Supreme Court Upholds Arbitration Award in Dispute Over Restaurant License Agreements: Arun Kumar Kamal Kumar vs. Selected Marble Home (2020)

Date of the Judgment: October 1, 2020
Citation: Not Available
Judges: N.V. Ramana, J., S. Abdul Nazeer, J., Surya Kant, J.
Can a party be compelled to pay damages for the use of a property even when the agreement between the parties did not explicitly mention it? The Supreme Court of India addressed this question in a recent case involving a dispute over a license agreement for operating a restaurant. The core issue revolved around whether an arbitrator was correct in awarding damages for the use and occupation of premises based on a commission structure, even though the original agreement did not have a clause for such damages. The Supreme Court bench comprising Justices N.V. Ramana, S. Abdul Nazeer, and Surya Kant upheld the decision of the lower courts and the arbitrator, ruling against the appellants.

Case Background

M/s Arun Kumar Kamal Kumar & Ors., the appellants, operate a business under the brand name “Nathu’s Sweets,” which includes restaurants and the sale of sweets and other food items. In 1990, they entered into two separate license agreements with M/s Selected Marble Home & Ors., the respondents. These agreements allowed the appellants to run a restaurant and sweets shop at the respondents’ premises, with payments made on a commission basis. The first agreement, dated August 27, 1990, was between M/s. Arun Kumar Kamal Kumar (through Arun Kumar Gupta) and M/s. Selected Marble Home (through Anil Kumar Jain and two other partners). The second agreement of the same date was between M/s. Arun Kumar Kamal Kumar (through Arun Kumar Gupta) and Bhim Sain Jain.

The appellants claimed that the respondents violated the terms of the agreements by creating obstacles in the smooth running of the business. The premises had limited electricity connections (1 KV and 0.25 KV), and the respondents allegedly agreed to secure a 2.5 KV connection but failed to do so. This led to the Delhi Electricity Supply Undertaking (DESU) disconnecting the electricity supply on October 22, 1990. Consequently, the business was shut down in February 1991 and remained closed from March 1991 to October 1995.

Due to the appellants’ non-payment of commission and failure to vacate the premises, the respondents filed Suit No. 3708-A/1991 before the Delhi High Court under Section 20 of the Arbitration Act, 1940. On September 18, 1995, the High Court appointed an arbitrator to resolve the dispute. The business was restarted in November 1995 and continued until March 2000, when the appellants handed over possession to the respondents.

Timeline

Course of Proceedings

The respondents filed a suit in the Delhi High Court under Section 20 of the Arbitration Act, 1940, due to non-payment of commission and failure to vacate the premises by the appellants. The High Court appointed an arbitrator on September 18, 1995, to adjudicate the dispute. The arbitrator framed 16 issues, and after hearing arguments, framed an additional issue (15-A) regarding damages. The arbitrator considered a statement of accounts submitted by the appellants, which calculated the commission payable after the business restarted.

The appellants challenged the arbitrator’s award in the High Court. A Single Judge of the High Court rejected the appellants’ objections on November 4, 2004, and upheld the award, making it a rule of the court. The Division Bench of the High Court confirmed the Single Judge’s judgment on February 11, 2010, but reduced the interest rate from 16% to 9% per annum, applicable from the date of the award (March 16, 1998) until the date of the judgment, subject to the appellants paying the full decretal amount by June 30, 2010.

Legal Framework

The case primarily involves the interpretation and application of the Arbitration Act, 1940, specifically regarding the powers of an arbitrator to award damages. Additionally, Section 108 of the Transfer of Property Act was considered by the High Court to determine the liability of a tenant to pay rent even if the premises are not in use.

Section 20 of the Arbitration Act, 1940, allows parties to file a suit in court to seek the appointment of an arbitrator when a dispute arises under an arbitration agreement. The arbitrator’s role is to adjudicate the dispute and issue an award that is binding on the parties.

Section 108 of the Transfer of Property Act, deals with the rights and liabilities of lessors and lessees. The High Court referred to this provision to support the view that a tenant remains liable for rent even if the premises are not being used, unless the lease is surrendered.

Arguments

Appellants’ Arguments:

• The appellants argued that they were only liable to pay commission on gross sales, and there was no clause in the agreement for damages for the use and occupation of the premises.
• They contended that the arbitrator was not justified in declaring the agreements as license agreements and awarding damages based on the commission paid before the closure in March 1991 and after the reopening in 1995.
• The appellants argued that the Single Judge erred in holding them liable for damages, stating that even if they were considered tenants, they would not be liable to pay rent if the shop was closed and there were no sales.
• They claimed that the agreements did not contain any clause for damages, making the award of damages unjustified.
• The appellants also argued that the statement of accounts submitted by them had errors. The sales tax paid was not deducted to arrive at the commission payable, and expenses on electricity and water were deducted from sales instead of from the commission payable to the respondents.

Respondents’ Arguments:

• The respondents argued that there were no mistakes in the statement of accounts, and these contentions were an afterthought. They stated that the appellants were bound by the statement and had also deducted and paid taxes on the commission shown in the statement.
• On the question of damages, the respondents argued that the Single Judge had correctly concluded that the appellants were liable to pay damages for the use and occupation of the premises during the period when the business was not running and no commission was paid.
• The respondents maintained that the findings of fact recorded by the lower courts did not warrant interference in the appeal.

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame issues. However, the main issue that the Court addressed was:

• Whether the arbitrator was justified in awarding damages for the use and occupation of the premises based on the commission structure when the agreement did not explicitly provide for such damages.

Treatment of the Issue by the Court

Authorities

The Court considered the following authorities:

• State Bank of Patiala v. Chandermohan, 1996 RLR 404 – High Court of Delhi: This case was cited by the Single Judge of the High Court to support the view that a tenant remains liable for rent/damages even if the premises are destroyed, and the only option to stop the rent is to surrender the premises.
• Section 108 of the Transfer of Property Act: This provision was considered by the Single Judge of the High Court to emphasize that a tenant remains liable for rent even if the business is not operating.

Judgment

How each authority was viewed by the Court?

• State Bank of Patiala v. Chandermohan [1996 RLR 404]*: The High Court relied on this case to support the view that a tenant is liable to pay rent even if the premises are not in use, which was used to justify the award of damages based on the commission structure.
• Section 108 of the Transfer of Property Act: The High Court used this provision to support its view that a tenant remains liable for rent even if the business is not operating, which was used to justify the award of damages based on the commission structure.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the following factors:

• The appellants’ failure to hand over vacant possession of the premises despite disputes, as required by Clause 10 of the agreements.
• The arbitrator’s finding that the appellants were liable to pay damages for the period the business was closed but they retained possession.
• The High Court’s affirmation of the arbitrator’s decision, which was based on the statement of accounts submitted by the appellants themselves.
• The principle that a tenant remains liable for rent even if the premises are not in use, as supported by the High Court’s reliance on Section 108 of the Transfer of Property Act and the case of State Bank of Patiala v. Chandermohan.
• The fact that the appellants could not withdraw their own statement of accounts, which was used by the arbitrator to calculate damages.

The Court’s reasoning was based on the factual matrix of the case, where the appellants retained possession of the premises without operating the business. The legal principle of a tenant’s liability to pay rent, even if the premises are not in use, was also a significant factor. The Court also emphasized that the appellants were bound by their own statement of accounts.

The Court did not delve into any alternative interpretations of the agreements, as the primary focus was on the factual circumstances and the legal principle of tenant liability. The Court’s decision was based on the factual matrix of the case and the legal principle that a tenant remains liable for rent even if the premises are not in use.

The Supreme Court upheld the decisions of the lower courts and the arbitrator, ruling that the appellants were liable to pay damages for the use and occupation of the premises based on the commission structure, as reflected in their own statement of accounts.

The Court’s reasons for the decision are:

• The appellants failed to hand over the vacant possession of the premises as required by the agreement.
• The arbitrator’s decision to award damages was based on the statement of accounts submitted by the appellants.
• The appellants were bound by their own statement of accounts and could not withdraw it at a later stage.
• The principle that a tenant is liable to pay rent even if the premises are not in use, as supported by Section 108 of the Transfer of Property Act and the case of State Bank of Patiala v. Chandermohan.

“As per Clause 10 of both the Agreements, in case of any dispute, it was incumbent on the appellants to handover vacant possession of the premises to the respondents.”

“We are also of the view that the appellants are not justified in raising a contrary plea other than what was their defence and statement of counter claim in the arbitral proceedings.”

“We are of the view that the appellants cannot be permitted to withdraw their own statement made before the Learned Arbitrator which is predicated to on a mode of calculation, the same not being disputed by the respondents and accepted by the Arbitrator as correct.”

Key Takeaways

• Parties are bound by their own statements and submissions made during arbitration proceedings.
• Even if an agreement does not explicitly mention damages for use and occupation, an arbitrator can award such damages based on the conduct of the parties and the factual matrix.
• A tenant remains liable for rent or damages even if the premises are not in use, unless they surrender the premises.
• It is important to ensure that all financial statements and calculations submitted during arbitration are accurate, as they can be used as a basis for awarding damages.

This judgment reinforces the principle that parties are bound by their submissions and cannot later retract them. It also highlights the importance of fulfilling contractual obligations, particularly regarding the handover of possession of premises. This decision may have implications for future cases involving similar disputes over license or lease agreements, particularly in cases where there is a dispute over the payment of rent or damages.

Directions

The Supreme Court reduced the rate of interest from 16% per annum to 9% per annum from the date of the Award until the date of the judgment, subject to the appellants paying the complete decretal amount to the respondents on or before December 31, 2020. If the appellants fail to pay by this date, the original award with interest at 16% would be upheld.

Development of Law

The ratio decidendi of this case is that an arbitrator can award damages for use and occupation of premises based on the commission structure, even if the agreement does not explicitly provide for such damages, especially when the party liable for damages has submitted a statement of accounts based on this commission structure. This decision also reinforces the principle that a tenant remains liable for rent or damages even if the premises are not in use, unless they surrender the premises. There was no change in the previous positions of law.

Conclusion

In conclusion, the Supreme Court upheld the arbitrator’s award, ruling that the appellants were liable to pay damages for the use and occupation of the premises based on the commission structure. The Court emphasized that the appellants were bound by their own statement of accounts and that a tenant remains liable for rent even if the premises are not in use. The Court also reduced the interest rate subject to the appellants paying the full decretal amount by December 31, 2020.