Arbitral Tribunals Cannot Grant Equity-Based Relief Unless Authorised By Contract: Bombay High Court

The Bombay High Court has held that arbitral tribunals must decide disputes strictly in accordance with the contract and applicable law and cannot grant relief based on "notions of equity or fairness" unless the parties have expressly authorised such an approach.

Setting aside an arbitral award directing a refund of brokerage, the court held that arbitrators are not courts of law empowered to dispense equitable relief and that once transactions are held to be authorised, their contractual consequences cannot be undone on equitable considerations alone.

A single-judge bench of Justice Sandeep V. Marne made the observation while allowing a petition filed by Nirmal Bang Securities Pvt. Ltd., a registered stockbroker, which had challenged an appellate arbitral award passed under the dispute resolution framework of the National Stock Exchange.

The court was hearing a challenge under Section 34 of the Arbitration and Conciliation Act, 1996, to an appellate arbitral award that had upheld directions to refund 100% of the brokerage charged to the respondent, Shashi Mehra HUF, despite concurrently holding that the trades in question were authorised.

The dispute arose from trading activity between April and June 2019, during which high-volume trades were executed in the investor's account by a third party to whom the investor had voluntarily shared his login credentials.

The Investor Grievance Redressal Committee, the arbitral tribunal, and the appellate arbitral tribunal all held that the trades were authorised and declined to order restoration of the securities sold to cover trading losses. However, all three fora directed a refund of brokerage on the reasoning that the trades were reckless and undertaken primarily to generate brokerage.

Challenging the award, Nirmal Bang contended that once the trades were held to be authorised, the arbitral tribunal could not direct a refund of brokerage by falling back on equitable considerations, especially when there was no contractual or statutory basis for such relief.

Accepting this submission, the High Court held that Section 28(2) of the Arbitration Act permits an arbitral tribunal to decide on principles of equity only if the parties have expressly authorised it to do so. In the absence of such authorisation, the tribunal remains bound by the contract and the governing law.

"Arbitral Tribunals are not courts of law who can invoke notions of equity or fairness unless the parties confer such jurisdiction under Section 28(2)," it held

It further observed that even if regulatory or procedural lapses were established, such lapses may invite action by market regulators but cannot justify nullifying the contractual consequences of authorised transactions.

Finding that the direction to refund brokerage was founded on impermissible equitable reasoning, surmises, and conjectures, the court held the award to be perverse and set it aside.

At the same time, the court clarified that its decision would not preclude stock exchanges or regulatory authorities from initiating or continuing appropriate proceedings against Nirmal Bang Securities Pvt. Ltd. for any alleged regulatory or compliance lapses.