Absence of Reasons for Dismissal of Counter-claim and Failure to Establish Loss Vitiate Arbitral Award

The Petitioner (Developer) and Respondent entered into a Memorandum of Understanding (MoU) on 18.05.2018 for the operation of service apartments/hotels in a mall

Under Clause 14, the Petitioner paid ₹1,18,00,000 as advance fees for brand collaboration and technical support

Disputes arose when the Respondent demanded additional space not included in the MoU, leading to a stalemate where neither party performed their obligations

The Petitioner sought a refund of the advance, while the Respondent claimed further payments

An Arbitrator was appointed who rejected both the Respondent’s claim for additional money and the Petitioner’s counter-claim for refund, holding that the MoU lacked a specific refund clause

The Petitioner challenged this dismissal under Section 34 of the Arbitration and Conciliation Act, 1996

1. Whether the arbitral award is "non-speaking" and violates Section 31(3) of the Act by failing to provide reasons for dismissing the counter-claim

2. Whether the Respondent can legally retain advance payments in the absence of a forfeiture clause and proof of actual loss under Section 73 of the Contract Act

3. Whether the dismissal of the counter-claim constitutes patent illegality or a violation of public policy

Section 31(3) of the Arbitration and Conciliation Act, 1996, which mandates that an award must state the reasons upon which it is based

Dyna Technologies Pvt. Ltd. v. Crompton Greaves Ltd. and Som Datt Builders Ltd. v. State of Kerala, establishing that reasoning must be intelligible and adequate

Section 73 of the Indian Contract Act, 1872, and the principles from Central Bank of India v. Shanmugavelu and Kailash Nath Associates v. DDA, which dictate that in the absence of a forfeiture clause, advance payments must be returned unless the seller proves actual damage or loss

The doctrine of severability under Section 34 as clarified in Gayatri Balasamy v. ISG Novasoft Technologies Ltd.

The Court found the Arbitrator's dismissal of the counter-claim to be "bereft of reasons" and "non-speaking"

It noted that the Arbitrator correctly found that both parties failed to adhere to the MoU, rendering the project a "non-starter," yet inconsistently allowed the Respondent to keep the advance

The Court reasoned that since there was no forfeiture clause in the MoU, the Respondent was required under Section 73 of the Contract Act to prove legal injury or actual loss to justify retaining the money

Since the Arbitrator specifically found that "no work was done" and "neither the brand name was used nor technical support granted," there was no basis for damages

Failing to direct a refund despite these findings constituted a patent illegality and a violation of public policy

Applying the principle of severability, the Court allowed the petition in part

The arbitral award dated 01.07.2023 was set aside specifically to the extent that it dismissed the Petitioner's counter-claim for a refund of the advance amount