Arbitration Clause in Contract Does Not Bar the Writ Jurisdiction of High Court Under Article 226:Supreme Court 

UNITECH Limited & Ors.  Vs.  Telangana State Industrial Infrastructure Corporation (TSIIC) & Ors.

Brief facts of the case 

The appeal in the given case was filed against the judgment dated 1 April 2019 of the Division Bench of the High Court for the State of Telangana. 

In the year 2007, the Andhra Pradesh Industrial Infrastructure Corporation Ltd. (APIIC)  invited a bid to construct an integrated township project, and the bid submitted by Unitech was accepted. Unitech was required to pay an amount of 140 crores as project land cost and 5 crores as project development expenses. However, the litigation regarding the project land was pending. APIIC subjected the allotment of the land to the outcome of the pending litigation. 

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The High Court of Andhra Pradesh, in the proceedings concerning the project land, held that the Government of Andhra Pradesh did not have title to the project land. Following this decision, Unitech (appellant) requested APIIC to clarify the position and to jointly explore possible solutions to the title dispute over the project site. 

Meanwhile, the State of Andhra Pradesh was reorganized, Unitech addressed the letter to the newly formed Telangana State Industrial Infrastructure Corporation (TSIIC)(respondent), seeking its intervention in clarifying the status of the land with a clear title and compensation for loss of time and opportunity. 

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After the Supreme Court, upheld the decision of the High Court that the Government of Andhra Pradesh did not have title to the project land. After this, Unitech requested APIIC and TSIIC, to refund the amounts which they have received for the land together with interest and damages for the loss suffered by them. A writ petition seeking a refund was filed before the High Court for the State of Telangana. 

The Single Bench of the High Court allowed Unitech’s petition for a refund with interest to be compounded from September 2007 and the Division Bench modified the term of interest and directed payment from October 2015 by TSIIC. 

The Special Leave Petition was filed by Unitech and further by TSIIC and the State of Telangana. This appeal arose out of these three proceedings under Article 136. 

Appellant’s argument

It was submitted that Unitech fulfilled the peremptory obligation to deposit an amount of ₹165 crores. The ‘Political force majeure events’ harmed the project over nine months, thus, Unitech was to be compensated from APIIC. 

The failure of the title of the Government of Andhra Pradesh made the developer entitled to a refund with the interest compounded at SBI-PLR. The existence of an arbitration clause would not bar High Court under Article 226 to order the refund with interest, where a private developer agreed on the representation that the government has a title but could not proceed due to the failure of title. 

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The writ jurisdiction of the High Court under Article 226 is not ruled out in a contractual matter, especially, in the present case where there are no disputes regarding the basic facts. The money was paid in 2007, the refund must date back to the date of initial payment. Thus, the interest must also be computed from the date on which each installment was paid. 

The reversal of title of the Government of Andhra Pradesh, as against the LoA issued,  entitle the developer to a refund with interest, as contracted from the date of initial payment. 

Respondent’s argument

It was submitted that Unitech was aware of the pendency of litigation before the High Court arising out of the judgment dated 30 April 2007, which ruled that in favour of title of the Government of Andhra Pradesh. Unitech did not claim political force majeure, until the decision was against the title of Government of Andhra Pradesh on 14 October 2015. 

The High Court has brought about a just balancing of equities by granting interest from the date of the decision of the Supreme namely, 14 October 2015. 

Further, it was argued that the liability to refund the principal amount along with the interest cannot be imposed on TSIIC alone. The liability to refund the principal amount together with interest must be divided between TSIIC and APIIC in terms of the provisions contained in the Andhra Pradesh Reorganization Act, 2014. 

However, APIIC made submissions opposed to the submissions urged on the behalf of the State of Telangana and TSIIC that the liability to refund the principal and interest must be apportioned between TSIIC and APIIC. 

The APIIC submitted that, before the appointed date, 2 June 2014, the final audit was completed on 1 June 2014 and a joint certificate was issued by the Managing Directors of TSIIC/APIIC and in the demerger scheme all assets and liabilities having the bearing on the balance sheet on 1 June 2014, was duly apportioned between Andhra Pradesh and Telangana. 

Under the Demerger scheme, the liability concerning the dues to Unitech has to be borne by TSIIC. This was evident from schedule III which provides that the project site falls within the jurisdiction of TSIIC. The liability in terms of the demerger scheme is that of TSIIC. 

Several objections were raised by TSIIC concerning the correctness of the High Court judgment, on the following grounds. The High Court ought not to have entertained a writ petition in a purely contractual matter. The Development agreement consists of an Arbitration clause in Article 23.1. 

TSIIC can grant land to Unitech and hence a direction for a refund with interest ought not to have been given. There was a violation of bid terms and LoA by Unitech. Unitech bid for the project and accepted LoA with full knowledge of the pending litigation ad agreed to await the outcome. 

APIIC agreed with Unitech and thus to share the liabilities in the population ratio of approximately 58:42. The State of Telangana similarly assailed the judgment of the High Court. 

Observation by the Court

It was observed that the jurisdiction under Article 226 of the Constitution does not entirely exclude the contractual matter. A public law remedy exists for enforcing legal rights subjected to well-settled parameters. 

In the case of ABL International Ltd. v. Export Credit Guarantee Corporation of India, it was concluded that writs under Article 226 are maintainable for asserting the contractual rights against the state, or its instrumentalities as defined in Article 12 of the Constitution. 

The presence of an arbitration clause in a contract between a state instrumentality and a private party has not acted as an absolute bar to availing remedies under Article 226 of the Constitution. Thus, the arbitration clause under Article 23.1 of the Development Agreement does not bar the remedies under Article 226. 

If the state instrumentality violates the constitutional mandate under Article 14 to act fairly and reasonably, the remedy under the plenary powers of Article 226 would lie. 

The entitlement of Unitech to the amount of refund 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 furnish the basis for the “ compensatory justice”. 

The Supreme Court in the case of Central Bank of India vs. Ravindra, when considered the question of penal interest rates, it was held that even if the rate is not penal the Court may reduce it if the interest is excessive and the transaction was substantially unfair. Similarly, in interpreting Section 74 of the Indian Contract Act, 1872, the Supreme Court held that a contractually stipulated interest rate, if found to be penal, excessive, or in terrorem can be reduced to a reasonable rate of compensation. 

Therefore, considering the position of Unitech which knowingly entered into the Development Agreement with full awareness of the pending litigation and to continue with the project after a delay of over seven-year, thus, the Court found that the interest rate was payable to Unitech, without compounding. 

The Supreme Court followed the course of action that was adopted by the learned Single Judge and the Court did not adjudicate upon the rights inter se between TSIIC and APIIC. 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 according to the law over its claim for apportionment on which, the Court expressed no final opinion. 

The decision of the Court 

Unitech was held to be entitled to the refund of ₹ 165 crores together with the interest at the SBI-PLR commencing from the respective dates of payment following provisions of the Development Agreement. (except for compounding).

The appeal was disposed of. The appeal arising out of the SLP filed by the State of Telangana and TSIIC also stood disposed of with no order as to costs.  

Click here to read UNITECH Limited & Ors.  vs.  Telangana State Industrial Infrastructure Corporation (TSIIC) & Ors.


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