Supreme Court Refuses To Set Aside “Patently Illegal” Arbitral Award, Modifies Relief Instead

The Supreme Court on Tuesday refused to set aside an arbitral award despite finding it to be patently illegal, choosing instead to modify the award itself to bring finality to a dispute that has been pending since 2012.

A Bench of Justice Sanjay Kumar and Justice K. Vinod Chandran observed that sending the parties back into fresh litigation would cause further hardship and delay.

“Though the award, being patently illegal, deserves to be set aside under Section 34(2A) of the Arbitration Act, we are of the opinion that doing so would not be in the interest of justice, given the fact that the parties have been litigating since the year 2012. Setting aside the award at this stage would mean that they would again have to start afresh..”

The Court instead recalculated the parties' mutual entitlements and directed the owners' side to pay ₹25.62 lakh to the builder's legal heirs.

The dispute arose out of a reconstruction agreement dated April 9, 2010 entered into between late Sudershan Kumar Bhayana and Kiran Bhayana on one side and late Vinod Seth on the other. Bhupesh Bhayana and Kiran Bhayana were before the Court on the owners' side, while Kunal Seth and Sarita Seth were the builder's legal heirs.

Under the agreement, the builder was to reconstruct the owners' old property within 12 months of vacant land being handed over, with a grace period of two months. In return, he was entitled to retain the second floor and was also required to pay ₹64 lakh as earnest money and compensation.

Clause 7 of the agreement provided that delay beyond the stipulated period would attract a penalty of ₹10,000 per day payable by the builder to the owners, while Clause 13 dealt with consequences of breach.

Construction was abandoned in August 2011 after only partial work was completed, leading the owners to terminate the agreement on November 11, 2011.

The disputes were referred to arbitration pursuant to a Delhi High Court order dated September 21, 2012.

By an award dated October 21, 2013, the arbitrator held the builder guilty of breach and awarded the owners ₹72 lakh towards delay compensation. At the same time, the arbitrator directed refund of ₹45 lakh already paid by the builder and awarded him ₹36.92 lakh towards construction costs, resulting in a net direction for the owners to pay ₹9.92 lakh.

The builder challenged the award before the Delhi High Court. A Single Judge reduced the compensation payable to the owners, after which both sides filed appeals.

The Division Bench later denied compensation to the owners altogether, holding that they had failed to separately prove actual loss, prompting Bhupesh Bhayana and Kiran Bhayana to approach the Supreme Court.

The top court disagreed with that reasoning.

“The very fact that the contractual clause itself envisioned payment of penalty on a day-to-day basis for the delayed period indicated that the damage suffered by the owners was implicit therein. The Division Bench was, therefore, in error in holding that the owners would be disentitled to compensation on the ground that they failed to adduce evidence separately, in proof of having suffered damage or loss. This conclusion was opposed to the explicit covenant in the agreement and cannot be accepted. Therefore, non-suiting of the owners' claim on that ground by the Division Bench was manifestly erroneous and cannot be sustained”

However, the Court held that the arbitrator had wrongly calculated the penalty period and that the owners were entitled only to ₹6.30 lakh for 63 days between September 9, 2011 and November 11, 2011.

The Bench further held that the arbitrator wrongly denied the owners the contractual benefit of forfeiture while separately awarding delay compensation, but noted that this issue had attained finality because the owners never challenged that part of the award.

“When the contract itself contemplated that they would be separately recompensed for the delay in construction, on the one hand, and for the breach of the agreement, on the other, under these two clauses, it was not for the Arbitrator to grant them relief only under Clause 7 and deny them the right of forfeiture under the other clause, viz., Clause 13.”

Invoking its powers under Article 142 of the Constitution to do complete justice, the Court modified the award instead of sending the parties into a fresh round of litigation.

For Appellants (Bhupesh Bhayana and Kiran Bhayana): Advocate Sandeep Singh.

For Respondents (Kunal Seth and Sarita Seth): Respondents-in-person [R-1 and R-2].