Madras High Court Sets Aside Rental Loss In Arbitral Award Against VLCC In Lease Dispute

The Madras High Court has partly allowed an appeal filed by VLCC Health Care Limited, setting aside the rental loss component of an arbitral award while upholding damages and arrears of rent against the company.

The court held that once possession of the premises had been handed over, a claim for rental loss for the subsequent period was unsustainable.

A Division Bench of Justices P. Velmurugan and K. Govindarajan Thilakavadi was dealing with an appeal under Section 37 of the Arbitration and Conciliation Act, 1996, challenging an order of the Principal District Judge, Coimbatore, which had confirmed an arbitral award dated February 21, 2015.

The dispute arose from a registered lease agreement dated August 22, 2008, under which VLCC had taken commercial premises in Coimbatore for a period of nine years. The company occupied the premises till June 2010 and thereafter issued a termination notice on July 1, 2010, handing over possession shortly thereafter and seeking a refund of the balance security deposit.

Following this, the lessors raised claims towards arrears of rent and damages based on an engineer's report. After adjusting the security deposit, they sought recovery of the remaining amounts, which were denied by the company, leading to arbitration.

A Sole Arbitrator appointed by the High Court proceeded ex parte and passed an award granting Rs. 14.84 lakh towards damages, Rs. 1.35 lakh towards arrears of rent, and Rs. 7.2 lakh towards rental loss, along with interest at 18% per annum on Rs. 18.89 lakh from February 1, 2012. The company's challenge under Section 34 of the Act was dismissed by the District Court in 2022.

Before the High Court, VLCC contended that the arbitral proceedings were conducted in violation of principles of natural justice as notices were sent only to its regional office and not its registered office, thereby vitiating the proceedings.

Rejecting the contention, the bench held that the company had received communications and was fully aware of the proceedings.

“The appellant, having admittedly received such communications, was fully aware of the proceedings. The objection regarding service at the Regional Office, in the absence of any demonstrated prejudice, does not vitiate the proceedings. Despite having knowledge, the appellant failed to participate in the Arbitral proceedings, file objections, or adduce evidence,” the Court obserd.

The court further held that a party that chooses to remain absent cannot subsequently seek re-appreciation of evidence in proceedings under Section 34.

“The finding of the learned Principal District Judge, that sufficient opportunity was afforded is therefore justified,” it said.

Reiterating the limited scope of interference under Sections 34 and 37 of the Act, the court emphasised that arbitral awards can be interfered with only on grounds of patent illegality, perversity, or violation of public policy and not by re-evaluating evidence.

The bench also endorsed the principle that an arbitral award comprising distinct and severable components can be set aside in part, without disturbing the remaining valid portions.

On merits, the court upheld the award insofar as it directed VLCC to pay damages and arrears of rent to the lessors, finding no perversity or illegality. However, it set aside the award of Rs.7.2 lakh towards rental loss, noting that possession of the premises had already been handed over and accepted by the lessors.

“In the absence of any finding that possession was withheld, the grant of rental loss for the subsequent period is unsustainable,” the Court held, terming that portion of the award as vitiated by patent illegality.

Accordingly, the appeal was partly allowed, with the award modified to the extent of setting aside the rental loss component, while the remaining findings were affirmed.

For Appellant: Advocates S Kamalakannan and Jayasudha

For Respondents: Senior Advocate AL Gandhimathi and Advocate R Priyadharsini