Bombay HC upholds arbitral award in favour of Government of Israel, directs city-based firm to return security deposit

Source: barandbench.com

The Bombay High Court recently upheld an arbitral award passed in favour of the Government of Israel, and directed a company in South Mumbai to refund a security deposit worth Rs. 1.17 crore paid for office space given on rent basis for the Israeli Consulate between 2009 and 2012.

Justice RD Dhanuka passed an order to this effect while dismissing a plea filed by filed by Earnest Business Services Private Limited, challenging an arbitral award passed last year,

The Israel government had deposited an interest-free refundable security deposit with the petitioner under two agreements. The deposit was refundable after the two agreements expired on June 30, 2012. The Israel government had also agreed to pay monthly charges of nearly Rs 13 lakh under these agreements.

However, even after the contracts expired in June 2012, the Israeli government continued occupying the rented office space. The rental services were extended later by a subsequent agreement. All the same, the petitioner contended that prior to the extension, the Israeli government owed money for possessing the office space for five months (i.e. July-November 2012).

In this backdrop, the petitioner withheld the refundable security deposit, claiming that the Israel Government was yet to pay charges for the additional five months that it occupied the office space. The company claimed that the Israel Government was under a legal obligation to pay compensation of Rs. 58,500 per day, in addition to the business centre charges.

The Arbitral Award

Advocate Vishal Kanade was appointed as the sole arbitrator by the Bombay High Court to decide the dispute, following an application made under Section 9 of the Arbitration Act.

In April last year, he passed an award rejecting the plea filed by the firm to withhold the security deposit. In doing so, the arbitrator also rejected the firm’s claim that the Israel Government owed nearly Rs 11.58 crore for using the office space for the period between July and November 2012. This claim was rejected on the ground that it was filed belatedly, and therefore, barred by limitation.

The arbitrator directed the firm to refund the security deposit along with interest rate of 12 per cent per annum till its payment. Further, the firm was directed to pay an arbitral fee of nearly Rs. 38.75 lakh within 120 days from the date of award, failing which it would be liable to pay an interest at the rate of 9 per cent per annum.

Submissions before the Bombay High Court

Senior Counsel Haresh Jagtiani, appearing for petitioner firm, argued that appointment of the arbitrator in this case was flawed. He submitted that since Israel is a foreign country, the arbitration between the parties becomes an International Commercial Arbitration. Therefore, Jagtiani submitted that an application for appointment of an arbitrator could be made only before the Supreme Court of India under Section 11 (9) of the Arbitration Act. In other words, it was argued that the High Court did not have the power to appoint an arbitrator in this case.

Consequently, it was his case that the appointment of the arbitrator by the High Court in the instant case was beyond the jurisdiction the High Court, in conflict with the public policy of India, and void, regardless of the consent of the parties.

On facts, Jagtiani submitted that the petitioner was entitled to set off the security deposit amount claimed by the Israel Government towards the Rs 11.58 crore losses incurred by petitioner.

Appearing for the Israel Government, advocate Birendra Saraf countered that the arbitrator was appointed by the High Court based on the consent of both the parties. It was also pointed out that the petitioner firm did not raise any question about the said appointment at the time.

Further, it was also highlighted that as per the contract between the two parties, it was expressly agreed that any dispute would be subject to the exclusive jurisdiction of Indian laws and Mumbai courts. Saraf went on to submit that if the Court concludes that part of the award was contrary to the terms of agreement, it can reduce the rate of interest from 12% to the prevailing rate of interest. As regards the counter claim for setting off the security deposit amount, Saraf contended that the same was barred by limitation.

What the Bombay High Court held

Justice Dhanuka eventually ruled in the Israel Government’s favour, finding that that the sole arbitrator had rightly allowed the claim for refund of security deposit of Rs. 1.17 crore, since the respondent had handed over the possession before the due date (as per the extension agreement).

The verdict was arrived at after the Court rejected the petitioner’s contention that the arbitrator’s appointment was void. The judge rejected this contention in view of records revealing that both parties had agreed on the appointment of the arbitrator. As noted in the judgment,

“Since there was no dispute about the name of the arbitrator between the parties, there was no requirement of filing any arbitration application under Section 11(9) of the Arbitration Act by the respondent before the Hon’ble Supreme Court.“

Further, the Court also took note of contractual provisions conferring courts in Mumbai exclusive jurisdictions over disputes arising between the two parties.

While this was the case, Justice Dhanuka also found merit in the arbitrator’s finding that the counter claim made for setting off the security deposit owed by the petitioner was barred by limitation.

In view of these observations, the Court dismissed the petitioner’s plea and upheld the arbitral order directing the refund of the Rs. 1.17 crore security deposit to the Government of Israel. However, the Court lowered the rate of interest payable from 12% to 8% per annum, from April 9, 2013, until the refund of security deposit is made.