Recently, in the case of Vivek Khanna vs. OYO Apartments Investments LLP1, the Delhi High Court dismissed a petition filed under Section 34 of the Arbitration and Conciliation Act, 1996 (“A&C Act“), by way of which, Mr. Vivek Khanna (the “Petitioner“) assailed the award dated March 31, 2023 (the “Impugned Award“) passed by the arbitral tribunal comprising of a sole arbitrator.
The Petitioner and OYO Apartments Investments LLP (the “Respondent“) had executed a lease agreement dated February 18, 2019 (“Agreement“), under the terms of which, the Petitioner had leased out his premises to the Respondent for a term of 60 months, with a lock-in period of 36 months, during which, neither party could terminate the lease. The Agreement casted an obligation on the Respondent to pay a minimum guaranteed amount of Rs. 2,90,000/- or net revenue share, whichever is higher, payable every lease month, w.e.f. June 1, 2019. However, for the first two months, the Respondent was obliged to pay only 70% of the net revenue earned from the said premises from the time the same was made ‘live’ on Respondent’s portal, and was not obliged to pay the minimum guaranteed amount of Rs.2,90,000/- mentioned above.
The Respondent terminated the lease before expiration of the 36 months lock-in period, vide a termination notice dated November 23, 2019, alleging breach of the Agreement by the Petitioner, who in turn challenged the termination by invoking arbitration. The Agreement provided for resolution of disputes through arbitration and Delhi was the jurisdictional seat for arbitration. Pursuant to a Section 11(6) petition filed by the Petitioner, the arbitral tribunal comprising of a sole arbitrator was constituted. The Petitioner filed a total claim of Rs. 1,83,63,705,00/-, on account of investment made by the Petitioner as per the instructions of the Respondent, arrears of rent for the period till November 2019, rent payable for the remaining lock-in period etc. The Respondent also raised three counter claims. The arbitral tribunal held the premature termination of the lease by the Respondent to be illegal, however, disallowed the consequent claims made by the Petitioner, except partially awarding the Petitioner’s claims on account of arrears of rent for the period till November 2019, arrears of electricity charges and arrears of airtel phone/internet charges. The tribunal also awarded a sum of Rs, 4,78,841/- to the Respondent in its counter claim.
The Petitioner, inter alia, challenged the dismissal of Claim No.3 (i.e., rent payable for the remaining lock-in period). The Petitioner had claimed Rs. 87,00,000/- on account of rent towards remaining lock-in period from December 2019 onwards. It was contended by the Petitioner that the dismissal of the claim is inconsistent with the finding in the Impugned Award, holding the premature termination of the Agreement as illegal. The Petitioner claimed that the amount sought was a consequence suffered by him due to premature termination. In the Statement of Defence, the Respondent produced evidence to show that the said premises had been let out by the Petitioner from December 2019 onwards.
The tribunal relied on the judgments in Deepak Chopra v. FLAKT (India) Pvt. Ltd.2, Manju Bagai v. Magpai Retail Pvt.3 and Egon Zhender International Pvt. Ltd. v. Namgayal Institute for Research on Ladakhi Art & Culture (Nirlac) & Ors.4, to examine the legal position regarding the admissibility of liquidated damages. The tribunal reached the conclusion that the sum agreed by the parties as liquidated damages would not dispense with the requirement of proof by the party claiming liquidated damages that it actually suffered a loss.
It was also held by the Court that sum ascertained as liquidated damages in the contract is not in the nature of penalty, but is a pre-estimate of loss estimated by the parties likely to be suffered by a party in the event of breach of contract by the other party. Loss must be incurred by a party in order to claim the same. Liquidated damages are not payable merely as a penalty for breach of contract, if no loss is suffered. It is the quantification of loss that would require no further ascertainment by court/tribunal, which would quantify the same as per the pre-estimated loss or formula agreed to by the parties as liquidated damages in the contract. Therefore, the tribunal’s rejection of the abovementioned claim was held to be consistent with the prevalent legal position. Accordingly, the Petitioner’s petition was dismissed by the Hon’ble Court.
It is to be noted from the above that while ascertaining and recording liquidated damages in the contracts may be helpful, it is also equally crucial for the claiming party to prove the incurred loss.
1 MP (COMM) 266/2023
2 2020 SCC OnLine Del 103
3 2010 SCC OnLine Del 3842
4 2013 SCC OnLine Del 4288