2025 (4) TMI 1387 - SC - Indian Laws

Setting aside of arbitral award - binding nature of Development Agreement dated 10.03.1998 entered into between the Respondent and the Claimants - coercion and economic duress on the claimants - breaches of the fundamental terms of the Development Agreement - downsizing/ exit of the business of real estate development and not to pay EDC or commence development work - non provisions of security of the development site and unprovoked unilateral abandonment of the site by L T - termination of development agreement for the reasons stated in the letter of termination - obligation to commence construction in phase I - termination of the contract by the Claimants amounts to wrongful repudiation - Respondent is entitled to be relieved of its obligations under the Tripartite Agreement or not - liability to compensate the Claimants under the agreement of indemnity - authority to institute the instant claim petition and to carry out acts necessary to prosecute the instant claim petition on behalf of Claimants other than Puri Construction Limited. Power of the Court under Section 34 of partly setting aside the award - HELD THAT - This issue was dealt with by this Court in the case of Project Director National Highways No. 45 E and 220 National Highways Authority of India v. M. Hakeem and Another 2021 (7) TMI 1343 - SUPREME COURT . This Court in the said decision considered its earlier decision in the case of McDermott International Inc. v Burn Standard Co. Ltd. Ors. 2006 (5) TMI 442 - SUPREME COURT - Ultimately in paragraph 42 this Court held Even otherwise to state that the judicial trend appears to favour an interpretation that would read into Section 34 a power to modify revise or vary the award would be to ignore the previous law contained in the 1940 Act; as also to ignore the fact that the 1996 Act was enacted based on the Uncitral Model Law on International Commercial Arbitration 1985 which as has been pointed out in Redfern and Hunter on International Arbitration makes it clear that given the limited judicial interference on extremely limited grounds not dealing with the merits of an award the limited remedy under Section 34 is coterminous with the limited right namely either to set aside an award or remand the matter under the circumstances mentioned in Section 34 of the Arbitration Act 1996. The Development Agreement is a contract between PCL and L T. Clause 4 of the Development Agreement refers to the obligations of PCL under the agreement entered into by it on 30th July 1997 with ITCREF. It refers to the fact that PCL had agreed to hand over 1, 95, 000 sq. ft. of built-up area in the Schedule A property after its development comprising high-rise and low-rise buildings inclusive of a car park to ITCREF - The Agreement provides that L T shall complete the construction of the building on the Schedule B property within 60 months or such mutually extended period from the date of obtaining sanction for the building plan or tax clearance under Section 37-I of the Income Tax Act and making the said property available for development whichever is later. It has also stipulated that construction shall be carried out in phases. After completion of phase of 3, 00, 000 sq. ft. on Schedule B property L T in consultation with PCL by mutual consent shall have the option and liberty to renew and revise the specifications/amenities and built-up area of the balance development and extend the period of completion by a further period of 12 months depending upon the prevalent market conditions. In the recital of the Supplementary Agreement it is mentioned that L T has made only partial compliance with the requirement under the Development Agreement to pay EDC to DTCP. Moreover L T has failed to furnish a bank guarantee for the balance payment of EDC. In fact it records that L T had taken a stand that in view of the adverse market conditions the project had become unviable and sought further time from PCL to allow the prevailing real estate market conditions to improve - Clause (I) of the Supplementary Agreement makes it very clear that the Supplementary Agreement shall come into effect only upon the occurrence of the four events specified therein. That is how the Supplementary Agreement remained a non-starter. It is apparent from the recitals in the Supplementary Agreement as well as Tripartite Agreement that as L T did not discharge its obligation under the Development Agreement to pay EDC the Bank was required to be brought into the picture so that it could advance a sum of Rs. 6 crores by way of loan for making payment of the said amount to DTCP. The Division Bench referred to Section 16(3) of the Contract Act which provides that where a person who is in a position to dominate the will of another enters into a contract with him and the transaction appears on the face of it or on the evidence adduced to be unconscionable the burden of proving that there was no undue influence is on the person in a position to dominate the will of the other - After examining the evidence the Division Bench held that there was no patent illegality in the findings recorded by the Arbitral Tribunal that the Supplementary Agreement and the Tripartite Agreement were tainted by coercion. On consideration of the facts discussed before such a view by the Arbitral Tribunal cannot be said to be contrary to justice and morality. Whether the Claimants committed breaches of the fundamental terms of the Development Agreement dated 10.03.1998 to enable the Respondent to resile from the agreement of development? - HELD THAT - The Tribunal found that L T committed a breach of Clause 19 of the Development Agreement by not making payment of a single instalment of EDC. Moreover interest free deposit of Rs. 5 crores in terms of Clause 12 of the Development Agreement was not paid by L T to PCL. The Tribunal found that there was no Development work carried out and not a single floor of any residential building was constructed for which development plans were sanctioned. Therefore the finding recorded by the Tribunal that L T committed fundamental breaches of the agreement cannot be interfered within the limited jurisdiction under Section 34 of the Arbitration Act. Whether the respondent s Board of directors in pursuance of reports of Boston Consulting Group (for short BCG ). Richard Ellis and Jones Lang La Salle decide to downsize/ exit the business of real estate development and not to pay EDC or commence development work? - Whether there had been non provisions of security of the development site and unprovoked unilateral abandonment of the site by L T. If so whether such actions had resulted in encroachments causing monetary loss to the Claimants and in the event of such monetary loss caused to the Claimants what is the extent of such loss? - HELD THAT - The powers of the Appellate Court under Section 37 of the Arbitration Act are not broader than those of the Court under Section 34 of the Arbitration Act. Therefore what cannot be done in the exercise of the powers under Section 34 cannot be done in an Appeal under Section 37. An Arbitral Award cannot be modified. Thus even after recording the conclusions in paragraph no. 119 the Division Bench has not modified the Award by partly setting aside the Judgment under Section 34 - the remedy of PCL has been kept open to pursue appropriate course of action under law as there cannot be a remand to the Arbitral Tribunal for quantification of monetary claim. As the finding of the Arbitral Tribunal regarding breaches committed by L T was affirmed the Division Bench has rightly segregated that part of the Award by which cost of arbitration was ordered to be paid to PCL by L T. This part has been severed from rest of the Award. Therefore this part of the Award must be complied with by L T if not already done. As documents of title were deposited with the Registrar the direction to hand over the same to PCL cannot be faulted with. Conclusion - i) The conditions precedent in Clauses (I) (II) and (III) of the Supplementary Agreement were not fulfilled. Therefore the Supplementary Agreement was a non-starter hence only the Development Agreement was binding on the parties which was not novated by the Supplementary Agreement. ii) The Supplementary Agreement and the Tripartite Agreement were tainted by coercion. iii) L T committed fundamental breach of the Development Agreement by unilaterally abandoning the project failing to pay EDC and not fulfilling its obligations towards statutory authorities ITCREF and the Bank. iv) The termination of the Development Agreement by PCL was justified and did not amount to wrongful repudiation entitling L T to rescind or claim damages. v) The courts under Sections 34 and 37 of the Arbitration Act do not have the power to modify or partially set aside arbitral awards; they may only uphold or set aside in entirety or remand under limited circumstances. vi) The authority of the claimant s representative to institute arbitration was valid and unchallenged. Appeal dismissed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in the judgment include:

(a) Whether the Development Agreement dated 10.03.1998 between the parties remained binding or was novated by the Supplementary Agreement dated 30.12.1999;

(b) Whether the Supplementary Agreement and the Tripartite Agreement were vitiated by economic duress or coercion;

(c) Whether L&T committed fundamental breaches of the Development Agreement by abandoning the project and failing to perform obligations, including payment of External Development Charges (EDC);

(d) The validity and enforceability of the Tripartite Agreement and L&T's obligations thereunder;

(e) The entitlement of PCL to terminate the Development Agreement and the consequences thereof;

(f) Whether L&T was entitled to rescind the contract and claim damages for alleged wrongful repudiation by PCL;

(g) The quantum and basis of damages and compensation payable to PCL;

(h) The scope of judicial interference under Sections 34 and 37 of the Arbitration and Conciliation Act, 1996, particularly the power of courts to modify or partially set aside arbitral awards;

(i) Whether the Arbitral Tribunal exceeded its jurisdiction by granting reliefs in favour of the Bank, which was not a party to arbitration;

(j) The authority of the person instituting arbitration on behalf of PCL and related procedural issues.

2. ISSUE-WISE DETAILED ANALYSIS

(a) Binding Nature of Development Agreement vs. Supplementary Agreement

The Development Agreement was the original contract between PCL and L&T for land development. The Supplementary Agreement was intended as a modification, contingent upon certain conditions precedent including L&T's replacement of bank guarantees, payment of EDC through the Bank, reimbursement of expenses, and compliance with the Tripartite Agreement.

The Arbitral Tribunal found these conditions precedent unfulfilled, rendering the Supplementary Agreement a "non-starter" and holding that the Development Agreement remained binding. This finding was upheld by the Division Bench and affirmed by the Supreme Court as a plausible factual conclusion. The Single Judge's contrary view, that some conditions were not required to be fulfilled, was rejected as a misreading of the clauses.

The Court emphasized the plain language of Clause I of the Supplementary Agreement, which made its effectiveness conditional on the occurrence of specified events. The failure of L&T to satisfy these conditions meant the Supplementary Agreement never came into effect.

(b) Economic Duress and Coercion Affecting Supplementary and Tripartite Agreements

The Arbitral Tribunal, supported by the Division Bench, held that both the Supplementary and Tripartite Agreements were tainted by economic duress. PCL was compelled to enter these agreements due to L&T's failure to fulfill its obligations, particularly payment of EDC, which exposed PCL to statutory penalties and financial distress.

The Court applied Section 16(3) of the Indian Contract Act, which places the burden on the dominant party to prove absence of undue influence or coercion. The Tribunal's finding of coercion was based on evidence including PCL's dire financial need, L&T's defaults, and the circumstances surrounding the agreements' execution. The Supreme Court found no patent illegality or perversity in this conclusion.

The Tribunal's contradictory finding that the Tripartite Agreement remained binding despite the Supplementary Agreement being void was noted but not disturbed, recognizing the complex factual matrix and the Tribunal's discretion in interpreting contractual relationships.

(c) Breach of Development Agreement and Abandonment of Project by L&T

The Tribunal found that L&T committed fundamental breaches by abandoning the project, failing to commence development work, not paying EDC, and not providing security at the site, resulting in encroachments and monetary loss to PCL. L&T did not produce oral evidence or relevant documents to rebut these findings.

The Division Bench and Supreme Court upheld these findings as supported by evidence including site inspections and correspondence. Clauses 26 and 34 of the Development Agreement, which allowed extensions due to adverse market conditions, were considered but found inapplicable as L&T had not sought extensions or fulfilled prerequisite conditions such as EDC payment.

The Court rejected L&T's argument that market conditions excused non-performance, emphasizing that abandonment was a conscious decision rather than a justified delay.

(d) Validity and Enforcement of Tripartite Agreement and L&T's Obligations

The Tripartite Agreement involved the Bank paying EDC on behalf of PCL, with L&T undertaking repayment obligations. The Arbitral Tribunal ordered L&T to satisfy the loan and secure release of title deeds.

L&T challenged the Tribunal's jurisdiction to grant relief in favour of the Bank, which was not a party to arbitration and had no arbitration clause in the Tripartite Agreement. The Single Judge accepted this challenge and set aside related portions of the award.

The Division Bench, however, held that L&T's obligation to the Bank arose under the Development Agreement and was within the Tribunal's jurisdiction, but set aside the quantum of damages related to the loan repayment due to lack of evidence.

The Supreme Court upheld the Division Bench's nuanced approach, recognizing the complexity of contractual interrelations and the limited scope of judicial interference.

(e) Termination of Development Agreement by PCL

The Tribunal and Division Bench held that PCL was entitled to terminate the Development Agreement due to L&T's fundamental breaches. The termination was not wrongful repudiation entitling L&T to rescind or claim damages.

The Court noted that PCL's termination was justified by L&T's failure to perform obligations, abandonment of the project, and non-payment of EDC, which were material breaches.

(f) L&T's Claim for Damages and Counter-Claim

L&T claimed damages for wrongful repudiation and reimbursement of expenses. The Tribunal rejected these claims on the principle that L&T could not benefit from its own wrong, given its abandonment and breaches.

The Division Bench upheld the dismissal of L&T's counter-claim, noting that L&T had not challenged this finding before the Single Judge and had not led evidence to substantiate its claims.

(g) Quantum and Basis of Damages and Compensation to PCL

The Tribunal awarded damages of Rs. 35 crores to PCL based on L&T's own valuation of the project and evidence adduced by PCL. It also awarded compensation for loss of saleable area and default in returning statutory documents.

The Division Bench set aside the quantum of damages and compensation, holding that the Tribunal had erred in relying on L&T's counter-claim figures and failed to determine market value at the time of breach as required under Section 73 of the Contract Act. The Court found the award contrary to substantive law on damages and lacking evidentiary basis for the amounts awarded.

The Supreme Court agreed that the quantification of damages was not supported by proper evidence and that the correct approach would involve assessment of prevailing market rates.

(h) Scope of Judicial Interference under Sections 34 and 37 of Arbitration Act

The Court reaffirmed the settled legal position that courts have limited jurisdiction under Section 34 to either uphold or set aside arbitral awards but do not possess the power to modify or partially set aside awards. This principle was emphasized with reference to binding precedents.

The Division Bench's attempt to partially set aside portions of the award without modifying it was scrutinized. The Court noted that the Division Bench correctly did not modify the award but left the parties to pursue appropriate remedies, thereby respecting the limited scope of judicial intervention.

The Court also highlighted the need for restraint by counsel and courts in arbitration-related proceedings, cautioning against treating such appeals as full-fledged civil appeals with extensive factual re-examination.

(i) Jurisdiction to Grant Relief in Favour of Third Parties (Bank)

The Tribunal's award directing L&T to pay the Bank was challenged on the ground that the Bank was not a party to arbitration and the Tripartite Agreement lacked an arbitration clause.

The Single Judge set aside such relief, but the Division Bench held that L&T's liability to the Bank was embedded in the Development Agreement and thus fell within the Tribunal's jurisdiction.

The Supreme Court did not disturb the Division Bench's approach but noted the absence of evidence supporting the quantum of damages related to the Bank's claim.

(j) Authority of Claimant Representative

The Tribunal found that Mr. Mohinder Puri had authority to institute arbitration on behalf of PCL and related entities, based on board resolutions and lack of objection by L&T. This finding was not seriously challenged and was accepted by the courts.

3. SIGNIFICANT HOLDINGS

"The conditions precedent in Clauses (I), (II), and (III) of the Supplementary Agreement were not fulfilled. Therefore, the Supplementary Agreement was a non-starter, hence, only the Development Agreement was binding on the parties which was not novated by the Supplementary Agreement."

"The Supplementary Agreement and the Tripartite Agreement were tainted by coercion. These agreements were executed as PCL was in dire need of money for making EDC payments. It was the obligation of L&T to provide funds for payment of EDC and the Tripartite Agreement was signed since L&T failed to provide the requisite funds."

"L&T committed fundamental breach of the Development Agreement by unilaterally abandoning the project, failing to pay EDC, and not fulfilling its obligations towards statutory authorities, ITCREF, and the Bank."

"The termination of the Development Agreement by PCL was justified and did not amount to wrongful repudiation entitling L&T to rescind or claim damages."

"The quantum of damages awarded by the Arbitral Tribunal was set aside as it was based on L&T's own valuations without proper evidence or assessment of market value, contrary to Section 73 of the Contract Act."

"The courts under Sections 34 and 37 of the Arbitration Act do not have the power to modify or partially set aside arbitral awards; they may only uphold or set aside in entirety or remand under limited circumstances."

"The reliefs granted in favour of the Bank were within the jurisdiction of the Arbitral Tribunal to the extent they arose from the Development Agreement, notwithstanding the Bank's non-party status."

"The authority of the claimant's representative to institute arbitration was valid and unchallenged."

"The parties are left to pursue appropriate remedies under law for quantification of damages and other monetary claims, as the arbitral award's findings on breach and liability have been upheld but the quantum of damages set aside."