Madras High Court
S.Gunasekaran vs M/S.S & S Foundations Pvt Ltd on 29 May, 2019
Author: Senthilkumar Ramamoorthy
Bench: Senthilkumar Ramamoorthy
Arb.O.P.No.76 of 2021
IN THE HIGH COURT OF JUDICATURE AT MADRAS
D AT E D : 17.12.2021
C O RAM :
The Hon'ble Mr. Justice SENTHILKUMAR RAMAMOORTHY
Arb.O.P.(Comm. Div).No.76 of 2021
and
A.No.2745 of 2021
1.S.Gunasekaran
2.K.Selvarajan
3.J.Sathya Satchi
4.M.Prabhakaran ... Petitioners
Vs
M/s.S & S Foundations Pvt Ltd.,
Rep. by its Managing Director,
No.45, Giriappa Road,
T.Nagar, Chennai – 600 047 ... Respondents
PRAYER : This Petition has been filed under Section 34(2) of the
Arbitration and Conciliation Act 1996 praying to set aside the Arbitration
Award dated 29.05.2019 made in Arbitration Case on the file of the
Arbitrator Mr.Padmanaban Judge (Rtd.) and consequently allow the counter
claims as claimed by the petitioners herein.
For Petitioners : Mr.E.Om Prakash S.C.
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https://www.mhc.tn.gov.in/judis
Page No.1 of 21
Arb.O.P.No.76 of 2021
For M/s.U.Karunakaran
For Respondent : Mr.K.Bijai Sundar
ORDER
The Petitioners were the respondents in the arbitral proceedings between them and the Respondent herein. The arbitral award dated 29.06.2019 (the Award) is assailed in this petition.
2. The Petitioners owned about 39.28 acres of land close to the Grand Southern Trunk(GST) Road. Some time in the year 2013, the Respondent approached the Petitioners in relation to the procurement of the above mentioned 40 acres as well as additional lands of an extent of 80 acres. Pursuant to negotiations in such regard, a Memorandum of Understanding dated 09.05.2013(the MoU) was executed between the parties. In terms of the MoU, the Petitioners were required to facilitate and procure the acquisition of 120 acres, in the aggregate, as described in the schedule to the MoU, by the Respondent herein. The MoU records that the Petitioners herein had already purchased an extent of 34.38 acres and also held an agreement for an extent of 4.90 acres, thereby aggregating to 39.28 acres. The sale consideration of Rs.25 lakhs per acre was fixed for the _____________ https://www.mhc.tn.gov.in/judis Page No.2 of 21 Arb.O.P.No.76 of 2021 procurement of 120 acres under the MoU. The Respondent was required to pay an aggregate sum of Rs.30 crores for such purpose. The MoU imposed an obligation on the Petitioners herein to coordinate with the respective land owners, obtain the relevant documents and submit the same for perusal by the Respondent. If the total cost of purchase exceeded Rs.30 crores, such cost was to be borne by the Petitioners. The MoU provided for area sharing as follows: 26.1% or 6900 sq. ft. per acre of land was allotted to the share of the Petitioners; and 73.9% or 22200 sq. ft. per acre of land was alloted to the share of the Respondent. The MoU also stipulated that the Respondent is entitled to procure the lands if the Petitioners failed to do so, and that any excess cost in such regard shall be deducted by making an adjustment against the area allotted to the Petitioners under the MoU. Such MoU also contained an arbitration clause.
3. The agreed position is that the Petitioners were unable to procure the full extent of 120 acres in terms of the MoU. Pursuant to negotiations, the parties entered into a Supplemental Memorandum of Understanding dated 27.06.2014 (the Supplemental MoU). By the Supplemental MoU, the extent of land to be procured was reduced from 120 _____________ https://www.mhc.tn.gov.in/judis Page No.3 of 21 Arb.O.P.No.76 of 2021 acres to 65 to 67 acres, and the sale consideration was increased from Rs.25 lakhs per acre to Rs.35 to Rs.37 lakhs per acre. However, the Supplemental MoU recorded that any amounts paid by the Respondent in excess of Rs.25 lakhs per acre shall be adjusted from the share of the Petitioners. The Supplemental MoU also provided for a further 20% of the above mentioned excess amount to be adjusted towards interest factor. The Supplemental MoU contained a schedule in which the survey numbers of lands, which were required to be procured, were set out. Significantly, the Supplemental MoU imposed an obligation on the Petitioners herein to procure the balance extent of 10 acres or thereabouts within a period of 15 days from the date of Supplemental MoU. In case of default, the Respondent could proceed to procure the lands and adjust the excess cost, if any, against the share of the Petitioners in the total project area.
4. Pursuant to both the MoU and the Supplemental MoU, payments were made to the Petitioners herein. Each time such payment was received by the Petitioners, it appears that endorsements were made on the MoU or the Supplemental MoU, as the case may be.
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5. The Petitioners did not complete the procurement of the full extent of 67 acres, even as per the Supplemental MoU. While an extent of about 61.5 acres was procured, an extent of 5.5 acres could not be procured within the time limit envisaged by the Supplemental MoU. Meanwhile, disputes arose between the parties with regard to breach of the terms of the MoU and Supplemental MoU. Therefore, the Respondent issued notice dated 02.12.2017 to the Petitioners and informed them of the breach committed by them and put them on notice of the compensation claim in respect thereof. A further notice dated 10.01.2018 was also issued. Eventually, arbitral proceedings were instituted. In such proceedings, the Respondent herein prayed for a declaration that the Respondents had committed breach of the MoU and Supplemental MoU and that they were not entitled to a share in the developed project. In addition, a sum of Rs.6.02 crores was claimed as loss of profit; a sum of Rs.20.45 crores towards loss of interest; a sum of Rs.9.04 crores towards additional expenditure; and costs of the arbitral proceedings. A statement of defence was filed in response to the statement of claim. By such statement of defence, the Petitioners claimed the balance sale consideration for the 40 acres, which they owned previously, after adjusting the advance paid and for _____________ https://www.mhc.tn.gov.in/judis Page No.5 of 21 Arb.O.P.No.76 of 2021 compensation for not developing the property as per the MoU. The Respondent herein adduced documentary evidence by exhibiting Exhibits C1 to C14 and the Petitioners also adduced documentary evidence by exhibiting Exhibits R1 to R7. The said exhibits were marked by consent. Neither party adduced oral evidence. The Arbitral Tribunal framed 12 issues for consideration. Eventually, by the Award, the Arbitral Tribunal granted a declaration that the Petitioners herein committed breach of the MoU and Supplemental MoU and that they are not entitled to claim a share or right or interest in the layout developed by the Respondent. As regards the claim towards loss of profit, a sum of Rs.2,43,40,500/- was awarded. All the other claims were rejected except for a sum of Rs.9 lakhs towards costs of the arbitral proceedings.
6. The Petitioners assail the Award on multiple grounds. The first ground of challenge is that both the MoU and the Supplemental MoU are contingent contracts. The second ground of challenge is that the Arbitral Tribunal completely disregarded the documentary evidence adduced by the Petitioners in the form of Exhibits R1 to R7. The third ground of challenge is that the MoU and Supplemental MoU specified a mechanism to deal with _____________ https://www.mhc.tn.gov.in/judis Page No.6 of 21 Arb.O.P.No.76 of 2021 non-compliance by the Petitioners. In specific terms, it was contended that the Respondent was to be compensated by making an adjustment against the area share of the Petitioners. In derogation of the contractual stipulation, the Petitioners contended that the Arbitral Tribunal concluded that the Petitioners were not entitled to any area share at all. As regards the grant of a sum of about Rs.2.43 crores towards loss of profit, the Petitioners contended that the award of loss of profit was not based on any evidence. Indeed, the Petitioners contended that the Arbitral Tribunal recorded that there was no evidence of loss of profit and thereafter proceeded to record that nominal compensation could be granted. The Petitioners pointed out that these findings of the Arbitral Tribunal are patently illegal both on account of disregarding the MoU and Supplemental MoU and also because such conclusions were not based on the evidence on record. The Petitioners also pointed out that neither the MoU nor the Supplemental MoU have been terminated as on date.
7. These contentions were refuted by the Respondent. The Respondent placed considerable emphasis on the endorsements made by the Petitioners on the MoU and Supplemental MoU. By drawing reference to _____________ https://www.mhc.tn.gov.in/judis Page No.7 of 21 Arb.O.P.No.76 of 2021 the said endorsements, the Respondent contended that the Petitioners relinquished their rights under the MoU and Supplemental MoU. The Respondent also pointed out that the Arbitral Tribunal referred to and, in fact, extracted such endorsements before concluding that the Petitioners not only committed breach of the MoU and Supplemental MoU but categorically admitted the breach.
8. With regard to the purchase of 5.5 acres by the Respondent, the Respondent pointed out that such purchase was made subsequently since one of the owners was a minor earlier and, therefore, the purchase could not be made until such minor become a major without obtaining prior court approval.
9. The Respondent contended that the Petitioners had raised grounds that were not raised before the Arbitral Tribunal. In this regard, the following judgments were relied upon:
(i) Union of India v. M/s.Suska Pvt. Ltd., (2017) SCC online 1436, wherein, at paragraph 28, the Court concluded that a plea not taken at the appropriate stage cannot be taken subsequently.
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(ii) R.Vellammal v. R.Daivasigamani and others AIR 1993 Mad 100, (R.Vellammal) wherein, at paragraph 13, the Court concluded that a point not raised earlier could not be raised in appellate proceedings.
(iii) Pacifica (India) Projects Pvt. Ltd. v. Oriental Cuisines P. Ltd., (2017) SCC 37259 (Pacifica) wherein, after noting that a particular plea had not been raised before the Arbitral Tribunal, the Court concluded at paragraph 7 and 9 that such plea could not be raised in course of proceedings under Section 34 of the Arbitration and Conciliation Act, 1996 (the Arbitration Act).
10. In relation to the loss of profit claim, the Respondent relied upon the following judgments:
(i) A.T.Brij Paul Singh and Others v. State of Gujarat (1984) 4 SCC 59 (Brij Paul Singh), wherein, at paragraph 10, the Court upheld the award of damages for loss of profit at 15% of the value of balance work.
(ii) Government of Andhra Pradesh and Ors v. V.Satyam Rao, AIR 1996 AP 288, wherein a Division Bench of the Andhra Pradesh High Court referred to the judgment of the Hon'ble Supreme Court in Brij Paul _____________ https://www.mhc.tn.gov.in/judis Page No.9 of 21 Arb.O.P.No.76 of 2021 Singh and upheld the award of a loss of profit claim at 15% of the balance work.
(iii) Mohd. Salamatullah and Ors v. Government of Andhra Pradesh, (1977) 3 SCC 590(Mohd. Salamatullah), wherein the Hon'ble Supreme Court interfered with the High Court order by which the award of damages at 15% of the contract price was reduced to 10%.
(iv) The Superintending Engineer, T.N.U.D.P., Madras Circle and Ors v. A.V.Rangaraju and ors, AIR 1994 Mad 217, wherein, at paragraph 16, the award of 10% of the value of incomplete work towards loss of profit was upheld.
11. The Respondent referred to an abstract indicating payments made to the Petitioners. After submitting that such abstract was prepared by adding the amounts specified in the respective endorsements, it was pointed out that an aggregate payment of Rs.24.79 crores was made and that such payment exceeded the total liability of the Respondent under the MoU and Supplemental MoU by a sum of Rs.7.8 crores. Clauses 3 and 4 of the Supplemental MoU were relied upon in this connection. _____________ https://www.mhc.tn.gov.in/judis Page No.10 of 21 Arb.O.P.No.76 of 2021
12. By way of rejoinder, the Petitioners pointed out that the abstract was not produced before the Arbitral Tribunal; instead, only Exhibit C-14 was filed by the Respondent herein. As per Exhibit C-14, it was contended that the Petitioners did not receive full consideration even for the lands which they conveyed to the Respondent.
13. As regards the endorsements on the MoU and Supplemental MoU, the Petitioners pointed out that most endorsements on the Supplemental MoU were not signed by all the parties. While two parties signed certain endorsements, others were signed by one party. The Petitioners also contended that the Respondent did not plead that the Petitioners had relinquished their rights under the MoU and Supplemental MoU by virtue of the endorsements. By drawing reference to the statement of claim before the Arbitral Tribunal, the Petitioners contended that the Respondent herein pleaded breach of the MoU and Supplemental MoU, but not relinquishment of rights by the Petitioner.
14. The Respondent, however, adverted to paragraph 25 of the statement of claim and pointed out that the endorsements were referred to _____________ https://www.mhc.tn.gov.in/judis Page No.11 of 21 Arb.O.P.No.76 of 2021 therein. Once the endorsements are referred to in the pleading, it was contended that it is not necessary to set out the content thereof in the pleadings. Besides, it was contended that the endorsements were not disowned by the non-signatory Petitioners. The Respondent also pointed out that the plea of coercion, as regards the endorsements, was taken for the first time in the Petition under Section 34. With regard to the counter claim, the Respondent pointed out that no evidence of market value was adduced by the Petitioners herein although the counter claim was founded on market value.
15. The question that arises for consideration on the basis of the rival contentions is whether the Award is liable to be interfered with either because it is contrary to public policy or because it is patently illegal. The first ground of challenge by the Petitioners is that both the MoU and Supplementary MoU are contingent contracts. Since this is a fundamental and preliminary objection, this aspect should be examined first. A contingent contract is a contract which becomes enforceable only upon the occurrence of a future event. Upon perusal of the MoU and Supplementary MoU, it is evident that both these documents impose obligations on the parties with _____________ https://www.mhc.tn.gov.in/judis Page No.12 of 21 Arb.O.P.No.76 of 2021 effect from the date of execution thereof. Indeed, time limits are fixed, which run from the date of execution, and not the date of occurrence of a contingency. Learned senior counsel for the Petitioners contended, on this issue, that these contracts are contingent on third parties agreeing to sell their lands to the Respondent. While it is true that successful purchase of the lands by the Respondent is dependent on the volition of third parties, this feature of the contracts does not mean that they are contingent; instead, this characteristic would be material for purposes of deciding whether there was a breach of contract. To put it differently, in view of this characteristic, if the Petitioners were in a position to establish that they undertook best endeavours to procure the lands, they could have legitimately contested an allegation of breach. Thus, it would be erroneous to construe these contracts as contingent on that account.
16. The other grounds of challenge are on the merits of the Award. Therefore, the Award and the material facts and evidence on record should be examined while dealing with the same. The Award discloses that the relief of declaration was granted as also a sum of about Rs.2.43 crores towards loss of profit. Hence, it is sufficient to focus attention on these two aspects. The logical point to begin such exercise is the statement of claim before the _____________ https://www.mhc.tn.gov.in/judis Page No.13 of 21 Arb.O.P.No.76 of 2021 Arbitral Tribunal. After adverting to the sequence of events in the statement of claim, the Respondent pleaded as under:
''The claimant submits that despite all the assurances given by the Respondents as per the supplemental MoU, they miserably failed to perform their obligations as per the same and as a result of this they have breached the terms and conditions of both the MoU and the supplemental MoU.'' From the above pleading, it follows that the Respondent set up a case of breach of contract. It remains to be seen whether the Respondent pleaded relinquishment. Paragraph 25 of the statement of claim deals with the endorsements, and the said paragraph is set out below:
''It is also apposite to point out that the Respondents have themselves through a series of endorsements made by them from time to time in writing have themselves agreed that they have committed breach of terms and were unable to perform the MoU and Supplemental MoU. Thus, the fact that there is a material breach is admitted and therefore the claimant is clearly entitled for damages and compensation for the losses suffered.'' _____________ https://www.mhc.tn.gov.in/judis Page No.14 of 21 Arb.O.P.No.76 of 2021 In paragraph 25 also, while the Respondent referred to the endorsements, the Respondent did not plead that the Petitioners relinquished their rights under the MoU and Supplemental MoU by making such endorsements. This aspect gains greater significance in the light of the admitted position that neither the MoU nor the Supplemental MoU were terminated. Indeed, it appears that parties continued to perform their respective obligations in terms thereof, however belatedly, even after making such endorsements.
17. The Respondent contended, on this issue, that the endorsements were referred to and that it is not necessary to extract the endorsements. While it is true that evidence need not be pleaded by setting out the endorsements in full or even in part in the statement of claim, it was necessary to put the Petitioners on notice that a case of relinquishment of rights was being set up. Although the Code of Civil Procedure is not binding on the Arbitral Tribunal, the fundamental principle that a pleading is intended to put the counter party on notice of the position being canvassed by the claimant applies equally to arbitral proceedings. To put it differently, unless the Petitioners are put on notice that the Respondent pleads _____________ https://www.mhc.tn.gov.in/judis Page No.15 of 21 Arb.O.P.No.76 of 2021 relinquishment, the Petitioners do not have the opportunity to refute the plea of relinquishment or to lead evidence to counter the plea of relinquishment.
18. The Award should be examined by bearing in mind this context. In paragraphs 72 to 78 of the Award, the Arbitral Tribunal dealt with the endorsements. The endorsement made on 20.05.2013 by two of the Petitioners was extracted fully. Interestingly, the said endorsement does not deal with relinquishment; which, however, is referred to in subsequent endorsements. By adverting to such endorsements, the Arbitral Tribunal recorded that the Petitioners herein had committed breach of MoU and Supplemental MoU. To that extent, the Arbitral Tribunal cannot be faulted inasmuch as the pleading is also on the basis of breach. However, the Arbitral Tribunal proceeded further to record the following finding:
''....The Respondents cannot in law claim any share of profit in terms of the two MoU's on any date nor they could claim any interest thereon.''
19. As indicated earlier, the finding of the Arbitral Tribunal that the Petitioners had relinquished their rights under the MoU and Supplemental MoU, in the absence of a pleading for such purpose by the _____________ https://www.mhc.tn.gov.in/judis Page No.16 of 21 Arb.O.P.No.76 of 2021 Respondent herein, constitutes a patent illegality and warrants interference. On this issue, as correctly contended by the Petitioners, it should also be borne in mind that both the MoU and Supplemental MoU prescribe the mechanism to deal with breach. If the Petitioners failed to procure the extent of lands specified in the above documents, the Respondent was permitted to procure the same and adjust any excess cost against the Petitioners' share in the completed project. Neither the MoU nor the Supplemental MoU envisaged relinquishment of rights in case of breach. Thus, in addition to the fact that such conclusion is not in line with the pleadings of the Respondent herein, such conclusion was drawn in disregard of the contractual stipulations in case of breach.
20. The next issue that warrants attention is the grant of a sum of Rs.2.43 crores towards loss of profit. A claim for loss of profit is different from other claims for damages because it is towards unearned profits, which the claimant concerned contends could and would have been earned but for the breach. Thus, by its very nature, actual loss cannot be proved. Nonetheless, a claim for loss of profit is, typically, as in this case, a claim for unliquidated damages. The general rule in such regard is that the party _____________ https://www.mhc.tn.gov.in/judis Page No.17 of 21 Arb.O.P.No.76 of 2021 claiming unliquidated damages is required to prove breach, the loss caused by such breach, including the quantum of loss. Although this is a loss of profit claim and actual loss could not have been proved, the Respondent could have adduced evidence of the business plan for this project along with the return on investment or profit margin reckoned therein. In the alternative, evidence of the profit margin in substantially similar projects of the Respondent or any other developer could have been adduced. Instead, the Respondent endeavoured to justify the grant of loss of profit by referring to several judgments beginning with the judgment of the Hon'ble Supreme Court in Brij Paul Singh. In Brij Paul Singh, the Hon'ble Supreme Court refused to interfere with an award of loss of profits at 15% of the value of the remaining work on the basis that 15% had been awarded in respect of another contract in an adjacent location. Thus, Brij Paul Singh is not an authority for the proposition that 15% may be awarded towards loss of profit without any proof. Besides, all the judgments cited by learned counsel for the Respondent were in the context of construction contracts. In construction contracts, it is standard practice for contractors to submit bids by factoring a profit percentage which ranges between 10% to 15% of the value of work as judicially noticed in several judgments cited by the _____________ https://www.mhc.tn.gov.in/judis Page No.18 of 21 Arb.O.P.No.76 of 2021 Respondent. The present context is completely different inasmuch as the MoU and Supplemental MoU deal with a real estate development. There is absolutely no indication as to the margin of profit in such projects. Even with regard to evidence, an arbitral award is liable to be interfered with if such award is based on no evidence. The award of a sum of about 2.43 crores towards loss of profit is admittedly on the basis of no evidence as indicated by the following extract from the Award:
''There is no proof or evidence as to how much the claimant has to sell out more to purchase the adjacent lands to form a comprehensive block and no proof has been attempted by the Claimant to prove the alleged loss or quantum of loss by letting oral evidence or some proof of such claim of loss. If at all, only a nominal compensation could be allowed under Section 73 of the Indian Contract Act to the claimant....''
21. After recording a categorical finding that no evidence was adduced, the Arbitral Tribunal committed a patent error in awarding a sum of Rs.2.43 crores. Therefore, in this respect also, the Award is not sustainable. Since the award of costs to the Respondent is on the principle _____________ https://www.mhc.tn.gov.in/judis Page No.19 of 21 Arb.O.P.No.76 of 2021 that costs follow the event or the loser pays, the award of costs is also liable to be set aside on account of interference with other aspects of the Award.
22. For reasons set out above, the Arbitral Award dated 29.06.2019 is set aside. In view of the fact that the MoU and Supplemental MoU have not been terminated, it is open to either party to raise a dispute if such dispute arises on a distinct cause of action. Any such dispute should be raised in accordance with the MoU and Supplemental MoU. There will be no order as to costs. Consequently, connected application is closed.
17.12.2021
Index :Yes
Internet :Yes
rrg
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Page No.20 of 21
Arb.O.P.No.76 of 2021
SENTHILKUMAR RAMAMOORTHY
J.,
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Arb.O.P.(Comm.
Div)No.76 of 2021
and
A.No.2745 of 2021
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https://www.mhc.tn.gov.in/judis
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Arb.O.P.No.76 of 2021
17.12.2021
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