Arbitrator Can't Make Independent Lease Termination Right Conditional On Default: Karnataka High Court

The Karnataka High Court on 16 September held that an arbitrator cannot interpret a contract in a manner that nullifies an independent right of termination expressly provided under its terms.

A Division Bench comprising Justices D.K. Singh and H. Shanthi Bhushan dismissed an appeal filed by Padma, the landlord's legal representative, and upheld the Bengaluru Commercial Court's decision to partly set aside an arbitral award against Capgemini Technology Services India Limited. It observed:

“Although the learned Sole Arbitrator was undoubtedly competent to interpret the terms of the Lease Deed, the interpretation adopted could not have the effect of effacing an express contractual provision.”

The dispute arose from a commercial property in Bengaluru leased by T.S. Gomathi, since deceased and represented by Padma, to Capgemini Technology Services India Limited, formerly known as iGate Global Solutions Limited.

The lease commenced on 1 August 2019, and the parties executed a registered Lease Deed on 22 April 2021 for a three-year term ending on 31 July 2022.

Capgemini paid a refundable security deposit of Rs. 1,60,04,400. Clause 21.1 permitted either party to terminate the lease by giving six months' written notice, while Clauses 21.2 to 21.4 covered specified events or defaults.

On 1 May 2021, after the one-year lock-in period expired, Capgemini issued a notice terminating the lease with effect from 31 October 2021. It paid rent until that date and sought a refund of its security deposit, which remained unpaid despite repeated demands.

Under a settlement agreement dated 17 June 2022, the landlord agreed to refund the deposit by 8 July 2022. When the landlord failed to pay, Capgemini invoked arbitration and sought Rs. 1.60 crore with interest at 18% per annum.

On 4 September 2024, the sole arbitrator declared the termination notice invalid because Capgemini had not satisfied the conditions under Clauses 21.2 to 21.4. The arbitrator consequently imposed approximately Rs. 1.14 crore in rent for November 2021 to June 2022 and Rs. 6.10 lakh in interest.

After adjusting these amounts against the security deposit, the arbitrator directed the landlord to refund Rs. 39.33 lakh with interest at 18% per annum from 1 August 2022. Capgemini challenged the deductions under Section 34 of the Arbitration and Conciliation Act, 1996.

On 25 April 2026, the Bengaluru Commercial Court partly set aside the award, holding that Clause 21.1 independently permitted termination through six months' written notice without requiring compliance with Clauses 21.2 to 21.4. It consequently set aside the rent and interest liabilities.

Padma challenged this decision before the High Court under Section 37 of the Act, arguing that the Commercial Court had exceeded its jurisdiction by reinterpreting the lease and separating interconnected findings. Capgemini maintained that the arbitrator's interpretation had nullified its independent contractual right to terminate the lease.

The Court agreed with Capgemini, holding that Clause 21.1 independently permitted termination through notice, while Clauses 21.2 to 21.4 governed specified events or defaults. It observed:

“There is nothing in the language of Clause 21.1 which makes the exercise of the right thereunder conditional upon the existence of any of the circumstances contemplated under Clauses 21.2 to 21.4.”

The Bench held that requiring Capgemini to establish separate grounds of default would render Clause 21.1 ineffective. It described the arbitrator's interpretation as an unreasonable construction of the Lease Deed, amounting to patent illegality.

Further that once the finding invalidating the termination notice was set aside, the consequential rent and interest liabilities could not survive. It upheld the Commercial Court's decision to set aside the Rs. 1.14 crore rent liability and Rs. 6.10 lakh interest while preserving Capgemini's entitlement to a refund of the security deposit with applicable interest.

Dismissing Padma's appeal on 16 September 2026, the judges directed that Rs. 54,67,179.97 already deposited be credited towards the amount payable to Capgemini under the modified award. It imposed no costs.

Accordingly, the High Court upheld the partial setting aside of the arbitral award, preserving Capgemini's right to a refund of its security deposit with interest.

Appearances for appellant (Smt. Padma): Advocate Rakshitha D.J.

Appearances for respondent (Capgemini Technology Services India Limited): Advocate Pradeep Nayak, for Advocates Sanjana H. and Pranathi S.