India: SPECIFIC RELIEF ACT, 1963 - Developer Can Avail Remedy Of Specific Performance With Respect To "Development Agreement"

Last Updated: 29 October 2018
Article by AMLEGALS  

The anomaly created using Literal Rule of Interpretation for Section 14(3)(c) of the Specific Relief Act, 1963 has been removed and rectified by adopting the Purposive Rule of Interpretation.

IN THE SUPREME COURT OF INDIA
SUSHIL KUMAR AGARWAL
VS
MEENAKSHI SADHU & ORS.
ARISING OUT OF CIVIL APPEAL NO. 1129 OF 2012

FACTS

The Appellant is a developer who entered into a Development Agreement in respect of premises situated at Kolkata, West Bengal, with Late Kalidas Sadhu (hereinafter referred to as the Original Owner), who was the predecessor-in-interest of the Respondents herein. Upon his death, his legal heirs were substituted as the existing Respondents, vide order dated 12.05.2018.

The Development Agreement, in dispute, recites that the Original Owner had approached the Appellant for construction of a building on the aforesaid premises. The Development Agreement had the following terms incorporated in it:

  1. The Appellant agreed to apply for sanction of the plan of a proposed building complex to be built on 14 cottahs, 5 chittacks and 40 square feet, to the Calcutta Municipal Corporation (CMC). All costs for obtaining such sanction were agreed to be borne by the Appellant. (Clause 1)
  2. The plan of the building complex was to be prepared and submitted by the Appellant, after due approval of the Original Owner. (Clause 2)
  3. The Appellant was to make a deposit of Rs. 4,00,000/- (Rupees Four Lakh Only), without interest, which was to be refunded upon the completion of the building. (Clause 3)
  4. In the event that the construction could not take place, after the sanction of the plan, for any act or omission on the part of the Appellant, the deposit and all costs, charges and expenses incurred by the Original Owner were to be refunded. (Clause 22)
  5. 42% of the total constructed area was to be retained by the Original Owner as "sole owned" and 58% of the total constructed area was to remain secured for payment of construction costs. (Clause 6, 10 and 11)
  6. The Original Owner agreed to pay the costs and expenses along with agreed remuneration upon completion of the construction, to the Appellant. Further, in the event that this term was not fulfilled by the Original Owner, the Appellant was entitled to realize the due amount by selling 58% of the total constructed area. (Clause 6, 10 and 11)
  7. The Original Owner was entitled to demand any loss and/or damage suffered due to any illegal activities of the Appellant and the Appellant was entitled to recover damages from the Original Owner for lapse and negligence, if any. (Clause 24)
  8. Further, both the parties had the right to claim the specific performance of the said Development Agreement. (Clause 24)

The Appellant alleged that upon the execution of the Agreement, the said premises were encumbered and there existed arrears of municipal tax and electricity dues. Further, there were labour and industrial disputes apart from 'factory closure problems'.

The Original Owner, allegedly, requested the Appellant to make payment of all the aforementioned arrears with the assurance that he shall reimburse the Appellant for the same, before the sanction of the building plan was obtained from CMC. Thus, the Appellant made a payment of Rs. 7,03,000/- toward such arrears.

Vide letter dated 18.03.2002, the Original Owner addressed a letter to the Appellant and denied the execution of the said Development Agreement. The Appellant responded in protest and denial to that letter on 04.04.2002. Further, the Appellant requested the Respondent to give him the authority to obtain the sanction of the building plans from CMC.

Thereafter, the parties met and agreed to modify the terms of the Development Agreement. The allocation of the premises was modified from 47% to 42% of the Original Owner and from 58% to 53% of the Developer.

On 26.05.2003, the Appellant issued a notice to the Original Owner for payment of his share of the sanction fees. On 03.06.2003, the Original Owner sent a letter to the Appellant, through his Advocate. In that letter the Original Owner denied the contents of the notice dated 26.05.2013 on the ground that the Original Owner had cancelled the Development Agreement and requested the Appellant to return all documents and collect the deposit.

On 06.08.2003 the Appellant instituted a suit, T.S. No. 1150 of 2003 in the Hon'ble City Civil Court seeking a declaration that the cancellation of the Development Agreement by the Respondent was invalid and a permanent injunction restraining the Original Owner from entering into any agreement with a third party for sale of the premises.

Further, on 28.09.2005 the Hon'ble City Civil Court allowed an Amendment of the Plaint to include a prayer for Specific Performance.

On 28.02.2007, T.S. No. 1150 of 2003 was dismissed. The Hon'ble Court observed that there was no tangible evidence to prove that the Appellant had obtained the possession of the said premises after the execution of the Development Agreement. Hence, the suit at the instance of the Appellant was held to be barred by Section 14(3)(c) of the Specific Relief Act, 1963.

The Appellant filed an Appeal, F.A. No. 175 of 2007, against the Judgment of the Hon'ble City Civil Court in the Hon'ble High Court of Calcutta. It was the contention of the Appellant in the Appeal that the Development Agreement in question was not a contract for construction of building on the land since the Original Owner was not getting any consideration for building.

On 18.02.2009 the Division Bench of the Hon'ble High Court dismissed the Appeal on the ground that the Development Agreement was actually a Contract of Construction in substance, hence the suit was not maintainable under Section 14(3)(c) of the Specific Relief Act, 1963. The present Appeal is filed against the Judgment dated 18.02.2009 of the Hon'ble High Court of Calcutta.

ISSUES BEFORE SC

Whether Section 14(3)(c) of the Specific Relief Act, 1963 is a bar to a suit by a developer for specific performance of a Development Agreement between himself and the owner of the property.

OBSERVATION

In order to decide the issues of this case, the Hon'ble Court scrutinized the nature of a Development Agreement and the provisions of Section 14 of the Specific Relief Act, 1963.

"14. Contracts not specifically enforceable.—

(1) The following contracts cannot be specifically enforced, namely:—

(a) a contract for the non-performance of which compensation in money is an adequate relief;

(b) a contract which runs into such minute or numerous details or which is so dependent on the personal qualifications or volition of the parties, or otherwise from its nature is such, that the court cannot enforce specific performance of its material terms;

(c) a contract which is in its nature determinable;

(d) a contract the performance of which involves the performance of a continuous duty which the court cannot supervise.

(2) Save as provided by the Arbitration Act, 1940 (10 of 1940), no contract to refer present or future differences to arbitration shall be specifically enforced; but if any person who has made such a contract (other than an arbitration agreement to which the provisions of the said Act apply) and has refused to perform it, sues in respect of any subject which he has contracted to refer, the existence of such contract shall bar the suit.

(3) Notwithstanding anything contained in clause (a) or clause (c) or clause (d) of sub-section (1), the court may enforce specific performance in the following cases:—

(a) where the suit is for the enforcement of a contract,—

(i) to execute a mortgage or furnish any other security for securing the repayment of any loan which the borrower is not willing to repay at once: Provided that where only a part of the loan has been advanced the lendor is willing to advance the remaining part of the loan in terms of the contract; or

(ii) to take up and pay for any debentures of a company;

(b) where the suit is for,—

(i) the execution of a formal deed of partnership, the parties having commenced to carry on the business of the partnership; or

(ii) the purchase of a share of a partner in a firm;

(c) where the suit is for the enforcement of a contract for the construction of any building or the execution of any other work on land: Provided that the following conditions are fulfilled, namely:—

(i) the building or other work is described in the contract in terms sufficiently precise to enable the court to determine the exact nature of the building or work;

(ii) the Plaintiff has a substantial interest in the performance of the contract and the interest is of such a nature that compensation in money for non-performance of the contract is not an adequate relief; and

(iii) the Defendant has, in pursuance of the contract, obtained possession of the whole or any part of the land on which the building is to be constructed or other work is to be executed."

This Hon'ble Court observed that Sub-section 3 of Section 14 is an exception to clauses (a), (c) and (d) of sub-section (1). Further, the Hon'ble Court emphasised that though the species of contract stipulated in clauses (a), (c) and (d) of sub-section (1) cannot be specifically enforced, a suit for Specific Performance of contracts of that description will be maintainable only if the conditions set out in sub-clauses (i), (ii) and (iii) of clause (c) of Section 14(3) are satisfied.

Further, it went on to discuss that the consistent position of the common law is that Courts do not normally order specific performance of a contract to build or repair. But this rule is subject to important exceptions, and a decree for specific performance of a contract to build will be made only upon meeting the requisite requirements under law.

Further, this Hon'ble Court observed that if the rule of literal interpretation is adopted to interpret Section 14(3)(c)(iii), it would lead to a situation where a suit for Specific Performance can only be instituted by an owner against the developer, thereby denying the benefit of the provision to the developer despite having an interest in the property.

This is because if the Developer is the Plaintiff and the suit is against the owner, strictly applied, clause (iii) would require that the Defendant should have obtained the possession under the Agreement. Therefore, in such a situation, if the developer files a suit for specific performance against an Owner who is in possession of the land by virtue of a lawful title, the Defendant cannot be said to have obtained possession of the land by way of the agreement.

Hence, application of the literal rule of interpretation to Section 14(3)(c)(iii) would lead to an absurdity and would be inconsistent with the intent of the Specific Relief Act, 1963.

CONCLUDING VIEW

This Hon'ble Court relied on Ashok Kumar Jaiswal vs. Ashim Kumar Kar, a decision of the full bench of the Hon'ble Calcutta High Court, to hold that a right to seek specific performance of a Development Agreement is not barred either expressly or by necessary implication by the Specific Relief Act, 1963 and a broad interpretation should be given to allow an adequate remedy.

Further, according to the factual position of the current case, the Hon'ble Court held as per the intention of the parties, the Agreement between the Appellant and the Original Owner was an Agreement to carry out the construction of the building for which payment of construction costs and agreed remuneration had to be made. It did not create an interest in the land for the developer and there was no construction at all.

The Hon'ble Court held that a purposive interpretation must be given to Section 14(3)(c)(iii) to remove the absurdity and anomaly created by giving it a literal interpretation. The developer shall simply have to satisfy the two conditions laid out in the sub clauses (i) and (ii) for the suit for specific performance to be maintainable against the owner.

This Hon'ble Court held that the agreement between the parties herein is vague because the Hon'ble Court cannot determine the exact nature of the building or work by analyzing the terms and conditions of the contract. Hence, the first condition in Section 14(3)(c) is not fulfilled.

Further, before granting the remedy of specific performance, the Hon'ble Court needs to analyse the extent of the alleged harm or injury suffered by the developer and if monetary compensation shall suffice to make good the losses incurred due to the alleged breach by the owner. From the facts of this case it is clear that the alleged damages incurred by the Appellant can be quantified. Thus, the Appellant has failed to satisfy the condition under Sub-clause (ii) of Section 14(3)(c) of the Specific Relief Act, 1963.

This Hon'ble Court held that if there was an alternative plea for damages or monetary relief then the present case could have been remanded back to the Hon'ble High Court for consideration of the prayer. However, the Division Bench of the Hon'ble High Court of Calcutta had observed in its judgment that the Appellant had clearly stated that they did not want to avail of such a remedy.

In the facts and circumstances as discussed above, this appeal was dismissed since the Hon'ble Court found no merit in this appeal.

RELIED UPON DECISIONS

The following decisions were relied on by this Hon'ble Court to determine when the Hon'ble Court can order Specific Relief of on "Agreement to Build":

  1. Halsbury's Laws of England, Fourth Edition, Volume 44(1), para 806.
  2. Wolverhampton Corporation v Emmons , [1901] 1 K. B. 515, by the Court of Appeal.
  3. Carpenters Estate v Davies, 1940) Ch. D 160 by the Chancery Division.
  4. Hudson's Building and Engineering Contracts, Eleventh Edition, Volume 1, Page 67.
  5. Price v Strange, 1978] 1 Ch. 337 at page 359.

The following decisions and books were relied on by this Hon'ble Court to resolve the anomaly created by using the Literal Rule of Interpretation to interpret Section 14(3)(c):

  1. The decision of the House of Lords in Stock vs. Frank Jones (Tipton) Ltd., (1978) 1 WLR 231.
  2. Justice GP Singh's treatise on "Principles of Statutory Interpretation, 12th Edition–2010, Lexis Nexis – Page 144."

REASON OF JURISPRUDENCE

The Hon'ble Court referred to several decisions and opined that it is a settled rule of Law that the Hon'ble Court can order Specific Relief on "Agreement to Build" only if the following conditions are fulfilled:

  1. the building work is specifically defined by the contract;
  2. the Plaintiff has a substantial interest in the performance of the contract of such a nature that damages would not compensate him for the Defendant's failure to build;
  3. The Defendant, by virtue of the agreement, is in possession of the land so that the Plaintiff cannot employ another person to build without committing a trespass.

This Hon'ble Court also applied the Purposive Rule of Interpretation instead of the Literal Rule of Interpretation to remove the absurdity that was being created in the interpretation of Section 14(3)(c) of the Specific Relief Act, 1963.

Further, this Hon'ble Court has also established that there exists no express bar against a suit for specific performance with regard to an agreement to build and also stipulated the pre-conditions that need to be fulfilled before such a plea can be granted.

AMLEGALS REMARKS

This judgment of the Hon'ble Apex Court has removed the anomaly that has persistently existed in the interpretation of Section 14(3)(c) of the Specific Relief Act, 1963. It has reiterated the right of the Developers to file a suit for Specific Performance of an agreement to build.

Further, the three pre-conditions necessary to grant a plea for Specific Performance of an agreement to build have been firmly established by virtue of this decision.

This content is purely an academic analysis under "Legal intelligence series".

© Copyright AMLEGALS.

Disclaimer: The information contained in this document is intended for informational purposes only and does not constitute legal opinion, advice or any advertisement. This document is not intended to address the circumstances of any particular individual or corporate body. Reade should not act on the information provided herein without appropriate professional advice after a thorough examination of the facts and circumstances of a particular situation. There can be no assurance that the judicial/quasi-judicial authorities may not take a position contrary to the views mentioned herein.

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