Conclusions Drawn By Arbitrator In Disregard Of Evidence On Record Makes Award Liable To Be Set Aside As Being Perverse And Patently Illegal: Delhi High Court

Brief Facts:

The matter pertained to disputes that arose from a Memorandum of Understanding (MoU). According to the MoU, the Petitioner was to construct a mall named "R-3 Mall" in Ahmedabad, Gujarat, and the Respondent was to be provided space to run a multiplex on a lease basis. The central issue was that the Respondent accused the Petitioner of breaching the MoU terms by signing a contract with a third party on March 9, 2006, thereby terminating the Respondent's agreement. The Respondent argued that this termination was invalid and illegal which made it to file a claim in arbitration.

The arbitration concluded with an award directing the Petitioner to pay the respondent Rs. 24,54,458.33 along with interest at the rate of 12% per annum. The Petitioner challenged this award in the Delhi High Court (“High Court”).

The Petitioner contended that the MoU was merely an "agreement to agree" and therefore not a concluded or enforceable contract. It argued that the award of Rs. 20,00,000.00 for loss of profit was untenable as it was based on conjectures and surmises.

It pointed to issue No. 8 framed during the arbitral proceedings, which questioned whether the Petitioner was liable to pay the respondent Rs. 6,33,58,800/- towards loss of profit. The Arbitrator concluded that while calculating future loss of profit involves some conjecture, the award of Rs. 20,00,000.00 was reasonable despite acknowledging the speculative nature of potential profits.

In response, the Respondent argued that the Arbitrator found the Petitioner guilty of breaching the MoU. It argued that the Petitioner was essentially asking the court to re-evaluate the evidence, which is not permitted under Section 34 of the Arbitration Act. It maintained that the award was neither contrary to law nor against public policy.

Observations by the High Court:

Regarding the limited challenge brought by the Petitioner, specifically the award of Rs. 20 lakhs to the Respondent for loss of profit, the High Court found that the Arbitrator's reasoning and discussion were sparse and cryptic. The Arbitrator initially noted that the Respondent's claimed loss of profit, calculated for the period from June 20, 2006, to December 20, 2008, was based on estimated losses from ticket sales, advertising, and concessions. The Arbitrator acknowledged that calculating loss of profit involves conjecture and that there was no straightforward formula for it.

The High Court noted that the Arbitrator himself concluded that it was speculative whether the Respondent would have made any profit, yet proceeded to award Rs. 20 lakhs as a "reasonable loss of profit" simply because the Petitioner breached the contract. The High Court held that this award was made without a clear basis in the evidence presented.

The High Court held that an arbitrator's award can be set aside if it disregards evidence on record or lacks clear findings on contentious issues. It held that awards lacking findings on contentious issues or based on disregard of evidence are liable to be set aside for being perverse and patently illegal (referred to I-Pay Clearing Services (P) Ltd. vs. ICICI Bank Ltd).

Therefore, the High Court allowed the petition and held that the award of Rs. 20 lakhs to the Respondent for loss of profit was unsupported by evidence and that the Arbitrator failed to determine whether the Respondent incurred or would have incurred any loss of profit.

Case Title: M/S Divyam Real Estate Pvt Ltd Vs M/S M2k Entertainment Pvt Ltd

Citation: 2024 LiveLaw (Del) 675

Case Number: O.M.P. (COMM) 162/2020 & I.A. 14331/2012, I.A. 10655/2022

Advocate for the Petitioner: Mr. Adhitya Srinivasan and Mr. Rishabh Kanojiya, Advocates.

Advocate for the Respondent: Mr. Pravin Bhadur with Mr. Amit Agarwal, Ms. Kanika, Mr. Saurabh Kumar, and Mr. S. Anjani Kumar, Advocates.

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