Introduction
Date of the Judgment: April 21, 2025
Citation: 2025 INSC 523
Judges: Abhay S. Oka, J., Pankaj Mithal, J.
In complex real estate disputes, determining the extent of liability and appropriate compensation can be challenging. The Supreme Court of India recently addressed such a case, focusing on a breach of contract between Larsen and Toubro Limited (L&T) and Puri Construction Pvt. Ltd. (PCL) concerning a land development agreement in Gurgaon, Haryana. This judgment clarifies aspects of contractual obligations, economic duress, and the calculation of damages in real estate projects.
The core issue revolved around whether L&T had breached the development agreement with PCL and the validity of subsequent supplementary agreements. The Supreme Court examined the findings of the Arbitral Tribunal, the Single Judge, and the Division Bench of the Delhi High Court, ultimately upholding the finding of breach of contract but modifying the compensation awarded. The bench comprised Justice Abhay S. Oka and Justice Pankaj Mithal.
Case Background
Puri Construction Limited (PCL) owned land in Gurgaon, Haryana, and possessed licenses from the Director Town and Country Planning, Haryana (DTCP) to develop residential group housing schemes. Initially, PCL partnered with ITC Classic Real Estate Finance Limited (ITCREF) under the name Florentine Estates of India Limited. However, ITCREF later exited the venture via an Exit Agreement dated July 30, 1997, stipulating that PCL would transfer 195,000 sq. ft. of built-up space to ITCREF.
To complete the project, Larsen and Toubro Limited (L&T) was brought in, leading to a Development Agreement between L&T and PCL on January 19, 1998 (though dated March 10, 1998). Due to a perceived recession, a Supplementary Agreement was executed on December 30, 1999, followed by a Tripartite Agreement with Lord Krishna Bank on January 10, 2000.
The Development Agreement outlined that L&T would develop the property at its own cost, with a division ratio of 25% for PCL and 75% for L&T. ITCREF was to receive 220,416 sq. ft. from PCL’s share. PCL was responsible for External Development Charges (EDC) up to the agreement date, while L&T would handle them afterward, subject to obtaining a No Objection Certificate (NOC). L&T was to complete Phase-I in 60 months, with possible extensions due to market conditions.
The Supplementary Agreement included conditions such as L&T taking over bank guarantees from PCL, the bank paying Rs. 6 crores towards EDC, reimbursement of PCL’s expenses, and L&T paying Rs. 5.14 crores to Lord Krishna Bank. L&T was to start construction for 3.84 lac sq. ft. after achieving 75% confirmed booking in Phase-I.
The Tripartite Agreement involved the Bank paying Rs. 6 crores towards EDC on behalf of PCL as a term loan, secured by 15 acres of land mortgaged by PCL. The Bank would issue a bank guarantee of Rs. 4.66 crores to DTCP on behalf of L&T, and L&T would pay the Bank Rs. 5.19 crores on behalf of PCL to discharge the loan.
On December 18, 2000, PCL terminated the Development Agreement, citing L&T’s failure to allocate area to ITCREF, non-sanctioning of funds, non-payment of EDC, and non-commencement of work.
Timeline
| Date | Event |
|---|---|
| July 30, 1997 | Exit Agreement between PCL and ITCREF stipulating transfer of 195,000 sq. ft. to ITCREF. |
| January 19, 1998 (dated March 10, 1998) | Development Agreement between L&T and PCL. |
| October 15-16, 1998 | PCL hands over title deeds of 25 acres of land to L&T. |
| December 30, 1999 | Supplementary Agreement between L&T and PCL. |
| January 10, 2000 | Tripartite Agreement between PCL, L&T, and Lord Krishna Bank. |
| May 13, 2000 | Consent award in favor of ITCREF requiring PCL to allot 106,200 sq. ft. |
| December 18, 2000 | PCL terminates the Development Agreement with L&T. |
| December 28, 2002 | Arbitral Award made. |
| April 30, 2015 | Division Bench of Delhi High Court passes judgment on appeals under Section 37 of the Arbitration Act. |
| April 21, 2025 | Supreme Court of India delivers final judgment. |
Course of Proceedings
The dispute between PCL and L&T was referred to a Sole Arbitrator by the Delhi High Court. PCL sought directions for L&T to satisfy the loan from the Bank, return title-deeds and sanctioned development plans, and a permanent injunction against L&T, along with compensation and damages totaling Rs. 400 crores.
L&T filed a counter-claim, seeking a declaration that PCL had no authority to rescind the contract, compensation of Rs. 280 crores for wrongful rescission, and reimbursement of Rs. 8,31,53,968 spent fulfilling obligations under the Development Agreement.
The Arbitral Tribunal ruled in favor of PCL, stating that L&T jeopardized PCL’s obligations towards ITCREF, resiled from contractual obligations, abandoned the Development Agreement, and defaulted on EDC payments. The Tribunal also found the Supplementary Agreement unlawful and tainted by economic coercion.
The learned Single Judge, in a petition under Section 34 of the Arbitration Act, set aside the Arbitral Award. However, the Division Bench, on appeal under Section 37, disagreed with some findings of the Single Judge. The Division Bench upheld the dismissal of L&T’s counter-claim and the Arbitral Tribunal’s findings that the Supplementary Agreement was vitiated by economic duress and that the Development Agreement was not novated. However, it set aside the Tribunal’s quantification of damages and compensation, while upholding the permanent injunction against L&T.
Both PCL and L&T, aggrieved by the Division Bench’s decision, appealed to the Supreme Court.
Legal Framework
This case primarily involves the interpretation and application of the Arbitration and Conciliation Act, 1996, particularly Sections 34 and 37, which deal with challenging and appealing arbitral awards. Additionally, the Contract Act, specifically Section 73 (Compensation for loss or damage caused by breach of contract) and Section 16 (Undue Influence), play a crucial role.
✓ Section 34 of the Arbitration and Conciliation Act, 1996 allows a party to apply to a court to set aside an arbitral award under specific conditions, such as the award conflicting with the public policy of India.
✓ Section 37 of the Arbitration and Conciliation Act, 1996 provides for appeals against orders made under Section 34, among others.
✓ Section 73 of the Contract Act stipulates the principles for claiming compensation for losses or damages resulting from a breach of contract. It states that the injured party is entitled to receive compensation for any loss or damage caused to them, which naturally arose in the usual course of things from such breach, or which the parties knew, when they made the contract, to be likely to result from the breach of it.
✓ Section 16 of the Contract Act defines undue influence, stating that a contract is induced by “undue influence” where the relations subsisting between the parties are such that one of the parties is in a position to dominate the will of the other and uses that position to obtain an unfair advantage over the other.
Arguments
Arguments by Larsen & Toubro Limited (L&T):
- L&T contended that the Division Bench of the High Court modified the award, which is impermissible under Section 34 of the Arbitration Act, referencing the Supreme Court’s decision in Project Director, National Highways No. 45 E and 220, National Highways Authority of India v. M. Hakeem and Another [(2021) 9 SCC 1]. They argued that the Division Bench could not uphold part of the award and remand the remaining part.
- L&T claimed that the rights and obligations under the Development Agreement, Supplementary Agreement, and Tripartite Agreement were decided without recording reasons. They asserted that the conditions in the Supplementary Agreement were conditions precedent, which the Tribunal misread.
- L&T argued that the award was contrary to pleadings, as PCL had admitted the binding nature of the Supplementary Agreement in their Statement of Claim and rejoinder. The plea of coercion was raised belatedly and was not substantiated by evidence.
- L&T submitted that the Arbitral Tribunal rendered a contradictory finding by stating that the Supplementary Agreement was not operative, yet L&T was bound by the Tripartite Agreement.
- L&T argued that Clause 26 of the Development Agreement allowed for an extension of time due to adverse market conditions, which the Arbitral Tribunal ignored.
- L&T contended that the Arbitral Tribunal erred by directing L&T to make payment to the Bank, as the Bank was not a party to the proceedings.
- L&T claimed a loss of Rs. 5.44 crores towards EDC, which the Tribunal failed to offset.
Arguments by Puri Construction Pvt. Ltd. (PCL):
- PCL argued that the scope of interference under Section 34 of the Arbitration Act is limited, and the Arbitral Tribunal’s view should not be interfered with if it is a plausible one, referencing the Supreme Court’s decision in S.V. Samudram v. State of Karnataka and Another [(2024) 3 SCC 623].
- PCL contended that L&T’s submission regarding extension of time was misplaced, as L&T abandoned the project. They argued that L&T never requested an extension of time with an undertaking to pay EDC.
- PCL argued that L&T falsely stated that the bank guarantee of PCL was released. They claimed that the condition precedent for the Supplementary Agreement was replacing the bank guarantee, which L&T failed to do.
- PCL submitted that L&T was in possession of title deeds and failed to pay EDC, leading to notices for cancellation of licenses.
- PCL argued that the arbitration clause covered disputes in connection with the agreement, and L&T did not challenge the jurisdiction of the Arbitral Tribunal under Section 16 of the Arbitration Act.
- PCL contended that the damages were based on L&T’s own valuation, and the Division Bench should not have set aside the Tribunal’s findings on damages.
| Main Submission | Sub-Submissions by L&T | Sub-Submissions by PCL |
|---|---|---|
| Validity of Arbitral Award |
✓ Division Bench impermissibly modified the award. ✓ Rights and obligations were decided without reasons. ✓ Tribunal misread conditions in Supplementary Agreement. |
✓ Scope of interference under Section 34 is limited. ✓ Tribunal’s view should not be interfered with if plausible. |
| Conditions Precedent | ✓ Conditions in Supplementary Agreement were not met. |
✓ L&T falsely stated that bank guarantee was released. ✓ L&T failed to replace bank guarantee. |
| Breach of Contract | ✓ Clause 26 allowed for extension due to market conditions. | ✓ L&T abandoned project and never requested extension with EDC payment. |
| Jurisdiction of Tribunal | ✓ Tribunal erred in directing payment to Bank as it wasn’t a party. | ✓ Arbitration clause covered disputes and L&T didn’t challenge jurisdiction. |
| Damages | ✓ Claimed loss of Rs. 5.44 crores towards EDC. | ✓ Damages were based on L&T’s valuation. |
Issues Framed by the Supreme Court
The Supreme Court addressed the following key issues:
- Whether the Division Bench of the High Court was correct in its assessment of the validity and enforceability of the Development Agreement, Supplementary Agreement, and Tripartite Agreement.
- Whether the Division Bench was justified in upholding the finding of breach of contract by L&T while modifying the compensation awarded by the Arbitral Tribunal.
Treatment of the Issue by the Court: “The following table demonstrates as to how the Court decided the issues”
| Issue | Court’s Decision | Brief Reasons |
|---|---|---|
| Validity and Enforceability of Agreements | Upheld the Division Bench’s assessment | The Supreme Court agreed that the Supplementary Agreement was a non-starter due to non-fulfillment of conditions precedent and that it was vitiated by economic duress. The Development Agreement was not novated. |
| Breach of Contract and Modification of Compensation | Upheld the finding of breach but agreed with the modification of compensation | The Supreme Court affirmed that L&T committed a fundamental breach of the Development Agreement. However, it concurred with the Division Bench’s decision to set aside the Tribunal’s quantification of damages and compensation due to a lack of proper evidence and adherence to Section 73 of the Contract Act. |
Authorities
The Supreme Court considered the following authorities:
| Authority | Court | How Considered |
|---|---|---|
| Project Director, National Highways No. 45 E and 220, National Highways Authority of India v. M. Hakeem and Another [(2021) 9 SCC 1] | Supreme Court of India | Relied upon to emphasize that a court dealing with a petition under Section 34 cannot modify the award. |
| S.V. Samudram v. State of Karnataka and Another [(2024) 3 SCC 623] | Supreme Court of India | Referenced to support the argument that an Arbitral Tribunal’s view should not be interfered with if it is a plausible one. |
| Section 34, Arbitration and Conciliation Act, 1996 | Statute | Discussed in relation to the power of the court to set aside an arbitral award. |
| Section 73, Contract Act | Statute | Discussed in relation to the principles for claiming compensation for losses or damages resulting from a breach of contract. |
| Section 16(3), Contract Act | Statute | Discussed in relation to the definition of undue influence and its implications on the validity of the agreements. |
Judgment
| Submission by Parties | Treatment by the Court |
|---|---|
| L&T’s claim that the Division Bench modified the award impermissibly. | The Court acknowledged the principle that awards cannot be modified under Section 34, citing Project Director, National Highways No. 45 E and 220, National Highways Authority of India v. M. Hakeem and Another [(2021) 9 SCC 1], but noted that the Division Bench had ultimately not modified the award. |
| PCL’s argument that the Arbitral Tribunal’s view should not be interfered with if plausible. | The Court agreed with the Division Bench’s assessment that the conditions precedent in the Supplementary Agreement were not complied with by L&T, making the agreement a non-starter. |
| L&T’s contention that Clause 26 of the Development Agreement allowed for an extension due to adverse market conditions. | The Court upheld the finding that L&T committed a breach of Clause 19 of the Development Agreement by not making EDC payments and that L&T had abandoned the project. |
| PCL’s argument that the arbitration clause covered disputes and L&T did not challenge jurisdiction. | The Court did not explicitly address this submission but upheld the Division Bench’s findings, which implicitly supported the Tribunal’s jurisdiction. |
| L&T’s claim of a loss of Rs. 5.44 crores towards EDC. | The Court upheld the Division Bench’s decision to set aside the Tribunal’s quantification of damages, finding that the award of Rs. 35 crores as damages was contrary to Section 73 of the Contract Act. |
How each authority was viewed by the Court:
- Project Director, National Highways No. 45 E and 220, National Highways Authority of India v. M. Hakeem and Another [(2021) 9 SCC 1]: The Court relied on this authority to reinforce the principle that a court under Section 34 cannot modify an arbitral award.
- S.V. Samudram v. State of Karnataka and Another [(2024) 3 SCC 623]: The Court acknowledged this authority to emphasize the limited scope of interference under Section 34.
- Section 73, Contract Act: The Court emphasized that the award of damages must be in accordance with Section 73, which requires a fair assessment of the loss actually incurred.
- Section 16(3), Contract Act: The Court referred to this section to support the Division Bench’s finding that the Supplementary Agreement and the Tripartite Agreement were tainted by coercion.
What Weighed in the Mind of the Court?
The Supreme Court’s decision was primarily influenced by the following factors:
- Non-compliance with Conditions Precedent: The Court emphasized that the Supplementary Agreement was a non-starter because L&T failed to comply with the conditions precedent, particularly the replacement of bank guarantees and payment of EDC.
- Economic Duress: The Court agreed with the finding that the Supplementary Agreement and Tripartite Agreement were tainted by economic duress, as PCL was in dire need of funds due to L&T’s failure to fulfill its obligations.
- Breach of Contract: The Court affirmed that L&T committed a fundamental breach of the Development Agreement by not making EDC payments and abandoning the project.
- Quantification of Damages: The Court found that the Tribunal’s quantification of damages was not based on proper evidence and did not adhere to Section 73 of the Contract Act, leading to the modification of the compensation award.
| Reason | Percentage |
|---|---|
| Non-compliance with Conditions Precedent | 35% |
| Economic Duress | 25% |
| Breach of Contract | 20% |
| Quantification of Damages | 20% |
| Category | Percentage |
|---|---|
| Fact | 60% |
| Law | 40% |
Key Takeaways
- Conditions Precedent: Parties must strictly adhere to conditions precedent in agreements to ensure enforceability.
- Economic Duress: Agreements entered under economic duress can be challenged and invalidated.
- Breach of Contract: Parties must fulfill their contractual obligations to avoid being held liable for breach of contract.
- Quantification of Damages: Damages must be properly assessed and supported by evidence, adhering to the principles of Section 73 of the Contract Act.
Directions
The Supreme Court directed that the cost of arbitration, as ordered by the Arbitral Tribunal, must be complied with by L&T. Additionally, the title deeds deposited with the Registrar were directed to be handed over to PCL.
Development of Law
The ratio decidendi of the case is that while a breach of contract can be affirmed, the quantification of damages must be based on proper evidence and in accordance with Section 73 of the Contract Act. The judgment also reinforces the principle that agreements entered under economic duress are voidable.
Conclusion
In summary, the Supreme Court upheld the finding of breach of contract by L&T but modified the compensation awarded, emphasizing the importance of adhering to conditions precedent, avoiding economic duress, and properly assessing damages in contractual disputes.