Recently, the Delhi High Court examined whether a tenant who continued to occupy and commercially use licensed premises after discovering an alleged misrepresentation could later avoid paying the agreed contractual licence fee. The dispute raised an important question concerning the doctrine of affirmance under contract law and the extent to which an arbitral tribunal can alter contractual terms on grounds of alleged misrepresentation. The Court ultimately held that continued occupation and execution of a fresh extension agreement amounted to affirmance of the contract, disentitling the tenant from selectively rejecting its financial obligations while retaining contractual benefits.
Brief Facts:
The controversy arose from a long-standing Leave and Licence arrangement relating to commercial premises in New Delhi. Although the agreement was renewed on multiple occasions and the licensee continued to occupy and use the property for business purposes, disputes later emerged regarding the legality of the property's permitted use and the licence fee payable under the contract. After several years of occupation, the licensee alleged that the licensor had misrepresented that the premises could legally be used for commercial or office purposes. Relying on this allegation, the licensee stopped paying the agreed licence fee. However, despite raising concerns regarding the property's permissible use, the licensee neither rescinded the contract nor surrendered possession of the premises. Instead, it entered into an Addendum extending the arrangement and continued operating its business from the property.
Following non-payment of the licence fee, the licensor terminated the agreement and initiated arbitration proceedings. The Arbitral Tribunal accepted the plea of misrepresentation and substituted the agreed contractual licence fee with lower industrial benchmark rates. Aggrieved by the award, both parties approached the Court under Section 34 of the Arbitration and Conciliation Act, 1996.
The Contentions of the Appellant:
The licensee contended that the licensor had misrepresented the legal status of the premises by representing that it could be used for office purposes when such use was allegedly impermissible under applicable regulations. The Counsel argued that the Arbitral Tribunal had correctly assessed the consequences of the misrepresentation and was justified in reducing the licence fee to industrial-use rates. The Appellant further submitted that the Single Judge exceeded the permissible limits of judicial review under Section 34 of the Arbitration and Conciliation Act, 1996, by effectively substituting the Tribunal's findings with an independent assessment of the dispute. The Appellant also maintained that the alleged misrepresentation existed from the inception of the agreement and that subsequent developments relating to the property's conversion could not erase the original misrepresentation.
The Contentions of the Respondent:
The licensor argued that the Tribunal's award suffered from patent illegality and perversity as it rewrote the commercial bargain between the parties without any contractual basis. The Counsel submitted that the licensee, despite claiming misrepresentation, continued occupying the premises, renewed the contractual arrangement through an Addendum, and enjoyed uninterrupted commercial use of the property. Therefore, the licensee could not retain the benefits of the agreement while simultaneously seeking to avoid its financial obligations. The Respondent further contended that the Tribunal had failed to identify any actual pecuniary loss suffered by the licensee and had arbitrarily substituted the agreed licence fee with an industrial benchmark rate unsupported by the contract.
Observation of the Court:
The Division Bench of Justice Anil Kshetarpal and Justice Amit Mahajan observed, “once a contracting party, after discovering the alleged misrepresentation, elects to continue under the contract and even enters into a further arrangement (the Addendum) on the same footing, its conduct is consistent with affirmance of the contract rather than rescission.”
"A party cannot approbate and reprobate, continuing in possession and commercially exploiting the premises while simultaneously seeking to rework the agreed licence fee by invoking misrepresentation", added the Bench.
The Bench held, “the Respondent could not approbate and reprobate, continuing in possession and commercially exploiting the premises while simultaneously seeking to rework the agreed licence fee by invoking misrepresentation.”
The Court observed, “the Arbitral Tribunal neither identified any contractual clause authorising the re-pricing nor properly worked out damages linking the alleged misrepresentation to a quantified pecuniary loss; rather, the AT merely substituted the agreed rate of licence fee with a notional industrial benchmark drawn from an unrelated lease.”
The Bench noted, “such an exercise runs afoul of the statutory scheme of Section 19 of the Act of 1872, which does not contemplate selective avoidance or partial rescission confined to economic obligations while affirming the remainder of the contract.”
The Court held, “the AT’s substitution of the agreed licence fee with an industrial rate, in the absence of proof of actual loss and in disregard of the parties’ subsequent conduct, was ex facie contrary to Section 19 of the Act of 1872, Section 28(3) of the Act of 1996, and the contractual stipulations, rendering the award perverse.”
The decision of the Court:
In light of the foregoing discussion, the Court held that the licensee's continued occupation of the premises and execution of the Addendum after becoming aware of the alleged misrepresentation constituted affirmance of the contract, thereby excluding any right to selectively avoid payment obligations. The Court upheld the Single Judge's decision restoring the contractual licence fee and concluded that the Arbitral Tribunal's re-pricing mechanism was patently illegal and perverse. Accordingly, the appeals were dismissed.
Case Title: Goyal MG Gases Pvt Ltd Vs. Classic Motors Pvt Ltd
Case No.: FAO(OS)(COMM) 172/2020
Coram: Hon'ble Mr. Justice Anil Kshetarpal, Hon'ble Mr. Justice Amit Mahajan
Advocate for the Petitioner: Adv. Simran Mehta, Adv. Prakash Chand, Adv. Archit Vashistha
Advocate for the Respondent: Adv. Rahul Saxena, Adv. Padamja Sharma
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