Arbitrator Isn't Entitled To Allow Forfeiture Of A Significant Amount Of Money Without Proof Of Actual Loss

In the recent judgement of Rajesh Gupta v. Ram Avtar , the High Court of Delhi (High Court) partially set aside an arbitral award on the grounds that the sole arbitrator had incorrectly allowed forfeiture of earnest money, which constituted a significant portion of the total consideration in favour of the respondent, without the respondent proving the actual loss suffered.

In the instant case titled Rajesh Gupta vs. Ram Avtar the two issues raised before the High Court of Delhi for clarification were:

Whether there is any evidence that the respondent made a deception about the Property's constructed area?
Whether it is true that the sole arbitrator erred in refusing the petitioner's claim for INR 60,00,000 in refund?

With regard to the first issue, The High Court noted that the Agreement expressly stated that the respondent had constructed an area of 10,000 sq. ft. while deliberating on the first issue. During the arbitral proceedings, however, it was established that the constructed area was not 6,500 sq. ft. or 10,000 sq. ft., but rather 7,506 sq. ft., based on an independent assessment by the architect. As a result, the representation in the Agreement about the covered region was found to be erroneous. The High Court noted that, while it was not stated explicitly in so many words, it was clear from the impugned judgement that the lone arbitrator did not consider the reduced area to be substantial. It was difficult for the High Court to agree that a reduced area of the Property of over 25% could be regarded non-material, according to the court. The High Court further stated that the principle of 'caveat emptor' does not apply when the vendor makes an express claim that the buyer relies on. The High Court then pointed to the lone arbitrator's decision that the petitioner's claim was barred by the exclusion clause in Section 19 of the Indian Contract Act. The High Court held that the arbitrator's observation that the claim was barred under Section 19 of the Indian Contract Act did not warrant any interference under Section 34 of the Arbitration Act, given the limited scope of intervention under Section 34 and the general rule that a court could not supplant its understanding with that of the arbitrator. With regard to the second issue, The High Court noted that the sole arbitrator had determined that the payment of INR 60,00,000 could not be considered part of the sale price because it was made in the nature of earnest money, and that, under Clause 12 of the Agreement, the respondent was entitled to the entire earnest money if the petitioner failed to fulfil his obligations under the Agreement. The High Court stated in this regard that the question of whether a sum of INR 60,00,000 could be considered a guarantee for entering into a binding contract had to be addressed in light of the amount involved. The fact that the sum was only referred to as "earnest money" in the Agreement does not preclude the possibility that it was in fact earnest money or that it was paid as part of the consideration. As a result, the High Court held that an amount of INR 60,00,000, which constituted a significant component of the overall consideration (i.e. 37.5 percent), could not be forfeited unless the respondent could show that he had suffered any damage. As a result, the High Court determined that the respondent could not forfeit the sum of INR 60,00,000 unless it could show that it had suffered any damage as a result of the petitioner's failure to complete the transaction for the acquisition of the Property. As a result, the challenged arbitral judgement was set aside to the degree that it recognised the respondent's right to forfeit the sum of INR 60,00,000. The Court categorically held that, "It is settled law that a litigant is not entitled to refund of court fees in case of rejection of plaint under Order VII Rule 11 of the CPC where the plaint does not disclose a cause of action. On the same analogy, the plaintiff

cannot be entitled for refund of court fees in the event of an application under Section 8 of the Arbitration and Conciliation Act being allowed and the parties being referred for arbitration. The rationale being that the plaintiff has invoked a wrong remedy of filing the suit when it should have invoked the arbitration proceedings."

Thus, a list of words used in a contract isn't always helpful in determining the substance of the provision. As a result, the mere use of the word "earnest money" does not imply that the sum paid by a party was in the form of earnest money.