M/S Jyoti Ltd. vs E.I.H. Limited
2009 Latest Caselaw 1284 Del

     *IN THE HIGH COURT OF DELHI AT NEW DELHI

+                  CS(OS)579A/2002

%                                   Date of decision: 9th April, 2009

M/S JYOTI LTD.                                                 .......Plaintiff
                            Through:      Ms Vibha Datta Makhija with Mr
                                         Philemon Nongbri, Advocates

                                    Versus

E.I.H. LIMITED                                              ....... Defendant
                            Through: Mr H.L. Tikku, Sr Advocate with Ms
                            Yashmeet Kaur, Advocate.


CORAM :-
HON'BLE MR. JUSTICE RAJIV SAHAI ENDLAW

1.    Whether reporters of Local papers may
      be allowed to see the judgment?       Yes

2.    To be referred to the reporter or not?                   Yes

3.    Whether the judgment should be reported
      in the Digest?                                                    Yes


RAJIV SAHAI ENDLAW, J.

1. Objections by the defendant under the Arbitration Act, 1940 to

the arbitral award dated 6th November, 2001 and as corrected on

24th December, 2001 are for consideration. The arbitrator was

appointed vide common order dated 28th February, 1996 in suit

No.622A/1995 filed by the plaintiff and suit No.1808A/1995 filed by

the defendant, both for appointment of arbitrator. On demise of the

appointed arbitrator, vide order dated 30th July, 1998 in

OMP.No.160/98 the arbitrator who rendered the award was

appointed as the sole arbitrator to continue with the proceedings.

2. Disputes arose between the parties out of an agreement titled

Hotel Operation Agreement dated 8th August, 1980 between the

parties. Under the said agreement, the plaintiff being entitled to

land, building and super-structure collectively known as Gulab

Bhawan and later christened as Oberoi Palace Hotel at Srinagar,

allowed the defendant to operate the said hotel. The said agreement

was for a term of 20 years. The agreement was terminated by the

parties by mutual consent on 18th June, 1993. Even prior to the

Hotel Operation Agreement dated 8th August 1980, the property had

been let out to by owners thereof and who now control the shares of

the plaintiff to Rai Bahadur M.S. Oberoi since the year 1954 and the

hotel was being run therein. However, the lease was terminated

w.e.f. 1st December, 1975 and thereafter a Hotel Operation

Agreement dated 24th November, 1975 was entered into between the

parties hereto. That was followed by the agreement dated 8th

August, 1980 aforesaid.

3. The plaintiff made the following claims against the defendant

before the arbitrator:

i. of minimum guarantee of Rs 20 lacs per year under the

agreement, for the years 1990-1991, 1991-1992 and 1992-

1993.

ii. for declaration that the agreement stood terminated on

18th June, 1993 and the defendant was liable to meet all

gross operating expenses of the hotel and liable for losses

to the tune of Rs 30,28,218/- suffered during the said three

years.

iii. for declaration that the liability for wages and fees of the

employees of the hotel for the said period, to the tune of Rs

47,82,220/- was of the defendant.

iv. for declaration that the defendant is liable to pay the gross

operating expenses of electricity charges, outstanding

payments to Telecommunication Department, bills of P&T

Department, milk vendors' claims and amounts of sundry

creditors for the said three years.

v. for recovery of amounts needed for carrying out repairs to

the building occasioned due to negligence of the defendant

in maintaining the building during the said years. A sum of

Rs 1,13,78,000/- was claimed on this account.

4. The defendant besides resisting the aforesaid claims also made

a counter claim for total Rs 94,68,389 comprising of (i) Rs

47,31,208/- as the amount payable towards supplies and services

rendered by the defendant to the hotel business; (ii) Rs 35,65,461/-

as insurance premium paid by the defendant on behalf of the plaintiff

and treated as loan; (iii) Rs 11,71,720/-owed by the plaintiff to the

defendant on various counts.

5. It was, inter alia, the case of the defendant before the

arbitrator that the business of the Hotel was in fact of the plaintiff

and the defendant was merely the operator, analogous to a Manager

and for the remuneration of 10% of the gross operating profits - the

defendant was thus not at all responsible for hotel operation

expenses as claimed by the plaintiff. It was further the case of the

defendant before the Arbitrator that due to insurgency conditions

prevailing in the State, the agreement between the parties stood

frustrated in May 1990 itself and in any case due to presence of

force majeure conditions, the obligations under the agreement stood

suspended. It was further the case of the defendant that the

minimum guarantee amount was payable out of the gross profit of

the hotel and if there was no profit there could be no question of

payment of minimum guarantee.

6. The award allows only the claim of the plaintiff of minimum

guarantee of Rs 60 lacs. All the other claims of the plaintiff have

been disallowed by the arbitrator. The arbitrator also found that

there was no contest by the plaintiff to the claim of the defendant of

Rs 94,68,389/- against the plaintiff. The award thus after adjusting

Rs 60 lacs held to be due from the defendant to the plaintiff from the

total sum of Rs 94,68,389/- admittedly due from the plaintiff to the

defendant, directed the plaintiff to pay the balance of Rs 34,68,389/-

to the defendant together with interest at 18% per annum from the

date of the award till the award was made rule of the court.

7. The plaintiff has not preferred any objection to the award. The

defendant has preferred objections limited to the finding of the sum

of Rs 60 lacs being due from the defendant to the plaintiff. It is thus

the case of the defendant that if the said part of the award of the

sum of Rs 60 lacs being due from the defendant to the plaintiff is set

aside, the defendant shall be entitled to recover the said amount also

from the plaintiff. The sum of Rs 34,68,389/- awarded by the

arbitrator to the defendant against the plaintiff has already been

paid by the plaintiff.

8. Before dealing with the objections of the defendant, two

preliminary objections of the plaintiff are considered. The counsel

for the plaintiff firstly contended that the objections were barred by

time. It was stated that the notice of filing of the award was served

on the defendants on 23rd May, 2003 and the limitation for filing the

objections expired on 24th June, 2003, while the objections had been

filed on 5th July, 2003. However, it was found that the objections had

been preferred on the first reopening day after the intervening

summer vacation and during which the limitation was suspended for

the purposes of institution. The said preliminary objection of the

plaintiff is thus meritless.

9. The second preliminary objection of the counsel for the

plaintiff is that the defendant after having received payment from

the plaintiff of the sum of Rs 34,68,389/- as well as the amount found

due under the other arbitration before the same arbitrator between

the same parties, was not entitled to prefer the objections. It was

contended that such conduct of the defendant amounted to

acceptance of the awards and if the objections are entertained it will

lead to injustice to the plaintiff. I, however, do not find any merit in

the said submission also of the counsel for the plaintiff. Nothing has

been shown that the amount was paid or received in full and final

settlement and/or in waiver of the right of defendant to prefer

objection to the part of award against it or as to how the plaintiff has

suffered any injury by such payment. As noticed in the award itself

and to which no objection has been filed by the plaintiff, the plaintiff

had not contested the counter claim of the defendant. The amount of

the counter claim was thus in any case payable by the plaintiff to the

defendant and payment thereof would not debar or estop the

defendant from challenging that part of the award which is against

the defendant. The inference of waiver statutory right of preferring

objections to the award cannot be drawn so lightly.

10. That brings me to the core issue in the present matter. Since

some time has elapsed since the parties were heard, it is deemed

expedient to list out in detail the submissions of the senior counsel

for the defendant.

i. The challenge is only to issues No. 2 and 5 in the list of

issues in para 4 of the award and relatable to whether the defendant

was liable under the clause in the agreement of minimum guarantee.

ii. The parties to the contract are the plaintiff and the

defendant only and none else. This was highlighted because Article

XI titled "Minimum Guarantee" of the Agreement is as under:

"Oberoi guarantees a payment of Rs 20 lacs per year as owner's share of profit. Operator will pay to the owner a minimum amount of Rs 15 lacs every year. Operator will make up the difference between Rs 15 lacs and Rs 20 lacs per year on or before the expiry of every three years period. This clause shall constitute an essential element of the agreement and shall remain in force for the term of the agreement except that the last period shall be of two years. For the first financial year pro rata payment will be made".

It was contended that the use of the word "Oberoi" can refer

only to the defendant and not to Shri M.S. Oberoi. The definition of

gross operating profits in Article 1(xi) was referred, to contend that

it was the difference between the income and the gross operating

expenses. It was contended that the minimum guarantee clause

referred to the same being the "owner's share of profit" and thus the

question of payment of minimum guarantee arose only when profits

were earned, even if of much less than the guaranteed amount and

could not arise when no profits were earned or when the venture

was in losses.

iii. Attention was invited to Article XXIV and XXVII of the Article

to buttress the aspect of frustration and force majeure. It was

contended that there could be no agreement for minimum guarantee

if the contract stood frustrated or a force majeure circumstances

intervened.

(iv) Attention was invited to the affidavit of Mr V. Srinivas Raju

Company Secretary of the plaintiff filed before the arbitrator and

containing in paragraph 16 thereof the computation of payments

made by the defendant to the plaintiff towards minimum guarantee

during the year 1982-1990 and it was contended that the same

showed that minimum guarantee amount was paid only when the

hotel earned profits. It was urged that there could be no payment of

the minimum guarantee amount during the years 1990-1993 when

the hotel did not earn any profit and was, in fact, incurring losses.

(v) Letters dated 24th August, 1981, 20th May, 1982, 5th April,

1990, 5th May, 1990, 25th March, 1991, 16th April, 1991 and 27th

August, 1991 from arbitrators record were shown to contend that

the payments were by way of loan and/or disbursement. Attention

was invited to letter dated 5th April, 1993 of Dr Karan Singh to Mr

P.R.S. Oberoi to contend that the same though in favour of the

defendant had been construed by the arbitrator as against the

defendant.

(vi) The evidence of the witnesses appearing before the arbitrator

was read to contend that (a) the liability of the defendant for

minimum guarantee was understood by the parties to accrue only if

there was a shortfall in profit and not if there was no profit. (b) it

stood proved that circumstances justifying frustration of the

agreement and/or existence of force majeure conditions existed and

owing to which the defendant could not be held liable for the

minimum guaranteed amount for the last three years. The balance

sheet of the plaintiff and certain other letters/documents were also

referred to in this regard. It was urged that the termination of the

agreement with mutual consent in August, 1993 was of no

consequence because the agreement already stood frustrated in

1990.

(vii) Strong emphasis/reliance was placed on para 80 of the award

where the arbitrator has held that "due to force majeure conditions

the respondent perhaps could not be made liable for not operating

the hotel for the period 1990 - 1993..... and it was contended that

the award for liability of the defendant of minimum guaranteed

amount inspite of the arbitrator finding the existence of force

majeure conditions was inconsistent and thus suffered from error on

its face and to that extent was liable to be set aside.

(viii) It was contended that the arbitrator has wrongly interpreted

the clauses of the contract. It was contended that though the

interpretation of contract by arbitrator could not be interfered with if

two views/interpretations were possible but if the interpretation

adopted by the arbitrator was not possible at all, such interpretation

of contract by the arbitrator was liable to be interfered with by the

court.

(ix) Fault amounting to error on the face was found with the

finding of the arbitrator that there was no impossibility in the

defendant paying the minimum guarantee amount to the plaintiff in

spite of existence of conditions of force majeure.

(x) It was further contended that the payments at the rate of Rs

1,20,000/- per month being made by the defendant to the plaintiff

between the years 1990-1993 were not adjusted in minimum

guarantee account by the plaintiff also and were treated by the

plaintiff also as loan.

11. Per contra, the counsel for the plaintiff has urged that (i) none

of the contentions of the defendant amounted to ground on which

award could be interfered with; (ii) misapplication of law by the

arbitrator does not entitle the court to interfere with the award; (iii)

the argument of the defendant of frustration of the agreement was

misconceived inasmuch as, had the contract stood frustrated, the

plaintiff in terms of the agreement would not have been liable for

insurance etc which the defendant continued to incur, claiming to be

on behalf of the plaintiff and for recovery of which amounts the

counter claim had been made by the defendant; (iv) force majeure

covered a case of total impossibility and not of onerous performance;

(v) the arbitrator had collectively looked at the claims and the

counter claims and had reached a decision which did not call for any

interference; (vi) the defendant had held on to the agreement even

after 1990 and did not want to terminate the agreement and in these

circumstances no fault could be found with the award holding the

defendant liable for the minimum guarantee amount under the

agreement; (vii) if the contract stood frustrated, there could be no

question of counter claim of the defendant against the plaintiff for

amounts as per the agreement due from the plaintiff to the

defendant.

12. Before considering the aforesaid contentions, it is appropriate

to cull out the findings in the award with respect thereto.

A. On the "Minimum Guarantee" clause it is held:

"Important terms of the contract in question clearly show that

the respondent, EIH, virtually was to be in full and complete control

of the hotel and there was to be no interference by the claimant in

operation of the hotel...... Earlier a clear agreement was in operation

which entitled the owner to draw specific monthly rental. The owner

spent a lot of money to add more infrastructure to the hotel.............

and wanted a safe return for all his investments besides hoping to

earn substantial income from the operations of the hotel business.

The owner wanted to avoid any financial liabilities coming to it in any

manner......... It is true that the contract provided only 10% income

to the respondent out of profits of the business. The gross operating

profits were to be arrived at by deducting gross operating expenses

from gross operating income being earned from the operation of the

hotel. 90% of the said profits were to go to the share of the claimant

but minimum of Rs 20 lacs per year had to be paid by the respondent

and that was termed as owner's profit. It is not the hotel which had

given this assurance of minimum guarantee but "Oberoi" had given

this guarantee. There is not a whisper in the terms of the agreement

that minimum guarantee was not payable in case there was to be

zero profit or even loss in the hotel business at any time. There was

not even a hint in the whole of the agreement that the losses in the

hotel business were to be responsibility of the claimant. .................

In order to test the rationality of this contention an extensive

example is visualized where the gross profit in any particular year is

only one rupee still as per minimum guarantee clause the respondent

(Oberoi) were bound to skull out from its pockets the minimum

guarantee amount. If liabilities of running the hotel business were to

be considered payable by the claimant then the rationality of having

minimum guarantee amount payable to the claimant by the

respondent becomes illusionary. That could not be the intention of

the parties. It is not acceptable that the minimum guarantee amount

was only payable out of the gross operating profits of the hotel. The

minimum guarantee clause does not say so. The words "owner's

profit" do not mean the gross operational profits of the hotel

business. In case losses to be suffered by the hotel were to be the

liability of the claimant then there could be no minimum guarantee

clauses promising payment of Rs 20 lacs per year to the claimant.

......... The minimum guarantee clause is not linked to any condition

or conditions...... if that were to be so the clause could have been

worded in different words indicating that minimum guarantee was

payable only from gross operating profits and not otherwise. The

clause does not say so....... In case the claimant was only entitled to

share of gross operating profits then there was no need to have

minimum guarantee clause at all. The sharing of such profits stood

already provided in the contract. The minimum guarantee clause

has no connection at all with gross operating profits defined in the

contract. The respondent may be having high expectations from the

hotel and thus in its business was agreed to give minimum guarantee

of payment of Rs 20 lacs guarantee of payment per year to the

claimant as its profit whatever may be the financial gains or losses

were to occur in running and operating the hotel business by the

respondent......... There cannot be any other interpretation of the

terms of the agreement."

B. On "Frustration" and "Force Majeure" it is held:

"The agreement was to remain in force for 20 years w.e.f. Ist

January, 1980. The facts as proved on record show that till 3rd May,

1993 the respondent never took the stand that the contract stood

terminated since May, 1990 due to frustration. It is a fact that the

operations of the hotels virtually came to a standstill from May,

1990. The correspondence exchanged between the parties in

between May 1990 to April, 1993 does not depict any intention of the

parties for treating the contract as terminated. Perhaps the parties

expected the conditions to improve which would revive the operation

of the hotel............. The respondent did not leave the hotel. It

continued to be in charge of the hotel................... In case the

respondent thought that the contract stood terminated due to

frustration, the respondent did not communicate this perception to

the claimant before May, 1993. Rather the respondent continued to

manage the hotel and continued to remain in possession of the hotel.

The respondent did not ask the claimant to take over the hotel at any

time in between 1990 to 1993.

The contract in question was for a long period of 20 years and

only half the period had been covered till 1990 so it is not possible to

hold that due to insurgency taking place from 1990 the contract

stood frustrated. The parties also never thought so till April, 1993.

They agreed to mutually terminate the contract.

It is not correct on the part of the claimant that none of the

conditions mentioned in Force Majeure clause existed in Srinagar

during relevant period. ........ Force Majeure clause does not bring

about the termination of agreement as in the case with frustration

clause. Only liability of the party for non performing particular

terms or condition of the contract stands obliterated and nothing

more. ................. It is further that the obligation to pay a minimum

guarantee amount is not such a term or condition which could not

have been performed due to existence of any of the events

mentioned in force majeure clause. It is thus evident that due to

force majeure conditions the respondent could not perhaps be made

liable for not operating the hotel for the period 1990 to 1993 but

such force majeure condition neither prohibited nor prevented the

respondent from its absolute obligation to pay minimum guarantee

amount. This minimum guarantee amount per year was payable

during the subsistence of the agreement and debars (dehors ?) the

actual operation of the hotel and the results thereof. In Force

Majeure and Frustration of contract a book edited by Evan

Meckendrisk at page 157, it is observed that Force Majeure is the

concept whereby the law recognizes that a contracting party may

without on its part provide an excuse for non performance when

circumstances beyond control render performance impossible. It is

further emphasized that the purpose of including such clause in a

contract is to seek to limit one's exposure to damages for non

performance. .... The respondent's obligation to pay minimum

guarantee amount has not become impossible of performance due to

the hotel becoming non- operable due to force majeure

conditions................... In case the claimant was to claim any

damages from the respondent on its failure to operate or run the

hotel, the respondent could be justified to resist such claim on the

ground of being prevented from performing its obligation to operate

and run the hotel due to presence of force majeure conditions.

However, the respondent's obligation to pay minimum guarantee

has not become impossible to perform as this amount was payable

despite the hotel not earning any income or profit. Thus, it is held

that the respondent's liability to pay minimum guarantee amount for

the year 1990-1993 totaling Rs 60 lacs has not become extinct due to

force majeure condition and the force majeure clause is not

applicable to its liability."

13. The contentions of the senior counsel for the defendant can

now be dealt under two heads; Firstly, the interpretation of minimum

guarantee clause and secondly Frustration and Force Majeure.

14. The interpretation by the arbitrator of the minimum guarantee

clause in the agreement between the parties is not found to be such

which could not have been reached by any person. The senior

counsel for the defendant also agreed that if two views were

possible, the interpretation adopted by the arbitrator could not be

interfered with. In the present case, the defendant had been running

and managing the hotel since 1954; till 1975 on payment of fixed

rent for the premises to the plaintiff and with effect from 1975 also

on payment of fixed amount annually, which, though under the hotel

operation agreement was termed by the parties as minimum

guaranteed profits rather than as rent.

15. I had, during the hearing, also put to the senior counsel for the

defendant that it appears that such change in nomenclature of the

fixed amount being paid to the plaintiff in lieu of the premises where

the hotel was being run/operated belonging to the plaintiff appeared

to be guided by reasons of tax planning/management; Otherwise

there does not appear to be any difference in the transaction

between the parties. The control and management of the hotel

vested in the defendant under the lease deed as well as under the

hotel operation agreement, though under the latter agreement the

possession was deemed to be with the plaintiff. The plaintiff

however had nothing to do whatsoever with the running and

management of the hotel, even under the Hotel Operation

Agreement, as under the Lease Deed. Even if this court in exercise

of power under Sections 30 and 33 of the Arbitration Act, 1940, was

entitled to interfere with a possible interpretation of agreement, on

an interpretation of Article XI read with remaining agreement, I am

not able to find any fault with the interpretation placed by the

arbitrator thereon. The said clause contains an obligation on the

defendant to pay to the owner the minimum amount without

reference to profits or losses. The first sentence of the clause only

gives the colour of the head under which the said minimum amounts

to be paid by the defendant to plaintiff were to be held i.e., as the

profit and not as rent. The payment had to be described by some

name. Since the parties had switched from lease deed to Hotel

Operation Agreement, whereunder the earning of the plaintiff were

to be its profits from hotel business being carried in the property and

not rent as earlier described in lease deed, the expression "owner's

share of profit" finds mention in Article XI of the Agreement.

However, immediately thereafter, the obligation is undertaken by the

defendant "to pay to owner minimum amount". The clause is

described as "constituting an essential element of the Agreement"

and to remain in force for the entire term of the agreement. Inkling

of the mandatory nature of payment is also apparent from the clause

providing for payment of minimum Rs 15 lakhs each year and for

difference between Rs 15 lakhs and Rs 20 lakhs being made up

before the expiry of every three years.

16. The Apex Court in State of Gujrat Vs Dharangdhra

Chemical Works Ltd 1985 (Supp) SCC 1 in relation to a minimum

guarantee clause in contract in that case held that it had been

deliberately inserted with the object and purpose of ensuring that

even in respect of lean years when the production fell short, the

minimum guaranteed amount had to be paid. It was held to be a

special provision in the contract. It was further held that any other

interpretation, as taken by the High court whose judgment was in

appeal, would result in completely rendering the clause of minimum

guarantee otiose and such interpretation could not be made.

17. The provision for minimum charges are often found in

electricity supply contracts. The Division Bench of Punjab High

Court in M/s Watkins Mayor & Co. Vs Jullundur Electric Supply

Co Ltd AIR 1955 Punjab 133 held that a minimum charge is not

really a charge which has for its basis the consumption of electrical

energy; it is based on the principle that the supplier incurs a certain

amount of capital expenditure in plant and machinery on which he is

to have a reasonable return; he gets a return when energy is

consumed by a consumer and when no such energy is consumed by

consumer, he is allowed minimum charges which are really a return

on his capital outlay for a particular consumer.

18. The Division Bench of this court also in Gulab Rai Vs MCD

ILR (1991) Delhi 97 also took the same view.

19. A reading of Article IV of the agreement shows that the entire

operation of the hotel including letting of shops therein was with the

defendant. Under Article V of the authorized representative of the

plaintiff was permitted access to the hotel and right to enter only for

the purposes of inspection and with as little dislocation to operations

of hotel as possible. The actual arrangement between the parties

can be gathered from the stand of the defendant in its reply cum

counter claim before the arbitrator to the effect that inspite of force

majeure and frustration of contract in 1990, the plaintiff did not

come forward even to secure the property and abandoned the

property and to protect its interest and for this reason, the defendant

as a prudent person had no choice but to continue in the property. It

shows that the entire responsibility of earning profits from the hotel

was of the defendant only and though the agreement was that the

gross profits shall be shared between plaintiff and defendant in the

ratio of 90:10, the defendant in lieu of the property provided by the

plaintiff and other expenses thereon under the agreement to be

incurred by the plaintiff and irrespective of whether the defendant

brought earnings to the hotel or not had assured a minimum return

of Rs 20 lacs per annum to the plaintiff on its investment in

infrastructure and upkeep. This was to be irrespective of whether

the operations of the hotel entrusted to the defendant resulted in

profits or not. If the operations resulted in profits, and share of

plaintiff therein was in excess of Rs 20 lakhs, the plaintiff was to get

the excess.

20. I find the controversy around use of "Oberoi" in Article XI to be

of no avail. The earlier agreements it appear were with Mr M.S.

Oberoi personally. The bank accounts of the hotel, under the

agreement were to be operated by the defendant. Similarly the

books of account were also to be maintained by the defendant. The

use of "Oberoi" in the clause shows that the defendant was to make

good the payment mentioned therein to the plaintiff, and the same

was not dependent on monies in the accounts/books of the hotel.

21. There is thus no error on the face of the award in this respect.

22. That brings me to the second challenge i.e., qua

Frustration/Force Majeure. The argument of senior counsel for the

defendant is that the award for minimum guarantee payment in spite

of finding existence of force majeure conditions is erroneous; if force

majeure had intervened, all obligations under the contract including

of payment of minimum guaranteed amounts would be

suspended/discharged.

23. Both Force Majeure and Frustration dealt under separate

heads in the award are facets of section 56 of the Indian Contract

Act, 1872. The arbitrator, under Frustration, has found that the

parties did not treat the contract to have been frustrated and on the

contrary treated the same as subsisting. The same

facts/circumstances/conditions were pleaded for the plea of

Frustration as well as Force Majeure. As noticed above, the plea of

the defendant was that though the agreement stood terminated in

May 1990 but since the plaintiff had abandoned the hotel and did not

come forward to take control/charge of the hotel, the defendant as a

prudent person continued to do so - not under the agreement.

24. The senior counsel for the defendant urged that under Article

XXIV of the agreement, relating to termination, there is no

requirement to give notice; the same is the position in Article XXVII

relating to Force Majeure. It was argued that upon finding the

conditions for termination under Article XXIV (1) (ii) existing,

irrespective of whether the defendant had informed the plaintiff so

or not, the agreement stood terminated and the liability for payment

of minimum guarantee amount came to an end.

25. The award finds that ten years of agreement were remaining in

1990. The contemporaneous correspondence shows that the

defendant was denying liability to pay minimum guarantee amount

for the reason of same being due only when there were profits and

not for the reason of agreement having been frustrated. That reason

has been found incorrect, hereinabove. The defendant in pleadings

before arbitrator set up case of agreement having come to an end

under Article XXIV thereof i.e., Frustration. If that were to be so, the

coming into operation of Article XXVII i.e., Force Majeure would not

arise.

26. Articles XXIV, XXV and XXVII appear to be overlapping each

other and are set out below:

"XXIV. THIS AGREEMENT SHALL STAND TERMINATED:

(i) In the event either party hereto shall suspend or discontinue business or shall be adjudicated a bankrupt or insolvent or shall make an assignment for benefit of creditors or a composition with creditors, or shall file a voluntary petition or an answer admitting the jurisdiction of the court, and the material allegation of an insolvency petition or shall consent to an involuntary petition pursuant to any bankruptcy, reorganization or insolvency law of any jurisdiction or country, or an order shall be entered and continue in effect for sixty days pursuant to any such law approving an involuntary position seeking reorganization or to effect an arrangement or plan for, or appointing any receiver or trustee of or for either party, or for all or any substantial portion of the property of either party, or either party shall apply for or consent for the appointment of such receiver or trustee.

(ii) If the Hotel or any part thereof at any time during the term of this agreement becomes inoperable as Hotel by reason of compulsory acquisition, expropriation, condemnation or other act of any competent authority, or from any cause beyond the reasonable control of the Owner or the Operator or by act of God (subject,

however, to the rights of Operator to claim compensation from the appropriate authority).

(2) The Owner retains the right to require the Operator by written notice to remedy within sixty days any non- performance and/or nonobservance of the conditions of this agreement and/or nonpayment of any amount lawfully due to Owner under this agreement. Unless the matters so complained of are adjusted within the period specified above, the Owner may give a further written notice to the Operator of its intention to terminate this agreement upon a date to be specified in such notice which date shall not be less than sixty days from the date of such further notice. In the event, such further notice is given and he matters complained of are still not complied with, this agreement shall terminate on the date specified in such further notice unless within thirty days from the date of receipt of such further notice either party hereto shall have requested arbitration as provided for in this agreement, in which event this agreement shall remain in force and effect pending the decision in such arbitration proceedings.

XXV. DESTRUCTION OR SUSPENSION OF OPERATION OF HOTEL

In case the Hotel shall be destroyed or damaged to an extent which shall materially interfere with the operation of the Hotel, Owner shall undertake within ninety days after the commencement of such interference to begin repairs, rebuilding or replacing, within a reasonable period of time, so that after such repairs, rebuilding or replacing the Hotel shall be substantially the same. If the Hotel becomes totally inoperable and it is not viable for the Owner to rebuild it, either party shall have the right, without limiting any other rights which either party may have hereunder, to terminate this agreement by notice in writing to the other party. However, it will not be open to the Owner to rebuild the hotel and to manage it either itself or to handover the operations to any third party during the original term of this agreement and the Operator shall have the right to operate the said hotel in terms and conditions contained herein in the event the hotel has been rebuilt, repaired or restored for satisfactory running as a hotel for the remainder of the term.

XXVII. FORCE MAJEURE

This agreement shall not in any way be affected nor shall any party hereto be held liable for any failure or delay in the performance of any undertaking, term or condition herein, if such failure or delay is due to any cause or causes beyond its control, including but not limited to fire, flood, damage by the elements, perils of the sea or air accident, act of God, strike, lock out or other labour disorder, act of foreign or domestic de jure or de facto government, whether by law, order, legislation, decree, rule, regulation or otherwise,

revolution, civil disturbance, breach of the peace, declared or undeclared war, act of interference or action by civil or military authorities or due to any other cause beyond the control of Owner or Operator."

27. The settled principle of interpretation of contracts is that first

an attempt should be made to give effect to each and every clause of

the contract and only if that is not possible, the clause appearing

first prevails over that appearing latter.

28. Clause XXIV (1) (ii) deals with cases where the hotel is

inoperable for reasons mentioned therein. Clause XXV also deals

with hotel becoming inoperable for reason of destruction of property

and requiring any rebuilding work. Clause XXVII deals with failure

of a party to the agreement to perform its obligations for reasons

mentioned therein. To harmoniously construe these clauses it has to

be necessarily held that what is expressly covered in one is not

within the ambit of the other. Thus, Clause XXVII would apply

only where inspite of circumstances mentioned therein, the

agreement is not terminated under clause XXIV.

29. The obligation of the plaintiff under the agreement was only to

make its property/business of hotel being run therein available to the

defendant for operation and to provide initial inventories and capital,

insure the hotel and to carryout structural repairs. The obligation of

the defendant was to operate the hotel and gross profits of which

business where to be shared to the extent of 90% by the plaintiff,

subject to payment of minimum of Rs 20 lakhs per annum by the

defendant to the plaintiff.

30. The arbitrator found the defendant to have between 1990-1993

not taken a stand that the agreement stood terminated under Article

XXIV. That finding of arbitrator bring factual cannot be interfered

with. Even otherwise I find the defendant to have in letter dated 12 th

August, 1991 denied liability for minimum guarantee amount for the

reason of there being no profits and not for the reason of agreement

having been terminated. However, before the arbitrator stand was

taken that agreement stood terminated under Clause XXIV. If the

insurgency conditions fell within XXIV, then naturally XXVII would

not apply. I do not find any error in the finding of arbitrator in this

regard also. I do not agree with the contention of the senior counsel

for defendant that no notice was required to be given. Undoubtedly

the agreement does not provide giving of a notice. But where the

circumstances were such that the defendant could have either

immediately treated the contract as terminated or in expectancy of

improvement, treat the agreement as subsisting, notice was essential

specially when control/charge of hotel admittedly remained with the

defendant. Here the contract on inception was not to do an

impossible act to make it void ab initio. According to the defendant,

the act of operation of hotel became impossible after ten years of

inception of contract. Ten years of contract were still remaining. If

according to the defendant the contract had become void, it ought to

have given a notice under Section 66 of the Contract Act. In SBI Vs

Earnest Traders 67 (1997) DLT 218 relied upon by the senior

counsel for the defendant, there was a banning order dissolving the

contract and in that context it was held there was no need for

termination notice in case of Frustration. There was no such order

in this case and thus notice was essential.

31. The defendant having not succeeded on Article XXIV wants to

fall on Article XXVII. But as aforesaid they are mutually exclusive.

The defendant cannot blow hot and cold i.e., on the one hand say

that the agreement stood terminated and on the other hand say that

it was saved and only performance of obligation dispensed.

32. Be that as it may it having been found that minimum

guaranteed amount was payable irrespective of profits and for the

reason of the plaintiff having made available its property and

business to defendant and which the plaintiff was not prevented even

by events pleaded, from doing, as long as the defendant held the said

property and business and as it admittedly did till 1993, the

defendant remained bound to pay the said amount. No error is

found with this part of award also.

33. Though I have reached the same conclusion as the arbitrator. I

must notice State of UP Vs Allied Constructions (2003) 7 SCC

396, Sudershan Trading Co. Vs Govt of Kerala (1989) 1 SCR 665,

Union of India VS A.L. Rallia Ram AIR 1963 SC 1685, Firm

Madan Lal Roshan Lal Mahajan Vs Hukamchand Mills Ltd and

Champsey Bhara & Co. Vs The Jivrag Ballo Spinning &

Weaving Co Ltd XXVIII CWN 397 (PC) cited by counsel for the

plaintiff, all on the proposition that on interpretation of contract, on

findings on plea of frustration of contract, the court cannot

substitute its own opinion for that of arbitrator and that court cannot

correct mistakes if any in adjudication unless objection to legality is

apparent on the face of the award.

34. Per contra, the senior counsel for the defendant cited

(a) Trustees of Port of Madras Vs Engineering Constructions

Corporation Ltd (1995) 5 SCC 531 holding that arbitrator cannot

go beyond the contract and cannot misapply the law.

(b) Rajasthan State Mines & Minerals Ltd Vs Eastern

Engineering Enterprises (1999) 9 SCC 283 holding that arbitrator

cannot award an amount which is ruled out or prohibited by the

agreement.

(c) Steel India Authority of India Ltd Vs J.C. Budhiraja (1999)

8 SCC 122 again holding that if arbitrator disregards express term of

contract, interference is called for.

It was in the light of these judgments and at first blush finding

some inconsistency in award in holding defendant liable for

minimum guarantee amount inspite of existence of force majeure

that I independently verified the correctness of the findings. I have

reached the same result as the arbitrator.

35. The senior counsel for the defendant has also filed a number of

other judgments on the concept of Frustration. However, in the

facts above and this being a jurisdiction under sections 30 and 33 of

the Arbitration Act it is not deemed expedient to deal with those.

36. The objections to the award are dismissed. The arbitral award

is made rule of the court. Decree in terms thereof be drawn up.

However, in view of the past relations of parties and the other

payments as per award having already been made and admittedly no

business having been carried in last three years it is not deemed

expedient to impose any costs.

RAJIV SAHAI ENDLAW (JUDGE) April 09, 2009/M