Bombay High Court Sets Aside ₹1.17-Crore Arbitral Award Enforcing Off-Book Cash Claims

The Bombay High Court has set aside an arbitral award directing a real estate partnership to pay over Rs 1.17 crore to a former partner, holding that the award sought to enforce rights allegedly arising from illegal and undocumented cash transactions.

Allowing the challenge, Justice Somasekhar Sundaresan held that the arbitral tribunal had enforced rights flowing from a partnership arrangement that was shown to operate entirely outside lawful accounting.

The court warned that if such transactions were allowed to be enforced, it would collapse the distinction between legal contracts and illegal bargains.

"If such transactions, that are blatantly contrary to the rule of law, were to be permitted to be enforced by the legal system, there would be no difference between enforcement of a valid and legal contract and enforcement of bargains that are evidently in direct conflict with law", the court observed. 

The court found that the arbitral award rested on a legally impermissible foundation. Examining the audio recordings relied upon by the tribunal, the Court held that they did not establish any specific cash investment and merely revealed widespread off-the-books dealings.

“It is impossible to connect the dots in any reasonable manner to solve the puzzle of what investment had been made.,” the Court said. It held that treating such material as proof of a Rs 48 lakh cash contribution amounted to an “impossible view”.

The Court observed that the tribunal's approach appeared to be that once the transcripts showed some evidence of cash dealings among the parties, it was plausible to conclude that the respondent had invested Rs 48 lakh in cash.

“To my mind, this is where perversity strikes at the heart of the findings in the Impugned Award” the Court held. It further noted that the transcript could “be reasonably classified as gibberish” and did nothing beyond showing that the parties were engaged in rampant cash transactions.

The dispute arose from Jinam Arihant Realtors, a partnership firm constituted in 2011 for redevelopment of a property in Goregaon, in which Neha Yogesh Sachde held a 15% share. In December 2015, a memorandum of understanding was executed under which she agreed to retire from the firm for ₹1.17 crore. While Rs 46.50 lakh was paid, the balance remained unpaid.

Sachde later contended that since the full amount was not paid, her retirement never took effect and that the partnership continued until its dissolution in September 2019. She sought accounts and invoked arbitration.

In an award dated April 29, 2023, the arbitral tribunal ruled in her favour. The tribunal accepted the ex-partner's claim that she had invested Rs 60 lakhs in the partnership, of which Rs 48 lakhs was made in cash. It subsequently awarded her Rs 1.17 crore with 9% interest.

While agreeing with the claim, it relied mainly on incoherent audio recordings allegedly validating the cash investment.

Challenging the award under Section 34 of the Arbitration and Conciliation Act, the firm and its partners contended that the tribunal had placed reliance on defective electronic evidence, allowed the recall of a witness to plug gaps in the claimant's case, and fastened liability on the basis of an MOU that had, according to them, ceased to operate.

They denied any Rs 48 lakh cash investment and contended that Sachde had already withdrawn more than her contribution.

Defending the award, Sachde argued that the tribunal was entitled to assess the evidence before it and that the recordings demonstrated cash dealings between the parties. She also relied on the MOU fixing her entitlement at Rs 1.17 crore.

Rejecting these submissions, the High Court held that enforcing such claims would amount to the court actively assisting illegal bargains. It observed that “enforcement of justice in blatantly illegal ecosystem of transactions, is not something that would pass muster on the touchstone of an arbitral outcome having to be in consonance with the most basic notions of justice and morality”.

The court held that the award was perverse and contrary to public policy and set it aside in its entirety. Taking into account the conduct of both sides, it declined to award costs.

Appearances:

For the Petitioners: Mr. Atul G. Damle, Senior Counsel, instructed by Ashish J. Dubey. 

For the Respondent: Mr. Shanay Shah along with Kumar Kothari, instructed by Vohuman Legal.