2009 (7) TMI 1395 - HC - Indian Laws

Arbitral Award Modified: Respondents Liable as Guarantors; Arbitrator Misinterpreted Contract Act, Violated Public Policy.

Poysha Oxygen Pvt. Ltd. Versus Ashwini Suri and Or

The court modified the arbitral award, holding the respondents liable as guarantors for amounts due from M/s Ganga Automobiles Ltd. The arbitrator's ... - Issues Involved:1. Validity of the Inter Corporate Deposit Agreement.2. Validity of the deeds of personal and corporate guarantees.3. Consideration for the contracts of guarantee.4. Arbitrator's interpretation and application of Section 127 of the Contract Act.5. Public policy and fairness of the arbitral award.6. Judicial intervention and modification of the arbitral award.Detailed Analysis:1. Validity of the Inter Corporate Deposit Agreement:The arbitrator held that the Inter Corporate Deposit Agreement executed by M/s Ganga Automobiles Ltd. in favor of the petitioners was for consideration. The arbitrator found that as of 14th February 1997, M/s Ganga Automobiles Ltd. owed Rs. 2.70 crores and Rs. 1 crore respectively to the petitioners based on previous agreements. The arbitrator concluded that the past existing liability constituted valid consideration for the new agreements.2. Validity of the Deeds of Personal and Corporate Guarantees:The arbitrator determined that the deeds of guarantee executed by respondent No. 2 Sh. G. Sagar Suri and respondent No. 3 M/s Delhi Auto were void. The arbitrator reasoned that these respondents could not be presumed to be aware that the transaction of 14th February 1997 was based on past existing liability of M/s Ganga Automobiles Ltd. The arbitrator also referenced Sections 142 and 143 of the Contract Act, indicating that any guarantee obtained by means of misrepresentation is invalid.3. Consideration for the Contracts of Guarantee:The arbitrator applied illustration (c) of Section 127 of the Contract Act, which states that past consideration is not sufficient for a contract of guarantee. However, the court found this interpretation incorrect based on various judicial precedents. The court held that a past consideration is sufficient for a contract of guarantee, referencing judgments from multiple High Courts and legal commentaries.4. Arbitrator's Interpretation and Application of Section 127 of the Contract Act:The court reviewed several judgments and legal texts that contradicted the arbitrator's interpretation of illustration (c) to Section 127. The court noted that the language of Section 127 is wide enough to include past transactions as valid consideration. The court found that the arbitrator's reliance on illustration (c) was misplaced and contrary to established legal principles.5. Public Policy and Fairness of the Arbitral Award:The court found the award to be contrary to public policy because it left the petitioners with a paper decree against a wound-up company, while dismissing claims against the respondents who were guarantors and from whom recovery could be made. The court held that the award was unfair and unreasonable, as it deprived the petitioners of the benefit of the guarantees and protected the respondents to the detriment of the petitioners.6. Judicial Intervention and Modification of the Arbitral Award:The court held that it has the power to modify the arbitral award, even though Section 34 of the Arbitration Act, 1996, does not expressly provide for such power. The court reasoned that modification is necessary to serve the purpose of expeditious and fair resolution of disputes. The court set aside the award in so far as it disallowed the claims against respondents Sh. G. Sagar Suri and M/s Delhi Auto, and partially against respondent Sh. Ashwini Suri.Conclusion:The court concluded that the arbitrator's award was based on an incorrect interpretation of legal principles and was contrary to public policy. The court modified the award to hold the respondents liable as guarantors for the amounts due from M/s Ganga Automobiles Ltd. The petitions were allowed with costs awarded to the petitioners.