O.M.P./1206/2012 of AIRPORTS AUTHORITY OF INDIA Vs HOTEL LEELAVENTURE LTD

*IN THE HIGH COURT OF DELHI AT NEW DELHI

+O.M.P. 1206/2012

Date of Decision: 15[th]July, 2016

AIRPORTS AUTHORITY OF INDIA..... PetitionerThrough:Mr. Sandeep Sethi, Senior AdvocatewithMr.VaibhavKalraandMs.Jasbeer Bidhuri, Advocates.

versus

HOTEL LEELAVENTURE LTD.

..... RespondentThrough:Mr. Abhimanyu Mahajan, Mr. MilanDeep Singh and Ms. Ambha Goel,Advocates.

CORAM :-HON'BLE MR. JUSTICE J.R. MIDHA

JUDGMENT

1.The greatest challenge before the judiciary today is thefrivolous litigation. The judicial system in the country is choked withfalse claims and such litigants are consuming Courts’ time for awrong cause. False claims are huge strain on the judicial system. InSubrata Roy Sahara v. Union of India, (2014) 8 SCC 470, J.S.Khehar, J. observed that the Indian judicial system is grossly afflictedwith frivolous litigation and ways and means need to be evolved todeter litigants from their compulsive obsession towards senseless andill-considered claims.Relevant portion of the said judgment is asunder:

“191. The Indian judicial system is grossly afflicted, withfrivolous litigation. Ways and means need to be evolved, to

deter litigants from their compulsive obsession, towardssenseless and ill-considered claims.

(Emphasis supplied)

2.In the present case, the respondent is lessee in respect of11,000 sq. mtrs. land near Mumbai International Airport for periodof 30 years from 1[st]April, 1994 to 30[th]March, 2024. On 13[th]August,2008, i.e., after about 14 years of the commencement of the lease, therespondent invoked the arbitration and raised claim to seekdischarge from the liability to pay Royalty of Minimum GuaranteedAmount [hereinafter referred to as “Royalty (MGA)”] under the leaseon the ground that it has become commercially unviable to constructthe Hotel due to recession in the hotel industry and therefore, theclause with respect to payment of Royalty (MGA) has frustrated underSection 56 of the Contract Act.

3.The learned Arbitrator allowed the respondent’s claim anddeclared that the payment of Royalty (MGA) by the respondent hasbecome impossible under Section 56 of the Contract Act w.e.f. 01[st]June, 2008 and, therefore, the parties may enter into new contract.As result, the respondent is continuing the possession but isdischarged from the liability of paying Royalty (MGA). According tothe petitioner, the respondent’s liability as on 31[st]May, 2016 alongwith interest thereon has crossed Rs.258 crores.

4.The petitioner has challenged the award dated 29[th]August,2012 under Section 34 of the Arbitration and Conciliation Actonvarious grounds inter alia:

4.1.The award is against the well settled law that the lessee’sliability to pay the amounts under the lease to the lessor is absoluteand unconditional; and the learned Arbitrator had no power of

absolving the respondent from making the payment of the Royalty(MGA).

4.2.The impugned award is also against the well settled law thatSection 56 of the Contract Act is not applicable to leases.If thepayment of Royalty (MGA) had became unviable, the respondent hadthe option to surrender the lease but the respondent could not claimthat the clause requiring the payment of Royalty (MGA) hasfrustrated.

4.3.The learned Arbitrator has re-written the contract which is notpermissible in law. The learned Arbitrator was bound by the terms ofthe contract, but he has gone beyond the contract by discharging therespondent from the liability to pay the Royalty (MGA) and directingthe parties to re-negotiate the contract.

4.4.The statement of claim instituted by respondent is gross abuseand misuse of process of law. The statement of claim was not evenmaintainable in law and the learned Arbitrator ought to have rejectedthe same at the outset.

5.Factual matrix

5.1.The petitioner licensed 11,000 sq. meters of land near MumbaiInternational Airport to the respondent in 1982.On respondent’srequest, the license was converted into lease and lease deed dated07[th]February, 1996 was executed by the parties for period of 30years w.e.f. 01[st]April, 1994 to 31[st]March, 2024.Under the leasedeed, the respondent was required to pay the lease money as well asthe Royalty (MGA). Relevant clauses of the lease deed are as under: -

“WHEREAS the land, admeasuring approximately 11,000.00Sq. Mtrs. shown in the sketch annexed hereto vests in theAuthority.

WHEREAS Lessee is desirous of being guaranteed, lease forusing the said plot of land for term of 30(thirty) years for thepurpose of constructing and setting up of another wing to theexisting Hotel Block consisting of 150 rooms as new separateHotel Blockand after the expiry of the said terms of lease, theHotel structures, fitting and fixtures, plants and machinery willbecome the property of the Authority automatically withoutpaying any compensation to the Lessee by the Authority.

And whereas the Authority is willing to grant lease to theLessee as above on terms and conditions mutually agreed upon,this Indenture.

WITNESSETH:

1.(a) This lease shall commence on 01.04.1994 and shall be inforce for period of 30 (thirty) years from 01.04.1994 to31.03.2024. The lease period of 30 (thirty) years shall bewithout prejudice to the rights of the Authority todetermine the lease agreement for 18,000 Sqm. Plot ofexisting hotel with the party. The currency of thisagreement shall not bind Authority to an automaticextension of the lease agreements for 18,000.00 Sqm. onwhich existing hotel is situated.force for period of 30 (thirty) years from 01.04.1994 to31.03.2024. The lease period of 30 (thirty) years shall bewithout prejudice to the rights of the Authority todetermine the lease agreement for 18,000 Sqm. Plot ofexisting hotel with the party. The currency of thisagreement shall not bind Authority to an automaticextension of the lease agreements for 18,000.00 Sqm. onwhich existing hotel is situated.

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2.The Lessee shall pay @ Rs.200.00 per Sq. mtr. perannum as lease money subject to 10% compoundescalation per annum for use and occupation of the landper year in advance, in each year. The first of suchpayments to be made before taking over the land onlease. The rate of lease money payable by the Lesseeshall be subject to revision by the Authority from time totime and the lessee agrees to pay such revised leasemoney without any protest.annum as lease money subject to 10% compoundescalation per annum for use and occupation of the landper year in advance, in each year. The first of suchpayments to be made before taking over the land onlease. The rate of lease money payable by the Lesseeshall be subject to revision by the Authority from time totime and the lessee agrees to pay such revised leasemoney without any protest.3.In addition to the lease money mentioned hereinaboveand as revised from time to time, the lessee shall pay tothe Authority; Royalty as minimum guaranteed amountas mutually decided between the partiesand, in absenceof any decision, as decided by Chairman of AirportAuthority of India. For this purpose gross turnover willbe arrived at after excluding Govt. Taxes/levies onturnover.and as revised from time to time, the lessee shall pay tothe Authority; Royalty as minimum guaranteed amountas mutually decided between the partiesand, in absenceof any decision, as decided by Chairman of AirportAuthority of India. For this purpose gross turnover willbe arrived at after excluding Govt. Taxes/levies onturnover.

3.(a) The amount on royalty shall become payable from the

date of commencement of the Hotel or after the expiry of3 years gestation period allowed for construction of theHotel Block commencing from 01.06.1995, whichever isearlier.

xxxxxxxxxThelesseeshallconstructthebuilding/structure/installationsstrictlyinaccordancewith the plans and specifications with F.S.I. (Floor SpaceIndex) as ONE to be approved by the Authority, inwriting, and in conformity with such directions as theAuthority may give, in this behalf, or in connectiontherewith.Sanction or approval of any other localauthority to the constructions of the building/structure/Installations whenever required shall also be obtained bythe Lessee and the said building or structure shall beconstructed by the lessee in accordance therewith.Progress of construction shall be reported to theAuthorityquarterly,afterfurnishingscheduleofexecution.building/structure/installationsstrictlyinaccordancewith the plans and specifications with F.S.I. (Floor SpaceIndex) as ONE to be approved by the Authority, inwriting, and in conformity with such directions as theAuthority may give, in this behalf, or in connectiontherewith.Sanction or approval of any other localauthority to the constructions of the building/structure/Installations whenever required shall also be obtained bythe Lessee and the said building or structure shall beconstructed by the lessee in accordance therewith.Progress of construction shall be reported to theAuthorityquarterly,afterfurnishingscheduleofexecution.

6(a)Construction on the allotted land will commence within aperiod of 36 months. In case it is delayed, an additionalcharge of 50% of the lease rent will be levied for the nextyear i.e. 4[th]year. The allotment of land made under thislease will be cancelled if construction is not startedwithin five years.period of 36 months. In case it is delayed, an additionalcharge of 50% of the lease rent will be levied for the nextyear i.e. 4[th]year. The allotment of land made under thislease will be cancelled if construction is not startedwithin five years.

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6(e)The licencee shall construct the Hotel Block consisting of150 rooms as per approved plans.150 rooms as per approved plans.

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13.In the event of failure to pay the lease money and otheramounts herein provided from on the respective duedates, simple interest at the rate of 18% (Eighteenpercent) per annum shall be payable on all delayedpayments without prejudice to the Authority’s otherrights and remedies. Interest rate can be revised upwardsif there is upward revision in the bank rate and suchupward revision will be effected after giving 30 (thirty)days notice to the Lessee.amounts herein provided from on the respective duedates, simple interest at the rate of 18% (Eighteenpercent) per annum shall be payable on all delayedpayments without prejudice to the Authority’s otherrights and remedies. Interest rate can be revised upwardsif there is upward revision in the bank rate and suchupward revision will be effected after giving 30 (thirty)days notice to the Lessee.

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17.The lessee shall observe at all times without any questionor dispute all rules, regulations and directions issuedfrom time to time by the Authority and/or by DirectorGeneral of Civil Aviation and such other authoritieshaving jurisdiction over the locality wherein the premisesare situated which are intended to safeguard or facilitatethe use of the locality by airport or for any otherpurpose.or dispute all rules, regulations and directions issuedfrom time to time by the Authority and/or by DirectorGeneral of Civil Aviation and such other authoritieshaving jurisdiction over the locality wherein the premisesare situated which are intended to safeguard or facilitatethe use of the locality by airport or for any otherpurpose.

xxxxxxxxx26.If the lessee shall desire to determine this agreement itshall give the authority 180 days clear notice in writingofsuchdesireandshalluptothe timeofsuchdetermination pay the amounts due and perform andobservethecovenantsonhisparthereinbeforecontained, then immediately on the expiration of suchnotice this lease shall cease but without prejudice to therights and remedies to which the Authority has becomeentitled in respect of any anticipated claim or breach of”shall give the authority 180 days clear notice in writingofsuchdesireandshalluptothe timeofsuchdetermination pay the amounts due and perform andobservethecovenantsonhisparthereinbeforecontained, then immediately on the expiration of suchnotice this lease shall cease but without prejudice to therights and remedies to which the Authority has becomeentitled in respect of any anticipated claim or breach of”the covenant.

(Emphasis supplied)5.2.By supplemental agreement dated 07[th]February, 1996, theparties agreed to Royalty (MGA) according to Schedule or 7.5% ofthe gross turnover of the new hotel block, whichever was higher. Athree years’ gestation period was allowed to the respondent from 01[st]June, 1995 to 31[st]May, 1998 for construction of 150 rooms hotelblock on the leased land.Relevant terms of the supplementalagreement are as under:

“1.In addition to the payment of the lease rental as providedin the said Agreement to Lease dated the 7[th]day of February,1996, the Lessee shall also pay to the Authority Royalty asminimum guaranteed amount, as specified in schedule Aannexed hereto or at the rate of 7.5% of the gross turnover ofthe new Hotel Block, whichever is high.For the purpose ofdetermination of gross turnover, government taxes/levies onturnover will be excluded.

2.The amount of Royalty shall be payable from the date ofthe commencement of the Hotel or after the expiry of three

years gestation period allotted for the Hotel commencing from01.06.1995 whichever is earlier.

3.On account payment of the above Royalty amountproportionate to the gross turnover shall be made by the Lesseequarterly. The said payment shall be made within period of30 days of the close of each quarter.”

(Emphasis supplied)

5.3.The Schedule attached to the supplemental agreement dated 07[th]February, 1996 is reproduced hereunder:

“Schedule ‘A’

M/s Hotel Leela Venture Limited shall be liable to pay theminimum guaranteed amount as under:

The turnover for the remaining period of the agreement shall beworked out on the basis of 17% (Seventeen Percent) compoundgrowth per year.”

5.4.On 10[th]June, 1996, the respondent submitted plan for the

OM.P. No.1206/2012

proposed hotel to the petitioner in which the respondent amalgamatedthe land in question with the lands already allotted by the petitioner onlease and to use the same for the facilities like swimming pool andother recreational facilities.The petitioner rejected this plan on 4[th]September, 1996 and advised the respondent to submit revised planfor construction of 150 rooms as per the lease deed. On 23[rd]October,1997, the respondent submitted revised Plan-II which was rejected bythe petitioner on 12[th]November, 1997 on the ground that the height ofthe proposed building was above the maximum limit of 50 feet. On20[th]November, 1997, the respondent submitted Plan-III which wasaccepted by the petitioner on 21[st]November, 1997.However, therespondent did not raise the construction as per the approved plan andon 21[st]September, 1999, the respondent came up with fresh Plan-IVfor construction of hotel with 62.2 feet height which was rejected bythe petitioner on 21[st]January, 2000.

5.5.In the year 2002, disputes arose between the parties withrespect to the rejection of building plans and the liability to pay theRoyalty (MGA) which were referred to the sole arbitrator. Five issuesarose for consideration before the learned Arbitrator out of whichfollowing three issues are relevant to be discussed here and arereproduced hereunder:

“3.Whether HLVL is not liable to pay MGA/royalty onaccount of refusal of the AAI to sanction the building plansubmitted for sanction by HLVL on 21.07.1999?

4.Whether the AAI is entitled to recover Rs.39,51,24,000/-from HLVL on account of MGA/royalty for the period,01.01.1998 to 31.12.2006, and additional amount on thatreckoning from 01.01.2007 till date?

5.Is the AAI entitled to recover interest, if any from theHLVL and if so what would be the fair rate at which such

interest may be calculated and on what amount of the claim?”

(Emphasis supplied)5.6.Vide award dated 17[th]May, 2008, the learned Arbitrator heldthe respondent liable to pay Rs.4,53,53,850/- towards lease money forthe period ending 31[st]March, 2008 and Rs.47,80,17,177/- towardsRoyalty (MGA) for the period ending 30[th]June, 2007.Relevantportion of the award is reproduce hereunder:“(35) To conclude, therefore, the lessee admits that the lessor isentitled to realize and recover rent, and the arrears of rent, asclaimed till date. The arrears of rent from 01.04.2005 to31.03.2008 amounting to Rs.4,53,53,850/- as claimed, areadmittedly payable by the Respondent to the claimant. Theclaimant is also entitled to realize and recover royalty/MGAamountingtoRs.47,80,17,177/-fortheperiodending30.06.2007. The claimant admits having received payment of a-sum of Rs.10,00,00,000/ (Ten Crores) from the respondentduring the period of negotiations between the parties before the-present reference, thus leaving balance of Rs.37,80,17,177/still payable by the respondent to the claimant.Issue 3 and 4are therefore decided accordingly.

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The claimant is entitled to recover from the respondent sum ofRs.37,80,17,177/- on account of royalty/MGA with interestpendente lite with effect from 01.03.2007 till date at the rate of10% per annum with future interest at the same rate for theperiod of three months from today. He is also entitled to recoverRs.4,53,53,850/- on account of rent for the period 01.04.2005 to31.03.2008. If the two payments are not made within the periodof three months, as prescribed herein, the lessor will be entitledto recover both the decreetal amounts, with interest upon therespective principal amounts at the rate of 15% per annum fromtoday till their payment.”

(Emphasis supplied)

5.7.Both the parties accepted the arbitral award dated 17[th]May,2008 which became final and binding on both the parties.

5.8.Vide letter dated 13[th]August, 2008, the respondent againinvoked the arbitration agreement contained in Clause 37 of the leaseagreement dated 07[th]February, 1996.The relevant portion of theletter dated 13[th]August, 2008 is reproduced hereunder:

“It is submitted that the projected turnover set out in theSupplemental agreement is unconscionable, totally out ofproportion to reality and, therefore, unworkable.Since theprojected turnover under the Supplemental Agreement and theconsequent Minimum Guaranteed Amount is unconscionableand unachievable, we urged that the payment of the MinimumGuaranteed Amount under the Supplemental Agreemnt bedeleted so that the Royalty @ 7.5% will be paid on the actualgross turnover of the proposed hotel of 150 rooms.In anyevent, even if payment of the Minimum Guaranteed Amountwere to be retained, the projected turnover and the resultantMinimum Guaranteed Amount should be substituted withreasonable and achievable figures based on the turnover of theexisting Leela Hotel with yearly growth on the lines that wereagreed by AAI for the Radisson Hotel at Delhi.

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It will be clear beyond doubt from the above that it will not bepossible to achieve the Gross Turnover and the ARR for theproposed 150 room hotel.From the commencement of theMinimum Guaranteed Amount till date the ARR that will berequired to achieve the Projected Turnover is unrealistic andfar higher than the ARR achieved by the existing Leela Hotel aswell as that achieved by other hotels in Mumbai and Delhi.

If you fail to do so within 10 days of the receipt of this letter,this may be treated as invocation of arbitration under Clause37 of the Lease Agreement and the following issues may bereferred to Sole Arbitrator to be appointed by the Chairman,AAI:

(i)Whether the Projected Turnover of the Hotel and theresultant Minimum Guaranteed Amount set out in theSupplemental Agreement dated 7 February, 1996, is notunconscionable,arbitraryandanimpossibilitynotcapableofbeingachievedinthecircumstancesprevailing in the hotel industry.resultant Minimum Guaranteed Amount set out in theSupplemental Agreement dated 7 February, 1996, is notunconscionable,arbitraryandanimpossibilitynotcapableofbeingachievedinthecircumstancesprevailing in the hotel industry.

(ii)If the first question is answered in the affirmative, thenshould not fresh terms in regard to the MinimumGuaranteed Amount etc. be not finalised, to be bindingon the parties in pari materia with that of A.B. HotelsLtd. for the Radisson, New Delhi.should not fresh terms in regard to the MinimumGuaranteed Amount etc. be not finalised, to be bindingon the parties in pari materia with that of A.B. HotelsLtd. for the Radisson, New Delhi.

(iii)Should not the Agreement presently expiring on 31March, 2024 be not extended for further period of 14years in the circumstances of the case.”March, 2024 be not extended for further period of 14years in the circumstances of the case.”

(Emphasis supplied)

5.9.Vide letter dated 27[th]August, 2008, the respondent raised onemore dispute for being referred to the Arbitrator. The relevant portionof the letter dated 27[th]August, 2008 is reproduced hereunder: -

“We hereby request that the following issues be also includedin the reference to arbitration:

(IV)Whether fresh period of three years not be granted tothe Lessee for construction of the Hotel, during which noMinimum Guaranteed Amount shall be payable.”the Lessee for construction of the Hotel, during which noMinimum Guaranteed Amount shall be payable.”

5.10. On 12[th]January, 2009, the Chairman of Airport Authority ofIndia appointed sole Arbitrator to adjudicate the claims mentioned inthe letters dated 13[th]August, 2008 and 27[th]August, 2008 and thecounter claims of the petitioner.

5.11. On 13[th]February, 2009, the sole Arbitrator entered uponreference. On 02[nd]March, 2009, the respondent filed the Statement ofClaim before the learned Arbitrator in which the respondent soughtthe following prayers: -

“26. The Claimant Leela, therefore, prays –

(i)That this Hon’ble arbitral tribunal may be pleased todeclare:declare:

(a)That the Minimum Guaranteed Amounts as Royaltywhich are contained in the Supplemental Agreementdated 7[th]February, 1996 executed between AirportAuthority and Leela and unconscionable, arbitrary andan impossibility not capable of being achieved in thewhich are contained in the Supplemental Agreementdated 7[th]February, 1996 executed between AirportAuthority and Leela and unconscionable, arbitrary andan impossibility not capable of being achieved in the

circumstances prevailing in the hotel industry;

(b)That it will be in the interest of justice, equity and goodconscienceto,finalizetheMinimumGuaranteedAmounts payable by Leela to Airport Authority in parimaterial with that of A.B. Hotels Ltd. for the Radisson,New Delhi with effect from the date of the reference;conscienceto,finalizetheMinimumGuaranteedAmounts payable by Leela to Airport Authority in parimaterial with that of A.B. Hotels Ltd. for the Radisson,New Delhi with effect from the date of the reference;

(c)That the lease agreement between Airports Authority andLeela in respect of the said 11,000 sq. mtrs. of landwhich is scheduled to expire on 31[st]March, 2024 standsextended by period of 14 years;Leela in respect of the said 11,000 sq. mtrs. of landwhich is scheduled to expire on 31[st]March, 2024 standsextended by period of 14 years;

(d)That Leela will not be liable to pay any MinimumGuaranteed Amount towards Royalty for period ofthree years which is meant for the construction of the 150room hotel on the said 11,000 sq. mtrs. of land and Leelawill be entitled to further additional constructionperiod of one year after payment of an additional chargeof 50% of the ground rent, such provision may be givenin the Agreement.”Guaranteed Amount towards Royalty for period ofthree years which is meant for the construction of the 150room hotel on the said 11,000 sq. mtrs. of land and Leelawill be entitled to further additional constructionperiod of one year after payment of an additional chargeof 50% of the ground rent, such provision may be givenin the Agreement.”

(Emphasis supplied)5.12. At the stage of final hearing of the proceedings before thelearned Arbitrator, the respondent conceded that the prayers made inparas 26(i)(b), (c) and (d) of the Statement of Claim were outside thescope of the existing arbitration agreement between the parties and,therefore, the respondent gave up the said prayers. The respondenthowever pressed the prayer made in para 26(i)(a) of the Statement ofClaim.

6.Award of the Arbitrator

6.1.Vide award dated 29[th]August, 2012, the learned Arbitratordeclared that the Minimum Guaranteed Amounts mentioned inSchedule of the supplemental agreement dated 07[th]February, 1996had became impossible of performance w.e.f. 01[st]June, 2008 and,therefore, the parties are at liberty to enter into new appropriatearbitration agreement and make fresh arbitration seeking fixation of

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amounts payable by the respondent. The conclusion of the Arbitratoris reproduced hereunder: -

“ORDER

(A)It is declared that the minimum guaranteed amountswhich are stated as payable by the Claimant in Schedule tothe Supplemental Agreement dated 7[th]February, 1996 executedbetween the parties became impossible of performance witheffect from 1[st]June 2008.As already observed above in theabsence of specific arbitration agreement between the partiesto that effect, this Tribunal refrains from expressing anyopinion on what those figures should be.The parties are,however, at liberty to enter into new appropriate arbitrationagreement and make fresh arbitration seeking fixation of theamount payable as that I cannot do in the present Arbitrationas that would be beyond the scope of the existing arbitrationagreement between the parties.

(B)The arbitrator’s fees were ordered to be sharedequally between the parties at the commencement of thearbitration proceedings. Some of the arbitration hearings wereorganized by the Respondent and some others by the Claimantand each has borne the expenses of holding the hearingsorganized by it.In the facts and circumstances of the case,both parties are directed to bear the fees of their respectiveadvocates/counsel as well as incidental expenses.”

(Emphasis supplied)

6.2.The reasons given by the learned Arbitrator in the award forarriving at the above conclusion are as under:

“15. It is not in dispute that the Claimant has been paying thelease rent as stipulated in Clause 2 of the Lease Deed withoutdemur. It was also confirmed to me by the Respondent afterverification of its records that the Claimant has also paid theminimum guaranteed amounts as per Schedule to theSupplemental Agreement dated 7[th]February, 1996, for theperiod up to May, 2008.However, it is the case of theClaimant that the enormity of the worldwide recession coupledwith the terrorist attack on five star hotels in Mumbai, whichhas no precedent in history, have made it commerciallyimpossible for the Claimant to achieve the projected turnover

post May, 2008, and consequently, the Claimant is exoneratedfrom paying the minimum guarantees as quantified in ScheduleA of the Supplemental Agreement dated 7[th]February, 1996from June, 2008 onwards. The parties could not have foreseenthe catastrophic events referred to above when they agreed tothe estimates of turnover which formed the basis of theminimum guaranteed amounts referred to in Schedule of theSupplemental Agreement.

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23.As correctly pointed out by the learned counsel for theClaimant, the twin events that befell the hotel industry inMumbai during the second half of 2008 could not have beenforeseen by the parties acting as reasonable men entering intoa commercial bargain. Shri Thacker’s expert evidence, whichas I have said remains uncontroverted, shows that there hasbeen phenomenal change in the turnover and profitability offive star hotels in Mumbai from June, 2008, which areattributable to the worldwide recession and the terrorist attackon Mumbai hotels. It is therefore just and reasonable to holdthat the estimates of turnover made by the parties at the time ofexecuting the Supplemental Agreement dated 07[th]February,1996 and the resultant minimum guaranteed amounts payableby the Claimant are no longer binding as it is not commerciallypossible for the lessee to pay those minimum guaranteedamounts on account of the drastic and unforeseen change incircumstances which has knocked the bottom out of theunderstanding between the parties regarding future turnover asrecorded in Schedule of the Supplemental Agreement.

24.I have taken note of the fact that the Claimant is notdisputing or denying its obligation to pay 7.5% of the grossturnover of the hotel as stipulated in Clause 1 of theSupplemental Agreement dated 7[th]February, 1996. What hasbecome impossible of performance is payment of the minimumguaranteed amounts as specified in Schedule to theSupplemental Agreement dated 7[th]February, 1996 which werecalculated on the basis of estimates made by the partiesregarding the future turnover of the hotel.

25.The Claimant has not challenged the validity andenforceability of the registered Lease Deed dated 7[th]February,1996. As matter of law, the lease itself is incapable of being

frustrated under Section 56 of the Indian Contract Act asexplained by the Hon’ble Supreme Court in Raja Dhruv DevChand v. Raja Harmohinder, AIR 1968 SC 1024 and SushilaDevi v. Hari Singh, (1971) 2 SCC 288.

26.The Claimant continues to remain in possession of theleased land and is paying the lease rent stipulated in Clause 2of the Lease Deed.The learned counsel for the Claimantrepeatedly stated before me that the Claimant accepts andabides by all the terms of the registered Lease Deed. But theunregistered Supplemental Agreement dated 7[th]February, 1996was subsequent agreement between the parties to give effectto Clause 3 of the Lease Deed and stands on different footingfrom the Lease Deed. Frustration of the latter has no bearingon the former.

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30.It is well settled proposition of law that party to anagreement cannot refuse to perform his obligations under anagreement merely because their performance has become moreonerous.As pointed out by the learned counsel for theClaimant, the doctrine of frustration is an exception to thesanctity, inviolability and enforceability of contracts. The lawexpects parties to abide by the bargain which they have struckunless they are exonerated from performing their obligations bysupervening events of an extreme and unexpected characterover which they had no control. The concept of frustration ofcontract has varied from country to country and from age toage. When supervening events over which the parties had nocontrol have led to situation where the lessee of piece ofland given on lease for construction of hotel is required topay more than the actual turnover of the hotel itself asadditional consideration for the lease, which is over and abovethe lease rent stipulated in the lease deed, it is just andreasonable to conclude that such an agreement has becomefrustrated.

31.The development of the concept of frustration of contractunder the common law is no doubt interesting and educative,but it is unnecessary to dwell at length on any foreignauthorities as in my considered opinion the judgment of theHon’ble Supreme Court of India reported in AIR 1954 SC 44 issufficient for the purpose in hand. Courts in India have applied

the principle of commercial impossibility in appropriate cases.Illustrations can be found in (i) Sushila Devi v. Hari Singh,(1971) 2 SCC 288 (ii) Jagatjit Distilling & Allied Industries v.Bharat Nidhi Ltd., DLT 15 (1979) 152 (S.N.) (iii) D. DeviBhagat v. J.B. Advani & Co., 76 Calcutta Weekly Notes; and(iv)Smt.ShardaMahajanv.MapleLeafTradingInternational P. Ltd., [2007] 139 Comp. Cas 718 (Delhi).

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33.There can be no doubt that the principles of res judicataare applicable to arbitration proceedings.However, theClaimant is relying on events that occurred subsequent to thepassing of the Award dated 17[th]May, 2008 by Mr. Justice(Retd.) K.S. Sidhu and, hence, the earlier arbitration betweenthe parties cannot operate as bar to the present arbitration.

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38.To conclude, on the basis of the evidence led before me Ihave no difficulty in holding that the agreement between theparties that the Claimant would pay Minimum GuaranteedAmounts as stipulated in Schedule to the SupplementalAgreement dated 7[th]February, 1996 became impossible ofperformance in commercial sense on account of thefrustrating events that occurred during the second half of 2008.This of course does not mean that the Claimant has ceased tobe bound by the requirement of Clause 3 of the Lease Deed topay an additional amount as minimum guaranteed amountwhich may be mutually agreed upon, and failing such mutualagreement, as determined by the Chairman of the Respondent.I agree with the submission of the learned counsel for theClaimant that there is nothing in Clause 3 of the Lease Deed tosuggest that such mutual agreement or determination by theChairman of the Respondent is one-time act or event. Since Iam holding thattheSupplementalAgreementdated 7[th]February, 1996 has become impossible of performance fromJune 2008 on account of two supervening events over which theparties had no control, it will now be necessary for them toarrive at mutually acceptable figures, failing which theChairman of the Respondent will have to determine what thoseMinimum Guaranteed Amounts should be. In the absence of aspecific arbitration agreement between the parties to that effect,this Tribunal refrains from expressing any opinion on what

those figures should be. However, I am recording the fact thatthe learned counsel for the Claimant stated before me that theClaimant is not challenging the obligation of the Claimant topay 7.5% of the gross turnover of the hotel as stipulated inClause 1 of the Supplemental Agreement dated 7[th]February,”1996, whatever be that amount.

(Emphasis supplied)

7.Submissions on behalf of the petitioner

7.1.The doctrine of frustration as enacted in Section 56 of theContract Act has no application to leases.Reliance is placed onRaja Dhruv Dev Chand v. Raja Harmohinder Singh, AIR 1968 SC1024.

7.2.Even assuming Section 56 applies to leases, it cannot beinvoked in case of commercial hardship.Frustration cannot be usedas device to avoid bad bargain. The contract between parties wasfor period of 30 years and it was but natural and foreseeable by boththe parties that there would be various economic turmoils over aperiod as long as 30 years. Principle of frustration is not applicablewhen the event is foreseeable but not foreseen.

7.3.The lease deed and the supplemental agreement (both enteredon the same date) clearly provide that the respondent is liable to paythe Royalty (MGA).There is no liberty reserved to the Courts toabsolve party from liability to perform his part of the contract,merely because on account of certain turn of events, the performanceof the contract may become onerous.

7.4.The respondent’s prayer that the Royalty (MGA) set out in thesupplemental agreement dated 7[th]February, 1996 is unconscionable,arbitrary and an impossibility, is barred by well settled law that aparty cannot wriggle out of commercial contract on the plea that theterms of contract are onerous. The respondent is large company well

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established in hotel business for many decades, and has access to thebest advice both commercial and legal. It entered into the lease deedand the supplemental agreement with open eyes, acted upon the same,and is therefore estopped from challenging the terms of the lease deedand the supplemental agreement. It cannot approbate and reprobate.Reliance is placed as Alopi Parshad v. Union of India (1960) 2 SCR793, Panna Lal v. State of Rajasthan (1975) 2 SCC 633, State Bank ofHaryana v. Jage Ram (1980) 3 SCC 599, Har Shanker v. DeputyEscise and Taxation Commissioner (1975) 1 SCC 737, PuravankaraProjects Ltd. v. Hotel Venus International (2007) 10 SCC 33, BhartiCellular Limited v. Union of India (2010) 10 SCC 174, MumbaiInternational Airport Pvt. Ltd. v. Golden Chariot Airport JT 2010 (10)SC 381 and Track InnovationsIndia Pvt. Ltd. v. Union of India(2010) 170 DLT 424.

7.5.On failure of the respondent to pay the Royalty (MGA), thepetitioner commenced arbitration in which no plea of frustration orimpossibility was raised by the respondent in the said earlierarbitration proceedings and the learned Arbitrator published an awarddated 17[th]May, 2008 in favour of the petitioner directing payment ofRoyalty (MGA) in terms of the supplemental agreement. The pleas inthe subsequent arbitration are therefore clear afterthought and anabuse of the process.

7.6.Even though the arbitral award dated 17[th]May, 2008 was neverchallenged, the respondent in the garb of the Mumbai terrorist attacksand economic recession raised the same issues again on 13[th]August,2008 and 27[th]August, 2008 by invoking clause 37 of the lease deeddated 07[th]February, 1996 even though the same had already beendecided in the earlier arbitration proceedings.

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7.7.The petitioner, on receiving the statement of claim, filed anapplication under Section 16 of the Arbitration and Conciliation Act,1996 on the ground that the learned Arbitrator had no jurisdiction todecide or adjudicate the present dispute as the same had already beenadjudicated upon by the learned Arbitrator vide order dated 17[th]May,2008.The respondent thereafter filed reply of the aforesaidapplication and the petitioner filed rejoinder to the reply to therespondent herein along with letter dated 17[th]June, 2004 receivedunder RTI from the Municipal Corporation of Mumbai stating thereinthat the respondent had already utilized the FSI of the land allotted toit by the petitioner for construction of Hotel Leela Galleria.

7.8.The petitioner also filed detailed reply to the statement ofclaim raising preliminary objections about the maintainability of thearbitration as well as the fact that even after gap of more than 13years, the respondent had still not constructed any Hotel for whichland measuring 11,000 sqm. had been leased by the petitioner to therespondent and FSI/FAR for the 11,000 sq.mtrs of land had beenalready utilized by the respondent for additional construction on HotelLeela Galleria.The respondent’s claim was just an eye wash toescape the liability to pay Royalty (MGA) as per supplementalagreement dated 07[th]February, 1996.

7.9.The learned Arbitrator dismissed the petitioner’s applicationunder Section 16 of the Arbitration and Conciliation Act, 1996 on 22[nd]April, 2010 without even considering the fact that the point of disputethat is payment of Royalty (MGA) vis-à-vis grounds urged by therespondent regarding payment of Royalty (MGA) had already beenadjudicated upon in the previous award dated 18[th]May, 2008.

7.10. The learned Arbitrator failed to appreciate that the claims made

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by the respondent were barred by principle of res judicata andconstructive res judicata as the issue regarding liability of therespondent to pay the Royalty (MGA) had been specifically raised,argued and decided in favour of the petitioner in the arbitral awarddated 17[th]May, 2008.

7.11. The respondent itself had categorically admitted in the earlierarbitration that the petitioner was entitled to realise and recover theroyalty/MinimumGuaranteedAmountamountingtoRs.47,80,17,177/- for the period ending 30[th]June, 2007 and, therefore,the respondent cannot be permitted to re-agitate the same issue allover again.Assuming but not conceding that the claims are notbarred by the principle of res judicata, it is submitted that the samewould still be barred by the principles of constructive res judicata asany matter which might and ought to have been made ground ordefence or attack in the former proceeding but was not so made, thensuch matter in the eyes of law, to avoid multiplicity of litigation andto bring about finality in it, is deemed to have been constructively inissue and, therefore, is taken and decided. Reliance is placed on thejudgments passed in K.V. George v. Secy. to Govt., Water and PowerDeptt. (1989) 4 SCC 595, K.K. Modi v. K.N. Modi (1998) 3 SCC 573and State of Karnataka v. All India Manufacturers Organisation(2006) 4 SCC 683.

7.12. During the cross-examination of the respondent’s witnesses, thelearned Arbitrator directed the inspection of the site of construction ofthe Hotel on 10[th]June, 2011. Pursuant to the site inspection by thelearned Arbitrator as well as both the parties, the learned Arbitratorpassed an order dated 10[th]June, 2011 containing discussions whichhad never occurred on that date. The petitioner filed an application

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dated 4[th]July, 2011 to seek clarification of the order dated 10[th]June,2011 as it contained matters contrary to the record. Vide order dated4[th]July, 2011, the learned Arbitrator directed that the same shall beconsidered at the time of final arguments.However, the impugnedaward neither mentioned nor dealt with the said application.

7.13. The petitioner filed an application under Section 17 of theArbitration & Conciliation Act, 1996 praying therein that during thependency of the arbitration proceedings, the respondent should paythe Royalty (MGA) in terms of the supplemental agreement dated 07[th]February, 1996.

7.14. The application under Section 17 of the Arbitration andConciliation Act was dismissed by the learned Arbitrator vide orderdated 15[th]November, 2011 on the pretext that the matter was alreadyfixed for final arguments and as such, there is no need to go into themerits of the application.

7.15. The learned Arbitrator completely ignored and overlooked anddid not even consider the submissions made by the counsel for thepetitioner as well as various judicial pronouncements relied upon byhim.

7.16. The reliefs granted by the learned Arbitrator amounts to re-writing of the lease deed and supplemental agreement both dated 07[th]February, 1996 which is not permissible in view of the well-settledlaw. The respondent on the one hand wants to enjoy the benefit of thelease and on the other hand, wants to get rid of the conditions inrespect of construction of separate hotel and payment of Royalty(MGA), which are considered onerous by it. This is completely andtotally contrary to the settled law.

7.17. The learned Arbitrator has re-written the terms of the contractwhich is beyond the scope and jurisdiction of the arbitration.Thelearned Arbitrator has held that the Royalty (MGA) as agreed uponbetween the parties is impossible for performance, and at the sametime, upheld the remaining part for the clause, thereby trying toseparate single clause into two different parts.

7.18. The learned Arbitrator has ignored the well-settled principlelaid down by the Supreme Court in Food Corporation of India v.Chandu Construction & Anr. (2007) 4 SCC 697 that an arbitrator is acreature of the agreement and must act in the four walls of theagreement. However, in the present case, the learned Arbitrator hasexceeded his jurisdiction by passing the impugned order thereby re-writing the express terms and conditions of the contract which weremutually agreed upon by the petitioner and the respondent herein.

7.19. The learned Arbitrator did not take note of the fact that thenovation, rescission or alteration of contract under Section 62 of theIndian Contract Act can only be done with the agreement of both theparties of contract. Both the parties have to agree to substitute theoriginal contract with new contract or rescind or alter. It cannot bedone unilaterally or by the Court of law. The respondent in essencesought alteration of the terms of the contract through this tribunalwhich cannot be permitted.Reliance is placed on the judgmentspassed in Alopi Parshad & Sons Ltd. v. Union of India (1960) 2 SCR793, Citi Bank N.A. v. Standard Chartered Bank AIR 2003 SC 4630and Ramana Dayaram Shetty v. International Airport Authority ofIndia (1979) 3 SCC 489.

7.20. The learned Arbitrator bypassed the fact that the grounds urgedby the respondent due to temporary change in the market conditions

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and the terrorists attack on Mumbai are against the settled law thatcommercial difficulty, inconvenience or hardship cannot be ajustification for not complying with the terms of the contract, more sotemporary phase of recession or adverse market conditions cannot bejustification for changing the terms and conditions of commercialcontract executed for longer period, which is 30 yrs in the instantcase, and when the respondent with the full knowledge of the termsand conditions, willingly and voluntarily entered into an agreementand as such, the commercial difficulty in terms of the hardship inperformance of those conditions cannot be ground to avoid acontractual obligation. Reliance is placed on State of Haryana v. JageRam (1980) 3 SCC 599.

7.21. The learned Arbitrator failed to appreciate that the respondentwas approbating and reprobating at the same time, which is notpermissible in the eyes of law. The respondent who on its ownaccepted the terms and conditions of the contract cannot now beallowed to avoid the same, on the assumption that it is nowdisadvantageous to it. Reliance is placed on New Bihar Biri LeavesCo. v. State of Bihar, (1981) 1 SCC 537.

7.22. The learned Arbitrator failed to appreciate that change in theeconomic scenario which led project being less favourable or lessprofitable or the contract becoming more onerous, does not frustratethe terms of the contract.

7.23. The learned Arbitrator failed to appreciate the law laid down bythe Supreme Court in Continental Construction Company Limited v.State of Madhya Pradesh, 1998 (3) SCC 82 wherein the SupremeCourt expressly while dealing with similar facts and circumstancesheld that the arbitrator is Tribunal selected by the parties to decide

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the dispute according to law and so is bound to follow the settled lawand that contractor having contracted cannot go back to theagreement simply because it does not suit him to abide by it. TheCourt further held that the contract is not frustrated merely becausethe circumstance in which the contract was based was altered. TheSupreme Court further held that the Indian Contract Act does notenable party to contract to ignore the express covenants thereof,and to claim payment of consideration for performance of the contractat rates different from the stipulated rates on some vague plea ofequity. It was further observed that the parties to an executory contractare often faced, in the course of carrying it out, with turn of eventswhich they did not at all anticipate, such as abnormal rise or fall inprices, sudden depreciation of currency, an unexpected obstacle toexecution of the contract. However, no general liberty is reserved forthe Courts to absolve party from liability to perform his part of thecontract merely because on account of uncontemplated turn of events,the performance of the contract may become onerous.

7.24. The learned Arbitrator failed to appreciate the law laid down bythe Supreme Court in Alopi Parshad & Sons Ltd. v. Union of IndiaAIR 1960 SC 588 in which it was held that contract is not frustratedmerely because of its performance has become more onerous andburdensome namely because of abnormal rise and fall in prices, asudden depreciation of currency, or an unexpected obstacle to theexecution of the contract, as these are nothing but ordinary risks ofbusiness.The Supreme Court further observed that the Court has nopower of absolving the performance of the contract, merely because ithas become onerous on account of unforeseen circumstances.

7.25. The learned Arbitrator committed serious error of jurisdiction

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in returning finding in para 34 that it cannot be said that the claimanthas no FSI left to construct the hotel, failing to appreciate that thismatter was beyond the terms of reference of the learned Arbitrator.Assuming, though without admitting, that the matter of FSI waswithinthejurisdictionofthelearnedArbitrator,therespondent/claimant played fraud upon the petitioner by dishonestlyappropriating and utilizing the FSI for the land in question forconstruction of building on adjoining land belonging to therespondent. In this manner, the respondent not only misappropriatedvaluable property of the petitioner, but also this conduct bears out theintent of the respondent that it never intended to construct hotel onthe present land.

7.26. The petitioner filed an application under Section 27 of theArbitration and Conciliation Act, 1996 seeking liberty to summon awitnessfromMumbaiMunicipalCorporationtoresolvethecontroversy relating to the FSI of 11000 square meters of land. Thelearned Arbitrator disposed of the application on the ground that therespondent had given up prayers (b) to (d) of the statement of claim.Despite that learned Arbitrator dealt with the plea of FSI in para 34 ofthe impugned award.

7.27. The respondent does not have the required Floor Space Index tofulfil the contractual obligations. The learned Arbitrator has failed toappreciate the fact that the evidence, documents and the admissionsmade by the witnesses of the respondent themselves that there is noFloor Space Index (FSI) left with the respondent to construct theHotel as stipulated in the lease agreement dated 07[th]February, 1996and the present proceeding is nothing but way devised by therespondent to come out of its liability to construct the hotel.TheOM.P. No.1206/2012Page 25 of 95

petitioner had placed sufficient materials on record i.e. by way ofletter from the Municipal Corporation of Mumbai dated 17[th]June,2004 which clearly stated that the respondent does not have therequired FSI (Floor Space Index) to construct any hotel on the 11000sq. mtr. land as the FSI of the same has already been utilized by therespondent in some other projects.The petitioner also placed onrecord occupancy certificate dated 15[th]November, 2002 issued by theMunicipal Corporation of Mumbai which clearly highlighted the factbeyond doubt that there was no FSI available with the respondent.

7.28. The learned Arbitrator failed to appreciate the fact that even thewitness i.e. CW-2 admitted that FSI under the present agreement was“one” and the above mentioned fact was also admitted by theclaimant’s witness during his cross examination.

7.29. The learned Arbitrator has erred in relying upon the letter dated26[th]June, 1981 issued by the Government of Maharashtra UrbanDevelopment Department to the respondent. It is submitted that aperusal of the letter dated 25[th]June, 1991 would show that it was aconditional offer made to the respondent before the agreement wasentered into between the parties wherein the State of Maharashtra hadoffered that subject to fulfilment of the conditions mentioned therein,the respondent may have an FSI of “two” subject to payment ofcertain charges. However, the learned Arbitrator failed to appreciatethe fact that in terms of clause 6 of the lease deed dated 07[th]February,1996 entered between the parties, the FSI of the land was “one” andthe respondent could not go beyond the same without the priorpermission or approval from the petitioner. It is also an admittedposition that no such approval was even taken by the respondent fromthe petitioner herein.

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7.30. The learned Arbitrator while erroneously holding that therespondent had an available FSI of “two” by over-looking not only theagreement entered between the parties dated 07[th]February, 1996,letter dated 17[th]June, 2004 from the Municipal Corporation ofMumbai, the occupancy certificate dated 15[th]November, 2002 issuedby the Municipal Corporation of Mumbai which clearly specified anddemarcated the FSI available on the land in question in terms of thepresent rules was “one”, but also the acceptance and admission byCW-2 that there exists no FSI on the said land.

7.31. The impugned award is also contrary to the law laid downunder Section 34 of the Specific Relief Act, 1963.The learnedArbitrator has failed to appreciate the fact that pursuant to the orderdated 30[th]January, 2012, the sole surviving prayer claimed by therespondent was the ‘declaration’ to the effect that the MinimumGuaranteed Amount has become impossible of performance. In termsof Section 34 of the Specific Relief Act, merely declaration withoutseeking any consequential relief cannot be granted.

8.Submissions on behalf of the respondent

8.1.The respondent in the arbitration proceedings restricted its reliefto declaration that the Minimum Guaranteed Amounts stipulated inthe Supplemental Agreement dated 7[th]February, 1996 executedbetween the parties is an impossibility not capable of being achievedin the circumstances prevailing in the hotel industry.As such, theonly point at issue before the learned Arbitrator was whether theMinimum Guaranteed Amount of royalty mentioned in Schedule tothe Supplemental Agreement dated 7[th]February, 1996 had becomeimpossible of performance post June, 2008 on account of theworldwide recession and the terrorist attack on five star hotels in

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Mumbai. The combined effect of both these events had cripplingeffect on the hotel industry in Mumbai and that the projected grossturnover for the respective years mentioned in the Schedule becameunachievable.The magnitude of the worldwide recession wascomparable only to the great depression of the 1920s and the terroristattack by Pakistani militants on five star hotels in Mumbai wasunimaginable.There was no precedent in history to what hadhappened during the second half of 2008 in Mumbai and no one couldhave foreseen such an eventuality.The Minimum GuaranteedAmount of royalty based on the estimate of the parties in 1996regarding the future gross turnover of the hotel had become irrelevantand incapable of achievement.The combined effect of these twoevents has been to render the Supplemental Agreement dated 07[th]February, 1996 regarding payment of Minimum Guaranteed Amountto the petitioner, not only more onerous, but commercially impossibleof performance within the meaning of Section 56 of the IndianContract Act, 1972.8.2.The respondent admits and acknowledges the existence,validity and enforceability of the Lease Deed dated 07[th]February,1996 executed by the petitioner in favour of the respondent in respectof 11,000 sq. meters of land located near the Sahar InternationalAirport, Mumbai.The rights and obligations of the lessor and thelessee as set out in the said Lease Deed were not under challenge atall.It was common ground between the parties before the learnedArbitrator that the lease deed dated 07[th]February, 1996 was neverfrustrated and both parties affirmed its validity and enforceability.The respondent states that as matter of law, lease is incapable ofbeing frustrated as has been repeatedly held by the Supreme Court.

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Reliance is placed on the judgment passed in Raja Dhruv Dev Chandv. Raja Harmohinder (supra) and Sushila Devi v. Hari Singh (1971)2 SCC 288.

8.3.The projected gross turnover mentioned in Schedule becameunachievablefollowingtheworldwiderecessionwhichwasunprecedented since the great depression of the 1920s as well as theterrorist attack by Pakistani militants on five star hotels in Mumbaiwhich had no precedent at all in history. The respondent led expertevidence on the impact of these events on the hotel industry inMumbai and the difference it would make to the projected turnover ofthe 150 room hotel proposed to be constructed on the 11,000 sq.meters of land leased to the respondent by the petitioner.Theaffidavit of the expert witness, Shri Vijay Premji Thacker, CharteredAccountant providing consultancy services to the hotel and tourismindustry, with vast experience to his credit was filed by therespondent. The witness analysed in detail the situation prevailing inthe hotel industry in Mumbai towards the end of 2008.

8.4.The conclusion drawn by this expert as mentioned in paragraph5.3 of his affidavit is that during the first ten years of its operations thetotal revenue or turnover of the proposed hotel would be Rs.646.1crores and the Minimum Guaranteed Amount payable to the petitioneras additional consideration for the lease would be Rs.673.4 crores forthe same ten year period. In other words, the Minimum GuaranteedAmount payable as part of the consideration for the lease willexceed the total revenue of the hotel by 27.3 crores. This is clearly abizarre situation which needs to be corrected by declaring the contentsof Schedule to the Supplemental Agreement dated 7[th]February,1996 as impossible of performance within the meaning of Section 56

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of the Indian Contract Act, 1872.The learned Arbitrator afterappreciating the evidence led by both the parties held that theMinimum Guaranteed Amount of royalty as mentioned in theSchedule to the Supplemental Agreement had become impossibleof performance.This is finding of fact which is not liable to beinterfered with by this Court. The learned Arbitrator has left it to theparties to arrive at Minimum Guaranteed Amount of royalty afresh interms of Clause 3 of the lease deed without in any manner disturbingthe obligation of the respondent to pay 7.5% of the gross turnover ofthe hotel towards royalty as agreed and recorded in the SupplementalAgreement dated 7[th]February, 1996.The learned Arbitrator hascommitted no error whatsoever and has acted within the jurisdictionconferred upon him by the arbitration agreement between the parties.8.5.The frustrating events that gave rise to the cause of action of therespondent occurred after the passing of the award dated 17[th]May,2008.It was from June 2008 that the global economic recessionbegan to have its impact on the hotel industry in India, and theevidence of the expert witness, Shri Vijay Thacker is clear on thispoint. The terrorist attack on Mumbai hotels was on 26[th]November,2008, which is historical event.The said expert witness hasdemonstrated with facts and figures the crippling effect which theseunforeseen events had on the occupancy levels and profitability offive star hotels in Mumbai. Obviously, the respondent could not haveraised the issue of frustration which is founded on these subsequentevents in the earlier arbitration proceedings.

8.6.The respondent accepts the legal proposition that contractdoes not become frustrated because it has become more onerous toone party. The doctrine of frustration is an exception to the sanctity,

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inviolability and enforceability of contracts. The law expects partiesto abide by the bargain which they have struck unless they areexonerated from performing their obligation by supervining events ofan extreme and unexpected character over which they had no control.The concept of frustration of contract has varied from country tocountry and from age to age. When supervening events over whichthe parties had no control have led to situation where the lessee of apiece of land given on lease for construction of hotel is required topay more than the actual turnover of the hotel itself as additionalconsideration for the lease, which is over and above the lease rentstipulated in the lease deed, it is not case of the contract becomingmore onerous, but one of frustration.

8.7.It could not have been in the contemplation of the parties to thesupplemental agreement dated 7[th]February, 1996 that the MinimumGuaranteed Amount stipulated in Schedule thereto would one dayexceed by far the total turnover of the hotel itself.Such anunexpected turn of events undoubtedly leads to frustration of theMinimum Guaranteed Amount as mentioned in Schedule to theSupplemental Agreement.

8.8.Reliance is placed on Satyabrata Ghose v. MugneeramBangur & Co. AIR 1954 SC 44, in Sushila Devi v. Hari Singh(1971) 2 SCC 288, Jagatjit Distilling & Allied Industries v. BharatNidhi Ltd. DLT 15 (1979) 152 (SN), D. Devi Bhagat v. J.B. Advani& Co. 76 Calcutta Weekly Notes and Sharda Mahajan v. MapleTrading International P. Ltd. [2007] 139 Comp. Cas 718 (Delhi).

8.9.With respect to the petitioner’s contention that the claim wasbarred by Section 34 of the Specific Relief Act, it was submitted thatthe claim was not barred as the declaration sought fell outside the

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purview of Section 34 of the Specific Relief Act, 1963.

8.10. With respect to the petitioner’s contention that the respondenthas no FSI left to build the Hotel block on the lease land, it wassubmitted that the respondent has utilised the FSI of 1 (one) incarrying out construction on the adjoining Hotel Leela Galleria, asback as in the year 2002 but the respondent can obtain FSI of 2 (two)on payment of premium to the Government. Reliance is placed on theletter dated 25[th]June, 1991 issued by Government of Mahrashtra,Urban Development Department, in support of this submission.

9.Scope of Section 34 of the Arbitration and Conciliation Act

9.1.The law with respect to the scope of Section 34 of theArbitration and Conciliation Act, 1996 is well settled.In Oil andNatural Gas Corporation v. Saw Pipes Ltd., 2003 (5) SCC 705, theSupreme Court has considered the scope of interference in an arbitralaward on the ground of public policy in great detail and observed thatthe phrase ‘public policy of India” is required to be given widermeaning so as to prevent frustration of legislation and justice. TheSupreme Court held that an arbitral award could be set aside, if it iscontrary to (i) the fundamental policy of Indian Law; or (ii) theinterest of India; or (iii) justice or morality; or (iv) if it is patentlyillegal. However, the Court cautioned that the illegality must go to theroot of the matter.If the illegality is of trivial nature, the arbitralaward cannot be taken to be against public policy. The Court furtherobserved that the award could be set aside if it is so unfair andunreasonable that it shocked the conscience of the Court.

9.2.In Delhi Development Authority v. R.S. Sharma, (2008) 13SCC 80, the Supreme Court summarized the principles as under:

“21. From the above decisions, the following principlesemerge:

(a)An award, which is(i)contrary to substantive provisions of law; or(i)contrary to substantive provisions of law; or

(ii) the provisions of the Arbitration and ConciliationAct, 1996; orAct, 1996; or

(iii) against the terms of the respective contract; or

(iv) patently illegal; or

(b)the interest of India; or

(c)justice or morality.

(d)The award could also be set aside if it is so unfair andunreasonable that it shocks the conscience of the Court.unreasonable that it shocks the conscience of the Court.

(e)It is open to the court to consider whether the award isagainst the specific terms of contract and if so, interferewith it on the ground that it is patently illegal andopposed to the public policy of India.”against the specific terms of contract and if so, interferewith it on the ground that it is patently illegal andopposed to the public policy of India.”

9.3.In Steel Authority of India Ltd. v. Gupta Brother Steel Tubes

Ltd., JT 2009 (12) SC 135, the Supreme Court summarised theposition in paragraph 26 as follows:

“26. It is not necessary to multiply the references. Suffice it tosay that the legal position that emerges from the decisions ofthis Court can be summarised thus:

(i) In case where an arbitrator travels beyond the contract,the award would be without jurisdiction and would amount tolegal misconduct and because of which the award wouldbecome amenable for being set aside by Court.

(ii) An error relatable to interpretation of the contract by anarbitrator is an error within his jurisdiction and such error isnot amenable to correction by Courts as such error is not anerror on the face of the award.

(iii) If specific question of law is submitted to the arbitratorand he answers it, the fact that the answer involves anerroneous decision in point of law does not make the award badon its face.

(iv) An award contrary to substantive provision of law oragainst the terms of contract would be patently illegal.

(v) Where the parties have deliberately specified the amount ofcompensation in express terms, the party who has suffered by

such breach can only claim the sum specified in the contractand not in excess thereof. In other words, no award ofcompensation in case of breach of 10 contract, if named orspecified in the contract, could be awarded in excess thereof.(vi) If the conclusion of the arbitrator is based on possibleview of the matter, the court should not interfere with theaward.

(vii) It is not permissible to court to examine the correctnessof the findings of the arbitrator, as if it were sitting in appealover his findings.”

9.4.In Oil and Natural Gas Coporation Ltd. v. Western GecoInternational Limited, (2014) 9 SCC 263, the Supreme Court furtherelaborated the principles relating to Section 34 and held as under:

“35. What then would constitute the “fundamental policy ofIndian law” is the question. The decision in ONGC [ONGCLtd. v. Saw Pipes Ltd., (2003) 5 SCC 705] does not elaboratethat aspect. Even so, the expression must, in our opinion,include all such fundamental principles as providing basis foradministration of justice and enforcement of law in thiscountry. Without meaning to exhaustively enumerate thepurport of the expression “fundamental policy of Indian law”,we may refer to three distinct and fundamental juristicprinciples that must necessarily be understood as part andparcel of the fundamental policy of Indian law. The first andforemost is the principle that in every determination whetherby court or other authority that affects the rights of citizenor leads to any civil consequences, the court or authorityconcerned is bound to adopt what is in legal parlance called a“judicial approach” in the matter.The duty to adopt judicialapproach arises from the very nature of the power exercisedby the court or the authority does not have to be separately oradditionally enjoined upon the fora concerned. What must beremembered is that the importance of judicial approach in-judicial and quasijudicial determination lies in the fact thatso long as the court, tribunal or the authority exercisingpowers that affect the rights or obligations of the partiesbefore them shows fidelity to judicial approach, they cannotact in an arbitrary, capricious or whimsical manner. Judicialapproach ensures that the authority acts bona fide and deals

with the subject in fair, reasonable and objective manner andthatitsdecisionisnotactuatedbyanyextraneousconsideration. Judicial approach in that sense acts as checkagainst flaws and faults that can render the decision of court,tribunal or authority vulnerable to challenge.

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xxx

38. Equally important and indeed fundamental to the policy ofIndian law is the principle that court and so also quasi-judicial authority must, while determining the rights andobligations of parties before it, do so in accordance with theprinciples of natural justice. Besides the celebrated audialteram partem rule one of the facets of the principles ofnatural justice is that the court/authority deciding the mattermust apply its mind to the attendant facts and circumstanceswhile taking view one way or the other. Non-application ofmind is defect that is fatal to any adjudication. Applicationof mind is best demonstrated by disclosure of the mind anddisclosure of mind is best done by recording reasons insupport of the decision which the court or authority is taking.The requirement that an adjudicatory authority must apply itsmind is, in that view, so deeply embedded in our jurisprudencethat it can be described as fundamental policy of Indian law.

39. No less important is the principle now recognised as asalutary juristic fundamental in administrative law that adecision which is perverse or so irrational that no reasonableperson would have arrived at the same will not be sustained ina court of law. Perversity or irrationality of decisions is testedonthetouchstoneofWednesburyprinciple [AssociatedProvincial Picture Houses Ltd. v. Wednesbury Corpn., (1948) 1KB 223 : (1947) 2 All ER 680 (CA)] of reasonableness.Decisions that fall short of the standards of reasonablenessare open to challenge in court of law often in writjurisdiction of the superior courts but no less in statutoryprocesses wherever the same are available.

40. It is neither necessary nor proper for us to attempt anexhaustiveenumerationofwhatwouldconstitutethefundamental policy of Indian law nor is it possible to place theexpression in the straitjacket of definition. What is importantin the context of the case at hand is thatif on facts provedbefore them the arbitrators fail to draw an inference whichought to have been drawn or if they have drawn an inference

which is on the face of it, untenable resulting in miscarriageof justice, the adjudication even when made by an ArbitralTribunal that enjoys considerable latitude and play at thejoints in making awards will be open to challenge and may becast away or modified depending upon whether the offendingpart is or is not severable from the rest.”

(Emphasis supplied)

9.5.In Associate Builders v. Delhi Development Authority, (2015)3 SCC 49, the Supreme Court further elaborated the scope of Section34 and held as under:

“Fundamental Policy of India Law

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29. It is clear that the juristic principle of “judicialapproach” demands that decision be fair, reasonable andobjective. On the obverse side, anything arbitrary andwhimsical would obviously not be determination whichwould either be fair, reasonable or objective.

30. The audi alteram partem principle which undoubtedly isa fundamental juristic principle in Indian law is alsocontained in Sections 18 and 34(2)(a)(iii) of the Arbitrationand Conciliation Act...... ”

31. The third juristic principle is that decision which isperverse or so irrational that no reasonable person wouldhave arrived at the same is important and requires somedegree of explanation. It is settled law that where:

(i)a finding is based on no evidence, or

(ii) an Arbitral Tribunal takes into account somethingirrelevant to the decision which it arrives at; orirrelevant to the decision which it arrives at; or

(iii) ignores vital evidence in arriving at its decision,such decision would necessarily be perverse.such decision would necessarily be perverse.

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Justice

36. The third ground of public policy is, if an award isagainst justice or morality. These are two different conceptsin law.An award can be said to be against justice onlywhen it shocks the conscience of the court. An illustration

of this can be given. claimant is content with restrictinghis claim, let us say to Rs 30 lakhs in statement of claim

before the arbitrator and at no point does he seek to claimanything more. The arbitral award ultimately awards him Rs45 lakhs without any acceptable reason or justification.Obviously, this would shock the conscience of the court andthe arbitral award would be liable to be set aside on theground that it is contrary to “justice”.

Morality

37. The other ground is of “morality”. Just as theexpression “public policy” also occurs in Section 23 of the

“”Contract Act, 1872 so does the expression morality. Two

illustrations to the said section are interesting for theyexplain to us the scope of the expression “morality”:

“(j) A, who is B's Mukhtar, promises to exercise hisinfluence, as such, with in favour of C, and promises topay 1000 rupees to A. The agreement is void, because it isimmoral.

(k) agrees to let her daughter to hire to for concubinage.The agreement is void, because it is immoral, though theletting may not be punishable under the Indian Penal Code(45 of 1860).”

Patent Illegality

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42. In the 1996 Act, this principle is substituted by the“patent illegality” principle which, in turn, contains threesubheads:

42.1. (a) contravention of the substantive law of Indiawould result in the death knell of an arbitral award. Thismust be understood in the sense that such illegality must goto the root of the matter and cannot be of trivial nature.This again is really contravention of Section 28(1)(a) ofthe Act, which reads as under:

“28.Rules applicable to substance of dispute.—(1)Where the place of arbitration is situated in India—Where the place of arbitration is situated in India—

(a)inanarbitrationotherthananinternationalcommercial arbitration, the Arbitral Tribunal shalldecide the dispute submitted to arbitration in accordancewith the substantive law for the time being in force inIndia;”

42.2. (b) contravention of the Arbitration Act itself would

be regarded as patent illegality — for example if an

arbitrator gives no reasons for an award in contravention ofSection 31(3) of the Act, such award will be liable to be setaside.

42.3. (c) Equally, the third subhead of patent illegality isreally contravention of Section 28(3) of the ArbitrationAct, which reads as under:

“28.Rules applicable to substance of dispute.—(1)-

(3) In all cases, the Arbitral Tribunal shall decide inaccordance with the terms of the contract and shall takeinto account the usages of the trade applicable to thetransaction.”

This last contravention must be understood with caveat.An Arbitral Tribunal must decide in accordance with theterms of the contract, but if an arbitrator construes term ofthe contract in reasonable manner, it will not mean thatthe award can be set aside on this ground. Construction ofthe terms of contract is primarily for an arbitrator todecide unless the arbitrator construes the contract in such away that it could be said to be something that no fair-mindedor reasonable person could do.”

(Emphasis supplied)

10.Discussion and Findings

Respondent’s liability to pay the Royalty (MGA) is absoluteunder the Transfer of Property Act, 1882

10.1. lease of an immovable property is transfer of an interest inan immovable property entitling the lessee to the enjoyment of suchimmovable property which includes the right to possession thereof.An essential feature of the lease is that the transfer is for aconsideration which is called premium or rent. The lease is defined inSection 105 of the Transfer of Property Act whereas the rights andliabilities of the lessor and the lessee are defined in Section 108.Section 105 of the Transfer of Property Act defines the lease asunder:-

“Section 105 - Lease defined

lease of immoveable property is atransfer of right to enjoysuch property, made for certain time, express or implied, orin perpetuity, in consideration of price paid or promised, orof money, share of crops, service or any other thing of value,to be rendered periodically or on specified occasions to betransferor by the transferee, who accepts the transfer on suchterms.

Lessor, lessee, premium and rent defined

The transferor is called the lessor, the transferee is called thelessee, the price is called the premium, and the money, share,service or other thing to be so rendered is called the rent.

(Emphasis supplied)

10.2. Section 108 clause (l) provides that the lessee is bound toregularly pay the rent/premium to the lessor.The liability of thelessee to pay the rent/premium is absolute and not subject to anycommercial hardship faced by the lessee.Section 108(l) of theTransfer of Property Act is as follows:

“Section 108 - Rights and liabilities of lessor and lessee

In the absence of contract or local usage to the contrary, thelessor and the lessee of immovable property, as against oneanother, respectively, possess the rights and are subject to theliabilities mentioned in the rules next following, or such of themas are applicable to the property leased:-

xxxxxxxxx

(B) Rights and Liabilities of the Lessee

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(l)the lessee is bound to pay or tender, at the proper timeand place, the premium or rent to the lessor or his agentin this behalf”

(Emphasis supplied)10.3. In Gopalakrishna Mudaliar v. Rajan Kattalai, (1974) 1 MLJ184, the tenant contested the claim for rent on the ground that there

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had been cyclone. The Madras High Court rejected the contentionholding that the rent stipulated in the lease is an unconditional rentand not subject to acts of God. Relevant portion of the said judgmentis as under:

“4. As far as the second contention is concerned, the lease itselfmakes it absolutely clear that the rent stipulated therein is anunconditional rent and it is not subject to acts of State and Godand that under no condition whatever, any remission in the rentshall be given.In view of these express provisions contained inthe lease deed, it is not open to the appellants to put forwardthe contention that they must be relieved of their obligation topay the stipulated rent either on account of the cyclone or onaccount of the alleged presence of the cultivating tenants on thelands...”

(Emphasis supplied)

Section 56 of the Contract Act has no application to leases

10.4. Section 56 of the Contract Act, second part provides thatcontract to do an act which, after the contract is made, becomesimpossible, becomes void when the act becomes impossible.Therelevant portion of Section 56 is reproduced hereunder:-

“Section 56 of the Indian Contract Act

Agreement to do impossible act.

An agreement to do an act impossible in itself is void.

Contract to do act afterwards becoming impossible orunlawful.

contract to do an act which, after the contract is made,becomes impossible, or, by reason of some event which thepromisor could not prevent, unlawful, becomes void when theact becomes impossible or unlawful—A contract to do an actwhich, after the contract is made, becomes impossible, or, byreason of some event which the promisor could not prevent,unlawful, becomes void when the act becomes impossible orunlawful.”

10.5. The essential ingredients for application of second part ofSection 56 are as under:

(a)A valid and subsisting contract.

(b)There must be some part of the contract yet to be performed.

(c)The contract, after it is entered, becomes impossible to beperformed.performed.

10.6. The doctrine of frustration applies to contracts. However, alease is something more than mere contract or agreement in so far asit results in the creation of an estate in favour of the lessee. It createsan interest in property in favour of the lessee.It brings intoexistence the respective covenants of the lessor and the lessee;includingtheconsideration,anditconstitutesanagreementenforceable at law i.e. contracts which have to be performed, untillease comes to an end. There is nothing to be done after the lessee isput in possession and therefore, condition (b) would not be fulfilled.Section 56 of the Contract Act does not apply to cases in which thereis completed transfer. There is clear distinction between acompleted conveyance and an executory contract, and the eventswhich discharge contract do not invalidate concluded transfer.The relevant judgments are as under:-

10.6.1.In Raja Dhruv Dev Chand v. Raja Harmohinder SinghAIR 1968 SC 1024, the three-Judge Bench of Supreme Court held thatSection 56 of the Contract Act is not applicable when the rights andobligations of the parties arise under transfer of property under alease.In this case, the appellant took agricultural land on lease forone year in 1947.The rent was paid and the lessee was givenpossession. However, before the land could be exploited for any crop,partition took place which left the land in Pakistan and the parties

migrated to India.The appellant instituted suit for refund of therent, which was decreed.The High Court reversed the decreewhereupon the appellant approached the Supreme Court.TheSupreme Court held that completed transfers are outside the scope ofSection 56.The Supreme Court laid down clear distinctionbetween completed conveyance and an executory contract, andevents which discharge contract, do not invalidate concludedtransfer. By its express terms, Section 56 of the Contract Act does notapply to cases in which there is completed transfer as in the case ofconcluded lease.Relevant portion of the said judgment is reproducedhereunder:

“10. We are unable to agree with counsel for the appellant inthe present case that the relation between the appellant and therespondents rested in contract. It is true that the Court ofWards had accepted the tender of the appellant and hadgranted him lease on agreed terms of lands of Dada SibaEstate. But the rights of the parties did not after the lease wasgranted rest in contract...

11.By its express terms Section 56 of the Contract Act doesnot apply to cases in which there is completed transfer. Thesecond paragraph of Section 56 which is the only paragraphmaterial to cases of this nature has limited application tocovenants under lease. covenant under lease to do an actwhich after the contract is made becomes impossible or byreason of some event which the promisor could not preventunlawful, becomes void when the act becomes impossible orunlawful. But on that account the transfer of property resultingfrom the lease granted by the lessor to the lessee is not declaredvoid.

12.By the agreement of lease the appellant undertook to payrent for the year 1947-48 and the Court of Wards agreed togive on lease the land in its management. It is not claimed thatthe agreement of lease was void or voidable. Nor is it the caseof the appellant that the lease was determined in any mannerknown to law. The appellant obtained possession of the land.

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He was unable to continue in effective possession on account ofcircumstances beyond his control. Granting that the parties atthe date of the lease did not contemplate that there may be riotsin the area rendering it unsafe for the appellant to carry oncultivation, or that the crops grown by him may be looted, therewas no covenant in the lease that in the event of the appellantbeing unable to remain in possession and to cultivate the landand to collect the crops, he will not be liable to pay the rent.Inability of the appellant to cultivate the land or to collect thecrops because of widespread riots cannot in the events thattranspired clothe him with the right to claim refund of the rentpaid.

13.Authorities in the Courts in India have generally takenthe view that Section 56 of the Contract Act is not applicablewhen the rights and obligations of the parties arise under atransfer of property under lease. In Abdul Hashem v.Balahari Mondal the Calcutta High Court held that in casewhere during the continuance of tenancy, notice was servedon the tenant requiring him to place part of the land undertenancy at the disposal of the Land Acquisition Collector, andthe Collector took possession of the premises let out to him, itwas held that even though the occurrence was unforeseen andwas not contemplated by the parties when the lease wascreated, the occurrence was not so fundamental as to beregarded in law to strike at the root and destroy the basis of therelationship of landlord and tenant.

14.In Tarabai Jivanlal Parekh v. Lala Padamehand it washeld that monthly tenants of residential premises from whoseoccupation the premises were requisitioned continued toremain the monthly tenants of the landlord as before and thatby reason of the requisition there was no eviction by titleparamount or frustration of adventure.The Court in thatcase observed that the doctrine of frustration did not applywhere there is lease whether the term is one for fixed periodor one which can be terminated by notice to quit, as the estatevested in the lessee by lease is not extinguished by the orderof requisition which is of temporary nature.

15.In Alanduraiappar Koil Chithakkadu by its Trustee M.Ramananda Nainar v. T.S.A. Hamid, lessee of shandy topeagreeing to pay an annual rent for period of five years washeld not to be entitled to remission merely for the reason that

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Page 43 of 95

the shandy was hit by two cyclones during the period of leaseand that for some period on account of the cyclone, “theshandy did not form properly or regularly and the lessee didnot get any income”. The Court held in that case that in theabsence of any provision for remission on account of losses, nosuch remission can be granted by the Courts.”

(Emphasis supplied)

10.6.2.In T. Lakshmipathi v. P. Nithyananda Reddy (2003) 5SCC 150, the Supreme Court referred to Raja Dhruv Dev Chand(supra) and held that doctrine of frustration belongs to the realm oflaw of contracts and it does not apply to transaction where not only aprivity of contract but privity of estate has also been createdinasmuch as lease is the transfer of an interest in immovableproperty within the meaning of Section 5 read with Section 105 of theTransfer of Property Act. Relevant portion of the said judgment isreproduced hereunder: -

“20.The tenancy cannot be said to have been determined byattracting applicability of the doctrine of frustration consequentupon demolishing of the tenancy premises.Doctrine offrustration belongs to the realm of law of contract; it does notapply to transaction where not only privity of contract but aprivity of estate has also been created inasmuch as lease is thetransfer of an interest in immovable property within themeaning of Section 5 of the Transfer of Property Act (whereinthe phrase “the transfer of property” has been defined), readwith Section 105, which defines lease of immovable propertyas transfer of right to enjoy such property.”

(Emphasis supplied)

10.6.3.In Mahadeo Prosad Shaw v. Calcutta Dyeing andCleaning Co. AIR 1961 Cal 70, the Calcutta High Court held that thedoctrine of frustration has no application to leases. Relevant portionof the said judgment is as under: -

“12. I, therefore, proceed to consider whether the doctrine offrustration has application to leases.

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13. Section 56 of the Contract Act, 2nd part, is the part whichwe have to consider. That section is as follows:we have to consider. That section is as follows:

"Contract to do an act which after the contract is madebecomes impossible ..... becomes void when the act becomesimpossible".becomes impossible ..... becomes void when the act becomesimpossible".

14. Hence, there must be--

(a) valid and subsisting contract between the parties,

(b) There must be some part of the contract yet 'to do'.

(c) The contract after it is made, becomes 'impossible'.

15. If these three conditions are satisfied, then the contractbecomes void when the act becomes impossible. This is the lawof frustration; but the question still is whether that wouldoperate to lease. The question arises in the following manner:16. When lease is executed, there is transfer of property. Thelessee is put in possession and it may be said after the lessee isput in possession that there is nothing yet to be done.Therefore,Section 56 would not apply because condition (b)would not be fulfilled, there being nothing yet to be done byeither party.

(Emphasis supplied)

Section 4 of the Transfer of Property Act, 1882

10.7. The Indian Contract Act was passed before the Transfer ofProperty Act. By Section 4 of the Transfer of Property Act, thechapters and sections of the Transfer of Property Act which relate tocontracts are to be taken as part of the Indian Contract Act, 1872.Section 4, however, does not enact and cannot be read as enacting thatthe provisions of the Contract Act are to be read into the Transfer ofProperty Act.Section 4 of the Transfer of Property Act is reproducedhereunder:

“Section 4 of the Transfer of Property Act- Enactmentsrelating to contracts to be taken as part of Contract Act andsupplemental to the Registration Act

The Chapters and sections of this Act which relate to contractsshall be taken as part of the Indian Contract Act, 1872.

And Section 54, paragraphs 2 and 3, and Sections 59, 107 and123 shall be read as supplemental to the Indian RegistrationAct”

10.8. It is significant to note that the whole of the Contract Act hasnot been extended to transfer of immovable properties under Transferof Property Act. Only such provisions of Transfer of Property Act,which relate to contracts alone, are read as part of the Contract Act,but not vice versa. There is clear distinction between contract,which still remains to be performed and conveyance by which thetitle to the property actually passes. Thus, mere agreement to leasewould not amount to an actual transfer of right in immovableproperty. However, after the execution of the lease deed, thetransaction passes out of the domain of mere contract into one ofconveyance governed by Transfer of Property Act. Such competedtransaction would be governed by the provisions of the Transfer ofProperty Act.

10.9. The doctrine of frustration embodied in Section 56 of the IndianContract Act which renders contract void by reason of theimpossibility, would not apply in the case of lease. The rights of theparties after lease was granted rest not in contract. Though underSection 4 of the Transfer of Property Act, the chapters and sections ofthe said Act relating to contracts are to be taken as part of the IndianContract Act that does not mean that the provisions of the ContractAct are to be read into the Transfer of Property Act. The relevantjudgments in this regard are as under:-

10.9.1.In Raja Dhruv Dev Chand v. Raja Harmohinder Singh(supra), the Supreme Court held as under:

“10. ...By S. 4 of the Transfer of Property Act the chapters andsections of the Transfer of Property Act which relate to

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contracts are to be taken as part of the Indian Contract Act,1872. That section however does not enact and cannot be readas enacting that the provisions of the Contract Act are to beread into the Transfer of Property Act.There is cleardistinction between completed conveyance and an executorycontract, and events which discharge contract do notinvalidate concluded transfer.

(Emphasis supplied)

10.9.2.In Amir Chand v. Chuni Lal, AIR 1990 P&H 345, thePunjab and Haryana High Court held as under:-

“4. The doctrine of frustration embodied in S. 56 of theContract Act which renders contract void by reason of theimpossibility of performing the act required on account of someevent, which the promissor could not prevent, would not applyin the case of lease. The rights of the parties after lease wasgranted rest not in contract. Though under S. 4 of the Transferof Property Act, the chapters and sections of the said Actrelating to contracts are to be taken as part of the ContractAct yet that does not mean that the provisions of ContractAct are to be read into the Transfer of Property Act. Thedoctrine of frustration cannot apply to lease of the presentnature...........”.

(Emphasis supplied)

Sections 108(e) of the Transfer of Property Act, 1882 is special lawand it excludes the general law i.e. Section 56 of the Contract Act

10.10.Section 56 of the Contract Act is general law whereas Section108(e) of the Transfer of Property Act is special law. In Kedar Lallv. Hari Lall, AIR 1952 SC 47, the Supreme Court held that the speciallaw dealing with the mortgage i.e. Transfer of Property Act shallexclude the general law i.e. the Contract Act. Relevant portion of theSupreme Court judgment is reproduced hereunder:

“Section 43 is provision of the Contract Act dealing withcontracts generally. Section 82 applies to mortgages. As theright to contribution here arises out of mortgage, I am clearthat Section 82 must exclude Section 43 because when there is

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general law and special law dealing with particular matter,the special excludes the general. In my opinion, the whole lawof mortgage in India, including the law of contribution arisingout of transaction of mortgage, is now statutory and isembodied in the Transfer of Property Act read with the CivilProcedure Code. I am clear we cannot travel beyond thesestatutory provisions.”

(Emphasis supplied)

10.11.The doctrine of frustration of leases is incorporated in Section108(e) of the Transfer of Property Act. Section 108(e) is reproducedhereunder:

“Section 108 - Rights and liabilities of lessor and lessee

In the absence of contract or local usage to the contrary, thelessor and the lessee of immovable property, as against oneanother, respectively, possess the rights and are subject to theliabilities mentioned in the rules next following, or such of themas are applicable to the property leased:-

xxxxxxxxx

(B) Rights and Liabilities of the Lessee

xxxxxx

xxx

(e)if by fire, tempest or flood, or violence of any army or ofa mob or other irresistible force, any material part of theproperty he wholly destroyed or rendered substantiallyand permanently unfit for the purposes for which it waslet, the lease shall, at the option of the lessee, be void:Provided that, if the injury be occasioned by the wrongfulact or default of the lessee, he shall not be entitled toavail himself of the benefit of this provision.”

(Emphasis supplied)

10.12.Thedestructionoftheleaseholdpropertyunderthecircumstances mentioned in Section 108(e) by itself does not amountto determination of the lease under Section 111.In other words,-even though the leasehold property is destroyed, the tenancy is notautomatically determined. Despite the destruction of the premises, thelease subsists and the lessee is liable to pay the contractual rent.Section 108(e) confers an option on the lessee to treat the lease as

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void and thereby avoid the liability of paying the rent in future.

10.13.A comparison of Section 108(e) of the Transfer of Property Actwith Section 56 of the Indian Contract Act would show that thedoctrine of frustration as enacted in Section 56 is substantiallyincorporatedin Section108(e) oftheTransferofPropertyAct.Section 56 refers to the stage when the contract becomesimpossible or unlawful and there would be frustration within themeaning of that Act and the contract is discharged thereby. Section108(e) of the Transfer of Property Act does not use the words 'whenthe contract becomes impossible', but really gives certain instances ofit. Section 108(e) of the Transfer of Property Act, begins with certaininstances where the lease becomes impossible of further performanceand those instances are destruction by 'fire, tempest, flood, violence ofan army or of mob'; and after citing specific instances, it continuesto use rather general clause 'other irresistible force'.

10.14.Section 108(e) is based on the principle of frustration ofcontract, and was enacted to safeguard the rights of the tenant in caseof the total destruction of the property leased to him. It gives him theright to escape his liability as tenant by declaring the lease void.However, if the tenant does not exercise the option under clause (e)that is, does not invoke the doctrine of frustration, the lease shallcontinue for the benefit of both the parties. It is the general rule thatthe rent continues to be payable notwithstanding that, in the case of a-dwellinghouse or flat, it is at the time of letting, or subsequentlybecomes, unfit for habitation; or in the case of land near the seashore,that it is of no value; or in the case of agricultural land, that it isunsuitable for the intended use; or that the premises are subsequentlydestroyed by fire, or carried away by flood, or inundated by fresh

water; or destroyed by enemy action; the premises have becomeuseless to the tenant.It would thus appear that in case of thedestruction of the leased accommodation though no fault of thelandlord, the tenant can avoid payment of rent only if he declares thelease void under Section 108(e) of the Transfer of Property Act, but ifhe fails to do so, the lease will subsist for the benefit of both partiesand the landlord is entitled to claim rent.

10.15.The entire law of frustration of leases is codified under Section108(e) of the Transfer of Property Act. Under the Contract Act, thecontract stands discharged as this is part of positive law; whereasunder the Transfer of Property Act, it depends on the option of thelessee. Therefore, as result of frustration, if lease is to be treated asacontract,itwouldcontradicttheresultasstatedin Section108(e) becauseinonecase,thecontractstandsautomatically discharged and in the other, only discharged at theoption of the lessee.

10.16.As the Transfer of Property Act is special provision regardingleases, the general provision as enacted in Section 56 of the ContractAct, would not apply in view of the specific provision relating toleases under Section 108(e) of the Transfer of Property Act. In thatview, Section 56 of the Contract Act has no application to leases andinstead of that section, Section 108(e) will apply so far as frustrationrelating to leases is concerned. The clear language of the provisionleaves no room for doubt that if any part of the property is whollydestroyed or rendered substantially and permanently unfit for thepurposes for which it was let, it is the lessee who is free to decidewhether to continue the lease or not. The lease will not automaticallybe rendered void.The principle enacted in Section 108(e) of the Act

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is based on sound equitable principles. The lessee has obtained theproperty leased on payment of particular rent/premium. As resultof destruction of material or substantial part of the premisesdemised; it is he to whom the usefulness of the property is lessened. Ifhe chooses to continue to pay the rent agreed upon, the lessor cannothave any grievance.The relevant judgments in this regard are asunder:-

10.16.1.In Raja Dhruv Dev Chand v. Raja Harmohinder Singh(supra), the Supreme Court held that if any material part of thepropertybewhollydestroyedorrenderedsubstantiallyandpermanently unfit for the purpose for which it was let out, because offire, tempest, flood, violence of an army or mob, or other irresistibleforce, the lease may at the option of the lessee, be avoided underSection 108 (e) of the Transfer of Property Act. Relevant portion ofthe said judgment is reproduced hereunder: -

“18. ............. Under lease of land there is transfer of rightto enjoy that land. If any material part of the property be whollydestroyed or rendered substantially and permanently unfit forthe purpose for which it was let out, because of fire, tempest,flood, violence of an army or mob, or other irresistible force,the lease may, at the option of the lessee, be avoided. This ruleis incorporated in Section 108(e) of the Transfer of PropertyAct and applies to leases of land, to which the Transfer ofProperty Act applies, and the principle thereof to agriculturalleases and to leases in areas where , the Transfer of PropertyAct is not extended. Where the property leased is not destroyedor substantially and permanently unfit, the lessee cannot avoidthe lease because he does not or is unable to use the land forpurposes for which it is let to him.”to enjoy that land. If any material part of the property be whollydestroyed or rendered substantially and permanently unfit forthe purpose for which it was let out, because of fire, tempest,flood, violence of an army or mob, or other irresistible force,the lease may, at the option of the lessee, be avoided. This ruleis incorporated in Section 108(e) of the Transfer of PropertyAct and applies to leases of land, to which the Transfer ofProperty Act applies, and the principle thereof to agriculturalleases and to leases in areas where , the Transfer of PropertyAct is not extended. Where the property leased is not destroyedor substantially and permanently unfit, the lessee cannot avoidthe lease because he does not or is unable to use the land forpurposes for which it is let to him.”

(Emphasis supplied)

10.16.2.In Mahadeo Prosad Shaw v. Calcutta Dyeing andCleaning Co. (supra), the Calcutta High Court held that the ContractCleaning Co. (supra), the Calcutta High Court held that the Contract

Act covers substantially wider field than Transfer of Property Act.The performance of the duties of lessor or lessee may becomeimpossible otherwise than by the destruction of the property; but thisclause does not cover those.The Court turned down the argumentthat the question of frustration of lease by destruction of the propertyis to be decided under this Act, but other cases of the lease (contract)becoming impossible are to be adjudged under the Contract Act on theground that the Supreme Court has, in Kedar Lal v. Harilal (supra)ruled that “it is established principle that where is general law andspecial law dealing with particular matter, the special excludes thegeneral.”The Court went on to observe that if the special lawexcludes the general law, it excludes the general law in its entirety andnot in parts only. Reading this clause, together with the proviso, theCourt held that the entire law of frustration of leases is codified underSection 108(e); that under the Contract Act, the contract standsdischarged as this is part of positive law, whereas under the Transferof Property Act it depends on the option of the lessee; that the resultof frustration, if lease is to be treated as contract, would contradictthe result, as stated in Section 108(e) because in one case the contractstands automatically discharged and in the other, only discharged atthe option of the lessee. The Court held that Section 56 of the ContractAct has no application to leases. The Court held as under:“17. ........ comparison of this section of the Transfer ofProperty Act with Section 56 of the Indian Contract Act wouldshow that the doctrine of frustration as enacted in Section 56 issubstantially incorporated in Section 108(e) of the Transfer ofProperty Act. Section 56 refers to the stage when the contractbecomes impossible or unlawful and there would be frustrationwithin the meaning of that Act and the contract dischargedthereby. Section 108(e) of the Transfer of Property Act does notuse the words ‘when the contract becomes impossible’, butProperty Act with Section 56 of the Indian Contract Act wouldshow that the doctrine of frustration as enacted in Section 56 issubstantially incorporated in Section 108(e) of the Transfer ofProperty Act. Section 56 refers to the stage when the contractbecomes impossible or unlawful and there would be frustrationwithin the meaning of that Act and the contract dischargedthereby. Section 108(e) of the Transfer of Property Act does notuse the words ‘when the contract becomes impossible’, but

really gives certain instances of it.The word ‘impossible’in Section 56 of the Contract Act has been understood to mean‘impracticable’ or ‘impossible’ of performance in the casebetweenSatyabratav.MugneeRam,aforesaid. Section108(e) of the Transfer of Property Act on the other hand beginswith certain instances where the lease becomes impossible offurther performance and those instances are destruction by‘fire, tempest, flood, violence of an army or of mob’; afterciting specific instances it continues to use rather generalclause ‘other irresistible force’.

18. Section 108(e) of the Transfer of Property Act refers to“destroyed wholly or rendered substantially and permanentlyunfit”, but Section 56 of the Contract Act refers to “an actbecoming unlawful or impossible”. Hence, there is no doubtthat the Contract Act covers substantially wider field thanthe Transfer of Property Act does. The performance of theduties of lessor or lessee may become ‘impossible’otherwise than by the destruction of the property; but Section108(e) of the Transfer of Property Act does not cover thosecases. An argument, that the question of frustration of leaseby destruction of the property is to be decided undertheTransfer of Property Act but other cases of the lease(contract) becoming impossible are to be adjudged underthe Contract Act, seems rather difficult to me. The reason iswhile dealing with the provisions of the Transfer of PropertyAct andthe ContractAct inrelationtocontributiontheSupreme Court held in Kedar Lal v. Harilal reported in 1952SCR 179 (AIR 1952 SC 47).

“It is an established principle that where there is generallaw and special law dealing with particular matter, thespecial excludes the general”. If it excludes the general itexcludes the general in its entirety and not in parts only.

19.Reading therefore S. 108(e) together with the proviso Icannot but hold that the entire law of frustration of leases iscodified under S. 108(e) of the Transfer of Property Act. Theresult is that under the Contract Act the contract standsdischarged as this is part of positive law; whereas under theTransfer of Property Act it depends on the option of the lessee.Therefore, the result of frustration, if lease is to be treated asa contract would contradict the result as stated in S. 108(e)becauseinonecasethecontractstandsautomatically

discharged and it the other only discharged at the option of thelessee. As the Transfer of Property Act is special provisionregarding leases, the general provision as enacted in S. 56 ofthe Contract Act, would not apply in view of the specificprovision relating to leases under S. 108(e) of the Transfer ofProperty Act. In that view, I hold S. 56 of the Contract Act hasno application to leases and instead of that section, S. 108(e)will apply so far as frustration relating to leases is concerned.”

(Emphasis supplied)

10.16.3.InHindRubberIndustriesPvt.Ltd.v.T.M.Bagasarwalla, AIR 1996 Bombay 389, the Bombay High Court heldthat the destruction of the leased property does not extinguish thelease. Section 108(e) of the Transfer of Property Act gives the optionto the lessee to treat such lease as void. However, if the lessee doesnot exercise the option, he would continue to be the lessee and liableto pay the rent.Relevant portion of the said judgment is as under:

“16. In my view, the correct legal position in this countryappears to be that the destruction of the tenanted structure doesnot extinguish the tenancy and the right of occupation of thetenant under the contract of tenancy continues to exist betweenthe parties. Merely because the tenanted structure has beendestroyed or demolished, the right transferred under the leasecannot be said to have come to an end, and the relationship oflessor and lessee continues to exist. The destruction of thetenanted premises does not destroy the tenancy rights nor doesit bring to an end the relationship of lessor and lessee or forthat matter landlord and tenant. The lessee continues to belessee in the property leased even after its destruction by fire orsuch like event unless the lessee exercises his option of treatingsuch lease as void. It may be observed that Section 108 of theappears to be that the destruction of the tenanted structure doesnot extinguish the tenancy and the right of occupation of thetenant under the contract of tenancy continues to exist betweenthe parties. Merely because the tenanted structure has beendestroyed or demolished, the right transferred under the leasecannot be said to have come to an end, and the relationship oflessor and lessee continues to exist. The destruction of thetenanted premises does not destroy the tenancy rights nor doesit bring to an end the relationship of lessor and lessee or forthat matter landlord and tenant. The lessee continues to belessee in the property leased even after its destruction by fire orsuch like event unless the lessee exercises his option of treatingsuch lease as void. It may be observed that Section 108 of the

T.P. Act deals with the rights and liabilities of lessor and lesseeand Part-B and clause (e) of Section 108 provides that if theproperty leased in wholly destroyed or rendered substantiallyand permanently unfit for the purposes for which it was leasedby fire, tempest or flood or violence of any army or of mob orother irresistible force, such lease may be rendered void at theoption of the lessee provided of course that such injury to theand Part-B and clause (e) of Section 108 provides that if theproperty leased in wholly destroyed or rendered substantiallyand permanently unfit for the purposes for which it was leasedby fire, tempest or flood or violence of any army or of mob orother irresistible force, such lease may be rendered void at theoption of the lessee provided of course that such injury to the

lease property has not been occasioned by the wrongful act ordefault of the lessee. That means that right of the lessee in theleased property subsists even if the leased properly has beendestroyed by fire, tempest or flood or violence of an army or ofa mob or other irresistible force unless the lessee exercises hisoption that on happening of such events the lease has beenrendered void.By necessary corollary, therefore, if the leasedproperty is destroyed wholly by fire, the lease cannot be said tobe extinguished, nor can it be said that lessee’s right in theleased property has come to an end unless the lessee exercisessuchoption.Theexpressprovisioninclause(e)ofSection 108 leaves no manner of doubt that on destruction ofleased property by fire, the lease cannot be said to beextinguished, automatically...”

(Emphasis supplied)

Commercial hardship does not frustrate the contract

10.17.Even assuming Section 56 applies to leases, it is well settledthat Section 56 of the Contract Act cannot be invoked in case ofcommercial hardship which may make the performance unprofitableor more expensive or dilatory.A contract is not frustrated justbecause it becomes more difficult or expensive to perform.

10.18.The whole case of the respondent is based on the ground thatdue to increase in project cost and due to temporary change in themarket condition, the contact has become less onerous and therefore,the terms of the contract could not be complied with. It is the settledlaw that commercial difficulty, inconvenience or hardship cannotprovide justification for not complying with the terms of the contract.The respondent entered into lease with the petitioner with the fullknowledge of conditions which they had to carry out in the conduct oftheir business, on which they had willingly and voluntarily embarked.The lease between parties is for period of 30 years and it is butnatural and foreseeable that there would be various economic turmoilsover period as long as 30 years.Principle of frustration is not

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applicable when the event is foreseeable but not foreseen.

10.19.In commercial contracts entered into with open eyes, therecannot be variation to the terms of concluded contract which hasalready been acted upon and the parties are estopped from challengingthe terms and conditions of the contract.If person of his ownaccord, accepts or contracts on certain terms and works out thecontract, he cannot be allowed to adhere to and abide by some of theterms of the contract which proved advantageous to him and repudiatethe other terms of the same contract which might be disadvantageousto him. The maxim is qui approbat non reprobat (one who approbatescannot reprobate), according to which party to an instrument ortransaction cannot take advantage of one part of document ortransaction and reject the rest.The above principles have been laiddown in the following judgments:-10.19.1.In Alopi Parshad v. Union of India, (1960) 2 SCR 793,the Supreme Court held that the contract is not discharged merelybecause it turns out to be difficult to perform or onerous. In thatcase the agent, appointed by the Government for supply of ghee,claimed enhancement of rates on the ground that the circumstanceschanged due to the war. The Supreme Court rejected the claim andheld as under:

“21. ...Performanceofthecontracthadnotbecomeimpossible or unlawful; the contract was in fact, performed bythe Agents, and they have received remuneration expresslystipulated to be paid therein. The Indian Contract Act does notenable party to contract to ignore the express covenantsthereof, and to claim payment of consideration for performanceof the contract at rates different from the stipulated rates, onsome vague plea of equity. The parties to an executor contractare often faced, in the course of carrying it out, with turn of

events which they did not at all anticipate – wholly abnormalrise or fall in prices, sudden depreciation of currency, anunexpected obstacle to execution, or the like.

xxxxxxxxx22.There is no general liberty reserved to the courts toabsolve party from liability to perform his part of thecontract, merely because on account of an uncontemplatedturn of events, the performance of the contract may becomeonerous.That is the law both in India and in England, andthere is, in our opinion, no general rule to which recourse maybe had, as contended by Mr. Chatterjee, relying upon which aparty may ignore the express covenants on account of anuncontemplated turn of events since the date of the contract...”

(Emphasis Supplied)

10.19.2.In Panna Lal v. State of Rajasthan, (1975) 2 SCC 633,the Supreme Court held that party cannot resile from the contract onthe ground that the terms of payment were onerous.The relevantportion of the judgment is as under:

“21. The licences in the present case are contracts between theparties. The Licensees voluntarily accepted the contracts. Theyfully exploited to their advantage the contracts to the exclusionof others. The High Court rightly said thatit was not open tothe appellants to resile from the contracts on the ground thatthe terms of payment were onerous. The reasons given by theHigh Court were that the Licensees accepted the licence byexcluding their competitors and it would not be open to theLicensees to challenge the terms either on the ground of”inconvenient consequence of terms or of harshness of terms.

(Emphasis supplied)

10.19.3.In State Bank of Haryana v. Jage Ram (1980) 3 SCC599 the Supreme Court held that the Licensee cannot challenge theterms of the licence on the ground that he is finding it commerciallyinexpedient to conduct his business. The Supreme Court reaffirmedthe principles laid down in Har Shankar v. Deputy Excise andTaxation Commissioner (1975) 1 SCC 737. Relevant portion of the

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said judgement is reproduced hereunder.

“14. In Har Shankar [(1975) 1 SCC 737, 745-46] appellants'bid was accepted in an auction held on March 23, 1968 for theright to sell country liquor at two vends in Ludhiana. Theappellants paid the security deposit but were unable to meettheir obligation under the conditions of auction and fell inarrears. When the State demanded the payment, threatened tocancel the licences granted to the appellants and declared itsintention to resale the vends, the appellants filed writ petitionsin the High Court of Punjab and Haryana asking that theauction be quashed and the respondents be restrained fromenforcingtheobligationsarisingunderitstermsandconditions. The High Court having dismissed the writ petitions,the Licensees filed an appeal to this Court by certificate.

15. What is important for our purpose in this appeal is that theState of Punjab, which was respondent to the appeal in HarShankar [(1975) 1 SCC 737, 745-46] raised preliminaryobjection to the maintainability of the writ petitions filed by theappellants and that objection was upheld by this Court.Thepreliminary objection was that such of the appellants whooffered their bids in the auctions did so with full knowledge

of the terms and conditions attaching to the auctions and thatthey could not be permitted to wriggle out of the contractualobligations arising out of the acceptance of their bids. Holding

that the preliminary objection was well-founded, this Courtobserved : (SCC pp. 745-746, para 16)

“Those interested in running the country liquor vends offeredtheir bids voluntarily in the auction held for granting licencesfor the sale of country liquor. The terms and conditions ofauctions were announced before the auctions were held andthe bidders participated in the auctions without demur andwith full knowledge of the commitments which the bidsinvolved. Those who contract with open eyes must accept theburdens of the contract along with its benefits. The powers ofthe Financial Commissioner to grant liquor licences by auctionand to collect licence fees through the medium of auctionscannot by writ petitions be questioned by those who, had theirventure succeeded, would have relied upon those very powersto found legal claim.Reciprocal rights and obligationsarising out of contract do not depend for their enforceabilityupon whether contracting party finds it prudent to abide by

the terms of the contract. By such test no contract could everhave binding force.” (p. 263)

At p. 266 (SCC p. 748) of the Report, the court further observedthat the writ jurisdiction of High Courts under Article 226 wasnot intended to facilitate avoidance of obligations voluntarilyincurred.

16..........They entered into contract with the State authoritieswith the full knowledge of conditions which they had to carryout in the conduct of their business, on which they hadwillingly and voluntarily embarked. The occurrence of acommercial difficulty, inconvenience or hardship in theperformance of those conditions, like the sale of liquor beingless in summer than in winter, can provide no justification fornot complying with the terms of the contract which they hadaccepted with open eyes.

17. The judgment in Har Shankar [(1975) 1 SCC 737, 745-46]was followed in Sham Lal v. State of Punjab [(1977) 1 SCC336] wherein, appellants were the highest bidders in an auctionfor the sale of country liquor vends at various places in theState of Punjab. The appellants were called upon by the State topay the amounts which they were liable to pay under the termsof the auction, whereupon they filed writ petitions in the HighCourt to challenge the demand. Relying upon the passagefrom Har Shankar [(1975) 1 SCC 737, 745-46] extractedabove, the court held that the Licensees could not be permittedto avoid the contractual obligations voluntarily incurred bythem and that therefore the High Court was right in refusing toexercise its jurisdiction under Article 226 of the Constitution intheir favour.

18. In view of these decisions, the preliminary objection raisedby the Solicitor General to the maintainability of the writpetitions filed by the respondents has to be upheld. We holdaccordingly that the High Court was in error in entertainingthe writ petitions for the purpose of examining whether therespondentscouldavoidtheircontractualliabilitybychallenging the Rules under which the bids offered by themwere accepted and under which they became entitled to conducttheir business.It cannot ever be that Licensee can work outthe licence if he finds it profitable to do so; and he canchallenge the conditions under which he agreed to take the

licence, if he finds it commercially inexpedient to conduct hisbusiness.

(Emphasis supplied)

One who approbates cannot reprobate

10.19.4.In New Bihar Biri Leaves Co. v. State of Bihar (1981) 1SCC 537, the Supreme Court held that it is fundamental principle ofgeneral application that if person of his own accord, accepts orcontracts on certain terms and works out the contract, he cannot beallowed to adhere to and abide by some of the terms of the contractwhich proved advantageous to him and repudiate the other terms ofthe same contract which might be disadvantageous to him.Therelevant portion of the judgment is reproduced as under:

“48.It is fundamental principle of general application thatif person of his own accord, accepts contract on certainterms and works out the contract, he cannot be allowed toadhere to and abide by some of the terms of the contractwhich proved advantageous to him and repudiate the otherterms of the same contract which might be disadvantageous tohim. The maxim is qui approbat non reprobat (one whoapprobatescannotreprobate).Thisprinciple,thoughoriginally borrowedfrom Scots Law, is now firmly embodiedin English Common Law. According to it, party to aninstrument or transaction cannot take advantage of one partof document or transaction and reject the rest. That is tosay, no party can accept and reject the same instrument ortransaction.if person of his own accord, accepts contract on certainterms and works out the contract, he cannot be allowed toadhere to and abide by some of the terms of the contractwhich proved advantageous to him and repudiate the otherterms of the same contract which might be disadvantageous tohim. The maxim is qui approbat non reprobat (one whoapprobatescannotreprobate).Thisprinciple,thoughoriginally borrowedfrom Scots Law, is now firmly embodiedin English Common Law. According to it, party to aninstrument or transaction cannot take advantage of one partof document or transaction and reject the rest. That is tosay, no party can accept and reject the same instrument ortransaction.49.The aforesaid inhibitory principle squarely applies to thecases of those petitioners who had by offering highest bids atpublic auctions or by tenders, accepted and worked out thecontracts in the past but are now resisting the demands orother action, arising out of the impugned Condition (13) onthe ground that this condition is violative of Articles 19(1)(g)”cases of those petitioners who had by offering highest bids atpublic auctions or by tenders, accepted and worked out thecontracts in the past but are now resisting the demands orother action, arising out of the impugned Condition (13) onthe ground that this condition is violative of Articles 19(1)(g)”and 14 of the Constitution.

(Emphasis supplied)

Supreme Court held that he who accepts benefit under deed or willor other instrument must adopt the whole contents of that instrument,must conform to all its provisions and renounce all rights that areinconsistent with it.

10.19.6.In Assistant Excise Commissioner v. Issac Peter (supra),the Supreme Court held that in cases of contracts entered into withopen eyes, party cannot seek alteration of the terms expressly agreedto, on the ground of financial hardship. The State has no responsibilityto ensure profit to everyone who contracts with it. The relevantportion of the judgment is reproduced hereunder:

“14........The contract between the parties is governed bystatutory provisions, i.e., provisions of the Act, the Rules, theconditions of licence and the counterpart agreement, theyconstitute the terms and conditions of the contract.They arebinding both upon the Government and the Licensee. Neitherof them can depart from them. It is not open to any officer ofthe Government to either modify, amend or alter the saidterms and conditions, not even to the Minister for Excise.

21……It is not case where any essential term of contract was

kept back or kept undisclosed. The Government had placed alltheir cards on the table. If the Licensees offered their bidswith their eyes open in the above circumstances they cannotblame anyone else for the loss, if any, sustained by them, norare they entitled to say that license fee should be reducedproportionate to the actual supplies made.

23. Maybe these are cases where the Licensees took acalculated risk. Maybe they were not wise in offering their bids.But in law there is no basis upon which they can be relieved ofthe obligations undertaken by them under the contract. It is wellknown that in such contracts — which may be called executorycontracts — there is always an element of risk. Many anunexpected development may occur which may either cause lossto the contractor or result in large profit. Take the very case ofarrack contractors. In one year, there may be abundance ofsupplies accompanied by good crops induced by favourable

weather conditions; the contractor will make substantial profitsduring the year. In another year, the conditions may beunfavourable and supplies scarce. He may incur loss.Such——contracts do not imply warranty or guarantee of—profit to the contractor. It is business for him profit andloss being normal incidents of business. There is no roomfor invoking the doctrine of unjust enrichment in such asituation. The said doctrine has never been invoked in suchbusiness transactions. The remedy provided by Article 226, orfor that matter, suits, cannot be resorted to wriggle out of thecontractual obligations entered into by the Licensees.

26. Doctrine of fairness or the duty to act fairly and reasonablyis doctrine developed in the administrative law field to ensurethe rule of law and to prevent failure of justice where the actionis administrative in nature. Just as principles of natural justiceensure fair decision where the function is quasi-judicial, thedoctrine of fairness is evolved to ensure fair action where thefunction is administrative. But it can certainly not be invoked toamend, alter or vary the express terms of the contract betweenthe parties.It must be remembered that these contracts areentered into pursuant to public auction, floating of tenders orby negotiation. There is no compulsion on anyone to enterinto these contracts. It is voluntary on both sides. There canbe no question of the State power being involved in suchcontracts. It bears repetition to say that the State does notguarantee profit to the Licensees in such contracts. There isno warranty against incurring losses. It is business for theLicensees. Whether they make profit or incur loss is noconcern of the State. In law, it is entitled to its money underthe contract. It is not as if the Licensees are going to pay moreto the State in case they make substantial profits. We reiteratethat what we have said hereinabove is in the context ofcontracts entered into between the State and its citizenspursuant to public auction, floating of tenders or bynegotiation. It is not necessary to say more than this for thepurpose of these cases.”

(Emphasis supplied)

10.19.7.In Bharti Cellular Limited v. Union of India (2010) 10SCC 174, the Supreme Court held that no one can approbate and

reprobate the same document and anyone who has accepted with fullknowledge or notice of facts, benefits under transaction which hemight have rejected or contested, cannot question the transaction ortake up an inconsistent position qua the same. Party who hasunconditionally accepted the package cannot thereafter reject theinconvenient and onerous conditions while accepting the conditionsbeneficial to him. Relevant portion of the said judgment is reproducedhereunder:-

“8. …A party which has unconditionally accepted the packagecannot after such acceptance reject the conditions subject towhich the benefits were extended to it under the package. Itcannot reject what is inconvenient and onerous whileaccepting what is beneficial to its interests…

9. Relying upon the decision of this Court in City MontessoriSchool v. State of U.P, New Bihar Biri Leaves Co. v. State ofBihar and R.N. Gosain v. YashpalDhir, this Court has inShyamTelelink Ltd. v. Union of India held thatno one canapprobate and reprobate and anyone who has accepted withfull knowledge or notice of facts, benefits under transactionwhich he might have rejected or contested, cannot questionthe transaction or take up an inconsistent position qua thesame.We have said: (ShyamTelelink case, SCC p. 172, para23)

“23. The maxim qui approbat non reprobat (one whoapprobates cannot reprobate) is firmly embodied in Englishcommon law and often applied by courts in this country.It isakin to the doctrine of benefits and burdens which at its mostbasic level provides that person taking advantage under aninstrument which both grants benefit and imposes burdencannot take the former without complying with the latter. Aperson cannot approbate and reprobate or accept and rejectthe same instrument.”

(Emphasis added)10.19.8.The principles of law so settled by the Supreme Court incatenaofjudgmentshavebeenagainreiteratedinMumbai

International Airport Pvt. Ltd. v. Golden Chariot Airport 2010 (10)SCC 422.

10.19.9.In Track Innovations India Pvt. Ltd. v. Union Of India,2010 (170) DLT 424, the Division Bench of this Court held that therecannot be variation of the terms of commercial contract, which hasbeen acted upon. Government is not bound to ensure profit in everycommercial contract more so when the contract had been awardedeither by public auction or by floating tender or negotiations.TheDivision Bench further noted that person cannot approbate andreprobate or accept or reject the same instrument. Relevant portion ofthe said judgment is reproduced hereunder: -

“12. …we are of the opinion that in commercial contracts,such as the present, where the private contractors enter intothese contracts having huge financial stakes, there is no scopefor seeking variation of the terms of the contract which havebeen acted uponon the ground of alleged unreasonablenessby invoking Article 14 of the Constitution.”

“14. The portions of the above judgments, underlined by usclearly show that in commercial contracts entered into withopen eyes, there cannot be variation to the terms of theconcluded contract which has been acted upon. Commercialmen take commercial decision which sometimes results eitherin profit or sometimes in loss, however, the Government is notbound to ensure profit in every contracts which are either bypublic auction or by floating tenders or negotiations. It hasbeen clarified that there is no issue of fairness or arbitrarinesswith respect to terms of the contract in such commercialcontracts.”

(Emphasis supplied)

10.19.10.In C.J. International Hotels Ltd. v. N.D.M.C., AIR 2001Del 435, this Court held that the Licensee cannot challenge theconditions of the licence if he finds it commercially unviable toconduct his business.Relevant portion of the said judgment is

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reproduced hereunder:

“26. As observed above, the plaintiff had offered its bid fortaking on licence the land on which the hotel is constructed.The terms and conditions of the auction were known to theplaintiffs before the auction was held and the biddersparticipated in the auction without demur and with fullknowledge of the commitments which the bids involved. TheGovernment's acceptance of those bids was the acceptance ofwilling offers made to it and on such acceptance the leaseagreement was executed between the parties which is bindingbetween them. The commercial considerations may haverevealed an error of judgment in the initial assessment ofprofitability of the adventure but that is normal incident oftrading transactions.Those who contract with open eyes mustaccept the burden of the contract alongwith its benefit.Reciprocal rights and obligations arising out of contract donotdependfortheirenforceabilityuponwhetheracontracting party finds it prudent to abide by the terms of thecontract. By such test, no contract could even have abinding force. The plaintiffs entered with full knowledge ofconditions, which they had to carry out in the conduct of theirbusiness, on which they had willingly and voluntarilyembarked. Merely because the plaintiffs are not finding thelicence fee payable under the agreement to be viable forpurposes of running the hotel, it cannot ever be said that aLicensee can work out the licence if he finds it profitable to doso and he can challenge the conditions under which heagreed to take the licence, if he finds it commercially”inexpedient to conduct his business.

(Emphasis supplied)10.20.In New Delhi Municipal Council vs. M/s Prominent HotelsLimited, 222 (2015) DLT 706, the licensee challenged the terms ofthe license deed requiring the licensee to pay the license fee @ 23% ofthe gross turnover as unlawful and void ab initio on the ground thatthe project was economically unviable. The Trial Court accepted thecontention of M/s Prominent Hotels Limited and declared Clause 3 ofthe license deed requiring the payment of 23% of the gross turnover as

OM.P. No.1206/2012

arbitrary,unreasonable,unjust,unconscionable,unlawfuland,therefore, null and void ab initio. The Trial Court directed NDMC torenegotiate the terms with respect to payment of license fee with thelicensee. NDMC challenged the decree passed by the Civil Court inRegular First Appeal. This Court following Alopi Parshad v. Unionof India (supra), Panna Lal v. State of Rajasthan, (supra), StateBank of Haryana v. Jage Ram (supra), New Bihar Biri Leaves Co. v.State of Bihar (supra), C. Bepathumma v. V.S. Kadambolithaya(supra), Assistant Excise Commissioner v. Issac Peter (supra), BhartiCellular Limited v. Union of India (supra), Mumbai InternationalAirport Pvt. Ltd. v. Golden Chariot Airport I (supra), TrackInnovations India Pvt. Ltd. v. Union Of India (supra) and C.J.International Hotels Ltd. v. N.D.M.C. (supra) held the challenge tothe licence deed was barred by well settled law that commercialdifficulty cannot provide justification for not complying with theterms of the contract. In commercial contracts entered into with openeyes, there cannot be variation to the terms of concluded contractwhich has already been acted upon and the parties are estopped fromchallenging the terms and conditions of the contract. The State has noresponsibility to ensure profit to everyone it contracts with. Profit andloss are normal incidents of business.The relevant portion of thesaid judgment is as under:-“30.1 Prayer (i) of the suit seeking declaration of clause 3 ofthe licence deed dated 16[th]July, 1982 as null and void ab initio,is barred by well settled law laid down by the Supreme Court inAlopi Parshad v. Union of India, (supra), Panna Lal v. Stateof Rajasthan(supra), State of Haryana v. Jage Ram (supra),New Bihar Leaves Co. v. State of Bihar (supra), AssistantExcise Commissioner v. Issac Peter (supra), PuravankaraProjects Ltd. v. Hotel Venus International (supra), BhartiCellular Limited v. Union of India (supra); and this Court in

Track Innovations India Pvt. Ltd. v. Union Of India (supra);and C.J. International Hotels Ltd. v. N.D.M.C.(supra).

30.2Following the aforesaid judgments, I hold that the suitwith respect to prayer (i) was not maintainable and therefore,the Trial Court had no jurisdiction to pass the decree ofdeclaration.

30.3The Licensee misled the Trial Court to disregard the wellsettled law and pass decree of declaration declaring clauseNo.3 of the licence deed dated 16[th]July, 1982 as arbitrary,discriminatory,unreasonable,unjust,unconscionable,unlawful, null and void ab initio.

30.4The decree of declaration passed by the Trial Courtdeclaringclause3ofthelicencedeedasarbitrary,discriminatory,unreasonable,unjust,unconscionable,unlawful, null and void ab initio, is hereby set aside.

30.26 The impugned judgement and decree is vitiated onaccount of conscious disregard of the well settled law by theTrial Court. The Trial Court, who was obliged to apply lawand adjudicate claims according to law, is found to havethrown to winds all such basic and fundamental principles oflaw. The Trial Court did not even consider and apply its mindto the judgments cited by NDMC at the time of hearing. Thejudicial discipline demands that the Trial Court should havefollowed the well settled law. The judicial discipline is one ofthe fundamental pillars on which judicial edifice rests and ifsuch discipline is routed, the entire edifice will be affected. Itcannot be gainsaid that the judgments mentioned below arebinding on the Licensee who could not have bypassed ordisregarded them except at the peril of contempt of this Court.This cannot be said to be mere lapse. The Trial Court hasdared to disregard and deliberately ignore the followingjudgments.

30.36 This case warrants imposition of costs on the petitionersintermsofthejudgmentsoftheSupremeCourtin Ramrameshwari Devi v. Nirmala Devi (supra) and MariaMargaridaSequeriaFernandes v. ErasmoJackdeSequeria (supra), Subrata Roy Sahara v. Union of India(supra) and of this Court in Harish Relan v. Kaushal Kumari

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Relan & Ors. in RFA(OS) 162/2014 decided on 03[rd]August,2015, Punjab National Bank v. Virender Prakash, 2012 V AD(Delhi) 373 and Padmawati v. Harijan Sewak Sangh (supra).

30.37 For the reasons discussed hereinabove, the appeal isallowed. The Licensee’s suit was not maintainable. The TrialCourt had no jurisdiction in this matter. The impugned-judgment and decree are nonest and therefore set aside. The’Licensees suit is dismissed with costs of Rs.5,00,000/- to bepaid by the Licensee to NDMC within two months.

30.41 The Licensee has no respect for truth and has pollutedthe pure fountain of justice with tainted hands. The Licenseehas played tricks by delaying the proceedings before the TrialCourt for more than 18 years. The Licensee has interfered withthe administration of justice. This case warrants strict action tobe taken. It is fit case for ordering inquiry or initiatingproceedings for contempt of Court. However, the action againstthe Licensee is deferred for two weeks to enable the Licensee tointrospect and file an undertaking to abide by the terms of thelicence deed dated 16[th]July, 1982 and not to resort to anyfrivolous proceedings/action in future. Since this appeal isbeing disposed of, the Licensee shall file his undertaking beforethe Writ Court in WP(C) No.1629/2015. In the event of thefailure of the Licensee to file such an undertaking within twoweeks, NDMC is permitted to initiate proceedings for criminalcontempt against the Licensee.”

(Emphasis supplied)

Patent illegality

10.21.The lessee cannot seek discharge from the payment of Royalty(MGA). Even assuming for the sake of argument that lease canfrustrate under Section 56 of the Indian Contract Act, the lessee wouldbe bound to surrender the lease and pay the Royalty (MGA) upto thedate of handing over of the possession. Even under Section 108(e) ofthe Transfer of Property Act, the lessee upon exercising the option totreat the lease as void, is liable to surrender the possession and makethe payment of the rent upto the date of the surrender.

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10.22.Section 56 cannot be invoked to partially declare the clauserelating to the payment of Royalty (MGA) to be void. Even assumingfor the sake of argument that the lease can frustrate under Section 56of the Contract Act, the whole lease would become void and thelessee would be liable to surrender the possession and clear theliability of Royalty (MGA) upto the date of surrender under Section65 of the Indian Contract Act.

10.23.The respondent’s argument that the lease is valid and only theclause relating to payment of Royalty (MGA) has frustrated, isabsolutely misconceived and unsustainable.Since Section 56 doesnot apply to leases, the respondent cannot invoke the same withrespect to its obligation to pay the Royalty (MGA).

10.24.Even assuming there was recession in hotel industry in 2008,it cannot be said that the recession was permanent and would continuefor the rest of the period of the lease.The market keeps on fluctuatingand therefore, taking the recession in 2008 to frustrate the entire leaseis absurd on the face of it. Even the respondent’s expert witness didnot say and could not have said that the recession would continueforever.

10.25.In Alanduraiappar Koil Chithakkadu v. T.S.A. Hamid, AIR1963 Madras 94, the tenant invoked Section 56 of the Contract Act toclaim remission of rent on the ground that the tenant could not pay therent on account of two cyclones. The Division Bench of Madras HighCourt held that Section 56 of the Indian Contract Act has noapplication to the case.The Division Bench further held that it isdifficult to conceive how the cyclone which lasted for short durationin 1952 and another milder cyclone in 1955 render the performance ofthe contract impossible or substantially prevented the performance of

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the contract.Relevant portion of the judgment is reproducedhereunder:

“(5)...Unfortunately, however much one may sympathise withthe defendant for his predicament, the courts have duty toenforce the contract between the parties, and in the absence ofany provision for remission on account of losses, no suchremission can fee granted by the courts.

(6)Taking up the question of frustration, we are of theopinion, that this is case where the principle of frustrationlaid down under Section 56 of the Indian Contract Act has noapplication...

(7)In India, this principle is embodied in Section 56 of theIndian Contract Act stating that contract to do an act which,after the contract is made, becomes impossible, or, by reason ofsome event, which the promisor could not prevent, unlawful,becomes void when the act becomes impossible or unlawful. Inthe decision of the Supreme Court in Satyabrata Ghosev. Mugneeram Bangur and Co., AIR 1954 SC 44 , the scope ofSection 56 has been considered. After referring to English caseson the subject of frustration, which could have only apersuasive value and may be helpful in showing how the courtsin England have, decided cases under similar circumstances,their Lordships observed that the doctrine of frustration isreally an aspect of part of the law of discharge of contract byreason of supervening impossibility or illegality of the actagreed to be done, and hence comes within the purview ofSection 56 of the Indian Contract Act. Having stated thisproposition, they considered the application of the principle tothe case before them. In that case the defendant companylaunched scheme for development of land, and undertook toconstruct the roads and drains necessary, on that land. Theyalso agreed to sell plot of the land to the plaintiff. Aconsiderable portion of the area comprised in the scheme, wasrequisitioned for military purposes in 1941. This prevented thevarious construction from proceeding, and the defendant-company who could not undertake the road construction for anindefinite period, wrote to the plaintiff, seeking to have theagreement treated as cancelled. Their Lordships at p. 326, ofthe report (SCR): (at p. 49 of AIR), took up the question for

consideration as to whether or not the disturbing element whichis alleged to have happened in the case, had substantiallyprevented the performance of the contract as whole. Theycame to the conclusion that it could not be said that therequisition by the military vitally affected the contract or madeits performance impossible.

(8)In the present case, it is difficult to conceive how thecyclone which lasted for short duration in 1952, and anothermilder cyclone in 1955 rendered the performance of thecontract impossible, or substantially prevented the performanceof the contract. The defendant admits the sudden influx ofproduce to the shandy, caused by the windfall of this after the1952 cyclone, and then the slackening of the supplies for aperiod of six months when the shandy was not being formedregularly. Thereafter, the shandy admittedly continued tofunction. These disturbances in the business of the shandywould have been over, by the middle of 1953. Though the suitlease commenced on 1-4-1952, the lease deed was executed andregistered only on 12-9-1953. By that time, the cyclone hadcome and gone, and its after-effects also had subsided. Nothingprevented the defendant at that stage, from insisting upon arecital in the contract to provide for the effects of the cyclone.The omission to mention this in the document of the lease,would show that the parties did not intend to provide for aclause about remission of lease amount, on account of thecyclone. In such circumstances it will not be open to the partiesto adduce oral evidence that the lease did include clause forremission, as it will amount to varying the terms of writtencontract by parole evidence. However, the defendant has notbased his claim for remission on the ground that the contractprovided for remission. He seems to have based his claim onthe doctrine of frustration. The trial court has referred to thedecisionoftheSupremeCourtabovementionedunderSection 56 of the Contract Act, and came to the conclusion thatin the circumstances of the case, the promisor could not fulfilhis promise on account of the two cyclones. It is not clear howthe promisor was prevented from fulfilling his promise onaccount of the cyclone. The interruption in the business for ashort period, no doubt, might have led to fall in the businessfrom what was anticipated, but the lease had five years to run,and the business would have resumed its normalcy in the

following season; the business might have even boomed, andthe increase in business might have offset the loss. Of course,no evidence has been given about this. The fact, however, isthat the lease had five years to run, and both temporary fall ofthe income in one year and temporary boosting of the income inanother year, should be considered to be implied in thecalculation of the parties when they entered into the agreement.The long duration of the contract was expected to iron out thesevariations and provide for fair average profit during theperiod as whole. Therefore, it was quite improper for the trialcourt to fasten only on the loss during the cyclone, and ignorethe profits that might have been earned in the other periods forholding that this is case where the doctrine of frustrationwould apply. The trial court in extending its sympathy to thedefendant has not considered the fact that the defendant waslargely responsible for his present predicament, through havingbid at highly excessive figure at the auction, for no otherpurpose than to get the better of rival competing lessee. Thecourt cannot relieve party of the consequences of such afoolish action. It would have been open to the temple authoritiesto give some relief on ex gratia basis, if they were so advised,but that is not for the court to grant. We are of the opinion thatthis is not case where the doctrine of frustration wouldapply.”

(Emphasis supplied)

The arbitrator cannot re-write the terms of the contract.

10.26.The learned Arbitrator is bound by the terms of the contract andcannot go beyond the terms laid down in the contract. The Arbitratorwhile giving the award or conducting the proceedings cannot travelbeyond the contract. However, the learned Arbitrator has re-writtenthe terms of the contract by absolving the respondent from liability topay Minimum Guaranteed Amount.

10.27.In Municipal Corporation of Greater Bombay v. ThermalEngineeringCorporation,Bombay,1997(2)Arb.LR361,theSupreme Court held that the arbitrator has to act within the parametersof the contract. Relevant portion is as under:

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“6. Law is well-settled that an arbitrator is not conciliatorand cannot ignore the law or mis-apply it in order to do whathe thinks just and reasonable. He is tribunal selected by theparties to decide their disputes according to law and so he isbound to follow and apply the law, and if he does not, he cannotbe set right by courts provided his error appears on the face ofthe award. It is equally well settled that where it is apparentnot by construction of the contract but by merely looking at thecontract that the arbitration travelled outside the permissibleterritory and thus exceeded his jurisdiction in making theaward, it is an error going to the root of his jurisdiction. Thearbitrator cannot act arbitrarily, irrationally, capriciously orindependently of the contract. His sole function is to arbitratein terms of the contract. He has no power apart from what theparties have given him, under the contract. If he has travelledoutside the bounds of the contract, he has acted withoutjurisdiction.”

(Emphasis supplied)

10.28.In State of Rajasthan v. Nav Bharat Constructions Co., (2006)1 SCC 86, the Supreme Court held that the arbitrator cannot gobeyond the terms of the contract between the parties.Relevantportion of the judgment is as under:

“27. …An arbitrator cannot go beyond the terms of thecontract between the parties. In the guise of doing justice hecannot award contrary to the terms of the contract. If he doesso, he will have misconducted himself.Of course if aninterpretation of term of the contract is involved then theinterpretation of the arbitrator must be accepted unless it is onewhich could not be reasonably possible. However, where theterm of the contract is clear and unambiguous the arbitratorcannot ignore it.”contract between the parties. In the guise of doing justice hecannot award contrary to the terms of the contract. If he doesso, he will have misconducted himself.Of course if aninterpretation of term of the contract is involved then theinterpretation of the arbitrator must be accepted unless it is onewhich could not be reasonably possible. However, where theterm of the contract is clear and unambiguous the arbitratorcannot ignore it.”

(Emphasis supplied)

10.29.In Food Corporation of India v. M/s. Chandu Construction,(2007) 4 SCC 697, the Supreme Court held that the arbitrator is acreature of the agreement between the parties and has to operatewithin the four corners of the agreement. Relevant portion of the said

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judgment is reproduced hereunder:

“11. It is trite to say that the arbitrator being creature of theagreement between the parties, he has to operate within thefour corners of the agreement and if he ignores the specificterms of the contract, it would be question of jurisdictionalerror on the face of the award, falling within the ambit of legalmisconduct which could be corrected by the Court.We may,however, hasten to add that if the arbitrator commits an errorin the construction of contract, that is an error within hisjurisdiction. But, if he wanders outside the contract and dealswith matters not allotted to him, he commits jurisdictionalerror (see Associated Engg. Co. v. Govt. of A.P., (1991) 4 SCC665 and Rajasthan State Mines & Minerals Ltd. v. EasternEngg. Enterprises, (1999) 9 SCC 283).

12.In this context, reference can usefully be made to theobservations of this Court in Alopi Parshad & Sons Ltd. v.Union of India AIR 1960 SC 588 wherein it was observed thatthe Contract Act does not enable party to contract to ignorethe express covenants thereof, and to claim payment ofconsideration for performance of the contract at rates differentfrom the stipulated rates, on some vague plea of equity. TheCourt went on to say that in India, in the codified law ofcontracts, there is nothing which justifies the view that achangeofcircumstances,“completelyoutsidethecontemplation of parties” at the time when the contract wasentered into will justify court, while holding the parties boundby the contract, in departing from the express terms thereof.Similarly, in Naihati Jute Mills Ltd. v. Khyaliram JagannathAIR 1968 SC 522 this Court had observed that where there isan express term, the court cannot find on construction of thecontract, an implied term inconsistent with such express term

13.In Continental Construction Co. Ltd. v. State of M.P.(1988) 3 SCC 82 it was emphasized that not being aconciliator, an arbitrator cannot ignore the law or misapply itin order to do what he thinks is just and reasonable. He is atribunal selected by the parties to decide their disputesaccording to law and so is bound to follow and apply the law,and if he does not, he can be set right by the court provided hiserror appears on the face of the award.

14.In Bharat Coking Coal Ltd. v. Annapurna Construction(2003) 8 SCC 154 while inter alia, observing that the arbitratorcannot act arbitrarily, irrationally, capriciously or independentof the contract, it was observed, thus: (SCC pp. 161-162, para22)

“22. There lies clear distinction between an error within thejurisdiction and error in excess of jurisdiction. Thus, the roleof the arbitrator is to arbitrate within the terms of the contract.He has no power apart from what the parties have given himunder the contract. If he has travelled beyond the contract, hewould be acting without jurisdiction,whereas if he hasremained inside the parameters of the contract, his awardcannot be questioned on the ground that it contains as errorapparent on the face of the record.”

15.Therefore, it needs little emphasis that an arbitratorderives his authority from the contract and if he acts indisregard of the contract, he acts without jurisdiction.Adeliberate departure from contract amounts to not onlymanifest disregard of his authority or misconduct on his part,but it may tantamount to mala fide action(also see AssociatedEngg. Co. v. Govt. of A.P. (1991) 4 SCC 93).”

(Emphasis supplied)

10.30.There is merit in the other grounds urged by the petitioner,namely, that the respondent’s claims are barred by principles of resjudicata/constructive res judicata; and the learned Arbitrator wronglydismissed the petitioner’s application under Sections 16 and 17 of theArbitration and Conciliation Act, 1996.However, considering thatthe award is against the well-settled law, is patently illegal and theArbitrator acted without jurisdiction; this Court is not basing thisjudgment on the other grounds urged by the petitioner and, therefore,it is not necessary to record the findings with respect to the othergrounds urged by the petitioner.

11.Judicial precedents must be applied with reference to the factsof the case

11.1. It is well settled that judicial precedent cannot be followed as astatute and has to be applied with reference to the facts of the caseinvolved in it. The ratio of any decision has to be understood in thebackground of the facts of that case. What is of the essence in adecision is its ratio and not every observation found therein nor whatlogically follows from the various observations made in it. It has to beremembered that decision is only an authority for what it actuallydecides. It is well settled that little difference in facts or additionalfacts may make lot of difference in the precedential value of adecision. The ratio of one case cannot be mechanically applied toanother case without regard to the factual situation and circumstancesof the two cases.

11.2. In Padma Sundara Rao v. State of Tamil Nadu (2002) 3 SCC533, the Supreme Court held that the ratio of judgment has to beread in the context of the facts of the case and even single fact canmake difference. In para 9 of the said judgment, the Supreme Courtheld as under:

“9. Courts should not place reliance on decisions withoutdiscussing as to how the factual situation fits in with the factsituation of the decision on which reliance is placed. There isalways peril in treating the words of speech or judgment asthough they are words in legislative enactment, and it is to beremembered that judicial utterances are made in the setting ofthe facts of particular case, said Lord Morris in BritishRailways Board v. Herrington. Circumstantial flexibility, oneadditional or different fact may make world of differencebetween conclusions in two cases.”discussing as to how the factual situation fits in with the factsituation of the decision on which reliance is placed. There isalways peril in treating the words of speech or judgment asthough they are words in legislative enactment, and it is to beremembered that judicial utterances are made in the setting ofthe facts of particular case, said Lord Morris in BritishRailways Board v. Herrington. Circumstantial flexibility, oneadditional or different fact may make world of differencebetween conclusions in two cases.”

11.3. In Bharat PetroleumCorporation Ltd v. N.R. Vairamani,(2004) 8 SCC 579, the Supreme Court held that decision cannot berelied on without considering the factual situation. The Supreme Court

observed as under:-

“9. Courts should not place reliance on decisions withoutdiscussing as to how the factual situation fits in with the factsituationofthedecisiononwhichrelianceisplaced.Observations of courts are neither to be read as Euclid'stheorems nor as provisions of statute and that too taken out oftheir context. These observations must be read in the context inwhich they appear to have been stated. Judgments of courts arenot to be construed as statutes. To interpret words, phrases andprovisions of statute, it may become necessary for judges toembark into lengthy discussions but the discussion is meant toexplain and not to define. Judges interpret statutes, they do notinterpret judgments. They interpret words of statutes; theirwords are not to be interpreted as statutes. In London GravingDock Co. Ltd. v. Horton [1951 AC 737: (1951) 2 All ER 1(HL)] (AC at p. 761) Lord Mac Dermott observed: (All ER p.14 C-D)“The matter cannot, of course, be settled merely by treating theipsissima verba of Willes, J., as though they were part of an ActofParliamentandapplyingtherulesofinterpretationappropriate thereto. This is not to detract from the great weightto be given to the language actually used by that mostdistinguished judge…”10. In Home Office v. Dorset Yacht Co. [(1970) 2 All ER 294 :1970 AC 1004 : (1970) 2 WLR 1140 (HL)] (All ER p. 297g-h)Lord Reid said, “Lord Atkin's speech … is not to be treated as ifit were statutory definition. It will require qualification in newcircumstances”.Megarry,J.in ShepherdHomesLtd. v.Sandham (No. 2) [(1971) 1 WLR 1062 : (1971) 2 All ER1267] observed: “One must not, of course, construe even areserved judgment of Russell, L.J. as if it were an Act ofParliament.”And,in Herrington v.BritishRailwaysBoard [(1972) 2 WLR 537 : (1972) 1 All ER 749 (HL)] LordMorris said: (All ER p. 761c)“There is always peril in treating the words of speech or ajudgment as though they were words in legislative enactment,and it is to be remembered that judicial utterances made in thesetting of the facts of particular case.”

11. Circumstantial flexibility, one additional or different factmay make world of difference between conclusions in two

cases. Disposal of cases by blindly placing reliance on adecision is not proper.

12. The following words of Lord Denning in the matter ofapplying precedents have become locus classicus:

“Each case depends on its own facts and close similaritybetween one case and another is not enough because even asingle significant detail may alter the entire aspect, indeciding such cases, one should avoid the temptation todecide cases (as said by Cardozo) by matching the colour ofone case against the colour of another. To decide therefore,on which side of the line case falls, the broad resemblanceto another case is not at all decisive.

Precedent should be followed only so far as it marks thepath of justice, but you must cut the dead wood and trim offthe side branches else you will find yourself lost in thicketsand branches. My plea is to keep the path to justice clear ofobstructions which could impede it.””

11.4. TherespondenthasrelieduponSatyabrataGhosev.Mugneeram Bangur and Co. (supra),Sushila Devi v. Hari Singh(supra), Jagatjit Distilling & Allied Industries v. Bharat Nidhi Ltd.(supra), D. Devi Bhagat v. J.B. Advani & Co. (supra) and ShardaMahajan v. Maple Trading International P. Ltd. (supra) which arenot applicable to the present case and have been wrongly applied bythe learned Arbitrator:

11.4.1.Satyabrata Ghose v. Mugneeram Bangur and Co.(supra) deals with case of specific performance of an agreement tosell in which the plea of frustration was raised by the seller. In thatcase, the owner of large tract of land in Greater Calcutta started ascheme for development of residential colony, named, Lake ColonyScheme No.1 and agreed to sell plot in that scheme on 5[th]August,1940.The owner received Rs.101/- as earnest money from thepurchaser and the conveyance was agreed to be executed within one

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month of the date of completion of roads on payment of balance saleconsideration. In November, 1943, the land was requisitioned due towar. The owner, therefore, decided to treat the agreement to sell ascancelled and gave the option to the purchaser to take back the earnestmoney within one month.The purchaser filed suit for specificperformance which was resisted on the ground of frustration underSection 56 of the Contract Act.The Supreme Court came to theconclusion that it could not be said that the requisition by the militaryvitally affected the contract or made its performance impossible. Thisjudgment does not help the respondent as this case relates to specificperformance of an agreement to sell and not lease.11.4.2.In Sushila Devi v. Hari Singh (supra), the owner invitedtender for lease of agricultural land in Tehsil Gujranwalla in January1947. The respondent deposited the earnest money of Rs.1,000/- andsecurity of Rs.34,000/- for payment of rent. Before the execution ofthe lease deed, Tehsil Gujranwalla became part of Pakistan as resultof partition and the lessee sought refund of security deposit and theearnest money which was declined by the owner. The lessee invokedSection 56 of the Contract Act.The Supreme Court held that theagreement to lease frustrated under Section 56. The Supreme Courtnoted Raja Dhruv Dev Chand v. Raja Harmohinder (supra) and heldthat there is clear distinction between completed conveyance and anexecutory contract. The Supreme Court applied Section 56 becausethe lease had not been executed and the agreement to lease hadfrustrated before the execution of the lease.

This judgment does not help the respondent as we are dealingwith lease deed and not an agreement to lease. It is well settled thatSection 56 can apply to agreement to lease but would not apply to the

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lease deed, which is completed conveyance.Relevant portion of thesaid judgment is as under:

“8.... Section 56 applies only to contract. Once valid leasecomes into existence the agreement to lease disappears and itsplace is taken by the lease. It becomes completed conveyanceunder which the lessee gets an interest in the property. There isa clears distinction between completed conveyance and anexecutory contract. Events which discharge contract do notinvalidate concluded transfer see Raja Dhruv Dev Chand v.Harmohinder Singh, (1968) SCR 339= (AIR 1968 SC 1024).Inview of that decision the view taken by some of the High Courtsthat Section 56 of the Contract Act applies to lease cannot beaccepted as correct. Further the English decisions bearing onthe point can have no further relevance.

9.But in this case there was no lease. There was only anagreement to lease. As seen earlier, the agreement between theparties was that the property in question should be leased to theplaintiffs for period of three years. Such lease could nothave been validly made except under registered instrument.As seen earlier the contract between the parties provided thatthe lease deed should be registered within 15 days from thedate of the acceptance of the tender. For one reason or theother, the contemplated lease deed was neither executed norregistered. Therefore, we have before us only an agreement tolease and not lease. Such an agreement comes within thescope of Section 56 of the Contract Act.”

(Emphasis supplied)

11.4.3.Jagatjit Distilling & Allied Industries v. Bharat NidhiLtd. (supra) relates to contract of bailment of goods and not with alease.

11.4.4.D. Devi Bhagat v. J.B. Advani & Co. (supra) relates to acontract for export of lin seed oil. After the execution of the contract,the export of lin seed oil was prohibited whereupon the defendantpleaded frustration of contract which was allowed.This case alsodoes not relate to lease.

11.4.5.In Sharda Mahajan v. Maple Trading International P.

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Ltd. (supra), the petitioner made payment of Rs.60,000/- to therespondent for purchase of gold coins.The respondent failed torefund the said money whereupon the petitioner filed winding uppetition before the Delhi High Court. The respondent invoked Section56 of the Contract Act on the ground that the respondents accountswere frozen by the Enforcement Directorate. This case also does notdeal with lease.

12.The respondent has raised false claims

12.1. In the statement of claim dated 2[nd]March, 2009 filed by therespondent, it was pleaded by the respondent that due to phenomenalincrease in the project cost, it was not possible for the respondent togo ahead with the construction of the proposed hotel if the minimumguaranteed amounts mentioned in the supplemental agreement aretreated as binding. The respondent sought further three years time toconstruct the hotel and exemption from payment of MinimumGuaranteed Amount till then. Relevant portion of the Statement ofClaim are reproduced hereunder:-

“8.However, Leela has been unable to proceed further inthat direction because the Minimum Guaranteed Amountspayable by Leela as Royalty as per the said SupplementalAgreement have become obsolete and unworkable. More than13 years have elapsed out of the total tenure of the LeaseAgreement of 30 years including the construction period ofthree years, since the execution of the said Lease Agreementand the Supplemental Agreement, and there has been aphenomenal increase in the project cost of the proposed hotelas envisaged by the parties. There is no time left for Leela toconstruct the hotel, set it up and recoup its investment duringthe remaining part of the term of the lease.

9.Marketconditionsforthehotelindustryhavedeteriorated and are continuing to deteriorate in the context ofthe recession, which is global phenomenon, and the threat ofterrorist attacks of the kind that Mumbai witnessed on 26th

November, 2008. Leelamade severalrepresentationstoAirports Authority pointing out that it is not possible for Leelato go ahead with the construction of the proposed hotel if theMinimum Guaranteed Amounts as mentioned in the saidSupplemental Agreement are treated as binding on Leela........”

“ISSUE NO.IV

Whether fresh period of three years not be granted to theLessee for construction of the Hotel, during which no MinimumGuaranteed Amount shall be payable.

25.It is common ground between Airports Authority andLeela that minimum of 3 years is required for construction ofthe hotel and even in the said Lease Agreement and the saidSupplemental Agreement it was clearly provided that there willbe no payment of any Minimum Guaranteed Amount towardsRoyalty for three years which is the minimum estimated periodfor construction of the hotel. It is preposterous to say that alesseeshouldpayanyroyalty,whetheritisminimumguaranteed or otherwise, based on turnover when there canpossibly be no turnover at all. Leela therefore submits that it isentitled to be given period of three years when no MinimumGuaranteed Amount towards Royalty will be payable and whichmay be called the construction period of the hotel. Also, as theoriginal lease deed also provided for the construction period tobe extended by one year after payment of an additional chargeof 50% of the ground rent, such provision may be given in theAgreement.”

(Emphasis supplied)

12.2. The respondent’s witness, Mr. V.P. Thakkar, in his affidavit byway of evidence submitted his report on the viability of constructionof 150 rooms on the leased land and opined that project was notviable. The witness took the opening date of 1[st]April, 2011 in para 5of his affidavit. Paras 2 and 5 of the affidavit of Mr.V.P. Thakkar isreproduced hereunder:-

“2.I have been requested by Hotel Leelaventure Limited(Company), public listed company which owns and operatesupscale and luxury hotels in India, to examine the viability of

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an expansion project of 150 rooms to be built adjacent to theirexisting about 400 room hotel at Sahar Airport in Mumbai. Theviability is to be examined having regard to market conditionsand expectations for the hotel industry in the context of marketconditions arising from the global economic recession and theterror attacks in Mumbai on 26th November, 2008. The projectwas to be initiated in December, 2008.”

“5.Operating and Financial projections

5.1In the context of the demand-supply scenario prevailingin the Mumbai market as of end 2008, updated to theperceptions and expectations as at date, we have preparedfinancial projections for 150 room new hotel to be comprisedas the Leela Mumbai project expansion.These projectionsassume that the guest rooms will be of superior contemporaryquality, and will primarily operate as Club Rooms targeted tothe upper end of business travelers; this positioning will enablethe expansion project to derive strong competitive capability.

5.2Our projections are made on the following mainassumptions:

5.2.1 Opening date of 1 April 2011…”

(Emphasis supplied)

12.3. During the course of arbitration proceedings, it came on recordand was also admitted by the respondent before this Court that therespondent had utilised the Floor Space Index (FSI) of 1 (One) inrespect of the land in question to raise the additional construction ontheir adjoining Hotel Leela Galleria prior to 2002 and, therefore, therespondent did not have the required FSI to raise any construction onthe land in question. The petitioner placed on record the occupancycertificate dated 15[th]November, 2002 (Ex.CW 2/2) in respect of theconstruction raised by the respondent.

12.4. As per Clause 6 of the lease deed dated 7[th]February, 1996, therespondent had FSI of 1 (One) to raise construction on the leased land

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and the respondent had utilized that the same for raising constructionon the adjoining Hotel Leela Galleria prior to the filing of thestatement of claim in the year 2002.

12.5. Sincetherespondenthadalreadyraisedtheadditionalconstruction on the adjoining Hotel Galleria by utilising the FSI of theland in question prior to the filing of the statement of claim, the claimmade in the statement of claim that the construction was not viableand further three years time be granted to raise the construction, areabsolutely false.

12.6. As per supplemental agreement dated 7[th]February, 1996, therespondent was liable to pay the Royalty according to Schedule or7.5% of the gross turnover of the new hotel block whichever is higher.Since the respondent had raised the construction in the Hotel Galleriaby using the FSI of the land in question, it was incumbent upon therespondent to have placed on record the particulars of the grossturnover of the construction raised by them. However, the respondentchose to conceal the particulars of the gross turnover. The respondentrelied upon the hypothetical assumptions which were not relevant asthe particulars of gross turn over were available.

12.7. The respondent instituted frivolous claim to challenge itsobligation to pay the Royalty (MGA) which was barred by wellsettled law.The respondent claimed four reliefs mentioned in para26(i)(a), (b), (c) and (d) of the statement of claim. However, at thestage of final hearing, the respondent conceded that prayers made inparas 26(i)(b), (c) and (d) of the statement of claim were notmaintainable and, therefore, the respondent gave up the said prayers.Therespondentpressedprayer26(i)(a)whichwasalsonotmaintainable and barred by well settled law. The learned Arbitrator

who was bound by the terms of contract, had no jurisdiction to declarethe terms of the lease as having frustrated and directing the parties tore-negotiate the terms. However, the respondent misled the learnedArbitrator in pursuance to which the learned Arbitrator exercised thejurisdiction not vested in him and declared that the payment ofRoyalty by the respondent has become impossible under Section 56 ofthe Contract Act w.e.f. 1[st]June, 2008 and, therefore, the parties mayenter into new contract.

12.8. At the stage of final hearing before the learned Arbitrator, therespondent did not dispute or deny its obligation to pay 7.5% of thegross turnover stipulated in Clause 1 of the supplemental agreementdated 7[th]February, 1996 but disputed the liability to pay the MinimumGuaranteed Amount.Reference may be made to para 13 of thewritten submissions dated 2[nd]June, 2012 filed before the learnedArbitrator. However, by directing the parties to re-negotiate the terms,the respondent has been discharged from even paying 7.5% of thegross turnover.

Consequences of making false claim in Court

13.Section 209 of the Indian Penal Code provides that dishonestlymaking false claim in Court is an offence punishable withpunishment of imprisonment upto two years and fine. Section 209 ofthe Indian Penal Code is reproduced hereunder:

“Section 209- Dishonestly making false claim in Court—

Whoever fraudulently or dishonestly, or with intent to injureor annoy any person, makes in Court of Justice any claimwhich he knows to be false, shall be punished withimprisonment of either description for term which mayextend to two years, and shall also be liable to fine.”

14.In H.S. Bedi v. National Highway Authority of India, 2016

(155) DRJ 259, this Court examined the scope of Section 209 of theIndian Penal Code and held as under:

“15.1 Section 209 of the Indian Penal Code makes dishonestlymaking false claim in Court as an offence punishable withimprisonment upto two years and fine.

15.2The essential ingredients of an offence under Section 209are: (i)The accused made claim; (ii)The claim was made in aCourt of Justice; (iii) The claim was false, either wholly or inpart; (iv)That the accused knew that the claim was false; and(v)The claim was made fraudulently, dishonestly, or with intentto injure or to annoy any person.

15.3A litigant makes ‘claim’ before Court of Justice forthe purpose of Section 209 when he seeks certain relief orremedies from the Court and ‘claim’ for relief necessarilyimpasses the ground for obtaining that relief.The offence iscomplete the moment false claim is filed in Court.

15.4The word “claim” in Section 209 of the IPC cannot beread as being confined to the prayer clause.It means the“claim” to the existence or non-existence of fact or set offacts on which party to case seeks an outcome from theCourt based on the substantive law and its application to factsas established. To clarify, the word “claim” would mean bothnot only claim in the affirmative to the existence of fact(s) as,to illustrate, may be made in plaint, writ petition, or anapplication; but equally also by denying an averred fact whileresponding (to the plaint/petition, etc.) in written statement,counter affidavit, reply, etc.Doing so is making “claim”to the non-existence of the averred fact.A false “denial”,except when the person responding is not aware, wouldconstitute making “claim” in Court under Section 209 IPC.

15.5The word ‘claim’ for the purposes of Section 209 of thePenal Code would also include the defence adopted by adefendant in the suit. The reason for criminalising false claimsand defences is that the plaintiff as well as the defendant canabuse the process of law by deliberate falsehoods, therebyperverting the course of justice and undermining the authorityof the law.

15.6Whether the litigant’s ‘claim’ is false, is not consideredmerely from whatever he pleads (or omits to plead): that wouldbe to elevate form over substance. To make out the offence, theCourt does not merely inspect how litigant’s pleadings have

been drafted or the case has been presented. The real issue to’be considered is whether, all said and done, the litigantsaction has proper foundation which entitles him to seekjudicial relief.

15.7Section 209 was enacted to preserve the sanctity of theCourt of Justice and to safeguard the due administration of lawby deterring the deliberate making of false claims. Section 209was intended to deter the abuse of Court process by all litigantswho make false claims fraudulently, dishonestly, or with intentto injure or annoy.15.8False claims delay justice and compromise the sanctity ofa Court of justice as an incorruptible administrator of truth anda bastion of rectitude.

15.9Filing of false claims in Courts aims at striking blow atthe rule of law and no Court can ignore such conduct whichhas the tendency to shake public confidence in the judicialinstitutions because the very structure of an ordered life is putat stake. It would be great public disaster if the fountain ofjustice is allowed to be poisoned by anyone resorting to filing offalse claims.

15.10 The Courts of law are meant for imparting justicebetween the parties. One who comes to the Court, must comewith clean hands. More often than not, process of the Court isbeingabused.Property-grabbers,tax-evaders,bank-loan-dodgers and other unscrupulous persons from all walks of life-find the Courtprocess convenient lever to retain the illegalgains indefinitely. person, who's case is based on falsehood,has no right to approach the Court. He can be summarilythrown out at any stage of the litigation.

15.11 The disastrous result of leniency or indulgence ininvoking Section 209 is that it sends out wrong signals. Itcreates almost licence for litigants and their lawyers toindulge in such serious malpractices because of the confidencethat no action will result.

15.12Unless lawlessness which is all pervasive in the society isnot put an end with an iron hand, the very existence of acivilized society is at peril if the people of this nature are notshown their place. Further if the litigants making false claimsare allowed to go scot free, every law breaker would violate thelaw with immunity. Hence, deterrent action is required touphold the majesty of law. The Court would be failing in itsduties, if false claims are not dealt with in manner proper and

effective for maintenance of majesty of Courts as otherwise theCourts would lose its efficacy to the litigant public.”

(Emphasis supplied)

15.Imposition of Costs

15.1. In Ramrameshwari Devi v. Nirmala Devi, (2011) 8 SCC 249,the Supreme Court has held that the Courts have to take intoconsideration pragmatic realities and have to be realistic in imposingthe costs. The relevant paragraphs of the said judgment arereproduced hereunder:-

“C. Imposition of actual, realistic or proper costs and orordering prosecution would go long way in controlling thetendency of introducing false pleadings and forged andfabricated documents by the litigants. Imposition of heavycosts would also control unnecessary adjournments by theparties. In appropriate cases the courts may considerordering prosecution otherwise it may not be possible tomaintain purity and sanctity of judicial proceedings.

54. While imposing costs we have to take into considerationpragmatic realities and be realistic what the Defendants or theRespondents had to actually incur in contesting the litigationbefore different courts. We have to also broadly take intoconsideration the prevalent fee structure of the lawyers andother miscellaneous expenses which have to be incurredtowardsdraftingandfilingofthecounteraffidavit,miscellaneous charges towards typing, photocopying, court feeetc.

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xxx

56. On consideration of totality of the facts and circumstancesof this case, we do not find any infirmity in the well reasonedimpugned order/judgment. These appeals are consequentlydismissed with costs, which we quantify as Rs. 2,00,000/-(Rupees Two Lakhs only). We are imposing the costs not out ofanguish but by following the fundamental principle thatwrongdoers should not get benefit out of frivolous litigation.”

(Emphasis supplied)

15.2. In Maria Margarida Sequeria Fernandes v. Erasmo Jack deSequeria (2012) 5 SCC 370, the Supreme Court held that heavy costs

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and prosecution should be ordered in cases of false claims anddefences as under:-

“85. This Court in recent judgment in RamrameshwariDevi (supra)aptlyobservedatpage266thatunlesswrongdoers are denied profit from frivolous litigation, it wouldbe difficult to prevent it. In order to curb uncalled for andfrivolous litigation, the Courts have to ensure that there is noincentive or motive for uncalled for litigation. It is matter ofcommon experience that Court's otherwise scarce time isconsumed or more appropriately, wasted in large number ofuncalled for cases. In this very judgment, the Court providedthat this problem can be solved or at least be minimized ifexemplary cost is imposed for instituting frivolous litigation.The Court observed at pages 267-268 that imposition of actual,realistic or proper costs and/or ordering prosecution inappropriate cases would go long way in controlling thetendency of introducing false pleadings and forged andfabricated documents by the litigants. Imposition of heavy costswould also control unnecessary adjournments by the parties.Inappropriatecases,theCourtsmayconsiderorderingprosecution otherwise it may not be possible to maintain”purity and sanctity of judicial proceedings.

(Emphasis supplied)

15.3. In Messer Holdings Ltd. v. Shyam Madanmohan Ruia, [2010]104 SCL 293(Bom), the Supreme Court imposed exemplary cost ofRs.25 lakh on each of the three parties for loss of judicial time.Relevant portion of the said judgment is as under:

“43. ...This Case, in our view, is classic example of theabuse of the judicial process by unscrupulous litigants withmoney power, all in the name of legal rights by resorting to-abuse of the judicial process by unscrupulous litigants withmoney power, all in the name of legal rights by resorting to-halftruths, misleading representations and suppression offacts.Each and every party is guilty of one or the other of theabove-mentioned misconducts. It can be demonstrated (by amore elaborate explanation but we believe the facts narrated sofar would be sufficient to indicate) but we do not wish to wasteany more time in these matters.facts.Each and every party is guilty of one or the other of theabove-mentioned misconducts. It can be demonstrated (by amore elaborate explanation but we believe the facts narrated sofar would be sufficient to indicate) but we do not wish to wasteany more time in these matters.

44.This case should also serve as proof of the abuse of thediscretionary jurisdiction of this Court under Article 136 by the

rich and powerful in the name of ‘fight for justice’ at eachand every interlocutory step of suit. Enormous amount ofjudicial time of this Court and two High Courts was spent onthis litigation. Most of it is avoidable and could have been wellspent on more deserving cases.

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45. We therefore, deem it appropriate to impose exemplarycosts quantified at Rs.25,00,000.00 (Rupees Twenty Five Lakhsonly) to be paid by each of the three partiesi.e. GGL, MGGand RUIAS. The said amount is to be paid to National LegalServices Authority as compensation for the loss of judicial timeof this country and the same may be utilized by the NationalLegal Services Authority to fund poor litigants to pursue theirclaims before this Court in deserving cases.”

(Emphasis supplied)

15.4. In Harish Relan v. Kaushal Kumari Relan, 2016 II AD (Delhi)571, the Division Bench of this Court considered the pronouncementsof the Supreme Court with respect to false claims as well as costs andheld that there is no limitation on the imposition of costs. Relevantportion of the said judgment is as under.

“88. It is important to note that Section 35A has no applicationto appeal or revision proceedings. Given the fact that thiscourt is adjudicating an appeal assailing the judgment passedin exercise of original jurisdiction. Therefore, the jurisdictionof this court to impose costs by virtue of Section 35 of the CPCis unhindered by the limitation contained in Section 35A.

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95. On the issue of costs, Sections 35, 35A, 35B as well asOrder XXA and Order XXIII of the Code of Civil Procedureapply to civil suits alone. There is no statutory provision evenproviding for imposition of costs, let alone restricting theexercise the power to do so in appellate jurisdiction. We alsofind that even under the Delhi High Court Rules, 1967 only,the manner in which counsel's fee may be computed in theappeal against the decree on the original side, is provided.There is no provision in the Delhi High Court Rules as to themanner in which the costs in appeals are to be evaluated orimposed. Guidance on the consideration by this court would

therefore, be taken from the principles laid down in the severalprecedents by the Supreme Court of India. There is therefore,no limitation by statute or the Rules at all on the appellatecourt to impose actual, reasonable costs on the losing party atall.

Orders under Section 151 CPC for abuse of process of thecourt

96. It is also necessary to advert to the power of the courtunder Section 151 of the CPC. This statutory provisionspecifically states that “Nothing in this Code shall be deemedto limit or otherwise affect the inherent power of the court tomake such orders as may be necessary for the ends of justiceor to prevent abuse of the process of the court”. The spirit,object and intendment of the statutory provisions, as well asstatutory scheme shows, that the inherent powers of the courtare complementary to the powers specifically conferred on thecourt by the Code, and are in addition thereto. While Section35A is confined to award of compensatory costs in respect of“false or vexatious claims or defences”, Section 151 takeswithin its ambit much wider area of litigation whichtantamounts to abuse of process of court. Section 151therefore, enables court to pass orders as may be necessaryfor the ends of justice, or to “prevent abuse of process of thecourt” which is beyond the “false and vexatious” litigationcovered under Section 35A and are wide enough to enable thecourt to pass orders for full restitution.”

(Emphasis supplied)

16.Conclusion

16.1. The award is patently illegal as respondent’s liability to pay theRoyalty (MGA) to the petitioner under the Transfer of Property Act isabsolute and unconditional; and the learned Arbitrator had no powerto discharge the respondent from paying the Royalty to the petitioner.

16.2. The award is against the well settled law that Section 56 of theContract Act is not applicable to leases as laid down by the threeJudge Bench of the Supreme Court in Raja Dhruv Dev Chand v. RajaHarmohinder (supra) and reiterated in T. Lakshmipathi v. P.

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Nithyananda Reddy (supra).

16.3. Section 108(e) of the Transfer of Property Act is special lawon the doctrine of frustration of lease and it excludes the general lawcontained in Section 56 of the Contract Act as held by the SupremeCourt in Kedar Lall v. Hari Lall (supra).Reference be made toSection 4 of the Transfer of Property Act, Mahadeo Prosad Shaw v.Calcutta Dyeing and Cleaning Co. (supra) and Amir Chand v. ChuniLal (supra).

16.4. Section 108(e) of the Transfer of Property Act incorporates thedoctrine of frustration of leases in case of destruction or rendering thesubject premises unfit for use by fire, tempest, flood, violence or otherirresistible force. In such cases, Section 108(e) gives the option to thelessee to treat the lease as void.However, if the lessee does notexercise the option, the lease continues and the lessee remains liableto pay the rent to the landlord. The three Judge Bench of the SupremeCourt have discussed Section 108(e) in Raja Dhruv Dev Chand v.Raja Harmohinder (supra).Reference be also made to MahadeoProsad Shaw v. Calcutta Dyeing and Cleaning Co. (supra) and HindRubber Industries Pvt. Ltd. v. T.M. Bagasarwalla (supra).

16.5. Even assuming Section 56 applies to leases, the award iscontrary to the well settled law that commercial hardship does notfrustrate the contract as laid down in Alopi Parshad & Sons v. Unionof India (supra), Panna Lal v. State of Rajasthan (supra), State Bankof Haryana v. Jage Ram (supra) Har Shankar v. Deputy Excise andTaxation Commissioner (supra), New Bihar Biri Leaves Co. v. Stateof Bihar (supra), C. Bepathumma v. V.S. Kadambolithaya, AssistantExcise Commissioner v. Issac Peter (supra), Bharti Cellular Limited

v. Union of India (supra), Mumbai International Airport Pvt. Ltd. v.Golden Chariot Airport I (supra), Track Innovations India Pvt. Ltd.v. Union Of India (supra), C.J. International Hotels Ltd. v. NDMC;and N.D.M.C. v. Prominent Hotels Ltd. (supra).

16.6. The award is also contrary to the well settled law that theArbitrator is bound by the terms of the contract and cannot go beyondthe terms of the contract as held by the Supreme Court in FoodCorporation of India v. Chandu Construction (supra), State ofRajasthan v. Nav Bharat Construction Co. (supra) and MunicipalCorporationofGreaterBombayv.ThermalEngineeringCorporation, Bombay (supra). However, the learned Arbitrator hasre-written the terms of the contract by discharging the respondentfrom the liability to pay the Royalty (MGA) and directed the parties torenegotiate the terms of the contract.

16.7. The award is against the justice as well as morality.Theobligation of the respondent to pay the Royalty (MGA) is absoluteand the respondent is not entitled to plead impossibility as an excusefor non-payment of the Royalty (MGA).If the payment of theRoyalty (MGA) had become onerous/unviable, the lessee had theoption to determine the lease under clause 26 of the lease deed by 180days’ notice.However, the lessee cannot seek discharge from theliability to pay the Royalty to the petitioner.

16.8. Even assuming that Section 56 of the Indian Contract Actapplies to leases, the lessee has to surrender the lease and pay theRoyalty (MGA) upto the date of handing over of the possession. Therespondent cannot continue in possession and seek discharge from thepayment of Royalty (MGA).Even under Section 108(e) of the

Transfer of Property Act, the lessee upon exercising the option to treatthe lease as void, is bound to surrender the possession and make thepayment of the rent/premium upto the date of the surrender.

16.9. Even assuming that Section 56 of the Contract Act applies toleases, the whole lease would become void and the lessee would beliable to surrender the leased property and clear the liability ofRoyalty (MGA) upto the date of surrender under Section 65 of theContract Act.

16.10.Even assuming, there was recession in the hotel industry in2008, it cannot be said that the recession was permanent and wouldcontinue for the rest of the period of lease. Frustration cannot be usedas device to avoid bad bargain. The contract between parties wasfor period of 30 years and it was but natural and foreseeable by boththe parties that there would be various economic turmoil over periodas long as 30 years.Reference be made to Alanduraiappar KoilChithakkadu v. T.S.A. Hamid (supra).

16.11.The statement of claim instituted by respondent is gross abuseand misuse of process of law. The statement of claim was not evenmaintainable in law and the learned Arbitrator ought to have rejectedthe same at the outset. The respondent’s claim does not have anyfoundation, which would have entitled it to seek any judicial relief.

16.12.The impugned award has resulted in windfall in favour of therespondent, more as premium for their own defaults and breaches.The respondent has enjoyed the subject property without paying theRoyalty (MGA) and the outstanding dues according to the petitioner,have accumulated to the tune of more than Rs.258 crores.

16.13.The Court is of the prima facie view that the respondent has

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made false claim before this Court which amounts to an offenceunder Section 209 of the Indian Penal Code.However, beforeinitiating the action against the respondent, two weeks’ time is grantedto enable the respondent to introspect and file an undertaking to paythe arrears of Royalty (MGA) to the petitioner and not to resort to anyfrivolous proceedings/action in future. In the event of failure of therespondent to file such an undertaking within two weeks, thepetitioner is at liberty to file an application under Section 340 Cr.P.C.

16.14.This case warrants imposition of costs on the respondent interms of the principles laid down in Ramrameshwari Devi v. NirmalaDevi (supra), Maria Margarida Sequeria Fernandes v. Erasmo JackdeSequeria (supra)andMesserHoldingsLtd.v.ShyamMadanmohan Ruia (supra) and Harish Relan v. Kaushal KumariRelan, (supra).

16.15.For the reasons discussed hereinabove, the petition is allowedand the impugned award is set aside with costs of Rs.2,00,000/-(Rupees Two Lakh Only) to be paid by the respondent to thepetitioner within period of two months from today.

JULY 15, 2016Dk/Rsk/Dev

J.R. MIDHA, J.