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

The Court passed order dismissing a plea 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 to be refunded after the two agreements expired on June 30, 2012. The Israel Government had also agreed to pay monthly charges of nearly ₹13 lakh under these agreements.

The Israeli Government on contrary continued occupying the rented office space even after the expiry of the contact. The rental services were extended later by a subsequent agreement. The petitioner contended that before the extension, the Israeli Government owed money for possessing the office space for 5 months.

As a reaction to this, the petitioner withheld the refundable security deposit making claims that the Israel Government was yet to pay charges for the additional 5 months that it occupied the office space.

It claimed that it was the legal obligation of the Israel Government to pay compensation of ₹58,500 per day, in addition to the business center charges.

The Arbitral Award

Court-appointed Advocate Vishal Kanade as the only arbitrator to decide the dispute, following an application made under Section 9 of the Arbitration Act.

Last year only he passed an award rejecting the plea filed by the firm to withhold the security deposit. The Arbitrator at the same time also rejected the firm's claim that the Israel Government owed nearly ₹11.58 crore for using the office space for the period between July and Nov 2012. It was rejected on the ground that it was filed belatedly and thus barred by limitation.

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

Learned Counsel of the petitioner firm, argued that arbitrator can't be appointed in this case. 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 didn't 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 ₹11.58 crore losses incurred by the petitioner.

Learned Counsel of the Israel Government 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 didn't raise any question about the said appointment at the time.

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. 

He further submitted that if the Court concludes that part of the award was contrary to the terms of the agreement, it can reduce the rate of interest from 12% to the prevailing rate of interest. As regards the counterclaim for setting off the security deposit amount, Saraf contended that the same was barred by limitation.

After taking up arguments of both the Counsels, 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 ₹1.17 crore since the respondent had handed over the possession before the due date (as per the extension agreement).

"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."

The Court in furtherance took note of contractual provisions conferring Courts in Mumbai exclusive jurisdictions over disputes arising between the two parties.

Justice Dhanuka also found merit in the arbitrator's finding that the counterclaim made for setting off the security deposit owed by the petitioner was barred by limitation.

The Court thus dismissed the petitioner's plea and upheld the arbitral order directing the refund of the ₹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 the security deposit is made.

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