Manipur High Court Sets Aside ₹10 Crore Lottery Damages Award Favouring State, Cites No Proof Of Loss

The Manipur High Court on 30 May held that compensation under a liquidated damages clause cannot be awarded without evidence of actual loss where such loss is capable of proof, and partly set aside an arbitral award arising from a dispute over delayed commencement of online lottery draws.

A Division Bench comprising Chief Justice M. Sundar and Justice A. Bimol Singh partly allowed MWC Market Services Pvt. Ltd.'s appeal under Section 37 of the Arbitration and Conciliation Act, 1996, setting aside the award of Rs. 10 crore in damages in favour of the State of Manipur while upholding the award of Rs. 19.48 lakh towards additional infrastructure costs. The judges held:

“The award of liquidated damages to the tune of ₹10 crores qua a claim of ₹35 crores without any evidence much less proof by adopting not even a rough and ready approximation approach but fixing it at ₹10 crores without any basis is clearly a patent illegality which goes to the root of the matter.”

The dispute arose from an agreement dated 5 April 2001 under which MWC Market Services Pvt. Ltd. was appointed the exclusive sole selling agent for Manipur State Online Lotteries.

After an earlier round of arbitration culminated in a consent award on 26 July 2002, the parties executed a modified agreement on 20 November 2002. Clause 10.4 of the modified agreement required MWC to commence the first lottery draw within six months, failing which it would be liable to pay Rs. 35 crore as compensation to the State.

MWC did not conduct the first draw until 20 May 2003. Although the State subsequently granted extensions and the first draw was eventually held on 1 December 2003, the State later claimed Rs. 35 crore as compensation for the delay.

By an award dated 30 June 2012, the sole arbitrator partly allowed the State's counterclaim and directed MWC to pay Rs. 10 crore as damages for the delayed commencement of the first draw and Rs. 19,48,111 towards additional infrastructure-related costs. The arbitrator also awarded interest at 12% per annum from the date of the award and rejected the remaining counterclaims.

MWC challenged the award under Section 34 before the District Judge, Imphal East. After the challenge was dismissed on 24 February 2021, it filed the present appeal under Section 37, limiting its challenge to the award of Rs. 10.19 crore. It argued that the arbitrator had arbitrarily fixed damages at Rs. 10 crore despite the State producing no evidence to establish any actual financial loss caused by the delayed commencement of lottery operations.

The State, in response, contended that MWC had admittedly breached the contractual timeline and that the burden lay on the company to show that the delay had not resulted in any loss of revenue.

The High Court found the arbitral tribunal's reasoning unsustainable. It held that even where a contract contains a liquidated damages clause, compensation cannot be awarded without proof of legal injury when the alleged loss is capable of being proved. 

The Bench further noted that online lottery operations fall within the category of res extra commercium and that the State had merely granted a concession for the sale of lottery tickets. Therefore, damages could not be presumed solely because the first draw was delayed. It observed:

“In any event, in the case at hand, it is only a concession given by State for selling online lottery tickets and the primary contract is more in the nature of a concessionaire agreement. There will be a little more allusion about this elsewhere infra in this order. Be that as it may, the State having merely given a concession qua sale of online lotteries which is more in the nature of res extra commercium, in the hope of earning revenue obviously cannot have suffered damages (by any stretch of imagination) owing to first draw being delayed.”

The Bench also reiterated the limited scope of interference under Sections 34 and 37 of the Arbitration Act, observing that a Section 37 proceeding is not an appeal against the arbitral award itself and that judicial scrutiny under these provisions is “not even a revision or a full-fledged review.”

Concluding that the Rs. 10 crore damages award was unsupported by evidence or reasoning, the Court held that it suffered from patent illegality and was contrary to the public policy of India.

Accordingly, the High Court set aside that portion of the award while affirming the award of Rs. 19.48 lakh towards additional infrastructure costs.

Appearances for petitioner (MWC Market Services Pvt. Ltd.): Advocates S. Bhandari, K. Pradeep.

Appearances for respondent (State of Manipur & Ors.): Advocates GN Sahewalla, Debojit Senapati, N. Elizabeth.