The Arbitrator Cannot Allow Forfeiture Of A Substantial Amount Of Consideration Without Proof Of Actual Loss Solely On The Ground That It Was Earnest Money: Delhi High Court

The Single Bench of Justice Vibhu Bakhru partly set aside an award on the ground that the arbitrator wrongly allowed the forfeiture of Earnest Money which formed a substantial portion of the total consideration without the respondent proving actual loss suffered by it.

The Court reiterated that Section 74 of the Indian Contract Act would apply in case of forfeiture of Earnest Money and the employer must prove the loss it has suffered.

Facts

The parties entered into a contract dated 05.12.2008 whereby the petitioner agreed to purchase the manufacturing unit including the built up factory, rights in the leasehold property No. C-37, Sector B-2, Tronica City, Loni Ghaziabad (UP) and all movable assets (the Property) for a sale consideration of Rs.1,60,00,000/-.

The petitioner paid a consideration of Rs. 60,000,00/- as Earnest Money under the Contract and the remaining 1 Crores were to be paid within a period of three months. A dispute arose between the parties regarding the area of the Property and the petitioner alleged that the respondent has fraudulently represented that the entire constructed/covered area of the factory premises was 10,000 sq.ft. whereas, upon taking measurements, the actual constructed area was found to be only 6,500 sq.ft.

Accordingly, the petitioner served the respondent with a legal notice and requested it to either finalize the agreement at a lower price based on the actual measurement or refund the Earnest Money deposited by it.

On failure of the respondent to reply to the notice, the petitioner filed a suit for the recovery of money. The respondent filed an application under Section 8 of the A&C Act and the parties were referred to arbitration.

The petitioner raised certain claims on the ground that the failure of the respondent has resulted in the breach of the contract, therefore, it is entitled to an amount twice the Earnest Money it deposited along with internet thereon.

The respondent contested the claims of the petitioner, however, it did not raise any counter-claims.

The Award

The arbitrator rejected all the claims of the petitioner on the ground that it was incumbent upon the petitioner to make reasonable inquiry as to the area of the property and held that the doctrine of 'caveat emptor' applied to the facts of the case. Consequently, it held that respondent to be entitled to forfeit the amount of Earnest Money on the ground that the petitioner was in breach of the terms of the contract.

The Grounds Of Challenge

The petitioner challenged the award on the following reasons:

• That once it was accepted that the total area of the property was much lesser than the area mentioned under the agreement, it was not possible for the arbitrator to say that there was no misrepresentation.

• The respondent did not prove that it has suffered any loss, therefore, it could not forfeit the earnest money deposited by the petitioner. Accordingly, the arbitrator erred in rejecting the claim of the petitioner for refund of the earnest money.

• That even though the Agreement referred to the payment of ₹60,00,000/- as earnest money, it was, ex facie, clear that the same was part consideration for purchasing the property in question. The said amount constituted substantial portion of the total agreed sale consideration and could not be treated as a nominal amount.

Analysis By The Court

The Court observed that the petitioner had taken a contradictory stand by stating in the Statement of Claims that the actual measurement of the premises came to his notice when the factory premises was measured, however, in his evidence as CW-1, had affirmed that the actual measurement came into his notice on visual examination.

The Court held that the finding of the arbitrator qua the issue of misrepresentation is based on the evaluation of the evidence, therefore, the court cannot supplant it's view over the view taken by the arbitrator unless it is against the public policy of India or vitiated by patent illegality.

The Court held that the objection taken by the petitioner does not fall withe the limited grounds mentioned under Section 34 of the Act, therefore, the award does not deserve any interference to the extent of the finding on this issue.

The Court partly set aside the award to the extent that it rejected the claim of the petitioner for refund of Earnest Money on the ground that the arbitrator failed to consider the fact that the respondent did not adduce any evidence to prove the loss suffered by it.

The Court relied on the decision in Kailash Nath Associates v. Delhi Development Authority and Another: (2015) 4 SCC 13 to reiterate that Section 74 of the Indian Contract Act also applies to forfeiture of Earnest Money and the requirement to prove the actual loss is not dispensed with.

The Court held that even though the amount was referred to as Earnest Money, it formed a substantial portion of the total consideration and was a payment towards the total amount, therefore, it couldn't be forfeited without the proof of actual loss.

Accordingly, the Court set aside the award to the extent that it accepts that the respondent was entitled to forfeit the amount of ₹60,00,000/-.

Case Title: RAJESH GUPTA v. RAM AVTAR, O.M.P. (COMM) 121/2020

Citation: 2022 LiveLaw (Del) 482

Date: 19.05.2022

Counsel for the Petitioner: Mr Sidhant Nath, Advocate.

Counsel for the Respondent: Mr Sushil Kumar Pandey and Mr Rahul Mourya

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