A seller cannot forfeit a significant earnest money amount without demonstrating actual loss, despite contractual agreements defining it as such.

JUDGMENT

Vibhu Bakhru, J. The petitioner has filed the present petition under Section 34 of the Arbitration and Conciliation Act, 1996 (hereinafter the `A&C Act') impugning an arbitral award (hereinafter the `impugned award') dated 19.04.2012 delivered by the Arbitral Tribunal consisting of Justice (Retd.) J.P. Singh as the Sole Arbitrator (hereinafter the `Arbitral Tribunal').

2. The impugned award was rendered in the context of disputes that have arisen between the parties in connection with the agreement dated 05.12.2008 captioned "Agreement to Sell and Purchase Cum Receipt' dated 05.12.2008 (hereinafter `the Agreement').

3. In terms of the Agreement, the petitioner agreed to purchase the manufacturing unit including the built up factory, rights in the leasehold property No. C-37, Sector B-2, Tronica City, Loni Ghaziabad (UP) and all movable assets (hereafter `the Property') for a sale consideration of Rs.1,60,00,000/-.

4. The petitioner paid a sum of Rs.60,00,000/- to the respondent. The receipt of the said amount was expressly acknowledged in the Agreement as receipt of `earnest money'.

5. After the parties had entered into the Agreement, the petitioner claimed that the respondent had committed fraud by representing that the entire constructed/covered area of the factory premises was 10,000 sq.ft. whereas, upon taking measurements, the actual constructed area was found to be only 6,500 sq.ft.

6. The petitioner claims that on discovering that the covered/constructed area of the factory premises was less by 3,500 sq.ft, the petitioner called upon the respondent to either reduce the consideration price; or to refund the earnest money/part sale consideration.

7. On 02.05.2009, the petitioner sent a legal notice calling upon the respondent to either refund the amount paid (Rs.60,00,000/-), or in the alternative, execute the sale deed in respect of the factory premises based on actual measurements. However, the respondent did not respond to the said legal notice.

8. Thereafter, the petitioner filed a suit before this Court captioned C.S. (OS) No. 1971/2009 for recovery of the earnest money along with damages.

9. The respondent filed an application under Section 8 of the A&C Act, which was allowed and by an order dated 19.01.2010, the parties were referred to arbitration under the aegis of the Delhi International Arbitration Centre (DIAC).

Arbitral proceedings

10. Before the Arbitral Tribunal, the petitioner filed his Statement of Claims and claimed an amount of Rs.1,20,00,000/- being twice the earnest money as liquidated damages due to the failure on the part of the respondent in fulfilling his obligations under the Agreement. Additionally, besides costs, the petitioner also claimed pendente lite interest as well as future interest at the rate of 18% per annum and 5% per annum respectively to be compounded quarterly.

11. The petitioner claims that he was willing to consummate the transaction albeit on a proportionately reduce consideration. It thus, appears that the respondent was also willing to reduce the consideration marginally but the parties could not arrive at mutually acceptable solution. The Arbitral Tribunal had also encouraged the parties to resolve the disputes amicably, however, the same did not fructify.

12. The petitioner claims that he was entitled to refund of the money of Rs.60,00,000/- which was paid as an advance in terms of the Agreement along with penalty of an equivalent amount as the respondent was not in a position to conclude the transaction. The petitioner further claims that respondent had induced the petitioner to enter into a transaction on a fraudulent representation that the constructed/covered area of the premises was approximately 10,000 sq.ft.

13. The respondent filed his Statement of Defence, however, did not raise any counter-claims.

14. Considering the rival contentions of the parties, the Arbitral Tribunal framed the following issues for determination:

"1. Whether