Gujarat High Court Flags Arbitrator Bias, Confirms Setting Aside Arbitral Award On Grounds Of Patent Illegality

The Gujarat High Court division bench, comprising Chief Justice Sunita Agarwal and Justice Pranav Trivedi, has held that agreements for the sale of agricultural land to non-agriculturists are invalid under Section 63 of the Gujarat Tenancy Act unless necessary permissions from the Collector are obtained. The court observed that the agreement, executed through a Power of Attorney, was a contingent contract, conditional on securing this sanction. The bench noted that specific performance could still be decreed. However, if such permissions were not obtained, the contract would be rendered unenforceable. The court also addressed the apprehension of bias of the arbitrator, holding that the arbitrator's prior association with a key stakeholder in the claimant company raised 'justifiable doubts' regarding independence and impartiality.Background Facts:Sentinel Properties Private Limited (the claimant, herein, the appellant) is a major developer engaged in housing and commercial projects across India. The claimant had entered into 16 agreements to purchase lands from four different Respondents between 2007 and 2008. The respondents were required to convert the properties from agricultural to non-agricultural lands, which had not been done to date. The respondents executed in the form of agreements to sell, an irrevocable Power of Attorney (PoA), appointing the claimant as the true and lawful person to transfer the said property. The dispute arose when the respondents issued public notices on 30.06.2012 and 29.06.2012 to cancel the irrevocable PoA. An application under Section 9 of the Arbitration and Conciliation Act, 1996, was then moved by the claimants and before the civil court at Viramgam.Procedural History:Arbitration ProceedingsBy the award dated 24.10.2016, the learned sole arbitrator ruled in favour of the claimant, declaring that the PoA was irrevocable and could not be revoked by the respondents. The award directed the appellant to deposit a sum of Rs. 3,63,825 in a nationalized bank as part of the remaining sale consideration for the land. The respondents were ordered to apply for the conversion of the land from agricultural to non-agricultural use once the claimant had made the required deposit. The arbitral award also included a provision for the respondents to execute a registered sale deed after receiving the necessary permissions for land conversion. In the event of non-compliance, the parties were allowed to take legal action to enforce the award. The respondents were also directed to pay Rs. 14,10,000, including the arbitrator's fees, administrative costs, and legal expenses.The claimants had filed an application under Section 12(2) of the Arbitration Act, challenging the competency of the arbitrator. The arbitrator disposed of this application in a common order dated 20.10.2016. The claimants had contended that the sole arbitrator, Justice Soni, had a close association with Mr. Mahendra G. Lodha, a director in a company which held 51% stake in the claimant company. It was alleged that Mr. Lodha's involvement raised justifiable doubts about the arbitrator's independence and impartiality. It was revealed that Mr. Lodha was a trustee of the "Justice on Trial" Trust, alongside the arbitrator, and they shared a personal relationship.The arbitrator, however, dismissed the application, recording that he had not been in contact with Mr. Lodha since his resignation from the trust in 2010. The arbitrator also stated that the respondent, Mr. Ajay Patel, was aware of this association as early as 2014, when both attended a family function organized by Mr. Lodha, yet failed to raise the issue of bias until two years later.The arbitrator held that the PoA, executed as part performance, was valid and irrevocable. More than 50% of the sale consideration had been paid. The court thus found that the contract was not affected by Sections 43 and 63 of the Gujarat Tenancy Act, 1948.The Appellant then filed the appeal under Section 37 of the Arbitration and Conciliation Act, 1996, challenging the award dated 24.10.2016.Civil Court's JudgmentThe civil court set aside the arbitral award, finding it contrary to statutory provisions and public policy. It was held that Section 63 of the Gujarat Tenancy Act, 1948, invalidates agreements for the sale of agricultural land to non-agriculturists. The sale deed could not be executed without obtaining necessary sanctions under Sections 43 and 63 of the Gujarat Tenancy Act. Rule 36 restricts the grant of permission for the sale of agricultural land to non-agriculturists unless the conditions prescribed are met.The court further held that specific performance is an equitable remedy and cannot be enforced if it requires supervision of the court or permission of a third-party. The court may grant damages if performance becomes impossible or is prohibited by statute.It was noted that the claims were time-barred under Article 54 of the Limitation Act due to delays in filing after the ...

Gujarat High Court Flags Arbitrator Bias, Confirms Setting Aside Arbitral Award On Grounds Of Patent Illegality

Tazeen Ahmed

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