2025:MHC:2329Arb.O.P.(Com.Div.)Nos.257

of 2021 & 209 of 2022

IN THE HIGH COURT OF JUDICATURE AT MADRAS

Reserved on :

26.9.2025

Delivered on:

08.10.2025

Coram :

The Honourable Mr.Justice N.ANAND VENKATESH

Arbitration O.P.(Com.Div.) Nos.257 of 2021 & 209 of 2022

& A.No.3306 of 2025

Arb.O.P.No.257 of 2021 :

1.M/s.Prime Store, Rep. by

its Partner Mr.S.Kaarthi

2.Mr.S.Kaarthi

3.Mrs.Padma Sivalingam

4.Mrs.Shruthi Kaarthi

All the petitioners are at

No.77, New Market, Tiruppur.

Pin : 641604. …Petitioners

Vs

1.Sugam Vanijya Holdings

Private Limited at

Plot No.11B, Sy.No.40/9,

Devasandra Industrial Area,

II Stage, K.R.Puram,

Hobli, Bangalore-560048

2.Mr.K.Sivalingam

3.M/s.SCM Silks Private Limited

R2 & R3 are at No.77,

New Market, Tiruppur.

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Arb.O.P.(Com.Div.)Nos.257

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Pin : 641604. …Respondents

Arb.O.P.No.209 of 2022 :

1.M/s.SCM Silks Private Limited rep.

by is Director Mr.K.Sivalingam,

2.Mr.K.Sivalingam

Petitioners are at No.77,

New Market, Tiruppur.

Pin : 641604. ...Petitioners

Vs

1.Sugam Vanijya Holdings

Private Limited at

Plot No.11B, Sy.No.40/9,

Devasandra Industrial Area,

II Stage, K.R.Puram,

Hobli, Bangalore-560048

2.M/s.Prime Store, Rep. by

its Partner Mr.S.Kaarthi

3.Mr.S.Kaarthi

4.Mrs.Padma Sivalingam

5.Mrs.Shruthi Kaarthi

R2 to R5 are at No.77,

New Market, Tiruppur.

Pin : 641604. ...Respondents

A.No.3306 of 2025 :

VR Dakshin Private Limited of 2025

(formerly known as Sugam

Vanijya Holdings Private Limited)

rep.by its authorized signatory

Mr.K.Suresh Kumar, Plot No.11B,

Sy.No.40/9, Devasandra

Industrial Area, II Stage,

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K.R.Puram, Hobli, Bengaluru.

560048. ...Applicant

Vs

1.M/s.Prime Store, Rep. by

its Partner Mr.S.Kaarthi

2.Mr.S.Kaarthi

3.Mr.K.Sivalingam

4.Mrs.Padma Sivalingam

5.Mrs.Shruti Kaarthi

6.M/s.SCM Silks Private Limited,

All the respondents are at

No.77, New Market Street,

Tiruppur-641604. ...Respondents

PETITIONS under Section 34 of the Arbitration and Conciliation

Act, 1996 praying to set aside the impugned award dated 22.3.2021

and

APPLICATION under Order XIV Rule 8 of the Original Side Rules

read with Section 151 of the Civil Procedure Code praying to direct the

respondents to deposit the amount as awarded under the award dated

22.3.2021.

For Petitioners in both

Arb.O.Ps. & Respondents in

A.No.3306 of 2025 : Mr.Anirudh Krishnan for

Mr.Adarsh Subramaniam

For R1 in both Arb.O.Ps

& Applicant in A.No.

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3306 of 2025 :Mr.P.S.Raman, SC for

Mr.P.J.Rishikesh

COMMON ORDER

Arbitration O.P.(Com.Div.)No.257 of 2021 has been filed by

respondent Nos.1, 2, 4 and 5 in the claim petition as against the

award passed by the learned Arbitrator dated 22.3.2021.

2. Arbitration O.P.(Com.Div.)No.209 of 2022 has been filed by

respondent Nos.3 and 6 in the claim petition as against the same

award.

3. The first respondent in both the above original petitions was

the claimant before the learned Arbitrator.

4. Heard the respective learned counsel on either side.

5. The facts leading to filing of the above original petitions are

as follows:

(a) The first respondent/claimant is engaged in the business of

developing and operating commercial projects and malls. During the

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course of business, they decided to develop a mall in Chennai and

accordingly developed a mall at Anna Nagar known as VR Chennai.

The mall was built and developed with a built up area of 9.88 lakh

sq.ft., including a multiplex cinema theatre, departmental stores, retail

stores, etc. The construction of the mall was completed on 20.4.2018.

(b) The petitioners are engaged in the business of operating

and running retail outlets (textiles) in Tamil Nadu. They approached

the first respondent/claimant to take on lease a large space in the mall

with the carpet area of nearly 34,434 sq.ft. (hereinafter called as the

demised premises). After negotiation, the parties entered into a lease

deed dated 12.9.2018, which was registered as doc.No.3779 of 2018

on the file of the Sub-Registrar, Anna Nagar.

(c) The lease deed contained various clauses relating to the

commencement date, common areas, fit out manual, lock-in period,

possession date, rent, security deposit, etc. Under Clause 4.1 of the

lease deed, the petitioners agreed to take on lease the demised

premises for a period of 9 years from the commencement date unless

terminated earlier in accordance with the provisions set out in the

lease deed.

(d) Clause 4.3 of the lease deed related to lock-in period and

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the first 36 months from the commencement date should be

considered as the lock-in period. It was also made clear that if the

lessee wanted to terminate the lease during the lock-in period for any

reason whatsoever as per Article 14.4, the lessee should pay to the

lessor an admitted liability (and not by way of penalty), 100% of the

rent for the balance term of the lock-in period.

(e) The lessee should also pay Rs.1,51,50,960/-, which was

equivalent to six months' rent as interest free refundable security

deposit for the due performance and observance by the lessee of each

of the terms and conditions of the lease deed. The lessee was also

given the right to terminate the lease deed dated 12.9.2018 after

expiry of the lock-in period by serving six months’ advance written

notice and if such termination was effected before the expiry of the

lock-in period, a prior written notice of six months to the lessor should

be given and 100% of the rent for the balance term of the lock-in

period must also be paid by the lessee.

(f) Even though the lease deed was signed on 12.9.2018, the

demised premises was handed over to the petitioners as early as on

02.8.2018. The commencement date was defined as 120 days from

the date of signing the lease deed dated 12.9.2018 and the

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commencement date was fixed as 09.1.2019. During the said 120

days, the petitioners, who were requested to take over possession of

the demised premises, should commence their interior works in

accordance with the fit out manual issued by the first respondent/

claimant. All the interior works must have been completed within 120

days as per Clause 3.4. This 120 days’ period was a rent free period.

(g) After possession was handed over to the petitioners on

02.8.2018, they were requested to submit the drawings for the

approval of the first respondent/claimant as per the fit out manual.

There was regular exchange of communications between the parties

and at one stage, the petitioners expressed interest for extension of

the fit out period for an additional period of 75 days commencing from

01.12.2018. The first respondent/claimant also informed the

petitioners that a decision would be taken in that regard by the Board

of Directors. The petitioners were also seeking for exemption from

payment of rent during the extended period.

(h) Ultimately, the petitioners informed the first respondent/

claimant that they would be commencing the fit out work from

14.12.2018 and would complete the same within 60 days and that the

showroom would be opened from 19.2.2019 and therefore, requested

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the first respondent/claimant for the commencement date for payment

of rent as 19.2.2019.

(i) While so, the petitioners chose to unilaterally terminate the

lease deed dated 12.9.2018 vide e-mail dated 14.12.2018 stating that

they decided not to proceed further due to unforeseen and

unavoidable circumstances. On receipt of this e-mail communication,

the first respondent/claimant called upon the petitioners to pay the

rent and 50% common area maintenance (CAM) charges in

accordance with Clause 4.3 of the lease deed dated 12.9.2018 for the

unexpired lock-in period equivalent to Rs.11.26 Crores

(approximately). Since the first respondent/claimant incurred

expenses towards fit out works for the demised premises, a further

claim of Rs.62 lakhs was made.

(j) The first respondent/claimant also invoked the arbitration

clause as per Clause 17.7 of the lease deed dated 12.9.2018 read with

Clause 20 of the addendum to the lease deed by nominating the sole

Arbitrator to decide the dispute and sent a notice on 23.1.2019

thereby making the following claims :

(1) to declare the termination of the lease

deed dated 12.9.2018 as wrongful and illegal;

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(2) damages for the wrongful termination of

the lease deed to the tune of Rs.11,26,16,397/-

as per Clause 14.2 of the lease deed;

(3) forfeiture of the security deposit to the

tune of Rs.75,75,480/- as per Clause 14.5 of the

lease deed;

(4) monthly lease rental from 10.1.2019

until lease was terminated to the tune of

Rs.25,25,160/- per month totaling to a sum of

Rs.1,35,55,547/- till the date of filing the claim

on 09.4.2019;

(5) a total of Rs.1,97,55,547/-, which was

incurred by the first respondent/claimant towards

engaging the services of the contractors to

dismantle and rearrange the structure to suit the

convenience of the petitioners to make more

conducive to start the fit out work and in order to

redo the work and restore it back to its original

shape and design it in order to let out to third

parties, who will not take the premises on lease

with the current shape and design.

(6) to direct the petitioners to register the

cancellation of the lease deed within a time

frame; and

(7) to pay interest at the rate of 24% per

annum for the total claim amount of

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Rs.13,23,91,944/-.

(k) Before the learned Arbitrator, the petitioners, who were the

respondents in the claim petition, took a stand that the first

respondent/claimant was obligated under Clause 8.2 to obtain all

permits, approvals and consent required for the construction,

development and operation of the mall. However, the first respondent/

claimant did not furnish any approval or the working drawings, the

detailed drawing facilities, etc., and there was no clarity even on the

car parking slots.

(l) Before the learned Arbitrator, the petitioners also took a

stand that the first respondent/claimant did not obtain sanction and

permission from the Government, which resulted in the rejection of the

trade licence for the tenants. Since the first respondent/claimant did

not obtain any sanction/permit, etc., from the Government Authorities

and fulfill their obligations, the commencement date as provided in the

lease deed never came into force.

(m) In the absence of proper water and sewage facilities and

the trade licence, the occupation of the premises would be

meaningless rendering the setting up of the business as per the lease

deed impossible. It was under those circumstances, having left with no

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other option, the petitioners terminated the lease deed. They also

sought for refund of the security deposit.

(n) In order to avoid repayment of the security deposit, the first

respondent/claimant invoked the arbitration clause by making

untenable claims. Accordingly, the petitioners sought for dismissal of

the claim petition.

(o) The first respondent/claimant filed a rejoinder specifically

denying the stand taken by the petitioners with respect to obtaining

the approvals/permits from various Government Authorities and

instead provided the particulars of the same. The first respondent/

claimant also took a specific stand that in so far as the water and the

sewage facilities were concerned, they installed sewage treatment

plant and water generator from the sewage treatment plant, for which,

they obtained permission from the Pollution Control Board. Apart from

that, many of the lessees had commenced their business after

obtaining necessary trade licence and accordingly, they denied the

allegations made by the petitioners as false.

(p) Based on the above pleadings, the learned Arbitrator

framed the following issues :

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"(i) Whether the termination of the lease

deed dated 12.9.2018 vide mail dated 14.12.2018

by the respondent is wrongful?

(ii) Whether the claimant is entitled for a

sum of Rs. 13,23,71,944/- especially when the

claimant has failed in his obligations?

(iii) Whether the contract is frustrated on

account of inability of the claimant in obtaining

various sanctions from the Government authority?

(iv) Whether these respondents can carry on

their business in the absence of proper amenities

to be provided by the claimant?

(v) Whether these respondents are entitled

for proportionate car parking slot based on the

total built up area leased out?

(vi) Whether these respondents are entitled

for refund of the security deposit?

(vii) Whether the claimant having failed to

fulfill various statutory obligations is entitled for

relief of damages?

(viii) Whether the claimant has approached

the Hon'ble Tribunal with clean hands and to all

other reliefs?

(ix) Whether the claimant is entitled for any

relief based on contract which is a mistake of law?"

(q) Before the learned Arbitrator, the first respondent/claimant

examined C.W.1 and marked Ex.C.W.1 to Ex.C.34. The petitioners,

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who were respondents in the claim petition, examined R.W.1 and

marked Ex.R.1 to Ex.R.14.

(r) The learned Arbitrator, on considering the claim made by

the first respondent/claimant and the defence taken by the petitioners

and on appreciation of the evidence let in by both parties, passed the

award directing the petitioners to pay a sum of Rs.11,88,16,397/-

together with interest at the rate of 24% per annum from the date of

claim till the date of realization. The petitioners were also directed to

pay a sum of Rs.5 lakhs towards arbitration cost. The other claims

made by the first respondent/claimant to the tune of Rs.73,55,547/-

came to be rejected. Aggrieved by that, the above original petitions

have been filed by the petitioners before this Court.

6. The learned counsel appearing on behalf of the petitioners

made the following submissions :

(i) Clause 4.3 of the lease deed was in the nature of liquidated

damages and to allow such a claim, the first respondent/claimant

ought to have proved the loss. That apart, the petitioners surrendered

possession of the premises on 12.11.2019. Under such circumstances,

the first respondent/claimant, not having proved the loss and having

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failed to mitigate the loss even after possession was surrendered on

12.11.2019, will not be entitled to the claim made before the learned

Arbitrator by relying upon 4.3 of the lease deed. The learned

Arbitrator, without considering the same, awarded the compensation

under this head and the same is in contravention of Sections 73 and

74 of the Indian Contract Act and the settled principles of law. As a

consequence, the claim awarded to that extent is liable to be set aside

under Sections 34(2)(b)(iii) and 34(2A) of the Act;

(ii) The award passed by the learned Arbitrator without setting

off the security deposit is contrary to the binding precedents and also

against the most basic notions of justice and is liable to be interfered;

(iii) The award of restoration costs is based on no evidence and

is liable to be set aside since it is patently illegal;

(iv) The learned Arbitrator failed to consider the material issue

with respect to frustration of the contract due to misrepresentation on

the part of the first respondent/claimant by not fulfilling their

obligation under Clause 8.2 of the lease deed and thereby the award is

liable to be interfered by this Court; and

(v) The award of 24% interest is exorbitant and it must shock

the conscience of the Court and the same is liable to be interfered by

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this Court.

(vi) In order to substantiate the above submissions, the learned

counsel appearing on behalf of the petitioners relied upon the following

judgments :

(1) of the Hon’ble Apex Court in

Ssangyong Engineering and Construction

Company Limited Vs. NHAI [reported in

2019 (15) SCC 131];

(2) of the Hon’ble Apex Court in

Associate Builders Vs. Delhi Development

Authority [reported 2015 (3) SCC 49];

(3) of the Hon’ble Apex Court in

National Agricultural Cooperative

Marketing Federation of India Vs.

Alimenta S.A. [reported in 2020 (19) SCC

260];

(4) of the Division Bench of the Kerala

High Court in M/s.Devchand Construction

Vs. Union of India [Arbitration Appeal No.

29 of 2018 dated 16.2.2022];

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(5) of the Hon’ble Apex Court in

Muralidhar Chiranjilal Vs. Harishchandra

Dwarkadas & Another [reported in AIR

1962 SC 366];

(6) of a learned Single Judge of the Delhi

High Court in Manju Bagai Vs. Magpie Retail

Ltd. [reported in 2010 (175) DLT 212];

(7) of a Division Bench of the Calcutta

High Court in MBL Infrastructure Limited

Vs. Rites Limited and Others [reported in

AIR 2020 Calcutta 155];

(8) of the Hon’ble Apex Court in PSA

SICAL Terminals (P) Ltd. Vs. Board of

Trustees of V.O.Chidambaranar Port Trust,

Tuticorin [reported in AIR 2021 SC 4661];

(9) of a learned Single Judge of this

Court in Chithra Kumar Vs Aarthi

Amarendra [reported in 2019 SCC OnLine

Madras 38938]; and

(10) of the Hon’ble Apex Court in Dyna

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Technologies (P) Ltd. Vs. Crompton

Greaves Ltd. [reported in 2019 (20) SCC

1].

7. Per contra, the learned Senior Counsel appearing on behalf of

the first respondent/claimant made the following submissions :

(i) The petitioners did not even apply for a trade licence.

However, they made false allegations regarding lack of approvals and

utilities. Ex.C.20 to Ex.C.25, Ex.C.31 and Ex.C.34 clearly established

the fact that all the major statutory approvals required for the

operation of the mall were obtained by the first respondent/claimant.

(ii) There was no frustration of the contract since there was

ample material to come to the conclusion that the first respondent/

claimant could run the business with adequate facilities and therefore,

there was no justification for the termination of the lease.

(iii) The petitioners, at no point of time, until the issuance of the

termination notice dated 14.12.2018, complained about any issue and

the termination itself was a unilateral no fault termination on the

ground of unforeseen and unavoidable circumstances. Having taken

such a stand, the petitioners were attempting to improve their case at

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the time of filing the statement of defence before the learned

Arbitrator. The state of mind of the parties was evident from Ex.C.5

(series) and Ex.C.6 to Ex.C.8.

(iv) The first respondent/claimant was not able to lease out the

demised premises after the illegal termination of the lease by the

petitioners and they suffered loss. Therefore, the claim awarded by

relying upon Clause 4.3 of the lease deed is perfectly in order and is

not liable to be interfered by this Court.

(v) The operation of Sections 73 and 74 of the Indian Contract

Act, 1872 will come into play only if the compensation claimed is in the

nature of penalty, in which case, the loss must be established.

However, in the case in hand, mere breach of contract entails payment

of 100% rent for the remaining lock-in period and hence, in the

absence of any contrary evidence on the side of the petitioners to

show that the demised premises was once again leased out in favour

of the third party during the lock-in period, the first respondent/

claimant would be entitled to 100% rent for the entire lock-in period.

(vi) The petitioners are the ‘parties in default' for having

breached the terms of the contract and as a consequence, it will result

in the forfeiture of the security deposit under Clause 14.5 of the lease

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deed.

(vii) The award passed by the learned Arbitrator is supported by

the reasons assigned. The learned Arbitrator has also taken a possible

view, which does not suffer from any perversity or manifest illegality.

Therefore, the award will not fall foul of any of the requirements under

Section 34 of the Act warranting its interference.

(viii) In order to substantiate his submissions, the learned Senior

Counsel appearing on behalf of the first respondent/claimant relied

upon the following judgments :

“(1) of the Hon'ble Apex Court in

Numaligarh Refinery Ltd. Vs. Daelim

Industrial Co. Ltd. [reported in 2007 (8)

SCC 466];

(2) of a Division Bench of this Court in

Software Technology Parks of India Vs.

Consolidated Construction Consortium

Ltd. [reported in 2019 (7) MLJ 57];

(3) of the Hon'ble Apex Court in MMTC

Ltd. vs. Vedanta Ltd. [reported in 2019

(4) SCC 163];

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(4) of the Hon'ble Apex Court in Dyna

Technologies (P) Ltd.;

(5) of the Hon'ble Apex Court in UHL

Power Co. Ltd. Vs. State of H.P. [reported

in 2022 (4) SCC 116];

(6) of the Hon'ble Apex Court in

K.Sugumar Vs. Hindustan Petroleum

Corporation Ltd. [reported in 2020 (12)

SCC 539];

(7) of the Hon'ble Apex Court in

Hindustan Construction Co.Ltd. Vs.

National Highways Authority of India

[reported in 2024 (2) SCC 613];

(8) of a learned Single Judge of the

Bombay High Court in Indiabulls Properties

P. Ltd. Vs. Treasure World Developers P.

Ltd. [reported in 2014 SCC OnLine

Bombay 4768]; and

(9) of a Division Bench of the Delhi High

Court in Zoom Communications (P) Ltd. Vs.

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Brij Mohan Punj [reported in 2021 SCC

OnLine Delhi 4167].”

8. This Court has carefully considered the submissions of the

learned counsel on either side and perused the materials available on

record and more particularly the impugned award.

9. Before going into the various grounds that have been taken

on the side of the petitioners and the defenses raised on the side of

the first respondent/claimant, this Court must necessarily take note of

certain developments that took place in this case previously.

10. These petitions were heard by a learned Single Judge of this

Court on an earlier occasion. By a common order dated 20.4.2023,

the award dated 22.3.2021 was set aside on the sole ground that the

Arbitrator was appointed unilaterally and therefore, he was disqualified

under Section 12(5) read with 7

th

Schedule of the Act on the

supposition that no express consent was given by the petitioners for

the appointment of the Arbitrator.

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11. The said common order dated 20.4.2023 was assailed before

the Commercial Appellate Division of this Court (Per K.R.Shriram,

C.J., and Senthilkumar Ramamoorthy,J) in O.S.A.(CAD) Nos.62

and 63 of 2023 by M/s.VR Dakshin Private Limited (formerly

known as Sugam Vanijya Holdings Private Limited) rep. by its

Authority Signatory Ramu Rangaraju. The Commercial Appellate

Division, vide common judgment dated 26.11.2024, set aside the

common order of the learned Single Judge dated 20.4.2023 and

remitted the matter to the Commercial Division on other issues de-

hors the issue of appointment of the Arbitrator. Later, the two special

leave petitions that were filed against the said common judgment of

the Commercial Appellate Division in S.L.P.(Civil) Nos.30047 &

30048 of 2024 [M/s.SCM Silks Pvt. Ltd. Vs. VR Dakshin

Pvt.Ltd.] were also dismissed by the Hon’ble Apex Court on

16.12.2024. It is in these circumstances that these petitions have

now come before this Commercial Division.

12. On carefully considering the submissions of the learned

counsel on either side, the following issues arise for consideration:

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A. Whether the first respondent/claimant

failed to get necessary approvals/permits and

as a result, whether the contract itself was

frustrated under Section 56 of the Indian

Contract Act and as a consequence, whether

the petitioners were not able to commence the

business and whether they were justified in

terminating the lease through the notice of

termination dated 14.12.2018 marked as

Ex.C.9 ?

B. Whether the first respondent/claimant

ought to have proved the loss as a sine qua

non to seek for compensation under Clause 4.3

of the lease deed ?

C. Whether the learned Arbitrator went

wrong in not setting off the security deposit

and permitted the forfeiture of the entire

security deposit by the first respondent/

claimant ?

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D. Whether the interest awarded at the

rate of 24% per annum is exorbitant ?

13. Before dealing with the above issues, this Court must bear in

mind the scope of judicial interference under Section 34 of the Act

while dealing with the award passed by the learned Arbitrator.

14. A learned Single Judge of the Delhi High Court in a recent

judgment in NHAI Vs. UNITECH – NCC (JV) [O.M.P.(COMM)

No.23 of 2017 dated 30.5.2025] took into consideration all the

earlier judgments on the point. Therefore, it is not necessary for this

Court to burden this order by considering every other judgment that

was cited before this Court and extracting the relevant paragraphs. It

will suffice if the relevant tests set out in the said judgment of the

Delhi High Court are extracted, which read as hereunder :

“13. The principles that emerge From the

decisions cited earlier, the following principles

emerge:

(i) An arbitral award cannot be interfered

with on grounds not envisaged by Section 34(2) or

(3) of the 1996 Act.

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(ii) Section 34 jurisdiction is not appellate.

Interference with arbitral awards is generally

proscribed, and is to be limited to rare and

exceptional cases.

(iii) Interference on the ground that another,

more appropriate and perhaps better, view,

different from that adopted by the arbitrator, is

possible, is impermissible.

(iv) There can be no interference with factual

findings of an arbitral tribunal, unless they are

perverse. A possible view by the arbitrator, on the

facts, has to be respected. The arbitrator is the

ultimate master of the quantity and quality of

evidence to be relied upon.

(v) “Perversity” exists where

(a) the arbitral tribunal ignores or excludes

relevant material, or

(b) the arbitral tribunal takes into

consideration irrelevant material, or

(c) the finding is so outrageously in defiance

of logic as to suffer from the vice of irrationality.

(vi) If there is no evidence, or the evidence

is thoroughly unreliable in the sense that no

reasonable person would act on it, there is

perversity. Where there is some acceptable

evidence on record, on which the arbitral tribunal

relies, the conclusion would not be perverse.

(vii) The Section 34 Court cannot look into

the merits of the dispute.

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(viii) An award is in conflict with the public

policy of India if it

(a) is patently violative of a statutory

provision, or

(b) reflects an approach by the arbitral

tribunal which is not judicial, or

(c) has been passed in violation of the

principles of natural justice, or

(d) is patently illegal, which would include a

case in which

(i) the award is in patent contravention of

applicable substantive law, or

(ii) the award patently breaches the 1996

Act, or

(iii) the award militates against the interests

of the nation, or

(iv) the award is shocking to the judicial

conscience, or

(v) the award ignores the specific terms of

the contract, which would not include a case of

mere erroneous contractual interpretation, unless

the error of interpretation was fundamental, as in

Ssangyong Engineering, which resulted in the

award being contrary to the “most basic notions of

justice”, which shocked the judicial conscience, in

which the arbitral tribunal substituted a clause in

the contract with another.

(ix) The Court cannot interfere with an

arbitral award on the ground that it does not do

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justice, in the opinion of the Court, as that would

require examination of the merits of the dispute,

which is proscribed.

(x) Infraction of fundamental policy of Indian

law includes a law meant to serve public interest or

public good. Mere infraction of the municipal laws

of India does not render the award violative of the

fundamental policy of Indian law.

(xi) An arbitral award infracts the

fundamental policy of Indian law if it contravenes

all or any of the fundamental principles which

provide a basis for administration of justice and

enforcement of law in the country. This would

include, for example,

(a) violation of the principles of natural

justice,

(b) disregarding orders of precedentially

superior Courts, or their binding effect, or

(c) violating laws linked to public good or

public interest.

(xii) “Justice” is nothing more or less than

exact conformity to some obligatory law.

(xiii) “Morality” includes agreements which

cannot be enforced given the prevailing mores of

the day. That said, an arbitral award can be set

aside on the ground that it is contrary to the most

basic concepts of morality only if it shocks the

judicial conscience of the Court.

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(xiv) An unreasoned award is patently

illegal.

(xv) In the matter of interpretation of

contractual covenants by the arbitral tribunal, the

following principles apply:

(a) An interpretation which is completely

unacceptable, in that it is one which no fair-minded

or reasonable person would take, merits

interference. If the arbitrator adopts a view which

is not a possible view, it merits interference. An

impossible view is one which no reasonable body of

persons could possibly have taken.

(b) The arbitral tribunal, being a creature of

the contract, cannot travel beyond it.

(c) An arbitral tribunal cannot rewrite the

contract, or substitute one clause with another.

(d) An arbitral tribunal cannot foist, on a

party, a covenant which is not to be found in the

contract and is not binding on it.

(e) An arbitral tribunal cannot proceed ex

debito justitiae, de hors the contract.

(f) The arbitral tribunal must also take into

account the usages of trade applicable to the

transaction, while interpreting the contract.

(g) An arbitrator has the jurisdiction to

interpret a contract having regards to its terms and

conditions, conduct of the parties including

correspondences exchanged, circumstances of the

case, the manner in which the parties worked out

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the contract, and pleadings of the parties. Thus

viewed, if the interpretation accorded by the

arbitrator to the contract is based on a possible

view, the Court would not interfere.

(h) An unexpressed term can also be read

into an agreement if such a term was always and

obviously intended by the parties thereto. It must

be a term which goes without saying, which is

necessary to give business efficacy to the contract

and which, although tacit, forms part of the

contract. It must, however,

(a) be just and equitable,

(b) be necessary to give business efficacy to

the contract, in that, if the contract is effective

without it, the term will not be implied,

(c) be obvious, in that it “goes without

saying”,

(d) be capable of clear expression, and

(e) not contradict any term of the contract.”

15. The first point that arises for consideration is as to whether

the first respondent/claimant was obligated to get necessary

approvals/permits under Clause 8.2 of the lease deed and failed to do

fulfill the said obligation and thereby frustrated the contract.

16. The materials placed before this Court establish the fact that

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the first respondent/claimant obtained all major statutory approvals

required for the operation of the mall. In so far as the planning

permission and the building permit were concerned, Ex.C.20 and

Ex.C.26 have been placed before the learned Arbitrator. In so far as

the environmental and operational clearances were concerned, Ex.C.21

and Ex.C.31 have been placed before the learned Arbitrator. In so far

as the utility approval and the permits were concerned, Ex.C.23 and

Ex.C.24 have been placed before the learned Arbitrator.

17. In so far as providing sewage facility was concerned, Ex.C.28

to Ex.C.30 have been placed before the learned Arbitrator and these

were the receipts for the payments made to the Chennai Metropolitan

Water Supply and Sewerage Board (CMWSSB) for the water and the

sewage connections. Ex.C.32 was the application made to the

CMWSSB for the water/sewage connection along with demand draft.

Ex.C.33 was the clarification letter issued by the CMWSSB.

18. In so far as the statutory approvals were concerned, Ex.C.31

and Ex.C.34 substantiated the same. Apart from these approvals, the

first respondent/claimant also obtained the environmental clearance,

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fire licence, traffic no objection certificate (NOC) from police

authorities, airport and air force NOCs, public building licence,

approval of the Public Works Department, CMRL NOC, property tax

assessment and permanent electricity connection.

19. The learned Arbitrator took into consideration all these

documents and rendered a finding that the first respondent/claimant

obtained all the major statutory approvals and clearances and that

adequate facilities have been provided by installing a sewage

treatment plant with water being supplied by tankers. He also took

note of the fact that at no point of time, more particularly in between

12.9.2018 and 14.12.2018, the petitioners raised any grievance by

pointing out to the above issues faced by them.

20. In fact, the learned Arbitrator also considered the evidence

of R.W.1 wherein he admitted that the petitioners have not even

applied for the trade licence to run the showroom and that from the

date of registration of the lease deed till the date of its termination,

cordial relationship existed between the parties. In fact, R.W.1, in his

evidence, admitted that the termination of the lease deed was a last

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minute decision.

21. Considering these materials, the learned Arbitrator gave a

finding that Section 56 of the Indian Contract Act would get attracted

only when there has been a supervening event or change of

circumstance, which renders the execution of the contract impossible

or it strikes at the root of the contract as a whole. In the case in hand,

no such contingency had ever arisen and it was not even a ground

raised in the termination letter. This ground has been raised for the

first time only when the statement of defense was filed by the

petitioners before the learned Arbitrator.

22. The petitioners were harping upon one of the writ petitions

that was filed by yet another tenant in W.P.No.9527 of 2019 to

establish that there was no water facility and that therefore, the trade

licence was not issued to the occupants.

23. At this juncture, it will be relevant to take note of the order

dated 10.6.2019 passed by a learned Single Judge of this Court in

W.P.No.9527 of 2019 [Maha Sports Design Apparels Private

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Limited, rep. by its Director, D.Dayakar Vs. Commissioner,

Greater Chennai Corporation, Rippon Buildings, Chennai-3 &

two others], the relevant portions of which read as follows :

“8. From the pleadings, records as well as

submissions made by the respective counsels, it is

seen that there is a wide gap in the attitude of the

building owner, the tenant and the government

agencies. It is an admitted fact that the building,

which is catering 186 tenants including theatre

does not have water and sewerage connections

provided by the State. Whether the sewerage

treatment plant in the premises is the adequate

alternate for water and sewerage connections is a

matter for consideration by the authorities. The

Court cannot express its opinion about that. Having

constructed the massive building where theatres

and shops are located and several thousands of

public are expected to visit the mall, the safety of

the building is a predominant one, vis-a-vis the

interest of the individuals who have constructed

the building and let out for rent to the persons who

want to carry out the trade. The statute indicates

that for trade license there must be all necessary

public safety measures in the premises which no

doubt includes water and sewerage connections.

Merely because the guidelines or rules of the

Corporation do not specifically mention that the

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sewerage connection is a mandatory requirement

for the issuance of trade license, one cannot expect

the Court to direct the Corporation to issue trade

license without water and sewerage connections. It

is a very basic requirement for any building for

existence. If in any building, more so of shopping

mall lacks provision for water and sewerage

connections is not available, the authorities cannot

allow the building to be occupied and put to use for

commercial purpose. Therefore, the writ petition

filed seeking Mandamus to issue trade license is

liable to be dismissed on two grounds:

(1) The first respondent has refused to grant

trade license for a specific reason; and

(2) Statute provides for appeal remedy.

9. The third respondent, who is the owner of

the building can either approach the concerned

authority for getting through its pending

applications for water and sewerage treatment

connections or convince the authority that the

sewerage plant available in the building is adequate

substitute, for water and sewerage connections.”

24. It is also relevant to take note of the cross and re-

examination of C.W.1 in this regard, the relevant portion is scanned

and extracted as hereunder :

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25. The above answers provided by C.W.1 during cross and re-

examination also establish the fact that nearly 150 tenants had

occupied the building and were doing the business during December

2018. Even the trade licences were granted so as to enable the

tenants/lessees to do the business. In the light of availability of

sufficient materials, the learned Arbitrator reached the correct

conclusion that the contract has not been frustrated by the operation

of Section 56.

26. The view taken by the Arbitrator is, in fact, the only view

that can be taken in the light of the law regarding Section 56 of the

Indian Contract Act as laid down by the Supreme Court in Satyabrata

Ghose Vs. Mugneeram Bangur & Co. [reported in 1953 (2) SCC

437]. That apart, on facts, the learned Arbitrator was correct in

concluding that this ground was sought to be raised as a clear

afterthought. These conclusions are pure findings of fact and do not

suffer from any perversity or patent illegality so as to call for

interference under Section 34. Issue A is answered accordingly

against the petitioners.

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27. The second point relates to the award of liquidated damages

in terms of Clause 4.3 of the lease deed.

28. The contention of the learned counsel appearing on behalf of

the petitioners is that there was no proof so as to award any

compensation under Clause 4.3.

29. To appreciate this contention, it is first necessary to set out

Section 73 of the Contract Act, which reads as follows:

“73.Compensation for loss or damage

caused by breach of contract —

When a contract has been broken, the party

who suffers by such breach is entitled to receive,

from the party who has broken the contract,

compensation for any loss or damage caused to

him thereby, which naturally arose in the usual

course of things from such breach, or which the

parties knew, when they made the contract, to be

likely to result from the breach of it.

Such compensation is not to be given for

any remote and indirect loss or damage sustained

by reason of the breach.

………..

Explanation. —In estimating the loss or

damage arising from a breach of contract, the

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means which existed of remedying the

inconvenience caused by the non-performance of

the contract must be taken into account.”

30. The rule embodied in Section 73 is that the party, who

“suffers by breach,” is entitled to receive “compensation” for “any

loss or damage caused to him”. It then goes on to state that such

loss or damage must have arisen naturally in the usual course of

things from such breach, which the parties knew, when they made the

contract, would be likely to result from the breach. Section 73

statutorily authorizes the grant of “compensation” for loss or damage

caused on account of a breach of contract.

31. In the decision in State of Kerala Vs. United Shippers

and Dredgers [reported in AIR 1982 Kerala 281], a Division

Bench of the Kerala High Court examined the meaning of the

expression “compensation” in the context of Section 73. The Court,

speaking through U.L.Bhat,J (as the learned Chief Justice then

was), observed as follows:

“Compensation” is “something that

constitutes an equivalent or recompense; making

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things equivalent; satisfying or making amends.”

This is how the word “compensation” has been

explained in Biswas's Encyclopaedic Law Dictionary

and in Jowitt's Dictionary of English Law. Black's

Law Dictionary explains compensation as

“indemnification; payment of damages; making

amends; making whole; giving an equivalent or

substitute of equal value; that which is necessary

to restore an injured party to his former position;”

“compensation” signifies restoration of position or

making things equivalent or recompense.

Necessarily something must have happened as a

result of the breach of the contract which requires

an act of recompense or restoration. If the breach

has not resulted in any harm, loss or damage to

the other party, the question of recompensing him

or restoring to him something which he has lost

would not arise. That is the reason why Section 73

of the Act states “compensation for any loss or

damage caused to him thereby”. However grievous

or serious an act of breach may be, if it does not

lead to any loss or damage caused to the other

party, Section 73 will not give rise to a right of

compensation.”

32. The aforesaid passage makes it clear that it is not mere

breach that makes a claim actionable, but a breach coupled with some

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loss or damage, which results in an actionable claim for damages. A

breach, without injury or loss, is, therefore, not actionable per se.

33. The last limb of Section 73 embodies another rider. It

recognizes that the loss or damage caused must have arisen naturally

ie., in the usual course of things from such breach. This is nothing but

a statutory recognition of the principle laid down by Baron Alderson,

who was one of the Judges, in the old case of Hadley Vs. Baxendale

[reported in (1853) 156 ER 145] wherein it was held as follows:

“Where two parties have made a contract

which one of them has broken, the damages which

the other party ought to receive in respect of such

breach of contract should be such as may fairly

and reasonably be considered as either arising

naturally i.e. according to the usual course of

things, from such breach of contract itself, or such

as may reasonably be supposed to have been in

the contemplation of both parties at the time they

made the contract, as the probable result of the

breach of it. If special circumstances under which

the contract was actually made were

communicated by the plaintiffs to the defendants,

and thus known to both parties, the damages

resulting from the breach of such a contract, which

they would reasonably contemplate, would be the

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amount of injury which would ordinarily follow from

a breach of contract under these special

circumstances so known and communicated. But,

on the other hand, if these special circumstances

were wholly unknown to the party breaking the

contract, he, at the most, could only be supposed

to have had in his contemplation the amount of

injury which would arise generally, and in the great

multitude of cases not affected by any special

circumstances, from such a breach of contract. For,

had the special circumstances been known, the

parties might have specially provided for the

breach of contract by special terms as to the

damages in that case; and of this advantage it

would be very unjust to deprive them.”

34. Turning to the succeeding Section 74 of the Indian Contract

Act, which, in so far as it is material, reads as follows:

“When a contract has been broken, if a sum

is named in the contract as the amount to be paid

in case of such breach, or if the contract contains

any other stipulation by way of penalty, the party

complaining of the breach is entitled, whether or

not actual damage or loss is proved to have been

caused thereby, to receive from the party who has

broken the contract reasonable compensation not

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exceeding the amount so named or, as the case

may be, the penalty stipulated for.”

35. Before examining Section 74, it may be profitable to briefly

notice the position at common law. In England, the Courts would

award liquidated damages where it is found, on facts, that it is a

genuine pre-estimate of damages agreed between parties. On the

other hand, where the sum prescribed is extravagant and

unconscionable in comparison with the greatest loss that could

conceivably be proved to have followed from the breach, it would be

labeled to be a penalty and the Court was empowered to refuse

awarding such sum. Thus, where a sum is found to be a penalty, the

Court would, in equity, relieve the party from its contractual obligation

to pay the said sum on coming to a finding that the said sum is

unconscionable. The essence of a penalty is that it is prescribed “in

terrorem”. The Court would, in each case, find out whether the

payment stipulated is, in truth, a penalty or liquidated damages. These

principles were recognized and affirmed by the House of Lords in

Dunlop Pneumatic Tyre Co. Vs. Selfridge [reported in 1915 AC

647].

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36. In India, the position is different. The drafters of the

Contract Act wanted to cut across the complex rules of English law and

lay down a straightforward proposition by way of Section 74 of the

Contract Act. The provision came up for consideration before a

Constitution Bench of the Hon'ble Apex Court in Fateh Chand Vs.

Balkishan Dass [reported in AIR 1963 SC 1405] wherein Shah,J

pointed out as under:

“The section is clearly an attempt to

eliminate the sometime elaborate refinements

made under the English common law in

distinguishing between stipulations providing for

payment of liquidated damages and stipulations in

the nature of penalty. Under the common law a

genuine pre-estimate of damages by mutual

agreement is regarded as a stipulation naming

liquidated damages and binding between the

parties : a stipulation in a contract in terrorem is a

penalty and the Court refuses to enforce it,

awarding to the aggrieved party only reasonable

compensation. The Indian Legislature has sought

to cut across the web of rules and presumptions

under the English common law, by enacting a

uniform principle applicable to all stipulations

naming amounts to be paid in case of breach, and

stipulations by way of penalty.”

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The principles underlying Section 74 were then explained as follows:

“Section 74 of the Indian Contract Act deals

with the measure of damages in two classes of

cases

(i) where the contract names a sum to be

paid in case of breach; and

(ii) where the contract contains any other

stipulation by way of penalty. We are in the

present case not concerned to decide whether a

contract containing a covenant of forfeiture of

deposit for due performance of a contract falls

within the first class. The measure of damages in

the case of breach of a stipulation by way of

penalty is by Section 74 reasonable compensation

not exceeding the penalty stipulated for. In

assessing damages the Court has, subject to the

limit of the penalty stipulated, jurisdiction to award

such compensation as it deems reasonable having

regard to all the circumstances of the case.

Jurisdiction of the Court to award compensation in

case of breach of contract is unqualified except as

to the maximum stipulated; but compensation has

to be reasonable, and that imposes upon the Court

duty to award compensation according to settled

principles. The section undoubtedly says that the

aggrieved party is entitled to receive compensation

from the party who has broken the contract,

whether or not actual damage or loss is proved to

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have been caused by the breach. Thereby it merely

dispenses with proof of “actual loss or damage”; it

does not justify the award of compensation when

in consequence of the breach no legal injury at all

has resulted, because compensation for breach of

contract can be awarded to make good loss or

damage which naturally arose in the usual course

of things, or which the parties knew when they

made the contract, to be likely to result from the

breach.”

37. As pointed out by Nariman,J in Kailash Nath Associates

Vs. Delhi Development Authority [reported in (2015) 4 SCC

136], Section 74 is a departure from English law and “all

stipulations naming amounts to be paid in case of breach

would be covered by Section 74 and this is because Section 74

cuts across the rules of the English common law by enacting a

uniform principle that would apply to all amounts to be paid in

case of breach, whether they are in the nature of penalty or

otherwise.”

38. However, unlike the facts in Fateh Chand, we are, in this

case, concerned with the first situation viz., “where the contract

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names a sum to be paid in case of breach”, and not with the

second situation i.e., “where the contract contains any other

stipulation by way of penalty,” which was the case in Fateh

Chand. The jurisdiction of the Court to award compensation in case of

breach of contract is unqualified, but is limited to the maximum

stipulated. Another aspect of Fateh Chand is that it recognizes

Section 74, which dispenses with “proof of actual loss or damage,”

but does not dispense with the requirement of showing legal injury

i.e., loss or damage. This is a subtle, but important distinction.

39. The scope of Section 74 came up for consideration before

the Hon'ble Apex Court once again in ONGC Vs. Saw Pipes Ltd.

[reported in 2003 (5) SCC 705], which was also, like the case on

hand, a case where the contract named a sum to be paid in case of

breach. Upholding the grant by the Arbitrator of such named sum as

liquidated damages, the Hon'ble Supreme Court held as follows:

“Therefore, when parties have expressly

agreed that recovery from the contractor for

breach of the contract is pre-estimated genuine

liquidated damages and is not by way of penalty

duly agreed by the parties, there was no justifiable

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reason for the Arbitral Tribunal to arrive at a

conclusion that still the purchaser should prove

loss suffered by it because of delay in supply of

goods.

Further, in arbitration proceedings, the

Arbitral Tribunal is required to decide the dispute in

accordance with the terms of the contract. The

agreement between the parties specifically

provides that without prejudice to any other right

or remedy if the contractor fails to deliver the

stores within the stipulated time, the appellant will

be entitled to recover from the contractor, as

agreed, liquidated damages equivalent to 1% of

the contract price of the whole unit per week for

such delay.”

40. The principles were once again restated by the Hon'ble

Supreme Court in Kailash Nath Associates wherein Nariman,J

stated the rule as under:

“Where a sum is named in a contract as a

liquidated amount payable by way of damages, the

party complaining of a breach can receive as

reasonable compensation such liquidated amount

only if it is a genuine pre-estimate of damages

fixed by both parties and found to be such by the

court. In other cases, where a sum is named in a

contract as a liquidated amount payable by way of

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damages, only reasonable compensation can be

awarded not exceeding the amount so stated.

Similarly, in cases where the amount fixed is in the

nature of penalty, only reasonable compensation

can be awarded not exceeding the penalty so

stated. In both cases, the liquidated amount or

penalty is the upper limit beyond which the court

cannot grant reasonable compensation.”

It must, however, be pointed out that in the aforesaid decision it was

found, on facts, that there was no breach at all. The actual ratio of the

decision is that “If damage or loss is not suffered, the law does

not provide for a windfall.”

41. At this juncture, it is necessary to take note of the decision

of the U.K. Supreme Court in Cavendish Square Holding BV Vs.

Makdessi [reported in 2016 AC 1172]. In the said decision, Lord

Neuberger and Lord Sumption criticized the century old common law

test for penalties and liquidated damages formulated by Lord Dunedin

for the House of Lords in Dunlop Pneumatic Tyre Co. by observing

thus:

“In our opinion, the law relating to penalties

has become the prisoner of artificial

categorisation, itself the result of unsatisfactory

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distinctions : between a penalty and genuine pre-

estimate of loss, and between a genuine pre-

estimate of loss and a deterrent. These distinctions

originate in an over-literal reading of Lord

Dunedin’s four tests and a tendency to treat them

as almost immutable rules of general application

which exhaust the field.”

42. The U.K. Supreme Court has, in the said decision, evolved a

slightly improvised test, which is as follows:

“The true test is whether the impugned

provision is a secondary obligation which imposes

a detriment on the contract-breaker out of all

proportion to any legitimate interest of the

innocent party in the enforcement of the primary

obligation. The innocent party can have no proper

interest in simply punishing the defaulter. His

interest is in performance or in some appropriate

alternative to performance.”

In a concurring judgment, Lord Hodge laid down the following test:

“Whether the sum or remedy stipulated as a

consequence of a breach of contract is exorbitant

or unconscionable when regard is had to the

innocent party's interest in the performance of the

contract”.

43. Thus, what the Court would now see is whether the sum

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stipulated is disproportionate to the legitimate interest of the innocent

party in the enforcement of the primary obligations under the contract.

If a sum is imposed in terrorem (in fear) as a measure of punishment,

as distinguished from a sum stipulated as a legitimate means of

securing compliance with the primary obligations, it would be a penalty

and remains unenforceable. If the sum named has a legitimate interest

to secure the compliance of the contract, the Courts would enforce

them.

44. In assessing whether the sum is a penalty or a liquidated

damage in the context of commercial contracts between parties of

equal bargaining power, the surrounding circumstances would be

material. The UK Supreme Court, in the decision in Cavendish

Square Holding BV, observed thus:

“But for all that, the circumstances in which

the contract was made are not entirely irrelevant.

In a negotiated contract between properly advised

parties of comparable bargaining power, the strong

initial presumption must be that the parties

themselves are the best judges of what is

legitimate in a provision dealing with the

consequences of breach. In that connection, it is

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worth noting that in the Philips Hong Kong case 61

BLR 41, 57–59, Lord Woolf specifically referred to

the possibility of taking into account the fact that

“one of the parties to the contract is able to

dominate the other as to the choice of the terms of

a contract” when deciding whether a damages

clause was a penalty.”

45. In India, a similar test was laid down by a Full Bench of the

Kerala High Court in the case of P.K.Acchuthan Vs. State Bank of

Travancore [reported in 1974 SCC OnLine Kerala 43] wherein it

was held as follows:

“The question whether a particular

stipulation in a contractual agreement is in the

nature of a penalty has to be determined by the

court against the background of various relevant

factors, such as the character of the transaction

and its special nature, if any, the relative situation

of the parties, the rights and obligations accruing

from such a transaction under the general law and

the intention of the parties in incorporating in the

contract the particular stipulation which is

contended to be penal in nature. If on such a

comprehensive consideration, the court finds that

the real purpose for which the stipulation was

incorporated in the contract was that by reason of

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its burdensome or oppressive character it may

operate in terrorem over the promiser so as to

drive him to fulfil the contract, then the provision

will be held to be one by way of penalty.”

46. The aforesaid passage has been approved by the Supreme

Court in the decision in K.P.Subbarama Sastri Vs. K.S.Raghavan

[reported in 1987 (2) SCC 424].

47. Reverting to the facts of this case, it is relevant to extract

Clause 4.3 of the lease deed as hereunder :

“Lock-in Period : The first 36 (thirty six)

months from the commencement date shall be

considered as the lock-in period (the Lock-in

Period). The lessee shall not have the right to

terminate the lease before the expiry of Lock-in

Period. In the event the lessee terminates the

lease during the Lock-in Period for any reason

whatsoever or the lessor terminates the lease

because of an event of default on part of the

lessee as per Article 14.4, then the lessee shall pay

the lessor and the lessor shall be entitled to

recover from the lessee as an admitted liability

(and not by way of penalty), 100% of the rent, for

the balance term of the Lock-in Period.”

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48. The contention raised by the learned counsel appearing on

behalf of the petitioners is that Clause 4.3 of the lease deed is in the

nature of liquidated damages and to allow a claim for liquidated

damages, proof of loss is a sine qua non and that since the first

respondent/claimant failed to prove the loss and since they have also

been awarded the future rent even after the petitioners surrendered

possession on 12.11.2019, the impugned award passed by the learned

Arbitrator for the entire lock-in period is unsustainable.

49. A careful reading of Clause 4.3 of the lease deed would show

that the first 36 months’ period from the commencement date, which

is defined in Clause 1.1 of the lease deed, will be considered as the

lock-in period. During this period, the lessee will not have the right to

terminate the lease before the expiry of the lock-in period. In case the

lessee terminates the lease, then the lessee must pay the lessor the

admitted liability (and not by way of penalty), 100% of the rent for the

balance term of the lock-in period. There can be no doubt that the

stipulation provided for in Clause 4.3 is in the nature of liquidated

damages by way of a fixed sum.

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50. As noticed earlier, Section 74 of the Indian Contract Act

provides that the party complaining of a breach, can receive as

reasonable compensation such liquidated amount only if it is a genuine

pre-estimate of damages fixed by both parties and if it is found to be

such by the Court. There are two categories of stipulated payment for

the breach of contract and they are :

(a) a sum named in the contract as the

amount to be paid in case of breach; and

(b) stipulation by way of penalty.

In both the categories of payment, the sum stipulated operated as the

maximum amount or ceiling.

51. The nomenclature of “liquidated damages” or “penalty” is

not relevant or conclusive or determinative and what is relevant is the

entire clause read together. If the Court concludes that the stipulated

payment is a genuine pre-estimate of anticipated loss in case of

breach, the sum stipulated would be managed to be paid if the Court

also concludes that it is difficult or impossible to prove the loss in

the facts and circumstances of the case. In both the

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contingencies, i.e. in cases where the amount is fixed as compensation

or it is stipulated by way of penalty, only reasonable compensation can

be awarded.

52. In the case at hand, it is not the contention on the side of

the petitioners that there was no loss or damage. The contention is

that there was no proof of loss or damage. However, once the case is

covered by Section 74 and loss or breach is established, the provision

itself says that the aggrieved party would be entitled to receive

compensation from the party, who has broken the contract, “whether

or not actual damage or loss is proved to have been caused by

the breach”.

53. From the facts on record, it is evident (i) that there was a

clear breach of contract on the side of the petitioners, (ii) that the first

respondent/claimant made adjustments and executed works through

contractors to suit the convenience of the petitioners to make it

conducive for the petitioners to start the fit out work, (iii) that the

petitioners, all of a sudden, issued the termination notice by merely

stating that due to unforeseen and unavoidable circumstances, they

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were not able to proceed with the proposed lease and (iv) that the first

respondent/claimant would have found it difficult to explore the

possibility of a tenant immediately since the work had to be re-done to

restore the demised premises to its original position.

54. Judged in the backdrop of the aforesaid facts, it would be

impossible to categorize the sum fixed under Clause 4.3 of the lease

deed as a sum in terrorem so as to warrant the label of penalty. That

apart, it cannot be forgotten, as pointed out by the UK Court of Appeal

in Cavendish Square Holding BV that “in a negotiated contract

between properly advised parties of comparable bargaining

power, the strong initial presumption must be that the parties

themselves are the best judges of what is legitimate in a

provision dealing with the consequences of breach.”

55. The learned counsel appearing on behalf of the petitioners

had placed reliance on a decision of Khanna,J in Manju Bagai. But,

the facts of that case would show that it arose out of a petition under

Section 433(e) of the Companies Act, 1956. It was contended that an

un-ascertained sum of damages constituted a debt within the meaning

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of the aforesaid provision. The situation therein, therefore, is not

comparable with the facts of this case.

56. In the context of damages as a “debt” under Section 433(e),

Chagla,C.J., pointed out in Iron & Hardware (India) Co. Vs. Firm

Shamlal & Bros. [reported in AIR 1954 Bombay 423], as follows:

“Now, damages are the compensation which

a Court of law gives to a party for the injury which

he has sustained. But, and this is most important

to note, he does not get damages or compensation

by reason of any existing obligation on the part of

the person who has committed the breach. He gets

compensation as a result of the fiat of the Court.

Therefore, no pecuniary liability arises till the Court

has determined that the party complaining of the

breach is entitled to damages. Therefore, when

damages are assessed, it would not be true to say

that what the Court is doing is ascertaining a

pecuniary liability which already existed. The Court

in the first place must decide that the defendant is

liable and then it proceeds to assess what that

liability is. But till that determination there is no

liability at all upon the defendant.”

57. The learned counsel appearing on behalf of the petitioners

also placed reliance on the decision of the Hon'ble Supreme Court in

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Muralidhar Chiranjilal.

58. However, a close look at the decision of the Hon'ble Supreme

Court in Muralidhar Chiranjilal would show that it is clearly

distinguishable. On facts, it was found that it was a simple case of

purchase of goods for re-sale and that the measure of damages would

have to be calculated taking into account the market rate prevalent as

on the date of breach and the contract rate.

59. The other decision relied upon by the learned counsel

appearing on behalf of the petitioners is the decision rendered by

N.Sathish Kumar,J in Chithra Kumar.

60. However, in the said decision of this Court in Chithra

Kumar, the Arbitrator had awarded a sum of Rs.15 lakhs for training

personnel in the absence of there being any proof of payment. On

these facts, it was held that the finding was perverse and

unsustainable.

61. In the instant case, the learned Arbitrator has construed the

contract and arrived at a factual finding that

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(a) there was a breach

(b) the sum determined and set out in

Clause 4.3 would constitute reasonable

compensation and

(c) the sum awarded was the maximum

set out in the said clause.

It cannot be said that these conclusions are outside the purview of

Sections 73 and 74 of the Contract Act.

62. In the decision in Shiva Jute Baling Ltd. Vs. Hindley and

Co. Ltd. [reported in AIR 1959 SC 1357], the Hon'ble Apex Court

held thus:

“Section 74, provides for breach of contract

where penalty is stipulated for or a sum is named

and lays down that when a contract has been

broken, if a sum is named in the contract as the

amount to be paid in case of such breach, or if the

contract contains any other stipulation by way of

penalty, the party complaining of the breach is

entitled, whether or not actual damage or loss is

proved to have been caused thereby, to receive

from the party who has broken the contract

reasonable compensation not exceeding the

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amount so named or, as the case may be, the

penalty stipulated for. What clause (12) of the

contract provides in this case is the measure of

liquidated damages and that consists of two things,

namely, (i) the difference between the contract

price and the market price on the date of default,

and (ii) an addition of 10s. per ton above that.

There is nothing in Section 73 or Section 74 of the

Contract Act, which makes the award of such

liquidated damages illegal. Assuming that the case

is covered by Section 74, it is provided therein that

reasonable compensation may be awarded for

breach of contract subject to the maximum amount

named in the contract. What the arbitrators have

done is to award the maximum amount named in

the contract. If the appellant wanted to challenge

the reasonableness of that provision in clause (12)

it should have appeared before the arbitrators and

represented its case. It cannot now be heard to say

that simply because clause (12) provided for a

further sum of 10s. per ton over and above the

difference between the contract price and the

market price on the date of the default, this was

per se unreasonable and was therefore bad

according to the law of India as laid down in

Sections 73 and 74 of the Contract Act. Both these

sections provide for reasonable compensation and

Section 74 contemplates that the maximum

reasonable compensation may be the amount

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which may be named in the contract. In this case

the arbitrators have awarded the maximum

amount so named and nothing more. Their award

in the circumstances cannot be said to be bad on

the face of it, nor can it be said to be against the

law of India as contained in these sections of the

Contract Act. The second contention must also

fail.”

63. It must also be remembered that the challenge is one under

Section 34 and this Court is, therefore, not entitled to substitute its

view for that of the Arbitrator merely because an alternative view is

plausible as has been pointed out in the decision of the Hon'ble Apex

Court in Associate Builders, which is as follows :

“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.”

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64. The learned Arbitrator found that there was breach and

having regard to the manner and mode of termination and the effort

put in by the first respondent/claimant to make the demises premises

ready for occupation and the inconvenience caused to such

termination, the learned Arbitrator awarded the entire rent for the

lock-in period namely for 36 months, which worked out to

Rs.9,09,05,760/-. The learned Arbitrator also awarded 50% of the

CAM charges, which worked out to Rs.2,17,10,637/-. In total, a sum of

Rs.11,26,16,397/- was awarded. In the light of the above discussions,

this court is unable to hold that the conclusions of the learned

Arbitrator are, in any way, against the Public Policy of India violating

Section 34(2)(b)(ii) or are, in any way, patently illegal violating

Section 34(2A) of the Act. Issue B is answered accordingly

against the petitioners.

65. The next issue namely Issue C is as regards the forfeiture of

the security deposit. Clause 14.5(b) of the lease deed deals with

forfeiture of the security deposit. It states that in the event of

termination of the lease deed, the lessor should have the right to

forfeit the security deposit made by the lessee and that the lessor

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would not be required to return the security deposit to the lessee

notwithstanding anything contained in Clause 14.5.

66. In so far as this issue is concerned, it was contended on the

side of the petitioners that it would amount to penalty, that therefore,

it had to be set off from the damages already awarded in favour of the

first respondent/claimant for the breach of contract and that failing to

do so would result in the first respondent/claimant unjustly enriching

themselves and it also runs against the most basic notions of justice.

67. The learned Arbitrator examined the terms of the lease deed

and the evidence let in by both parties and concluded that the

petitioners are the parties in default, that they have breached the

terms of the contract and that they are liable to face the consequences

under the contract, which included the forfeiture of security deposit.

The learned Arbitrator took into consideration the scope of Clause

14.5(b) of the lease deed, which provides for forfeiture of the security

deposit in the event of premature termination and which also contains

a non obstante clause whereby the first respondent/claimant has

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recourse to other legal remedies including the forfeiture of security

deposit.

68. The petitioners had, in fact, made a counter claim for the

return of the security deposit amount. But, it was rejected by the

learned Arbitrator. The findings of the learned Arbitrator on this issue

are available at paragraph 57 of the award. The learned Arbitrator

rendered a finding that the termination of the lease by the petitioners

is illegal and is in violation of the terms of the lease deed. Therefore,

the consequence is that the security deposit can be forfeited as per

Clause 14.5(b).

69. In the considered opinion of this Court, once the termination

of the lease had been found to be illegal, the learned Arbitrator was

empowered to award liquidated damages in terms of Clause 4.3. This

he proceeded to do and this Court has upheld the same in the

discussions supra. However, once the Arbitrator had awarded

“reasonable compensation” for the said breach by way of the sum

stipulated as liquidated damages, there remains no rhyme or reason

as to why a further sum ought to have been directed to be paid by way

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of forfeiture of the security deposit. The principle that award of

damages cannot result in a windfall applies. The direction to forfeit the

security deposit in addition to payment of liquidated damages is clearly

in the teeth of the reasonable compensation principle set out in

Section 74. This is a conclusion which, on the face of it, is illegal since

any sum, over and above the reasonable compensation fixed under

Section 74, would be legally impermissible.

70. The direction to forfeit the security deposit runs counter to

the substantive provisions of law relating to damages constituting a

patent illegality within the meaning of Section 34(2A) of the Act. The

award under this head is clearly severable from the rest of the award.

Consequently, the award under this head is severed and set aside.

Issue C is answered accordingly in favour of the petitioners.

71. In the course of arguments, an attempt was made on the

side of the petitioners that the award towards restoration costs is

based on no evidence.

72. This submission is unsustainable since the learned Arbitrator

referred to the records file marked as Ex.C.15 to Ex.C.18 to assess the

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expenses incurred by the first respondent/claimant and accordingly

gave the reasoning at paragraph 55 of the award. This is again a

possible/plausible view based on appreciation of evidence and this

Court cannot sit on appeal against such a finding.

73. The last issue is with regard to award of 24% interest.

74. It was submitted on the side of the petitioners that the

interest awarded was exorbitant and it would shock the conscience of

the Court.

75. Per contra, it was contended on the side of the first

respondent/claimant that the rate of interest at 24% per annum is

based on the provisions contained in the lease deed that were agreed

to between the parties. A specific reference was made to Clauses

5.1.(b) and 5.4.(a) of the lease deed.

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76. Clause 5.1.(b) relates to delay in payment of rent, which

attracts interest at the rate of 24% per annum. Clause 5.4.(a) of the

lease deed deals with late charges wherein it is provided that in the

event of payment of any sum of money including but not limited to

rent, taxes and other charges, becomes overdue beyond the date, on

which, payments are due and payable as per the terms of the lease

deed, the lessee would be under the obligation to pay interest at the

rate of 24% per annum on the delayed payment.

77. The above two clauses do not really justify the award of 24%

interest per annum, which also covers interest on future damages. The

interest was awarded in favour of the first respondent/claimant from

09.4.2019 for the sum of Rs.11,88,16,397/- towards rent for the

period from 30.11.2018 to 30.11.2021 (lock-in period). Even assuming

that such rent is due and payable, the liability is only upto 30.11.2021.

Despite this, the learned Arbitrator directed the petitioners to pay

interest at the rate of 24% per annum on rent, which was not even

due as on the date of the award i.e. 22.3.2021.

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78. Even otherwise, the interest awarded by the learned

Arbitrator at 24% per annum certainly shocks the conscience of this

Court. In the considered view of this Court, it goes against the basic

notions of justice. Therefore, the same requires the interference. In

the light of the above findings, to render substantial justice to both

parties, this Court is inclined to reduce the interest component from

24% per annum to 12% per annum. Issue D is answered

accordingly.

79. The issue as to whether a Court can modify an arbitral award

when a challenge was made under Section 34 of the Act was dealt with

in the decision of the Hon’ble Apex Court in Gayatri Balasamy Vs.

ISG Novasoft Technologies [reported in 2025 SCC OnLine SC

986 : 2025 (7) SCC 1]. One of the contingencies where such a

modification can be made is where the award is severable meaning

thereby that the invalid part can be separated from the valid part. This

Court has set aside the direction to forfeit the security deposit in the

discussions supra. The award under this head had been held to suffer

from patent illegality under Section 34(2-A). But, as the award under

this head is severable, modification in this regard is permissible in view

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of the decision of the majority in Gayatri Balasamy.

80. Accordingly, the interest component has been scaled down

from 24% to 12 % as discussed supra in issue D as this modification

has also been held to be permissible in the majority judgment in

Gayatri Balasamy.

81. In the result, these original petitions are partly allowed on

the following terms:

(i) The forfeiture of a part of the security

deposit made by the petitioners to the tune of

Rs.75,75,480/- is set aside. The petitioners

shall be entitled to set off the said sum from

the sums found due and payable by them to

the first respondent/claimant by the learned

Arbitrator.

(ii) The interest awarded at the rate of

24% per annum is modified to 12% per annum

from the date of claim till the date of

realization.

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(iii) In all other respects, including costs,

the award dated 22.3.2021 of the learned

Arbitrator is confirmed.

Consequently, the connected application, if any, is closed.

08.10.2025

Index : Yes

Neutral Citation: Yes

RS

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N.ANAND VENKATESH,J

RS

Arb.O.P.(Com.Div.)No.257 of 2021

& 209 of 2022 & A.No.3306 of 2025

08.10.2025

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