The Bombay High Court has clarified that the established legal principle that a party who terminates a contract cannot subsequently sue for its specific performance, is subject to exceptions. Such an election to terminate can be negated by an intervening event, such as the subsequent conduct of the parties indicating a revival of the contract.
The Court explained that a solemn undertaking given or a judicial admission made in court proceedings by the defaulting party to perform its contractual obligations, subsequent to the other party’s termination of the contract, can revive the contract or form a new foundation for the right of the aggrieved party to seek specific performance.
Accordingly, the High Court held that an arbitral award that imposes a monetary liability in terrorem, contingent upon the failure to perform a primary obligation (like obtaining an Occupation Certificate), will not be set aside under Section 34 of the Arbitration Act, on the ground of an erroneous yardstick for quantification, provided the awarded amount is not perverse, is supported by some evidence, and is not demonstrably excessive compared to what a correct yardstick would have yielded.
The Court, therefore, upheld the arbitral award, and extended the time limit specified in the award for obtaining the Occupation Certificate, by six months, with a corresponding extension for the alternative of regularisation, for a total of nine months. It clarified that if the Petitioner-Developer fails to secure the Occupation Certificate within the extended timeline, the liability to pay interest on the awarded sums as per the original award would continue to operate from the dates originally stipulated by the Arbitral Tribunal.
A Single Judge Bench of Justice Sandeep V. Marne acknowledged the settled legal principle that once a contract is broken, the injured party must elect between two remedies: (i) treat the contract as ended and sue for damages, or (ii) treat the contract as subsisting and sue for specific performance. The Bench observed that by terminating the contract, a party makes an election that precludes them from later seeking specific performance, as they cannot then aver continuous readiness and willingness to perform.
The Bench found that the general principle was not applicable due to the “extraordinary circumstances” and “intervening event” in this case. The crucial event was the solemn statement and undertaking given by the Petitioner-Developer before the High Court, after the termination notice, to procure the Occupation Certificate.
The Bench observed that by giving this undertaking, the Petitioner-Developer “virtually revived the terminated contract” and drove the Society in the direction of specific performance. This conduct negated the Society’s initial election to terminate. The Petitioner made the Society believe the contract was still subsisting, and hence, it was now estopped from arguing that specific performance was impermissible, as it would amount to approbating and reprobating.
The Bench held that the undertaking before the Court and a similar averment in the Statement of Defence constituted a “judicial admission”, and stated that such admissions can themselves be made the “foundation of the rights of the parties”. Therefore, the Society had a right to seek specific performance based on the Petitioner’s own admission.
The Bench observed that the direction to pay Rs. 128.98 crores were the third and final consequence, which would only “kick in” if the Petitioner failed to secure the Occupation Certificate and also failed to get the building regularised. The direction was held to be essentially in terrorem (as a deterrent) to ensure the Petitioner does not evade its primary responsibility.
Since the awarded amount was less than what could have been justified under the correct yardstick, and the Petitioner had failed to produce any contrary evidence on valuation, the Bench found no patent illegality or perversity, and upheld the direction to pay monthly compensation at ₹80 per sq. ft., noting that the Tribunal based this on the Petitioner’s own admission in its written submissions that it had paid rent at this rate until January 2014.
Briefly, the dispute arose from a Development Agreement between the Petitioner (a developer) and the Respondent (a cooperative housing society) for the redevelopment of the Society’s property. The Petitioner agreed to provide 52% additional usable carpet area to the 58 members of the Society, construct a new building (Wing ‘A’) for them, and a ‘free sale’ component (Wing ‘B’). The initial building plans were also sanctioned.
The core of the dispute is that the Petitioner, after constructing Wing ‘A’ largely in accordance with the 2008 plan, subsequently got the plans amended in 2009 and 2011 without the Society’s authorised consent. These amended plans introduced ‘open to sky ducts’ within the living rooms and bedrooms of the Society members’ flats on paper, thereby reducing the built-up area of Wing ‘A’ and transferring the saved area to the free-sale Wing ‘B’. Since the actual construction of Wing ‘A’ did not have these ducts and was therefore not in conformity with the last approved plan (of 2011), the Municipal Corporation of Greater Mumbai (MCGM) did not grant an Occupation Certificate.
Due to these breaches, including the failure to pay monthly compensation from February 2014, the Society terminated the Development Agreement and the Power of Attorney on 15 October 2015. The Society then filed a petition under Section 9 of the Arbitration and Conciliation Act, 1996. In those proceedings, on 20 October 2015, the Petitioner-Developer made a solemn statement before the High Court that it would take steps to obtain the Occupation Certificate (OC) for the entire building.
The Arbitral Tribunal, constituted thereafter, passed an award, directing the Petitioner to procure the Occupation Certificate for Wing ‘A’ in consonance with the original 2008 plan. In the alternative, if the OC was not granted, the Petitioner was to get the ‘open to sky duct’ areas regularised. If both these measures failed, the Petitioner was directed to pay the Society a sum of Rs. 128.98 crores. The award also granted other reliefs, including payment of arrears of monthly compensation. The Petitioner challenged this award under Section 34 of the Arbitration Act.
Appearances:
Senior Advocates Janak Dwarkadas and Prateek Seksaria, along with Advocates Ankit Lohia, Dharam Jumani, Arun Panickar, Rohit Agarwal, Vijay Nair, and Mihir Nerurkar, for the Petitioner
Senior Advocate Ravi Kadam, along with Advocates Piyush Raheja, Vikramjit Garewal, Aadil Parsurampuria, Tejas Agarwal, Ria Goradia, Tejaswi Pania, and Ishaan Choudhary, for the Respondent
