Companies Act / Employee Equity · F2J-C-2788
Waterfield Advisors Private Limited v. Sridhar Kurpad
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Holding (ratio)
A company cannot rely on its own failure to implement the promised equity scheme to defeat an employee's vested contractual entitlement.
Operative order (extract)
48. Hence, the following order : (i) The Arbitration Petition stands dismissed with costs.
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Complete searchable judgment text
CNR No : HCBM020121772025
2026:BHC-OS:17479
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IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
IN ITS COMMERCIAL DIVISION
COMM ARBITRATION PETITION NO. 1149 OF 2025
Waterfield Advisors Private Limited
A private limited company registered under
the provisions of Companies Act, 1956,
having its Registered Office at 142,
Maker Chambers VI, 220, Jamnalal Bajaj
Marg, Nariman Point, Mumbai – 400 021. ...Petitioner
Versus
Sridhar Kurpad
Aged 50 years, Indian Citizen
Residing at B1, Paradise Building
Vishnu Baug Society, SV Road, …Respondent
Andheri West, Mumbai – 400 058.
Mr. Sumit Rai, with Nidhi Singh, Nidhi Faganiya and Owais Khan, i/b
Vidhii Partners, for the Petitioner.
Mr. Karl Shroff, with Chirag Bhavsar and Anand Jagmalani, i/b Vis
Legis Law Practice, for the Respondent.
CORAM : N. J. JAMADAR, J.
RESERVED ON : 15th JULY 2026
PRONOUNCED ON : 5th AUGUST 2026
JUDGMENT:
1. This Petition is filed under Section 34 of the Arbitration and
Conciliation Act, 1996 (“the Act, 1996”) to set aside the Award dated
18th December 2024 passed by the Arbitral Tribunal, comprising of a
sole Arbitrator, constituted by an order dated 6 th July 2021 passed by
this Court in Commercial Arbitration Application No. 95 of 2021.
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2. The background facts leading to this Petition can be summarised
as under:
2.1 The Petitioner is a private limited company. The Petitioner is
engaged, inter alia, in the business of providing Management
Consultancy and Business Advisory Services. The Respondent joined
the Petitioner-Company as a Director Operations on 24th August 2011,
pursuant to an Appointment Letter dated 24th August 2011 issued by
the Petitioner.
2.2 By way of remuneration, the Respondent was paid an annual
salary and benefit package aggregating to Rs.21,60,000/- per annum.
The basic salary was Rs.1,80,000/- per month. In addition, the
Petitioner offered the Respondent equity shares of the company in the
ratio: 0.5% in Y1, 0.2% in Y2, 0.2% in Y3, which were to be allocated to
the Respondent in May of each year, based on the total share capital of
the company at the relevant time. The shares allocated to the
Respondent in Y1, Y2 and Y3 were to vest in the Respondent in
Y4(30%), Y5(30%) and Y6(40%) respectively, subject to the
Respondent continuing to be employed with the Petitioner. It was
further provided that the allocation of equity would be in accordance
with the Company’s policy.
2.3 The Appointment Letter also contained a clause as regards the
termination of the Respondent’s employment. The Respondent was
required to relinquish all shares vested in him, upon termination of his
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employment with the Petitioner-Company, as directed by the
Company’s policy.
2.4 On 1st March 2017, a Grant Letter came to be issued by the
Petitioner, thereby declaring the entitlement of the Respondent to
transfer in all 31,878 equity shares (“the subject shares”).
2.5 Since 4th August 2017, the Respondent remained absent without
prior notice or intimation. In the wake of correspondence that ensued,
the Respondent tendered his resignation. Vide communication dated
10th April 2018, the Petitioner accepted the resignation of the
Respondent and relieved the Respondent from the service of the
Petitioner with effect from 1st September 2017.
2.6 The Petitioner claims that, after the termination of the
employment vide letter dated 8th December 2018, the Respondent for
the first time made a demand for allotment of the subject shares.
Correspondence ensued between the parties. Eventually by a
communication dated 15th October 2020, the Petitioner informed the
Respondent that the allocation of the shares to the Respondent under
Clause 3 of the Appointment Letter dated 24th August 2011 was subject
to the Company’s internal policy and at the sole discretion of the Board
of Directors of the Company and the options granted to the
Respondent stood relinquished on account of the Respondent ceasing
to be an employee of the Petitioner. Thus, having ceased to be an
employee of the Petitioner, the Respondent was not entitled to any
shares of the Petitioner-Company.
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2.7 Operationalising the Dispute Resolution Mechanism contained in
Clause 12 of the Appointment Letter, the Respondent invoked the
Arbitration. As noted above, pursuant to the order dated 6 th July 2021
in Commercial Arbitration Application No. 95 of 2021, the Arbitral
Tribunal came to be constituted.
2.8 The Arbitral Tribunal after completion of the pleadings, settled the
issues in the Arbitral proceedings. The Respondent-Claimant (CW1)
examined himself and the Petitioner-Respondent examined Mr. Kartik
Kini, (RW-1), its Chief Operating Officer.
2.9 After appraisal of the evidence and material on record, the
Arbitral Tribunal was persuaded to allow the claim of the Claimant in
terms of prayer clauses (A) and (B) of the Statement of Claim, which
reads as under :
“A. this Hon’ble Tribunal be pleased to direct the
Respondent to specifically perform the terms of the
employment letter dated 24 th August 2011 as also the
Grant Letter dated 1st March 2017 by allotting to the
Claimant 31,878 shares in the Respondent company
within such time and on such terms as this Hon’ble
Tribunal deems fit;
B. this Hon’ble Tribunal be pleased to direct the
Respondent to do all acts, execute all deeds and
documents as may be necessary to enable the effective
transfer of the shares in favour of the Claimant.”
2.10 The Arbitral Tribunal also directed the Petitioner to pay an
amount of Rs.15,51,265/- as costs. Incidental directions as regards the
stamping of the Appointment Letter were also issued.
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2.11 The learned Arbitrator was of the view that the vesting of options
in favour of the Claimant had already taken place in view of the
Appointment Letter read with the Grant Letter and in accordance with
Rule 12 of the Companies (Share, Capital and Debentures) Rules,
2014 (“the Rules, 2014”).
2.12 The absence of the policy in regard to Employees Stock Option
Plan (“ESOP”) did not constitute an impediment to the vesting of the
subject shares in the Claimant. In substance, the Company was not
justified in refusing to allot the subject shares on the premise that the
shares stood relinquished upon the termination of the employment of
the Claimant as the vesting of the subject shares in the Claimant had
occurred prior thereto in terms of the Appointment Letter and the Grant
Letter.
2.13 Being aggrieved and dissatisfied, the Petitioner-Company has
filed this Petition seeking to set aside the impugned Award, on the
ground that the impugned Award is in contravention of the public policy
and suffers from patent illegality.
3. I have heard, Mr. Sumit Rai, the learned Counsel for the
Petitioner-Company and Mr. Karl Shroff, the learned Counsel for the
Respondent-Claimant, at some length. With the assistance of the
learned Counsel for the parties, I have also perused the material on
record.
4. Mr. Sumit Rai, the learned Counsel for the Petitioner-Company
mounted a multi-pronged challenge to the impugned Award. First and
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foremost, Mr Rai would urge that, the impugned Award is in the teeth of
the governing provisions of the Companies Act, 2013 (“the Act, 2013”)
and the Rules, 2014. Laying emphasis on the provisions contained in
Section 53 of the Act, 2013, Mr. Rai would urge, there is an express
prohibition against issuance of the shares at a discount except by way
of sweat equity shares, which is not the case at hand. Conversely, the
allotment of shares to employees under Section 62 of the Act, 2013 is
permitted, provided there is a scheme framed by the Company in
regard to ESOP authorising the issuance of ESOP. Thus, the shares
cannot be allotted to an employee unless there is ESOP Scheme and
in the manner provided under Section 62 of the Act, 2013.
5. Mr. Rai further submitted that if the provision in Section 62(1)(b)
of the Act, 2013 is read in conjunction with Rule 12 of the Rules, 2014,
it becomes explicitly clear that ESOP cannot be extended save in the
manner indicated therein. The learned Arbitrator, Mr. Rai would urge,
therefore committed a gross error in law in ignoring the governing
provisions of the Act, 2013 and the Rules, 2014, by passing an order in
the nature of specific performance of the Agreement contained in the
Appointment Letter. The reasons which weighed with the learned sole
Arbitrator were wholly irrelevant for determining the issue that arose for
determination.
6. Secondly, the learned Arbitrator was in error in completely
misconstruing the Appointment Letter and Grant Letter by reading
those documents in a selective manner. While laying emphasis on
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Clause 3 of the Appointment Letter, the learned Arbitrator completely
eschewed from consideration the other clauses of the Appointment
Letter including the consequences of termination; which according to
Mr. Rai, would be attracted even in the case of termination of
employment by way of resignation. The learned Arbitrator, Mr. Rai
would urge, rewrote the contract between the parties and that
constitutes a fundamental error.
7. Mr. Rai would urge, it was not a matter of error in interpretation of
the contract but that of rewriting the contract. In the face of such
manifest error where the Arbitral Tribunal ignored the terms of the
contract, the Award is required to be set aside. To lend support to this
submission, Mr. Rai placed reliance on the judgment of the Supreme
Court in the case of Indian Railways Catering And Tourism Corp Ltd
Vs Brandavan Food Products.1
8. Thirdly, Mr. Rai submitted that the learned Arbitrator failed to
appreciate the three different stages in the matter of the ESOP, namely,
options, vesting and the exercise of the vested options. In the case at
hand at best, Mr. Rai would submit that, options were given to the
Claimant. There was no vesting of those options in the Claimant, much
less the exercise of those options by the employee. The learned
Arbitrator, completely misread and misconstrued the very terms of the
Appointment and Grant Letters to hold that the vesting took place
before the Claimant resigned from the Company.
1 2025 SCC OnLine SC 2369.
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9. Mr. Rai submitted that, the patent illegality in the impugned
Award is manifest in the incorrect invocation of law in the matter of
grant of discretionary relief of specific performance. Amplifying the
submission, Mr. Rai urged with tenacity that if it was the case that the
petitioner had committed the breach of promise to allot the equity
shares, in terms of the appointment letter and grant letter, the
appropriate remedy was that of damages. From this standpoint, it was
incumbent upon the Arbitral Tribunal to evaluate whether an award in
terms of money would not have been an adequate relief. Relief of
specific performance in the nature of a direction to allot the subject
shares was wholly inappropriate, as from the perspective of the
claimant, the subject shares have no special value to the claimant and
from the point of view of the company, the latter would have the right to
buy back such shares at fair market value at its discretion. The Arbitral
Tribunal failed to examine whether it was equitable to grant the relief of
specific performance. The consequences that may ensue if an ex-
employee, in whom the petitioner company had lost confidence, is
introduced as a shareholder of the petitioner company, after eight years
of his resignation, were not at all evaluated. This non-application of
mind in the matter of the grant of the discretionary relief renders the
award patently illegal. To bolster up this submission, Mr. Rai placed
reliance on the enunciation of law in the case of P. Daivasigamani
versus S. Sambandan2,
2 (2024) 14 SCC 793.
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10. Lastly, Mr. Rai would submit that, the Arbitral Tribunal was
completely missed to note the conduct of the claimant in not evincing
interest in acquiring the subject shars till the acceptance of his
resignation. There was no correspondence emanating from the
claimant, even till the month of April 2018, when the claimant sought
relieving order. Non-consideration of all these relevant factors renders
the impugned award legally infirm, submitted Mr. Rai.
11. Mr. Karl Shroff, the learned Counsel for the respondent-claimant
stoutly supported the impugned award. It was submitted that the
grounds which were sought to be urged before this Court were not
agitated before the Arbitral Tribunal. As recorded in the impugned
award, the parties proceeded before the Arbitral Tribunal on the basis
that, in case claimant succeeds in demonstrating that the appointment
letter coupled with the grant letter constituted vesting of the option, the
absence of ESOP Policy would have no bearing on the claimant’s claim
and that even the resignation with effect from 31 August 2017 would
not be an impediment for the grant of the reliefs claimed by the
claimant. Having proceeded on that premise, Mr. Shroff would urge, it
is now impermissible for the petitioner to turn around and assail the
award on the grounds that the ESOP Policy was not in place and the
resignation amounted to termination and the failure to exercise the
option before the resignation impaired the claim of the claimant.
12. Mr. Shroff further submitted that the letter dated 15 October
2020, wherein the petitioner company declined to allot the subject
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shares records the sole reason that the option granted to the claimant
stood relinquished on account of the claimant having ceased to be an
employee of the company. If the appointment letter and the grant letter
are perused in the light of the aforesaid reason for refusal, it becomes
explicitely clear that the cessation of the employment of the claimant
had no bearing on the entitlement to the subject shares. The defences
subsequently raised by the petitioner were creatures of the
afterthought, submitted Mr. Shroff.
13. Taking the Court through the appointment letter and the grant
letter, Mr. Shroff submitted that the options already stood vested in the
claimant and such vesting took place before the claimant tendered
resignation. This finding of fact recorded by the Arbitral Tribunal, based
on the evaluation of the material on record, is impeccable and not open
for interference in the petition under Section 34.
14. The absence of ESOP, Mr. Shroff would urge, is a clear
subterfuge. The Arbitral Tribunal has found that the employees who
were similarly circumstanced, with identical appointment letters, have
been granted ESOP and continued to hold such shares even after
ceasing to be employees of the petitioner company, though no ESOP
Policy was framed by the petitinoer company. The Arbitral Tribunal has
also recorded in clear and explicit terms that the petitioner never called
upon the claimant to exercise the options or deposit the amount. Since
the aspect of the quantity and quality of evidence is within the exclusive
domain of the Arbitral Tribunal, the challenge to the impugned award is
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completely devoid of substance.
15. Mr. Shroff further submitted that the submission on behalf of the
petitioner that, the Arbitral Tribunal has rewritten the contract between
the parties is belied by plain text of the appointment letter and grant
letter. Laying emphasis on Clause 3 of the appointment letter and the
grant letter, Mr. Shroff would urge, no other inference than the one
drawn by the Arbitral Tribunal was conceivable. In substance, the
findings of facts recorded by the Arbitral Tribunal on the basis of the
interpretation of the documents is an exercise within the realm of the
Arbitral Tribunal's jurisdiction and, by no stretch of imagination, it could
be termed as rewriting of the contract.
16. Mr. Shroff submitted that the challenge to the award premised on
the award being in contravention of the fundamental policy and
suffering from the vice of patent illegality is driven by the objective of
bringing the case within the limited scope of interference under Section
34 of the Act, 1996. To emphasise that the scope of interference in
exercise of the power under Section 34 is extremely limited and strictly
confined to the grounds specified therein, Mr. Shroff placed reliance on
the judgments of the Supreme Court in the cases of Consolidated
Construction Consortium Limited vs. Software Technology Parks
of India,3 Associate Builders vs. Delhi Development Authority, 4
PSA Sical Terminals Private Limited vs. Board of Trustees of V. O.
3 (2025) 7 SCC 757.
4 (2015) 3 SCC 49.
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Chidambranar Port Trust Tuticorin and others, 5 Hindustan
Construction Company Limited vs. National Highways Authority
of India,6 and Dyna Technologies Priavate Limited vs. Crompton
Greaves Limited7.
17. Before adverting to appreciate the aforesaid rival submissions
canvassed across the bar, it is imperative to keep in view the approach
expected of the Court in a Petition seeking setting aside of an Arbitral
Award. The only recourse against an Arbitral Award is a Petition under
Section 34 of the Act, 1996. Per force the challenge to an Arbitral
Award is confined to the statutory grounds enumerated in Sub-Section
(2) and (2-A) of Section 34 of the Act, 1996. The prime reason for the
restricted jurisdiction conferred upon the Court under Section 34 is the
adherence to the fundamental principles of arbitral autonomy and
minimal judicial intervention in the arbitral proceedings. Lest, the very
object of arbitration as a preferred dispute resolution mechanism,
resorted to by the parties as a matter of choice, would be defeated.
18. In the facts of the case at hand, the grounds mentioned in clause
(a) of sub-section (2) of Section 34 have no application. The challenge,
as noted above, is mounted on the twin ground that the award is in
conflict with the public policy of India [sub-clause (ii) of clause (b) of
sub-section (2)] and that it suffers from the vice of patent illegality (sub-
section 2-A of Section 34). These expressions have defined judicial
5 (2023) 15 SCC 781
6 (2024) 2 SCC 613
7 (2019) 20 SCC 1
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connotation. Over a period of time, these expressions have been
refined in the form of concrete propositions, albeit not exhaustive. In
the very text of Section 34(2)(b)(ii) and sub-section (2-A) of Section 34,
the legislature has made the provisions which confine the ambit of
these expressions to obviate the possible expansive interpretation
which would undermine the arbitral autonomy and run counter to the
policy of minimal judicial intervention.
19. Explanation 1 to sub-clause (b) of sub-section (2) clarifies when
an award can be said to be in conflict with public policy of India. It
reads as under :
[Explanation 1. - For the avoidance of any doubt, it is
clarified that an award is in conflict with the public policy
of India, only if, -
(i) the making of the award was induced or affected
by fraud or corruption or was in violation of section 75
or section 81; or
(ii) it is in contravention with the fundamental policy
of Indian law; or
(iii) it is in conflict with the most basic notions of
morality or justice.”
20. Explanation 2 further constricts the scope of interference by
providing that the test as to whether there is contravention with
fundamental policy of Indian law shall not entail a review on the merits
of the dispute. Thus, the arbitral award cannot be attacked in an
indirect manner by resorting to evaluation of the merits of the dispute.
The proviso to sub-section (2-A) of Section 34 restricts the scope of
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interference on the ground of patent illegality by providing that an
award shall not be set aside merely on the ground of an erroneous
application of the law or by re-appreciation of evidence. The legislative
prescription is, thus, abundantly clear. The arbitral award cannot be set
aside on the ground that the award is erroneous in law by resorting to
re-appraisal of evidence before the Tribunal. A Petition challenging the
award cannot be allowed to be converted into an appeal in disguise
where the Appellate Court is empowered to re-appreciate the evidence
and correct the errors on facts and in law.
21. General nature of the jurisdiction exercised by the Court under
Section 34 and the limitations thereon, were expounded by the
Supreme Court in the case of Consolidated Construction
Consortium Ltd. (supra), in the following terms :
“46. Scope of Section 34 of the 1996 Act is now
well crystallized by a plethora of judgments of this
Court. Section 34 is not in the nature of an appellate
provision. It provides for setting aside an arbitral
award that too only on very limited grounds i.e. as
those contained in sub-sections (2) and (2A) of
Section 34. It is the only remedy for setting aside an
arbitral award. An arbitral award is not liable to be
interfered with only on the ground that the award is
illegal or is erroneous in law which would require re-
appraisal of the evidence adduced before the arbitral
tribunal. If two views are possible, there is no scope
for the court to re-appraise the evidence and to take
the view other than the one taken by the arbitrator.
The view taken by the arbitral tribunal is ordinarily to
be accepted and allowed to prevail. Thus, the scope
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of interference in arbitral matters is only confined to
the extent envisaged under Section 34 of the Act. The
court exercising powers under Section 34 has
perforce to limit its jurisdiction within the four corners
of Section 34. It cannot travel beyond Section 34.
Thus, proceedings under Section 34 are summary in
nature and not like a full-fledged civil suit or a civil
appeal. The award as such cannot be touched unless
it is contrary to the substantive provisions of law or
Section 34 of the 1996 Act or the terms of the
agreement.” (emphasis supplied)
22. As the challenge in the instant case is premised on the ground of
contravention of “public policy” and vitiation on account of “patent
illegality” it may be apposite to note the judicial precedents which
expound these expressions. In the case of Associate Builders
(supra), the Supreme Court elaborately exposited as to what
constitutes “fundamental policy of Indian Law” After adverting to the
decisions in the cases of Renusagar Power Co. Ltd. V/s. General
Electric Co.8 and ONGC Ltd. V/s. Western Geco International Ltd. 9,
the Supreme Court culled out the juristic principles, the violation of
which would constitute the violation of fundamental policy of Indian law
:
(i) the violation of the governing statute. For instance, the
violation of Foreign Exchange Act, in Renusagar Power Co. Ltd.
(supra).
8 1994 Supp (1) SCC 644
9 (2014) 9 SCC 263
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(ii) disregard to the orders of the superior Courts in India.
(iii) disregard to the binding effect of the judgment of a
superior Court.
(iv) failure to adopt a “judicial approach” which demands that a
decision be fair, reasonable and objective. Conversely, if the
determination by the arbitral tribunal is arbitrary and actuated by
extraneous consideration, it would violate the fundamental policy of
Indian law.
(v) non-observance of the principles of natural justice, which
also finds resonance in Sections 18 and 34(2)(a)(iii) of the Arbitration
Act, 1996. Non-application of mind by the arbitral tribunal is subsumed
in this juristic principle.
(vi) perversity – a decision which is perverse or so irrational
that no reasonable person would have arrived at the same, falls foul of
the fundamental policy of Indian law. Perversity may arise on account
of the findings being based on no evidence or the findings being based
on irrelevant consideration or the findings being the product of non-
consideration of the material/evidence which is relevant.
23. In the case of Associate Builders (supra), the Supreme Court
also administered a caution that, while applying the test of “Public
Policy” to an arbitration award the Court must be alive to the fact that it
is not acting as a Court of appeal and, consequently, errors of fact
cannot be corrected. Relevant observations in para 33 read as under :
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“33. It must clearly be understood that when a court is
applying the "public policy" test to an arbitration award, it
does not act as a court of appeal and consequently
errors of fact cannot be corrected. A possible view by
the arbitrator on facts has necessarily to pass muster as
the arbitrator is the ultimate master of the quantity and
quality of evidence to be relied upon when he delivers
his arbitral award. Thus an award based on little
evidence or on evidence which does not measure up in
quality to a trained legal mind would not be held to be
invalid on this score. Once it is found that the arbitrators
approach is not arbitrary or capricious, then he is the
last word on facts……” (emphasis supplied)
24. In the said case, the Supreme Court also expounded the concept
of “patent illegality” in the following words :
“42. In the 1996 Act, this principle is substituted by the
“patent illegality” principle which, in turn, contains three
subheads :
42.1 (a) A contravention of the substantive law of
India would result in the death knell of an arbitral award.
This must be understood in the sense that such illegality
must go to the root of the matter and cannot be of a
trivial nature. This again is really a contravention of
Section 28(1)(a) of the Act, which reads as under :
“28. Rules applicable to substance of dispute. - (1)
Where the place of arbitration is situated in India -
(a) in an arbitration other than an international
commercial arbitration, the Arbitral Tribunal shall decide
the dispute submitted to arbitration in accordance with
the substantive law for the time being in force in India.”
42.2 (b) A contravention of the Arbitration Act itself
would be regarded as a patent illegality – for example if
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an arbitrator gives no reasons for an award in
contravention of Section 31(3) of the Act, such award
will be liable to be set aside.
42.3 (c) Equally, the third subhead of patent
illegality is really a contravention of Section 28(3) of the
Arbitration Act, which reads as under:
“28. Rules applicable to substance of dispute. - (1)
and (2) *******
(3) In all cases, the Arbitral Tribunal shall decide in
accordance with the terms of the contract and shall take
into account the usages of the trade applicable to the
transaction.”
This last contravention must be understood with a
caveat. An Arbitral Tribunal must decide in accordance
with the terms of the contract, but if an arbitrator
construes a term of the contract in a reasonable
manner, it will not mean that the award can be set aside
on this ground. Construction of the terms of a contract
is primarily for an arbitrator to decide unless this
arbitrator construes the contract in such a way that it
could be said to be something that no fair minded or
reasonable person could do.”
(emphasis supplied)
25. In the case of PSA Sical Terminals Pvt. Ltd. (supra), after
adverting to the previous pronouncements, the Supreme Court further
expounded the concept of ‘patent illegality’ in the following words :
“40. It will thus appear to be a more than settled
legal position, that in an application under Section 34,
the court is not expected to act as an appellate court
and re-appreciate the evidence. The scope of
interference would be limited to grounds provided
under Section 34 of the Arbitration Act. The
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interference would be so warranted when the award is
in violation of “public policy of India”, which has been
held to mean “the fundamental policy of Indian law”. A
judicial intervention on account of interfering on the
merits of the award would not be permissible.
However, the principles of natural justice as contained
in Section 18 and 34(2)(iii) of the Arbitration Act would
continue to be the grounds of challenge of an award.
The ground for interference on the basis that the
award is in conflict with justice or morality is now to be
understood as a conflict with the “most basic notions
of morality or justice”. It is only such arbitral awards
that shock the conscience of the court, that can be set
aside on the said ground. An award would be set
aside on the ground of patent illegality appearing on
the face of the award and as such, which goes to the
roots of the matter. However, an illegality with regard
to a mere erroneous application of law would not be a
ground for interference. Equally, re-appreciation of
evidence would not be permissible on the ground of
patent illegality appearing on the face of the award.
41. A decision which is perverse, though would not be
a ground for challenge under “public policy of India”,
would certainly amount to a patent illegality appearing
on the face of the award. However, a finding based on
no evidence at all or an award which ignores vital
evidence in arriving at its decision would be perverse
and liable to be set aside on the ground of patent
illegality.” (emphasis supplied )
26. In the case of Indian Railways Catering and Tourism Corp.
Ltd. (supra), on which reliance was placed by Mr. Rai, the Supreme
Court enunciated that, rewriting contract for the parties would be a
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breach of fundamental principle of justice. The observations in para 65
to 67 read as under :
“65. Again, in PSA Sical Terminals Pvt. Ltd. (supra),
this Court found that the arbitral tribunal had thrust a
new term into the agreement between the parties and
thereby created a new contract for them. Referring to
Ssangyong Engineering10, this Court affirmed that
rewriting a contract for the parties would be a breach of
the fundamental principles of justice, entitling a Court to
interfere as it would shock its conscience and would fall
within the exceptional category.
66. A little later, in State of Chhattisgarh and Anr. V/s.
SAL Udyog Pvt. Ltd.11, a 3-Judge Bench of this Court
dealt with the issue as to what would constitute ‘patent
illegality’ appearing on the face of the award, in terms of
Section 34(2-A) of the Act of 1996. Reference was
made to the earlier decisions in Associate Builders
(supra) and Ssangyong Engineering (supra), and it was
held that the failure of the arbitral tribunal to decide in
accordance with the terms of the contract governing the
parties would certainly attract the ‘patent illegality’
ground as the said oversight amounted to gross
contravention of Section 28(3) of the Act of 1996, which
enjoined the arbitral tribunal to take into account the
terms of the contract while making the award.
67. Much earlier, in Industrial Promotion and
Investment Corporation of Orissa Limited vs.
Tuobro Furguson Steels Private Limited and
others12, this Court observed, on facts, that the High
Court had completely overlooked the fact that the
parties, with their eyes widely open, had entered into a
10 (2019) 15 SCC 131
11 (2022) 2 SCC 275
12 (2012) 2 SCC 261
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contract, which was subject to the terms and conditions
clearly spelled out therein, and in furtherance of the
contract, payments were made and possession
changed hands. This Court noted that both sides had
therefore acted on the basis of the contract, changed
their respective positions and assumed rights and
obligations against each other. This Court held that the
contract, having been acted upon, could not unilaterally
be abrogated at the sweet will of either of the parties.”
(emphasis supplied)
27. In the light of the aforesaid enunciation of law on the contours of
the jurisdiction of the Court under Section 34 of the Act, 1996, the
challenge to the impugned award deserves to be appreciated. By and
large, there is not much controversy over the foundational facts
narrated above. The core controversy revolves around the question
whether the subject shares had vested in the claimant or was it a case
of mere options. The subsidiary question which hinges upon the
answer to the preceding question would be, whether the alleged non-
exercise of the option, after vesting of the subject shares by the
claimant, would defeat the right of the claimant.
28. To explore an answer, of necessity, reference to the appointment
letter becomes indispensable. Clause 3 of the appointment letter
which constitutes the substratum of the claim of the claimant, reads as
under :
“3. Company Equity : The Company is pleased to
offer you equity shares of the Company on the following
basis 0.5% in Y1, 0.2% in Y2, 0.2% in Y3, which will be
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allocated to you in May each year based on the total
share capital of the Company at such time. The Y1
tranche will be allocated to you in January 2012. The
shares allocated to you in Y1, Y2 and Y3 shall vest to
you in Y4 (30%), Y5(30%) and YE (40%) respectively,
subject to your remaining with the Company The
allocation of equity will be in accordance with the
Company’s policies in this regard, which will be made
available to you in due course. Should your
employment with the Company be terminated for any
reason, you will be required to relinquish all shares
vested in you, as directed by the Company’s policies at
such time.”
29. Mr. Rai, learned Counsel for the Petitioner, submitted that the
aforesaid clause 3 of the appointment letter is required to be read in
conjunction with other clauses, especially clause 9, governing the
termination of service. Relevant part of clause 9 reads as under :
“9. Termination and suspension : Your employment
may be terminated upon the occurrence of one or
more of the following events :
(i) Your employment may be terminated at will, by
you or the Company, other than for Cause, by
providing ninety (90) days prior written notice, or by
payment of basic salary in lieu of notice in case of
termination of employment by the company……
On termination of your employment, the Company
shall not have any liability towards you other than for
remuneration, allowances and perquisites which may
have accrued prior to the date of termination of
employment. Upon termination of employment for any
reason whatsoever, you shall surrender or handover
to the company, in good condition, all property of the
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company, in your possession including records and
documents whether stored electronically or otherwise,
office access cards, keys corporate credit cards,
passes or any other property and equipment of the
Company which you may have received during the
term of your employment.”
30. The learned Arbitrator was of the view that the appointment letter
read as a whole, makes it abundantly clear that it was in the nature of
grant of options and those options would vest on the claimant upon
completing 4th, 5th and 6th year of employment with the Petitioner.
Support was sought to be drawn by the learned Arbitrator from the
course of conduct of the Petitioner in the matter of vesting of shares in
the other employees in the absence of the ESOP policy. The thrust of
the submission of Mr. Rai was that the learned Arbitrator misconstrued
the aforesaid appointment letter and, in fact, rewrote the contract
between the parties. Mr. Rai would urge, the aforesaid interpretation is
in the teeth with the provisions contained in Section 62(1)(6) of the
Companies Act, 2013 and Rule 12 of the Rules 2014, given the
indisputable fact that there was no policy of ESOP.
31. A bare perusal of clause 3 of the appointment letter indicates that
the shares, in the ratio indicated therein, aggregating to 0.9% of the
total share capital, were offered to be allocated to the claimant in the
month of May each year in the first three years. Offer of allotment of
shares did not stop at that. Had it been a case of the appointment
letter only offering the shares, probably it could have been construed
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as that of offering an option only. The appointment letter also envisages
vesting of the shares in a definite manner, namely, the shares allocated
in Y1 would vest in the claimant in Y4; those allocated in Y2 would vest
in Y5 and the last tranche allocated in Y3 would vest in Y6, provided
the claimant continued to be in the employment of the company.
Vesting of the respective shares was to take effect after the period of
three years.
32. Clause 3 of the appointment letter (extracted above) indicates
that the parties were alive to the necessity of making the provision for
vesting of the shares. The quantity of shares that would vest was
specified. The duration was prescribed. Thus, clause 3 of the allotment
letter cannot be construed as a simple offer of options. The Arbitral
Tribunal was, therefore, justified in construing clause 3 in a rational and
meaningful manner.
33. Mr. Rai would urge that the other clauses of the appointment
letter and even the later part of clause 3, were not considered by the
Arbitral Tribunal to gather the real intent of the parties. Indeed, the
latter part of clause 3 provided that the allocation of equity would be in
accordance with the policy of the company, in that regard. The second
caveat was that, should the employment of the claimant with the
company be terminated for any reason, the claimant would be required
to relinquish all shares vested in the claimant, as directed by the
Company’s policy at the given time. Co-relating the second caveat with
clause 9(i) (extracted above), Mr. Rai would urge that, even in case
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termination brought about by the resignation , the clause of
relinquishment of the equity kicked in.
34. I find it rather difficult to accede to the aforesaid submission.
Clause 9(i) clearly provides that, upon termination of employment, the
company would not have any liability towards the employee other than
the remuneration, allowances, perquisites, which had accrued prior to
the date of termination of the employment. If the subject shares stood
vested in the claimant before the termination of the employment, and
the prevailing policy did not provide for relinquishment of those shares,
(when the Petitioner pitches the case on the premise of absence of
policy), the second caveat contained in the latter part of clause 3 did
not get attracted. This also becomes evident from the fact that the
continuance of the employment with the Petitioner was a condition for
vesting of the subject shares at the stipulated time.
35. This brings to the fore the implications of the grant letter. Clause
1 of the grant letter dated 1 March 2017 reads as under :
“Subject : Grant of equity shares
In consideration of the services rendered by you, in
relation to your employment with Waterfield Advisors
Private Limited (“Company”), the Company hereby
grants to you, an entitlement to receive equity shares of
the Company in accordance with the terms and
conditions detailed below.
1. You are entitled, at the sole determination of the
Board of Directors of the Company to such number of
equity shares of the Company at a face value of INR 10
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transferred by Waterfield Employee Benefit Trust
(“Trust”) as are set out below :
a) On the date of execution of this letter, 31878
equity shares;”
36. If there was any doubt whether subject shares vested in the
claimant, the aforesaid disposition in the grant letter removes the
same. 31878 equity shares were quantified as the entitlement of the
claimant in consideration of the services rendered by the claimant in
relation to his employment with the Petitioner Company. Grant letter
was evidently issued after the claimant had completed six years of
employment with the Petitioner.
37. The Arbitral Tribunal was, thus, within its jurisdiction in construing
the appointment letter in juxtaposition with the disposition under the
grant letter. The construction of the terms of the contract, it is trite, is
within the province of the jurisdiction of the Arbitral Tribunal. The error
in the construction of contract, or, for that matter, the erroneous
interpretation of the terms of the contract, is not a sustainable ground
for the interference with the arbitral award.
38. A profitable reference can be made to the decision of the
Supreme Court in the case of Mcdermott International Inc. V/s. Burn
Standard Co. Ltd.13, wherein the Supreme Court emphasised that, the
construction of the contract agreement is within the jurisdiction of the
arbitrators. The observations in para 112 read as under :
13 (2006) 11 SCC 181
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“112. It is trite that the terms of the contract can be
express or implied. The conduct of the parties would also
be a relevant factor in the matter of construction of a
contract. The construction of the contract agreement, is
within the jurisdiction of the arbitrators having regard to the
wide nature, scope and ambit of the arbitration agreement
and they cannot, be said to have misdirected themselves
in passing the award by taking into consideration the
conduct of the parties. It is also trite that correspondences
exchanged by the parties are required to be taken into
consideration for the purpose of construction of a contract.
Interpretation of a contract is a matter for the arbitrator to
determine, even if it gives rise to determination of a
question of law. [See Pure Helium India (P) Ltd. V/s. Oil
and Natural Gas Commission14 and D.D. Sharma v.
Union of India15.”
39. In the case of Hindustan Construction Company Ltd. (supra),
after adverting to the aforesaid pronouncement and the decision in the
case of MSK Projects (1) (JV) Ltd. V/s. State of Rajasthan16, the
Supreme Court held that, for a long time, it is the settled jurisprudence
of the Courts in the country that awards which contain reasons,
especially when they interpret contractual terms, ought not to be
interfered with, lightly.
40. At best, error in the interpretation of a contract by an Arbitrator is
“an error within his jurisdiction”. An inference is inescapable that the
Arbitral Tribunal has after ascribing adequate and justifiable reasons
14 (2003) 8 SCC 593
15 (2004) 5 SCC 325
16 (2011) 10 SCC 573
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construed the appointment letter and the grant letter in a reasonable
manner and arrived at a sustainable finding. I am therefore afraid to
accede to the submission of Mr. Rai that the Arbitral Tribunal, in effect,
rewrote the contract. Thus, the challenge to the impugned award on the
ground that it is in contravention of the terms of the contract between
the parties or that the Arbitral Tribunal rewrote the contract, does not
merit acceptance.
41. The submission that the Arbitral Award is in breach of the
governing law, also does not carry much substance. Section 62(1)
which empowers the Company to issue further share capital, inter alia,
provides that such shares may be offered to employees under a
Scheme of Employee Stock option, subject to special resolution
passed by the Company and subject to such condition as may be
prescribed [clause (b)].
42. The prescription of conditions is to be found in Rule 12 of the
Rules 2014, under the heading “Issue of employee stock option”. Rule
12 proscribes offer of shares by the company to its employees under
ESO scheme, unless the Company complies with the requirements
stipulated in sub-rule (1) and (2), in particular. Under sub-rule (1), a
special resolution is required to be passed by the share holders of the
company. Disclosures as warranted under sub-rule (2) are required to
be made including : (d) the requirement of vesting and period of
vesting; (e) the maximum period within which the options shall be
vested; (g) the exercise period and process of exercise; (k) the
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conditions under which option vested in employees may lapse e.g. in
case of termination of employment for misconduct; and (l) the specified
time period within which the employee shall exercise the vested
options in the event of a proposed termination of employment or
resignation of employee.
43. If the aforesaid stipulations are construed in the context of the
appointment letter and grant letter, by and large, the conditions of
requirement of vesting and period of vesting, the lapse of the option
vested in employee, could be said to have been adequately prescribed.
On first principles, the Petitioner company cannot be permitted to take
advantage of its failure to frame employee stock option scheme. It was
not a case that the company was disabled or restrained from framing
such a scheme. To allow the Petitioner to now take advantage of its
omission to frame a scheme, when it had made an offer of equity as a
part of its remuneration package to the employees would amount to
putting a premium on its own wrong. The fact that the allocation of
shares was in the nature of the recompense for the services rendered
by the claimant cannot be lost sight of.
44. The aspect of the alleged failure on the part of the claimant to
exercise the option does not advance the case of the submission to the
extent desired by Mr. Rai. The Arbitral Tribunal upon appraisal fo the
evidence has recorded that no fault can be attributed to the claimant on
the said count. In any event, the Arbitral Tribunal has recorded that
there was evidence to show that the shares were allocated to similarly
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circumstanced employees, despite the absence of the ESOP, which
was sought to be urged as a ground to deny the same dispensation to
the claimant. Such finding of fact cannot be said to be either perverse
or suffering from the patent illegality.
45. The last submission of Mr. Rai that the Arbitral Tribunal had
invoked an incorrect law while granting the discretionary relief of
specific performance, again touches upon the matter which can be said
to be an erroneous application of law, which is beyond the scope of
interference under Section 34 of the Act, 1996. In the circumstances of
the case, the exercise of discretion to award a relief which compels the
Petitioner company to perform its part of the contract to allot the shares
on the faith of which the claimant had rendered services for requisite
period, cannot be faulted at, even on equitable consideration.
46. The allocation of shares to the tune of 0.9% of the then paid up
share capital of the company would not present such difficulties in the
management of the affairs of the company that it could be construed as
such hardship as was not envisaged by the company when the
contract was made. To now urge that the damages could have been
awarded in terms of money, instead of the shares for the reason that
the value of the shares of the company has substantially increased, is
to dispute the very rationale of offering the shares to the employee as a
part of the growth prospect and incentive for the employee to render
the services for the company. Looked at from any perspective, the
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challenge to the impugned award on this count, does not deserve
countenance.
47. The conspectus of aforesaid consideration is that the impugned
award does not deserve to be interfered with on any of the grounds
sought to be urged on behalf of the Petitioner. Resultantly, the Petition
deserves to be dismissed.
48. Hence, the following order :
ORDER
(i) The Arbitration Petition stands dismissed with costs.
[N. J. JAMADAR, J.]
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