Developer can avail remedy of Specific Performance with respect to Development Agreement, Supreme Court
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Developer can avail remedy of Specific Performance with respect to Development Agreement, Supreme Court

Murali Krishnan

The Supreme Court has held that Section 14(3)(c) of the Specific Relief Act, 1963 (Act) is not a bar to a suit by a developer for specific performance of a development agreement between himself and the owner of the property. Both owners and developers can avail of the remedy of specific performance under the Act, a Bench comprising Justices AM Khanwilkar and DY Chandrachud held.

Background

The case arose from a judgment of a Division Bench of the High Court of Calcutta. The appellant, who is a builder, had instituted a suit for specific performance of a development agreement, against the respondents, who are owners of the premises. The suit was dismissed by the City Civil Court. The High Court dismissed the first appeal.

The subject matter of the suit for specific performance was a development agreement entered into by the appellant with the respondents. The agreement stated that the owners had approached the appellant for construction of a building on the land and that the following terms, inter alia, were agreed upon by and between the parties.

The appellant alleged that upon the execution of the agreement, he found that the premises were encumbered and that there were arrears of municipal tax and electricity dues, besides which there were labour and industrial disputes and ‘factory closure problems’. The respondent is alleged to have requested the appellant to make payments and assured that he will reimburse him before the sanction of the building plan was obtained. Accordingly, the appellant had claimed to have made a payment of Rs. 7 lakh.

After certain disputes between the parties, the agreement was modified as per which (i) allocation of the owner would be 47% instead of 42%; and (ii) allocation of the developer would be 53% instead of 58%.

Subsequently, the appellant issued to the respondents a notice for payment of his share of the sanctioned fees. The owners, however, responded by denying the contents of the notice on the ground that he had by a notice dated May 19, 2003, canceled the agreement and requested the appellant to return all documents and collect the deposit

The appellant then instituted a suit in the City Civil Court seeking a declaration that the cancellation of the agreement by the respondents was invalid and a permanent injunction restraining the respondents from entering into any agreement with a third party for the sale of the premises. Subsequently, a prayer for specific performance was also included.

Judgments of City Civil Court and High Court

The City Civil Court dismissed the suit holding that a suit for specific performance of a development agreement at the instance of a developer is barred by the provisions of Section 14(3)(c) of the Specific Relief Act 1963 (Act).

Upon examining various clauses of the agreement, the City Civil Court concluded that the appellant had agreed to apply at his own cost and expense to the Calcutta Municipal Corporation for getting the plans of the proposed building approved. The City Civil Court noted that it was an admitted fact that sanction was not obtained by the appellant and therefore, it could not be said that he had obtained possession. As a result, the suit at the instance of the appellant was held to be barred by Section14(3)(c).

Aggrieved by the judgment and order of the City Civil Court, the appellant preferred an appeal before the High Court of Calcutta. A Division Bench of the High Court dismissed the appeal, on the ground that the suit was not maintainable under Section 14(3)(c) of the Act.

The High Court also rejected the argument of the appellant that the agreement in question was not a contract for construction of building on the land in a real sense, as the respondents were not getting any consideration for the building. The High Court held that the agreement was in substance a contract of construction within the meaning of sub-section (3)(c) of Section 14 and the consideration was payable only upon the completion of the work.

<strong>Summary Sheet – What happened in the Supreme Court!</strong>
<strong>Summary Sheet – What happened in the Supreme Court!</strong>

Judgment of Supreme Court

The issue which the Supreme Court had to decide was whether Section 14(3)(c) of the Act is a bar to a suit by a developer for specific performance of a development agreement between himself and the owner of the property.

On Section 14(3)(c)

Section 14(1) provides categories of contracts which are not specifically enforceable. Sub-section (3) of Section 14 is an exception to clauses (a), (c) and (d) of sub-section (1). 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 if the conditions set out in sub-clauses (i), (ii) and (iii) of clause (c) of Section 14(3) are satisfied.

The condition under Section 14(3)(c)(iii) is that the defendant has, by virtue of the agreement, 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. 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 at the behest of the owner against a developer, denying the benefit of the provision to the developer despite an interest in the property having been created.

“This anomaly is created by the use of the words “the defendant has, by virtue of the agreement, obtained possession of the whole or any part of the land” in Section 14(3)(c)(iii).”

Under a development agreement, an interest in the property may have been created in favour of the developer. 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 possession under the agreement.

In such a case if the developer files a suit for specific performance against the owner, and the owner is in possession of the land by virtue of a lawful title, the defendant (i.e. the owner) cannot be said to have obtained possession of the land by way of the agreement. The Court reasoned that this would lead to an anomalous situation where the condition in Section 14(3)(c)(iii) would not be fulfilled in the case of a suit by a developer.

The Court, therefore, made it clear that 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 Act.

Hence, it held that a purposive interpretation should be resorted to.

The Court made it clear that if a purposive interpretation is given to Section 14(3)(c)(iii), the anomaly and absurdity created by the third condition will have no applicability in a situation where the developer who has an interest in the property, brings a suit for specific performance against the owner

The developer will have to satisfy the two conditions laid out in sub-clause (i) and (ii) of Section 14(3)(c), for the suit for specific performance to be maintainable against the owner. This will ensure that both owners and developers can avail of the remedy of specific performance under the Act.

A suit for specific performance filed by the developer would then be maintainable, it ruled.

On its applicability to the development agreement in the current cases, the Court proceeded to consider the scope of “development agreements” and what kinds of development agreement can be subject to specific performance.

A Bench comprising of Justice Khanwilkar (<em>Left</em>) and Justice Chandrachud(<em>Right</em>)  passed this Judgment
A Bench comprising of Justice Khanwilkar (<em>Left</em>) and Justice Chandrachud(<em>Right</em>)  passed this Judgment

Development Agreement

The consistent position of the common law is that courts do not normally order specific performance of a contract to build or repair, the Court observed. 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 the law.

Placing reliance on a catena of decisions holding the field in this regard, the Court held that when a pure construction contract is entered into, the contractor has no interest in either the land or the construction which is carried out. But in various other categories of development agreements, the developer may have acquired a valuable right either in the property or in the constructed area.

The terms of the agreement are crucial in determining whether any interest has been created in the land or in respect of rights in the land in favour of the developer. In a construction contract, the contractor has no interest in either the land or the construction carried out on the land. But, in other species of development agreements, the developer may have acquired a valuable right either in the property or the constructed area, the Court noted.

In some situations, under a Development Agreement, the owner may part with the right to exploit the development, potential to construct and to deal with the constructed area etc in favour of the developer. These rights which are incidental to ownership which is in essence a parting of some of the incidents of ownership of the immovable property, the Court held.

In development agreements, where an interest is created in the land or in the development in favour of the developer, it may be difficult to hold that the agreement is not capable of being specifically performed.

In the present case, the court noted that the respondent had agreed to pay the appellant the costs and expenses along with the agreed remuneration upon completion of the construction. If the respondent failed to pay, the appellant was entitled to realise its money by selling 58% of the total constructed area. Clauses 6, 10 and 11 of the agreement indicate that the respondent would retain 42% of the total constructed area and the balance 58% would remain secured for due payment of the construction costs.

The intention of the parties was clear from the agreement. It was an agreement to carry out the construction of the building for which payment of the construction costs and agreed remuneration had to be made. The agreement did not create an interest in the land for the developer. If the payment due to the developer was made, there would arise no security interest. Moreover, the security interest in respect of 42% of the constructed area would arise only if the construction came up and the payment due to the builder was not made.

In the present case, there was no construction at all, the Court held.

The Court, therefore, dismissed the appeal.

Read the judgment below. 

Sushil-Kumar-Agarwal-v.-Meenakshi-Sadhu.pdf
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