Title: H.Sunil Kumar vs M Deepak Kumar Samdariya and Anr

Citation: 2025 LiveLaw (Mad) 451

Case Number: Arbitration Original Petition (Com.Div) No.506 of 2025

For Petitioner:  Advocate H.Siddarth

For Respondent: R P Vijayakrishnan

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