Hotel Wildflower Hall Dispute – HC Upholds Arbitration Award, Dismisses Oberoi’s Plea

Shimla: Finding no merit in an appeal against an order upholding an arbitrator award over an ownership dispute for high end luxurious 5-Star Wildflower Hotel, a division bench of the High Court here has dismissed the plea of EIH Ltd, an Oberoi Hotels company.

EIH had appealed that the single judge’s order dated 25.02.2016 upholding an arbitrator award dated 23.7.2005 that had established that the relationship between the disputing parties was ‘damaged beyond repair and parting of ways was the only solution” before handing out a settlement award – be set aside.

Set amidst a pristine forest at a commanding height in the Kufri hills in Chharabra, the state government was owner of the property where Himachal Tourism operated a heritage Wildflower Hotel that burnt down in an inferno in 1993.

Premium Five Star Hotel Wild Flower Hall

With the intention ‘putting the hotel back in operation’ the Himachal Government, after inviting global tenders, decided to partner with the Oberoi Group to set up a Five Star Deluxe Hotel at the site.

For the purpose ajoint venture agreement (JVA) on 30.10.1995 was signed between the state government and EIH to incorporate a joint venture company (JVC) for constructing and operating the premier property

The JVC ‘Mashobra Resorts Ltd’ was incorporated to execute the project with the terms that the state government share in the company would be not less than 35%, EIH shareholding would not be less than 36% but not more than 55% and 10% was reserved for a public issue.

EIH was handed ‘responsibility for constructing, running and managing the hotel.

However, the state government was entitled to terminate the JVA if commercial operation of the hotel did not start within 4 years of handing over possession of the land. Under the agreement, the government had also had powers not to terminate the JVA but EIH was bound to pay Rs 2 Crore per annum penalty for the delays incurred.

In case the hotel was not operational after expiry of 6 years, the JVA was to be terminated automatically and the entire land would revert back to the state government.

The dispute arose when the state government on 6.3.2002 terminated the JVA for breach of terms that EIH had failed to make the hotel fully operational even after a lapse of 6 years.

EIH filed a petition before the Company Law Board and evoked a JVA arbitration clause. HP High Court by way of a consent order referred all outstanding disputes to a sole arbitrator on 17.12.2003.

Supreme Court retired judge RP Sethi was appointed as the sole arbitrator to the dispute.

After recording evidence, the arbitrator found that the JVA was legally valid and binding on all parties and recorded that the relationship between the disputing parties was ‘damaged beyond repair and parting of ways was the only solution” and had handed out a settlement Award on 23.7.2005.

The arbitration award had settled that the JVA be changed into a 40-year period lease arrangement for which EIH pay the state government a lease amount of Rs 92.75 crore.

“Should EIH and Mashobra Resorts Ltd refuse to accept the lease hold arrangement,” the Arbitrator had also proposed an alternate award that “the state government would be entitled to forthwith takeover the management and possession of Wildflower Hall.”

The arbitration award was contested by EIH but was upheld by the judge in his order dated 25.02.2016 that categorically stated, “it could not be said that the Arbitrator had exceeded his jurisdiction,” and also held that, “the Award was not vitiated by patent illegality.”

After hearing the parties, the division bench of Justice Tarlok Singh Chauhan and Justice Chander Bhusan Barowalia pointed out that the, “Arbitrator, after detailed appreciation of evidence arrived at a categorical finding that the hotel was not fully commercially operational by 3.5.2002.”

Justice Tarlok Singh Chauhan, writing for the bench held, “Since, the Hotel was not ‘fully commercially operational’, as defined in the Articles of Association, on 3.5.2002, the learned Arbitrator rightly held that the State Government had a right to terminate the JVA”

In response to an EIH submission that Wildflower Hall was denied timely registration by the Tourism Department because of malice particularly that of Mr Ashok Thakur who was serving as Secretary Tourism Department and was also a nominee director on the board of MRL, the bench noted the issue, “was raised for the first time during oral arguments. No pleading to this effect were made in the Statement of Claim filed by EIH nor was any issue framed on this aspect by the learned Arbitrator.”

“The Award also recorded that no mala fides had been attributed to the state or against any official,” the bench held.

Outdoor Whirlpool overlooking Himalayas – Hotel Wildflower Hall

The bench observed, “The Arbitrator sought to do justice between the parties by avoiding expulsion of the appellant (EIH) from the business of running the hotel and demolition of the hotel. By virtue of the Award, the Appellant has in fact been saved the harsher consequences of the termination order passed by the State Government which would have entailed reversion of the land as well as acquisition of all the shares of the appellants in MRL.”

About the lease rent, the bench noted, “the rent fixed by the learned Arbitrator while conferring leasehold rights upon EIH was extremely reasonable and based on the bids submitted by EIH and other parties during the tendering process.”

“It cannot be said that the fixation of rent by the arbitrator was arbitrary,”, the bench held.

About revenues earned, the bench noted, “from the date of the JVA, the state government has barely earned any revenue from the hotel. Only in 2014, MRL had offered to pay dividend of Rs 49 lakhs.”

“The said dividend is a meagre return for the state government, considering the length of time for which MRL has occupied Wildflower Hall which is an extremely valuable property,” the bench held.

After noting, “rejecting the challenge to the arbitral award has been correctly excercised by the learned Court below,” the bench before dismissing the appeal held that, “the instant case is not a fit case for this court to exercise its jurisdiction.”

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