Madras High Court
M/S.Prime Store vs Sugam Vanijya Holdings on 22 March, 2021
Author: N.Anand Venkatesh
Bench: N.Anand Venkatesh
2025:MHC:2329
Arb.O.P.(Com.Div.)Nos.257
of 2021 & 209 of 2022
IN THE HIGH COURT OF JUDICATURE AT MADRAS
Reserved on : Delivered on:
26.9.2025 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
of 2021 & 209 of 2022
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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Arb.O.P.(Com.Div.)Nos.257
of 2021 & 209 of 2022
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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Arb.O.P.(Com.Div.)Nos.257
of 2021 & 209 of 2022
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 4/71 https://www.mhc.tn.gov.in/judis ( Uploaded on: 08/10/2025 01:43:34 pm ) Arb.O.P.(Com.Div.)Nos.257 of 2021 & 209 of 2022 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 5/71 https://www.mhc.tn.gov.in/judis ( Uploaded on: 08/10/2025 01:43:34 pm ) Arb.O.P.(Com.Div.)Nos.257 of 2021 & 209 of 2022 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 6/71 https://www.mhc.tn.gov.in/judis ( Uploaded on: 08/10/2025 01:43:34 pm ) Arb.O.P.(Com.Div.)Nos.257 of 2021 & 209 of 2022 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 7/71 https://www.mhc.tn.gov.in/judis ( Uploaded on: 08/10/2025 01:43:34 pm ) Arb.O.P.(Com.Div.)Nos.257 of 2021 & 209 of 2022 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;8/71
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(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 9/71 https://www.mhc.tn.gov.in/judis ( Uploaded on: 08/10/2025 01:43:34 pm ) Arb.O.P.(Com.Div.)Nos.257 of 2021 & 209 of 2022 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 10/71 https://www.mhc.tn.gov.in/judis ( Uploaded on: 08/10/2025 01:43:34 pm ) Arb.O.P.(Com.Div.)Nos.257 of 2021 & 209 of 2022 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 :
11/71
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(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, 12/71 https://www.mhc.tn.gov.in/judis ( Uploaded on: 08/10/2025 01:43:34 pm ) Arb.O.P.(Com.Div.)Nos.257 of 2021 & 209 of 2022 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 13/71 https://www.mhc.tn.gov.in/judis ( Uploaded on: 08/10/2025 01:43:34 pm ) Arb.O.P.(Com.Div.)Nos.257 of 2021 & 209 of 2022 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 14/71 https://www.mhc.tn.gov.in/judis ( Uploaded on: 08/10/2025 01:43:34 pm ) Arb.O.P.(Com.Div.)Nos.257 of 2021 & 209 of 2022 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
16/71
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Arb.O.P.(Com.Div.)Nos.257
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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 17/71 https://www.mhc.tn.gov.in/judis ( Uploaded on: 08/10/2025 01:43:34 pm ) Arb.O.P.(Com.Div.)Nos.257 of 2021 & 209 of 2022 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 18/71 https://www.mhc.tn.gov.in/judis ( Uploaded on: 08/10/2025 01:43:34 pm ) Arb.O.P.(Com.Div.)Nos.257 of 2021 & 209 of 2022 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];
19/71 https://www.mhc.tn.gov.in/judis ( Uploaded on: 08/10/2025 01:43:34 pm ) Arb.O.P.(Com.Div.)Nos.257 of 2021 & 209 of 2022 (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. 20/71 https://www.mhc.tn.gov.in/judis ( Uploaded on: 08/10/2025 01:43:34 pm ) Arb.O.P.(Com.Div.)Nos.257 of 2021 & 209 of 2022 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 7th 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: 22/71
https://www.mhc.tn.gov.in/judis ( Uploaded on: 08/10/2025 01:43:34 pm ) Arb.O.P.(Com.Div.)Nos.257 of 2021 & 209 of 2022 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 ?23/71
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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.24/71
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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 26/71 https://www.mhc.tn.gov.in/judis ( Uploaded on: 08/10/2025 01:43:34 pm ) Arb.O.P.(Com.Div.)Nos.257 of 2021 & 209 of 2022 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 28/71 https://www.mhc.tn.gov.in/judis ( Uploaded on: 08/10/2025 01:43:34 pm ) Arb.O.P.(Com.Div.)Nos.257 of 2021 & 209 of 2022 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 29/71 https://www.mhc.tn.gov.in/judis ( Uploaded on: 08/10/2025 01:43:34 pm ) Arb.O.P.(Com.Div.)Nos.257 of 2021 & 209 of 2022 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, 30/71 https://www.mhc.tn.gov.in/judis ( Uploaded on: 08/10/2025 01:43:34 pm ) Arb.O.P.(Com.Div.)Nos.257 of 2021 & 209 of 2022 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 31/71 https://www.mhc.tn.gov.in/judis ( Uploaded on: 08/10/2025 01:43:34 pm ) Arb.O.P.(Com.Div.)Nos.257 of 2021 & 209 of 2022 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 32/71 https://www.mhc.tn.gov.in/judis ( Uploaded on: 08/10/2025 01:43:34 pm ) Arb.O.P.(Com.Div.)Nos.257 of 2021 & 209 of 2022 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 33/71 https://www.mhc.tn.gov.in/judis ( Uploaded on: 08/10/2025 01:43:34 pm ) Arb.O.P.(Com.Div.)Nos.257 of 2021 & 209 of 2022 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 37/71 https://www.mhc.tn.gov.in/judis ( Uploaded on: 08/10/2025 01:43:34 pm ) Arb.O.P.(Com.Div.)Nos.257 of 2021 & 209 of 2022 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 38/71 https://www.mhc.tn.gov.in/judis ( Uploaded on: 08/10/2025 01:43:34 pm ) Arb.O.P.(Com.Div.)Nos.257 of 2021 & 209 of 2022 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 39/71 https://www.mhc.tn.gov.in/judis ( Uploaded on: 08/10/2025 01:43:34 pm ) Arb.O.P.(Com.Div.)Nos.257 of 2021 & 209 of 2022 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 40/71 https://www.mhc.tn.gov.in/judis ( Uploaded on: 08/10/2025 01:43:34 pm ) Arb.O.P.(Com.Div.)Nos.257 of 2021 & 209 of 2022 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 41/71 https://www.mhc.tn.gov.in/judis ( Uploaded on: 08/10/2025 01:43:34 pm ) Arb.O.P.(Com.Div.)Nos.257 of 2021 & 209 of 2022 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.” 43/71 https://www.mhc.tn.gov.in/judis ( Uploaded on: 08/10/2025 01:43:34 pm ) Arb.O.P.(Com.Div.)Nos.257 of 2021 & 209 of 2022 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 44/71 https://www.mhc.tn.gov.in/judis ( Uploaded on: 08/10/2025 01:43:34 pm ) Arb.O.P.(Com.Div.)Nos.257 of 2021 & 209 of 2022 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 45/71 https://www.mhc.tn.gov.in/judis ( Uploaded on: 08/10/2025 01:43:34 pm ) Arb.O.P.(Com.Div.)Nos.257 of 2021 & 209 of 2022 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 46/71 https://www.mhc.tn.gov.in/judis ( Uploaded on: 08/10/2025 01:43:34 pm ) Arb.O.P.(Com.Div.)Nos.257 of 2021 & 209 of 2022 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 47/71 https://www.mhc.tn.gov.in/judis ( Uploaded on: 08/10/2025 01:43:34 pm ) Arb.O.P.(Com.Div.)Nos.257 of 2021 & 209 of 2022 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 48/71 https://www.mhc.tn.gov.in/judis ( Uploaded on: 08/10/2025 01:43:34 pm ) Arb.O.P.(Com.Div.)Nos.257 of 2021 & 209 of 2022 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 49/71 https://www.mhc.tn.gov.in/judis ( Uploaded on: 08/10/2025 01:43:34 pm ) Arb.O.P.(Com.Div.)Nos.257 of 2021 & 209 of 2022 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 50/71 https://www.mhc.tn.gov.in/judis ( Uploaded on: 08/10/2025 01:43:34 pm ) Arb.O.P.(Com.Div.)Nos.257 of 2021 & 209 of 2022 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 51/71 https://www.mhc.tn.gov.in/judis ( Uploaded on: 08/10/2025 01:43:34 pm ) Arb.O.P.(Com.Div.)Nos.257 of 2021 & 209 of 2022 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.” 52/71 https://www.mhc.tn.gov.in/judis ( Uploaded on: 08/10/2025 01:43:34 pm ) Arb.O.P.(Com.Div.)Nos.257 of 2021 & 209 of 2022
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 54/71 https://www.mhc.tn.gov.in/judis ( Uploaded on: 08/10/2025 01:43:34 pm ) Arb.O.P.(Com.Div.)Nos.257 of 2021 & 209 of 2022 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 55/71 https://www.mhc.tn.gov.in/judis ( Uploaded on: 08/10/2025 01:43:34 pm ) Arb.O.P.(Com.Div.)Nos.257 of 2021 & 209 of 2022 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 56/71 https://www.mhc.tn.gov.in/judis ( Uploaded on: 08/10/2025 01:43:34 pm ) Arb.O.P.(Com.Div.)Nos.257 of 2021 & 209 of 2022 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 57/71 https://www.mhc.tn.gov.in/judis ( Uploaded on: 08/10/2025 01:43:34 pm ) Arb.O.P.(Com.Div.)Nos.257 of 2021 & 209 of 2022 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 58/71 https://www.mhc.tn.gov.in/judis ( Uploaded on: 08/10/2025 01:43:34 pm ) Arb.O.P.(Com.Div.)Nos.257 of 2021 & 209 of 2022
(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 59/71 https://www.mhc.tn.gov.in/judis ( Uploaded on: 08/10/2025 01:43:34 pm ) Arb.O.P.(Com.Div.)Nos.257 of 2021 & 209 of 2022 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 60/71 https://www.mhc.tn.gov.in/judis ( Uploaded on: 08/10/2025 01:43:34 pm ) Arb.O.P.(Com.Div.)Nos.257 of 2021 & 209 of 2022 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.” 61/71 https://www.mhc.tn.gov.in/judis ( Uploaded on: 08/10/2025 01:43:34 pm ) Arb.O.P.(Com.Div.)Nos.257 of 2021 & 209 of 2022
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 62/71 https://www.mhc.tn.gov.in/judis ( Uploaded on: 08/10/2025 01:43:34 pm ) Arb.O.P.(Com.Div.)Nos.257 of 2021 & 209 of 2022 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 63/71 https://www.mhc.tn.gov.in/judis ( Uploaded on: 08/10/2025 01:43:34 pm ) Arb.O.P.(Com.Div.)Nos.257 of 2021 & 209 of 2022 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 64/71 https://www.mhc.tn.gov.in/judis ( Uploaded on: 08/10/2025 01:43:34 pm ) Arb.O.P.(Com.Div.)Nos.257 of 2021 & 209 of 2022 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 65/71 https://www.mhc.tn.gov.in/judis ( Uploaded on: 08/10/2025 01:43:34 pm ) Arb.O.P.(Com.Div.)Nos.257 of 2021 & 209 of 2022 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. 67/71 https://www.mhc.tn.gov.in/judis ( Uploaded on: 08/10/2025 01:43:34 pm ) Arb.O.P.(Com.Div.)Nos.257 of 2021 & 209 of 2022
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 68/71 https://www.mhc.tn.gov.in/judis ( Uploaded on: 08/10/2025 01:43:34 pm ) Arb.O.P.(Com.Div.)Nos.257 of 2021 & 209 of 2022 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.69/71
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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
70/71
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Arb.O.P.(Com.Div.)Nos.257
of 2021 & 209 of 2022
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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