Contract: Tender – APIIC invited bids to develop, design and construct an integrated township/aerospace park in area of 350 acres of land – Unitech was successful bidder – In LOA, it was stipulated that the allotment of land was subject to outcome of a pending litigation – Pursuant to acceptance of LOA, Unitech by various instalments paid Rs. 165 crores: Rs. 140 towards cost of land, Rs. 20 crores towards earnest money deposit and Rs. 5 crores toward project development expenses – On 19.12.2011, decision was given by High Court in pending litigation in State of Andhra Pradesh through Principal Secretary v. Pratap Karan that the Government of Andhra Pradesh did not have title to the project land – During the years 2012 and 2013, Unitech called upon APIIC to execute the sale deed, handover the project site and ensure that the encumbrances on the project land are cleared in terms of Development Agreement so as to comply with its obligations – The State of Andhra Pradesh was reorganised w.e.f. 02.06.2014 – Request was made to newly formed TSIIC (successor of APIIC) to clarify the status – On 02.04.2015, Unitech sought release of earnest money deposit of Rs.20 crores in light of full payment of consideration – On 09.10.2015, Supreme Court in Pratap Karan case upheld the judgment of the High Court – Thereafter, on 14.10.2015, Unitech requested APIIC and TSIIC, to refund all the amounts which were received in relation to the land together with interest and damages for the loss suffered by them – Writ petition under Art.226 was instituted before the High Court seeking a refund of Rs 165 crores together with interest at the SBI Prime Lending Rate (“SBI- PLR”) from the date of payments – A Single Judge of the High Court allowed Unitech’s Writ Petition – Writ Appeal by TSIIC and the State of Telangana – The Division Bench of the High Court while upholding order of Single Judge on liability of TSIIC directed refund of the principal sum of Rs 165 crores with interest from 14.10.2015 at the SBI-PLR, as opposed to the dates of payment of installments, beginning from September 2007 – Appeal by Unitech – Held: Under the Development Agreement which was executed between APIIC and Unitech, APIIC was to transfer the land absolutely free from all encumbrances by executing a sale agreement – The terms of the agreement were to prevail in the event of any conflict with any other document which formed a part of the bidding process – Thus, the terms of the agreement were placed on the pedestal of the highest priority for interpretation, as compared to other documents, including the LoA – Under the terms of the Development Agreement, APIIC was obligated to sell and transfer the land together with its right, title and interest free from all encumbrances “forthwith upon payment of the last installment of the total purchase price by the developer” – The fulfillment of the terms of the agreement was postulated on the availability of the land – The failure of title in the erstwhile APIIC and the Government of Andhra Pradesh attained finality upon the decision of Supreme Court – The basic postulate on which the entire contract was founded stood nullified as a consequence of the failure of title – The agreement clearly provides that the ability of the Government of Andhra Pradesh/TSIIC to convey full title to the developer forms the basis of the contract – The failure of title entitled Unitech to claim a full refund together with compensatory payment, as contractually defined – Further, the Development Agreement provides that compensatory payment will be “from the date on which the first payment of project price” is made – The Division Bench was in error in curtailing the right of Unitech to claim a refund with effect from the dates on which the respective payments were made – Unitech cannot be penalized for wanting to continue with the agreement, as APIIC navigated disputes over its claim to the land – While Unitech was put to notice of the existence of a litigation, the Development Agreement which stipulated an encumbrance-free handover also specified that its covenants would supersede all other understandings and that its terms would rank as the first, in order of interpretive priority – The judgment of the Division Bench suffers from a clear and patent error in restricting the liability of paying interest w.e.f. 14.10.2015 – The liability must date back, in terms of the Development Agreement, from the date on which the respective payments were made by Unitech – Interest at the contractual SBIPLR rate has to be paid to Unitech – However, considering the position of Unitech which knowingly entered into the Development Agreement with full knowledge of the pending litigation and with an intention to continue with the project after a delay of over seven years, up until a decision by this Court, the interest rate is payable to Unitech, without compounding.
Andhra Pradesh Reorganization Act, 2014: Apportionment of the liabilities between the instrumentalities of the State of Andhra Pradesh and Telangana – The land which is comprised in the project site falls exclusively within the Telangana region as specified in the demerger scheme – TSIIC shall refund the amounts due and payable to Unitech in terms of the present judgment – TSIIC would be at liberty to pursue its rights and remedies in accordance with law over its claim for apportionment.
Stamp duty: Unstamped agreement – The Development Agreement, on the basis of which Unitech sought to avail its contractual remedy has not been registered or assessed to stamp duty – Under Article 3.1 of the Development Agreement, the obligation of paying registration fees and stamp duty is on Unitech – Stamp Act is a fiscal measure enacted to secure the revenue for the State, and not to arm the opponent with a weapon of technicality – Unitech’s claim to compensatory payment cannot be defeated on the sole ground of the payment of stamp duty – Directions passed to impound the Development Agreement and present it to the Chief Controlling Revenue Authority in the State of Telangana for assessment of stamp duty and to the competent authority for registration – The assessment shall be completed within thirty days – The appropriate stamp duty and registration charges shall be paid by TSIIC and be deducted from the refund due and payable to Unitech under the terms of this order.
Constitution of India: Art.226 – Writ jurisdiction – The jurisdiction under Art.226 is a valuable constitutional safeguard against an arbitrary exercise of state power or a misuse of authority – In determining as to whether jurisdiction should be exercised in a contractual dispute, the Court must, undoubtedly eschew, disputed questions of fact which would depend upon an evidentiary determination requiring a trial – But equally, it is well-settled that the jurisdiction under Art.226 cannot be ousted only on the basis that the dispute pertains to the contractual arena – This is for the simple reason that the State and its instrumentalities are not exempt from the duty to act fairly merely because in their business dealings they have entered into the realm of contract – Similarly, the presence of an arbitration clause does oust the jurisdiction under Art.226 in all cases though, it still needs to be decided from case to case as to whether recourse to public law remedy can justifiably be invoked – Contract.
Constitution of India: Art.14 – The State and its instrumentalities are duty bound to act fairly under Art.14 of the Constitution – They cannot, even in the domain of contract, claim an exemption from the public law duty to act fairly – The State and its instrumentalities do not shed either their character or their obligation to act fairly in their dealings with private parties in the realm of contract – Investors who respond to the representations held out by the State while investing in public projects are legitimately entitled to assert that the representations must be fulfilled and to enforce compliance with duties which have been contractually assumed.
Disposing of the appeals, the Court
HELD: 1. Article 23.1 of the Development Agreement in the present case mandates the parties to resolve their disputes through an arbitration. However, the presence of an arbitration clause within a contract between a state instrumentality and a private party has not acted as an absolute bar to availing remedies under Article 226. If the state instrumentality violates its constitutional mandate under Article 14 to act fairly and reasonably, relief under the plenary powers of the Article 226 of the Constitution would lie. While exercising its jurisdiction under Article 226, the Court is entitled to enquire into whether the action of the State or its instrumentalities is arbitrary or unfair and in consequence, in violation of Article 14. The jurisdiction under Article 226 is a valuable constitutional safeguard against an arbitrary exercise of state power or a misuse of authority. In determining as to whether the jurisdiction should be exercised in a contractual dispute, the Court must, undoubtedly eschew, disputed questions of fact which would depend upon an evidentiary determination requiring a trial. But equally, it is well-settled that the jurisdiction under Article 226 cannot be ousted only on the basis that the dispute pertains to the contractual arena. This is for the simple reason that the State and its instrumentalities are not exempt from the duty to act fairly merely because in their business dealings they have entered into the realm of contract. Similarly, the presence of an arbitration clause does oust the jurisdiction under Article 226 in all cases though, it still needs to be decided from case to case as to whether recourse to a public law remedy can justifiably be invoked. The jurisdiction under Article 226 was rightly invoked by the Single Judge and the Division Bench of the Andhra Pradesh in this case, when the foundational representation of the contract has failed. TSIIC, a state instrumentality, has not just reneged on its contractual obligation, but hoarded the refund of the principal and interest on the consideration that was paid by Unitech over a decade ago. It does not dispute the entitlement of Unitech to the refund of its principal. [Para 33][1097-F-G; 1098-A, E-H; 1099-A-B]
2. Contractual right to compensatory payment
In the present case, the basic postulate underlying the contract between the parties was the availability of the land which comprised the project site. The LoA dated 28 November 2007, stated that the allotment of land was subject to the outcome of the pending appeal before the High Court of Andhra Pradesh. The dispute over the title of the Government of Andhra Pradesh was the subject of the pending litigation. At the same time, the LoA mandated that Unitech must pay the amount stipulated including the purchase price of Rs.145 crores for the land as well as the project development expenses. A failure to do so would constitute a significant event of default resulting in a forfeiture of the earnest money deposit. Acting on the LoA, Unitech did in fact comply with its obligation to pay, having paid a total amount of Rs.165 crores towards the purchase price, besides the earnest money deposit and project development expenses. The Development Agreement which was executed between APIIC and Unitech contains specific representations to the effect that APIIC was authorized to transfer and deliver the project site admeasuring 350 acres on an outright sale basis. Under the Development Agreement, APIIC was to sell and transfer the land absolutely together with its right, title and interest, free from all encumbrances by executing a sale agreement. The terms of the agreement were to prevail in the event of any conflict with any other document which formed a part of the bidding process. The terms of the agreement were placed on the pedestal of the highest priority for interpretation, as compared to other documents, including the LoA. Under the terms of the Development Agreement, APIIC was obligated to sell and transfer the land together with its right, title and interest free from all encumbrances “forthwith upon payment of the last installment of the total purchase price by the developer”. That Unitech paid the total purchase price is not in dispute. The obligation assumed by APIIC to handover possession together with title upon the payment of the last installment of the purchase price unequivocally emerges from Article 3.1 and Article 4.1 of the Development Agreement. The fulfillment of the terms of the agreement was postulated on the availability of the land. [Para 34][1099-B-H; 1100-A]
3. The failure of title in the erstwhile APIIC and the Government of Andhra Pradesh attained finality upon the decision of this Court in State of Andhra Pradesh Through Principal Secretary v. Pratap Karan. The basic postulate on which the entire contract was founded stood nullified as a consequence of the failure of title. The agreement clearly provides that the ability of the Government of Andhra Pradesh/TSIIC to convey full title to the developer forms the basis of the contract. The failure of title entitles Unitech to claim a full refund together with compensatory payment, as contractually defined. The claim does not raise a disputed question of fact requiring an evidentiary determination. The finding in regard to the entitlement of Unitech to a refund is unexceptionable and has correctly not been called into question at the stage of the hearing, despite the grounds which were raised in the pleadings in the proceedings initiated under Article 136 of the Constitution by TSIIC and the State of Telangana. APIIC, as an instrumentality of the erstwhile Government of Andhra Pradesh, invited bids for a public project. Having invited private entrepreneurs to submit bids on stipulated terms and conditions, it must be held down to make good its representations. The State and its instrumentalities are duty bound to act fairly under Article
14 of the Constitution. They cannot, even in the domain of contract, claim an exemption from the public law duty to act fairly.The State and its instrumentalities do not shed either their character or their obligation to act fairly in their dealings with private parties in the realm of contract. Investors who respond to the representations held out by the State while investing in public projects are legitimately entitled to assert that the representations must be fulfilled and to enforce compliance with duties which have been contractually assumed. [Para 37][1101-F-G; 1102-A-E] State of Andhra Pradesh through Principal Secretary v. Pratap Karan (2016) 2 SCC 82 – referred to.
4. The Single Judge of the Andhra Pradesh High Court, in the course of the judgment dated 23 October 2018 computed as on 30 September 2018, an amount of Rs.660.55 crores as due and payable. Interest on the basis of the SBI-PLR was compounded annually in terms of the provisions of the Development Agreement. The Single Judge noted that the respondents to the writ proceedings had not disputed (i) the dates of payment or (ii) interest at the rate of the SBI-PLR and no material to contradict the computation was submitted. In appeal, the Division Bench however directed that the claim for interest should be computed from 14 October 2015. This was the date on which Unitech addressed a communication seeking a refund of the ‘compensatory payment’ following the decision of this Court on 9 October 2015 on the absence of title to the land in the Government of Andhra Pradesh. The Division Bench has proceeded on the rationale that Unitech was placed on notice that the award of the contract was subject to the outcome of the appeal in the High Court; and Unitech was aware of the outcome of the first appeal yet, as a developer, it wanted to continue with the project. The above circumstances have no bearing on whether Unitech is entitled to a refund of moneys from the date of initial payment. The entitlement of Unitech to a refund of the amounts paid is embodied in the terms of the contract which envisage that a default on the part of APIIC in conveying the land or the existence of political force majeure events would furnish a valid basis for the “compensatory payment”. Moreover, the date from which compensatory payment has to be made is specifically provided : the Development Agreement provides that it will be “from the date on which the first payment of project price” is made. The Division Bench was in error in curtailing the right of Unitech to claim a refund with effect from the dates on which the respective payments were made. Obviously, Unitech had entered into the project since it wished to pursue it. Unitech cannot be penalized for wanting to continue with the agreement, as APIIC navigated disputes over its claim to the land. While Unitech was put to notice of the existence of a litigation, the Development Agreement which stipulated an encumbrance-free handover also specified that its covenants would supersede all other understandings and that its terms would rank as the first, in order of interpretive priority. The judgment of the Division Bench suffers from a clear and patent error in restricting the liability of paying interest with effect from 14 October 2015. The liability must date back, in terms of the Development Agreement, from the date on which the respective payments were made by Unitech. Interest at the contractual SBI-PLR rate has to be paid to Unitech. However, considering the facts and circumstances of this case, the conscionability of Article 14.3.1 read with Article 1(h) of the Development Agreement stipulating compensatory payment at the SBI-PLR, compounded annually, becomes suspect. Clause
17 of the LoA expressly mentioned that the title of the land is lis pendens and subject to the outcome of the proceedings pending before the Andhra Pradesh High Court. Unitech considered this circumstance and consciously entered into the Development Agreement. It continued to liaise with APIIC after an unfavorable judgement of the Andhra Pradesh High Court and did not issue a termination notice, until the title was conclusively denied by a judgement of this Court. [Para 38][1102-F-G; 1103-A-H; 1104-A]
Central Bank of India v. Ravindra (2002) 1 SCC 367 : [2001] 4 Suppl. SCR 323 – followed .
K P Subbarama Sastri v. KS Raghavan (1987) 2 SCC
424 (38) – relied on.
5. Considering the position of Unitech which knowingly entered into the Development Agreement with full knowledge of the pending litigation and with an intention to continue with the project after a delay of over seven years, up until a decision by this Court, the interest rate is payable to Unitech, without compounding. [Para 38][1105-B]
Apportionment of the liabilities between the
instrumentalities of the state of Andhra Pradesh and Telangana
6.1 The Single Judge has imposed the liability to refund on TSIIC clarifying however, that it is “entitled to recover it from the State of Andhra Pradesh and the APIIC, if under law they are entitled to do so”. The Division Bench has not interfered with the above direction. [Para 39][1105-C-D]
6.2 Section 68 of the Re-organization Act is comprised in Part VII which enunciates “Provisions as to Certain Corporations”. The corporations which are listed out in the IXth Schedule include APIIC which appears at Serial No.17. Section 68(2) states that the assets, rights and liabilities of the companies and corporations referred to in sub-Section (1) shall be reapportioned between the successor states in the manner provided in Section 53. [Para 40][1105-D-E, G-H]
6.3 Section 65 allows for the successor states of Telangana and Andhra Pradesh to agree on the manner in which the benefit or burden of any particular asset or liability can be apportioned. Section 66 empowers the Central Government on a reference made, within three years from the appointed date, by either of the successor states to order an adjustment or allocation of the liability. Finally, to complete the narration of the statutory scheme. [Para 41][1106-E; 1107-A]
6.4 Section 71(a) speaks of the interests and shares of the existing State of Andhra Pradesh in the companies specified in the IXth Schedule between the successor States. APIIC has brought on record the certificate issued by the Managing Directors of TSIIC and APIIC recording the auditing of assets and liabilities as on 1 June 2014. [Para 41][1107-C-D]
6.5 Schedule I provides for the Zonal offices pertaining to Telangana region. Serial no.3 refers to the Shamshabad and Mauli Ali region which includes the area covered by the project site. The land which is comprised in the project site falls exclusively within the Telangana region as specified in the demerger scheme. TSIIC shall refund the amounts due and payable to Unitech in terms of the present judgment. TSIIC would be at liberty to pursue its rights and remedies in accordance with law over its claim for apportionment. [Paras 42, 43][1109-A-C]
7. TSIIC and the State of Telangana have brought to our notice that the Development Agreement, on the basis of which Unitech has sought to avail its contractual remedy has not been registered or assessed to stamp duty. Under Article 3.1 of the Development Agreement, the obligation of paying registration fees and stamp duty is on Unitech. It is well-settled law that the Stamp Act is a fiscal measure enacted to secure the revenue for the State, and not to arm the opponent with a weapon of technicality. Unitech’s claim to compensatory payment cannot be defeated on the sole ground of the payment of stamp duty. The Development Agreement shall have to be impounded and be presented to the Chief Controlling Revenue Authority in the State of Telangana for assessment of stamp duty and to the competent authority for registration. The assessment shall be completed within thirty days. The appropriate stamp duty and registration charges liable to be paid in terms of the determination shall be paid by TSIIC and be deducted from the refund due and payable to Unitech under the terms of this order. [Para 44][1109-D-F]
8. The Development Agreement stands impounded and shall be forwarded by TSIIC within two weeks to the competent authority for registration and for assessment of stamp duty. The assessment to stamp duty and formalities for registration shall be completed within one month. The amount payable towards stamp duty, penalty (if any) and registration charges shall be paid initially by TSIIC into the account of the competent authority within two weeks of the determination and shall be adjusted against the refund payable by TSIIC to Unitech; The appeal filed by Unitech, arising out of SLP(C) No 9019 of 2019 is allowed in part by setting aside the direction of the Division Bench of the High Court which confined the liability to pay interest only with effect from 14 October 2015; Unitech shall be entitled to a refund of an amount of Rs.165 crores together with interest at the SBIPLR commencing from the respective dates of payment, computed in accordance with the provisions of the Development Agreement (except for compounding); The amount which has been deposited in the Registry of this Court in pursuance of the interim order shall be disbursed to Unitech together with accrued interest. The balance due and payable under the terms of this judgment shall be refunded by TSIIC to Unitech within two months from the receipt of a certified copy of this judgment; and In terms of the directions of the Single Judge of the High Court, TSIIC will be at liberty to pursue its remedies for apportionment in relation to APIIC in accordance with law. No opinion is expressed on the merits or tenability of the claim for apportionment asserted by TSIIC. [Para 45][1109-G-H; 1110-A-F]
ABL International Ltd. v. Export Credit Guarantee Corporation of India (2004) 3 SCC 553; State of UP v. Sudhir Kumar 2020 SCC online SC 847; Oriental Kuries Ltd. v. Lissa (2019) 19 SCC 732; Bhubaneshwar
Development Authority v. Susanta Kumar Mishra (2009)
4 SCC 684 : [2009] 2 SCR 149 – referred to.
As published in the Supreme Court Reports, Supreme Court of India. Text from the Indian Supreme Court Judgments open data set (Dattam Labs), CC BY 4.0.
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