New Delhi: The Supreme Court has held that an arbitral tribunal which re-writes the terms of a contract violates Section 28(3) of the Arbitration and Conciliation Act, 1996, and that an award directing specific performance in derogation of the agreement’s sequence of obligations was rightly set aside in appeal under Section 37.
Invoking Article 142, it directed the landowners to refund the amounts received with 9% simple interest.
A Bench of Justice Sanjay Kumar and Justice Sanjeev Sachdeva was hearing appeals by Shreeram Builders against the Bombay High Court judgment of 05.03.2024, which set aside a majority arbitral award of 10.12.2011 in favour of the firm and its partners against Upendra Kantilal Thanawala and others, who owned a 2/9th undivided share in land at Panchpakhadi, Thane.
Under an ‘Agreement for Development’ dated 06.08.2003, the Thanawalas gave the firm the right to develop their share, with a consideration of ₹915 per sq. ft. on an estimated 25,000 sq. ft. of FSI, totalling ₹2,28,75,000, of which ₹55 lakh was paid as earnest money and the balance was payable in ten instalments, time being of the essence. The landowners terminated the agreement by notice dated 09.04.2008. The majority award (Justice S.D. Pandit, umpire, and P.S. Mudholkar) held the termination illegal, treated the agreement as one to sell, and directed a conveyance on payment of ₹10,91,30,164, computed at six times the agreed rate. Arbitrator V.P. Patil dissented. Both sides’ Section 34 challenges failed before the Principal District Judge, Thane.
The Court first applied the Constitution Bench decision in Gayatri Balasamy v. ISG Novasoft Technologies that Section 37 jurisdiction is coterminous with Section 34. Because the applications were filed before 23.10.2015, the unamended Section 34 governed, per Ssangyong Engineering v. NHAI and BCCI v. Kochi Cricket. It reviewed the case law on patent illegality and public policy, including Western Geco, Associate Builders, UHL Power, OPG Power and SEAMEC v. Oil India: a tribunal must decide per the contract's terms, a plausible interpretation will not be disturbed, but a view no fair-minded person could take is perverse.
On the nature of the agreement, the Court said stamp duty of 1% did not conclude the matter, since nomenclature is not decisive and it is the rights and obligations created that determine character (citing Sasan Power v. North American Coal). It found the agreement “not a run-of-the-mill development agreement”, as the landowners would get no built-up area or sale proceeds. But it held that the label was unnecessary to decide, since the agreement set out a binding sequence of performance:
“The fundamental error writ large in the majority award is that it dealt with the matter as if it was a regular suit for specific performance of an agreement to sell and not as an arbitration arising out of a contract that visited obligations upon the parties thereto with a binding sequence as to how they were to perform their respective parts.”
Examining the record, the Court found that the instalments were repeatedly delayed, the balance was not paid by 01.03.2008, and the cheques tendered for later instalments were returned. It held that the landowners’ failure to serve a Clause 7 notice cured the delay in the six accepted instalments but did not wipe out the time stipulation. The consideration also remained fluid, being linked to the sanctioned plan and FSI, additional FSI on regularising adverse possession, and basements, and the plan was never sanctioned. Conveyance was to follow payment of all amounts, which had not occurred.
The Court listed further aberrations in the majority award. It directed conveyance that included part of the excluded bungalow property in which the owners of the remaining 7/9th share were not before the tribunal. It adjusted ₹13,18,334 and ₹26,222 from payments under a 2002 MoU, despite Clause 51 superseding all earlier agreements. It fixed a rate of ₹5,490 per sq. ft. without computation or reasons. And it awarded alternative damages though the agreement provided for none. This amounted to substituting new terms “as per their own fancies”, contrary to Section 28(3), and the High Court was right on that ground. The Court also found the High Court’s reliance on Ramabai Shriniwas Nadgir to disregard admissions made in an earlier suit to be misplaced.
The Court, however, noted that the landowners had themselves not complied with Clause 54, under which the amount paid was refundable, without interest, if no construction had been made. Having retained the money since their termination notice of 09.04.2008, it said, “it would only be fair” that they refund it with interest. To do complete justice and avoid a fresh round of litigation, it exercised power under Article 142 and directed the respondents to return the amounts received under the agreement with simple interest at 9% per annum from the date of each payment until refund. The appellant’s sums deposited in court, with accrued interest, may also be returned. Parties will bear their own costs.
Case Title: Shreeram Builders vs. Upendra Kantilal Thanawala & Ors., Civil Appeal Nos. 9817-9818 of 2024, 2026 INSC 1176
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