| PETITION NO. | Arbitration Petition no. 4 |
| DATE OF JUDGMENT PRONOUNCED | April 13, 2013 |
| COURT | In the High court of judicature at Bombay |
| PETITIONER | Sunit C. Khatau |
| RESPONDENT | Dilip Dharamsey Khatau |
| CORAM | R D Dhanuka,j. |
INTRODUCTION
Arbitration Petition No. 4 of 1986 v/s Dilip Dharamsey Khatau, 2013 is a noteworthy legal case that revolves around the realm of arbitration and its enduring implications. This case serves as a testament to the persistence of legal disputes and the integral role that arbitration plays in resolving them. Dating back to 1986, this protracted legal battle between the parties involved, namely Arbitration Petition No. 4 of 1986 and Mr. Dilip Dharamsey Khatau, ultimately culminated in a significant ruling in 2013. The case encompasses a myriad of legal complexities and intricacies, providing valuable insights into the functioning of arbitration mechanisms within the Indian legal system. The case raises important questions about the efficacy and enforceability of arbitration agreements, as well as the procedures involved in resolving disputes through this alternative means of dispute resolution. It showcases the dynamics of arbitration in the context of evolving legal principles and judicial interpretations.
FACTS OF THE CASE
Mr. Sunit, Chandrakant Khatau,, Kiran Chandrakant Khatau, Dilip Khatau, Abhay KhatauL. Khatau, and Kishore Khatau were co-owners of a property called Khatau Bungalow on Manav Mandir Road, Mumbai.
On August 10, 1983, they entered into a family arrangement where certain means, including Khatau Company Limited, were distributed to the pleaders’ group. Regarding Khatau Bungalow, a Memorandum of Understanding was inked on July 12, 1984, between Kishore Dharamsey Khatau, Dilip Dharamsey Khatau, and Abhay Laxmidas Khatau( appertained to as” DMK GROUP”) and Mr. Sunit Chandrakant Khatau and Kiran Chandrakant Khatau( appertained to as” CMK GROUP”). The main purpose of the MOU was to divide the property by metes and bounds. It was agreed that the DMK group would have physical possession and power of two- thirds of the property, and the CMK group would have the remaining one- third. Clause 3 of the MOU quested that when CMK group handed over vacant possession of the DMK group’s share, DMK group would pay CMK group Rs. as consideration. Clause 4 determined the Floor Space Index (FSI) for each group’s salutary use. Clause 5 needed the parties to demolish structures on their separate portions to allow the other party to use their allocated FSI. Clause 6 stated that DMK group had to vacate their portion within six months and give a performance guarantee of Rs. 5,000 per day in case of dereliction. A analogous obligation was assessed on CMK group in clause 7.
Clause 9 gave DMK group exclusive possession of certain bottoms in a new structure, and CMK group was to vacate these on payment of Rs. 30 lakhs, which would be credited against the Rs. 55 lakhs in clause 3. Clause 12 needed both parties to develop their portions without affecting the other’s FSI, and clause 13 commanded cooperation in carrying necessary blessings and warrants. Clause 17 mentioned compliance with external rules and common sweats for property branch, and clause 24 covered guardianship of title deeds. Clause 26 verified each group’s exclusive rights to their separate portions, and clause 27 commanded arbitration in case of controversies.
The repliers wanted to pay Rs. 35 lakhs to CMK group in January 1985, but CMK group refused, stating that the MOU was an intertwined scheme, and enforcing only one clause would disrupt the entire arrangement. The dispute arose between the parties.
ISSUE RAISED
- Whether the failure of payment by The DMK Group make him liable to pay Rs. 5000 per day as a penalty?
WHY ARBITRATION AFTER ALL?
In order to request the appointment of the arbitrator pursuant to the arbitration agreement contained in paragraph 27 of the aforementioned MOU, DMK Group filed arbitration suit No. 1196 of 1985 in the court under section 20 of the Arbitration Act, 1940. Mr. Pratapsingh Mathuradas Vissanji was chosen as the only arbitrator specified in the arbitration agreement by order dated July 8th, 1985. Between the parties, an agreement for reference was also made. The arbitrator had the authority to issue whatever orders and directives he saw proper, including final orders. A summary decision-making authority was also granted to the learned arbitrator.
CONTENTIONS OF PETITIONER
- Petitioner presented that no misfortune is caused to the respondents regardless of whether the part of the suit property in control of CMK was not given over.
- It is alleged that the contract does not provide sufficient time for the FSI to be made available to the other parties. It is presented that piece of the commitment under provision 7 of the MOU could never have been executed in detachment.
- It is argued by the petitioner that the MOU’s clauses must be read together. Mr. Cooper presents that the plan of the 13/50 Assertion Appeal NO. 4 OF 1986.sxw parties were to receive FSI, and the CMK group cannot receive FSI unless the property was subdivided and demolished.
- It is argued that clause 8 of the MOU does not specify a deadline for the transfer of possession. It is alleged that the parties’ subdivided proposal to the Municipal Corporation is still subject to uncertainty.
- The learned counsel contends that the learned arbitrator could not have ordered the petitioner to pay such compensation in the form of a penalty unless it was demonstrated that the petitioner had committed willful default and that the respondents had suffered any loss as a result of the alleged willful default. The respondents failed to demonstrate that the daily compensation of Rs. 10,000 was appropriate.
CONTENTION OF RESPONDENT
- CMK Group was dissatisfied with an arbitration award and subsequently filed a petition (numbered 4 of 1986) in the court under sections 30 and 33 of the Arbitration Act, 1940. On October 5th, 1998, this court issued an order and judgment partially nullifying the award. Specifically, the court invalidated the directions provided by the arbitrator in clauses 1, 10, and 12 of the award.
- The arbitrator had ruled that CMK had breached their obligations under clauses 7 and 9 of the Memorandum of Understanding (MOU) and had to pay compensation of Rs. 31,20,000/- due to an alleged willful default related to clause 7 of the MOU, as well as Rs. 3,75,000/- for a bungalow and other expenses as per clause 10 of the MOU.
- CMK Group was unhappy with this court’s order and judgment, prompting them to file an appeal, numbered 621 of 2010, in this court. Following mutual agreement between the parties involved, the Division Bench of this court in Appeal No. 621 of 2000 set aside the earlier order and judgment made by the individual judge of this court in connection with Arbitration Petition No. 4 of 1986.
- Consequently, the petition was sent back to the original judge for a fresh hearing and a decision in compliance with legal procedures.
JUDGEMENT
The Court took the reference of a case like in the case of Board of Trustees of Port vs. Pioneer, the Division Bench of this court provided an interpretation of the Supreme Court’s judgment in the case of ONGC vs. Saw Pipes. They clarified that the Supreme Court’s observations should be understood in the context of the specific facts of that case. The Division Bench explained that the Supreme Court’s view, which stated that there was a mutually agreed genuine pre-estimate of damage and no need for further proof, was based on the contractual terms of that particular case. Those terms stated that in the event of a contract breach, the purchaser could recover agreed-upon liquidated damages, rather than a penalty, which equated to 1% of the contract price or a portion thereof for failure to meet delivery deadlines.
In contrast, the Division Bench noted that the clause considered by the Supreme Court in the ONGC vs. Saw Pipes case was substantially different. In the present case, the respondents themselves claimed that it was impossible to demonstrate any losses incurred due to the petitioner’s failure to hand over one-third of the possession. Even if the finding of willful default was valid, the Division Bench believed that the arbitrator’s role should have been limited to awarding reasonable compensation, calculated based on a clause that resembled a penalty. Importantly, neither party presented any evidence before the arbitrator to determine what a reasonable compensation amount should be.
Upon reviewing the contested award, it became apparent that the arbitrator had granted the entire sum of Rs. 10,000 per day for the alleged willful default not only from January 27, 1985, to December 4, 1985, but also from December 5, 1985, until the petitioners handed over vacant possession to the respondent.
Court held that considering that the respondents have raised significant claims in ongoing arbitration proceedings, including matters like the partition of the entire property, sub-division, determination of FSI, construction of a compound wall, and similar issues related to the property in question, which are being adjudicated by Shri Justice B.N. Srikrishna, a former Supreme Court Judge, it would be more appropriate to set aside and refer back the disputed award in question, specifically the directions outlined in paragraphs 1, 8, 10, and 11, to the same arbitral tribunal currently handling the overall dispute between the parties.
Therefore, the court hereby issued the following order:
The contested declaration and directions provided by the arbitrator are annulled, and the matter is referred back to the arbitral tribunal currently overseeing the ongoing dispute between the parties for a fresh decision.
The petition is partially granted in the manner described above, and a decree will be issued in accordance with the modified award as outlined. No costs will be awarded in this matter.
ANALYSIS
Court held that terms of the contract are required to be taken into consideration before arriving at the conclusion whether the 32/50 arbitration petition no. 4 of 1986, party claiming damages should be entitles the same. If the terms are unambiguous and clear stipulating the liquidated damages in case of the breach of the contract unless it is held that such estimate damages/compensation is unreasonable or is by way of penalty, party who has committed the breach is required to pay the compensation and that is what it is under Section 73 of the Indian Contract Act. Section 74 is to be read along with section 73 and therefore in every case of breach of contract the person aggrieved by the breach is not required to prove actual loss or damage suffered by him before he can claim a decree. The court is competent to award reasonable compensation in case of breach even if no actual damage is proved to have been suffered consequence of the breach of contract. In some contract it would be impossible for the court to access the compensation arising from breach and if the compensation contemplated is not by way of penalty or unreasonable. Court can award the same if it is genuine pre estimate by the parties as the measure of reasonable compensation.
CONCLUSION
To conclude, this case deals with the resolution of disputes through arbitration, a widely recognized alternative dispute resolution mechanism. Arbitration is a process wherein parties agree to settle their disputes outside of the traditional court system, opting instead for a private and often more expeditious resolution procedure.
REFERENCES
This Article is written by Yashasvi Sharma student of Vivekananda Institute of Professional Studies, GGSIPU; Intern at Legal Vidhiya.
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