Supreme Court clarifies compensation liability in real estate disputes: Parsvnath Developers vs. Gagandeep Brar (2023)

Introduction

Date of the Judgment: 13 April 2023
Citation: 2023 INSC 370
Judges: M.R. Shah, J. and A.S. Bopanna, J.
When a real estate project is delayed, who should bear the burden of compensating the homebuyers? The Supreme Court of India recently addressed this question in a case involving a dispute between a developer, Parsvnath Developers Ltd., and the Chandigarh Housing Board (CHB). The core issue revolved around the liability for compensation to homebuyers due to project delays. The Supreme Court clarified that the liability should be shared between the developer and the CHB, based on a prior arbitration award. The judgment was delivered by a bench of Justices M.R. Shah and A.S. Bopanna, with Justice M.R. Shah authoring the opinion.

Case Background

The Chandigarh Administration appointed CHB as the nodal agency for the development of an integrated project named “Pride Asia” at Rajiv Gandhi Chandigarh Technological Park on 01 December 2005. The bid of Parsvnath Developers Ltd. was accepted, and a Development Agreement was signed between CHB and the developer on 06 October 2006 for development rights on 123 acres of land. The developer then advertised the project for sale of flats and penthouses. Subsequently, Tripartite Agreements were executed between the Developer, CHB, and the flat owners/allottees. Clause 9(a) of this agreement stated that construction was likely to be completed within 36 months from the date of the Development Agreement, i.e., 06 October 2006. However, the developer could not complete the construction, citing CHB’s failure to hand over unencumbered land.

A dispute arose between the developer and CHB, which was referred to arbitration. A former Judge of the Supreme Court was appointed as the sole arbitrator. While the arbitration was ongoing, homebuyers filed complaints before various consumer forums due to delays in allotment. The National Consumer Disputes Redressal Commission (National Commission) modified the orders of the lower forums, directing a uniform interest rate of 9% to be paid to the allottees. It also directed that compensation under clause 9(c) of the Flat Buyer Agreement be paid as an interim measure, subject to the arbitration’s outcome.

Timeline

Course of Proceedings

The District Forum and the State Commission allowed a batch of complaints filed by the homebuyers, which were challenged before the National Commission. The National Commission modified the orders of the lower forums, directing a uniform interest rate of 9% to be paid to the allottees. It also directed that compensation under clause 9(c) of the Flat Buyer Agreement be paid as an interim measure, subject to the arbitration’s outcome. The Supreme Court initially stayed the part of the National Commission’s order concerning compensation under clause 9(c). Later, the Supreme Court disposed of the matter, upholding the National Commission’s order, but allowed the developer to raise objections based on the arbitrator’s award in execution proceedings.

The arbitrator’s award, dated 09 January 2015, stipulated that any amount payable on account of refund, interest, or compensation would be borne by the developer and CHB in a 70:30 ratio. The Supreme Court, in its order dated 21 April 2015, noted the arbitrator’s award but did not enter into its controversy, allowing the executing court to consider objections based on the award. Subsequently, the State Commission ordered the developer to pay compensation as per clause 9(c) of the Flat Buyer Agreement. The National Commission dismissed the developer’s appeal executions, leading to the present appeals before the Supreme Court.

Legal Framework

The core of the legal framework in this case revolves around Clause 9 of the Flat Buyer Agreement, particularly clause 9(c), which deals with compensation for delays in construction. This clause was the basis for the homebuyers’ claims for compensation. The Development Agreement between CHB and the developer, and the subsequent arbitration award, also form a crucial part of the legal framework. The arbitration award, dated 09 January 2015, determined the liability for any amount payable on account of refund, interest, or compensation to be shared between the developer and CHB in a 70:30 ratio. The relevant clauses are:

• Clause 9(a) of the Tripartite Agreement: “The construction of the flats was likely to be completed within 36 months from the date of signing of the Development Agreement between CHB and the appellant, i.e., 06.10.2006.”
• Clause 9(c) of the Flat Buyer Agreement: This clause stipulates compensation for delays in construction, which was the subject of dispute in this case.

The arbitration award, which was brought to the notice of the Supreme Court, also played a significant role in determining the liability between the developer and CHB. The Supreme Court’s earlier orders, especially the one dated 21 April 2015 and 17 December 2019, also form part of the legal framework, as they addressed the issue of compensation and the applicability of the arbitration award.

Arguments

Arguments by the Developer (Parsvnath Developers Ltd.):

• The developer argued that the National Commission’s order was contrary to the Supreme Court’s decision in Chandigarh Housing Board v. M/s Parasvanath Developers Pvt. Ltd., where it was held that clause 9(c), regarding compensation for delay, was not applicable.
• It was submitted that both the developer and CHB were responsible for the delay, and therefore, clause 9(c) of the Flat Buyer Agreement should not be invoked, especially since the conditions in clause 9(a) were not met.
• The developer contended that the arbitration award, which had attained finality, stipulated that the liability to pay compensation should be shared in a 70:30 ratio between the developer and CHB. The Supreme Court had also observed that the split of 70:30 under the arbitration award must be given effect.
• The developer argued that the National Commission and State Commission orders, directing the developer to pay the entire compensation, were unsustainable.

Arguments by the Chandigarh Housing Board (CHB):

• CHB argued that as per clause 9(c) of the Flat Buyer Agreement, the liability to pay compensation to the buyers/allottees was solely that of the developer.
• It was submitted that the plain language of clause 9(c), which is a commercial agreement, is binding on the parties.
• CHB contended that the liability of the developer to pay compensation under clause 9(c) was affirmed by the Supreme Court in its order dated 21 April 2015.
• CHB relied on the orders passed by the Supreme Court on 21 April 2015 and 17 December 2019 to support its argument that the developer was solely liable for compensation.

Summary of Arguments

Issues Framed by the Supreme Court

The primary issue framed by the Supreme Court was:

1. Whether the compensation awarded by the State Commission in terms of clause 9(c) of the Flat Buyer Agreement is payable solely by the developer, or is it to be shared between the developer and the CHB in the ratio of 70:30?

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

Cases:

• Chandigarh Housing Board v. M/s Parasvanath Developers Pvt. Ltd. (Civil Appeal No. 10748 of 2016): The Supreme Court had observed that clause 9(c) was not applicable and that the 70:30 split under the arbitration award must be given effect.

Legal Provisions:

• Clause 9(a) of the Tripartite Agreement: Stipulated the timeline for construction completion.
• Clause 9(c) of the Flat Buyer Agreement: Provided for compensation for delays in construction.

Treatment of Authorities by the Court

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• The Supreme Court followed the ratio in Chandigarh Housing Board v. M/s Parasvanath Developers Pvt. Ltd. [Civil Appeal No. 10748 of 2016], which stated that clause 9(c) was not applicable and that the 70:30 split under the arbitration award must be given effect.
• The Court considered clause 9(a) of the Tripartite Agreement, noting that the conditions in clause 9(a) were not met, which was a factor in determining the applicability of clause 9(c).
• The Court interpreted clause 9(c) of the Flat Buyer Agreement to determine the liability for compensation, ultimately holding that it was to be shared between the developer and CHB.
• The Court gave effect to the 70:30 liability split as determined by the arbitrator in the Arbitration Award dated 09.01.2015.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the following factors:

• The finality of the arbitration award, which mandated a 70:30 split in liability between the developer and CHB.
• The previous order of the Supreme Court in Chandigarh Housing Board v. M/s Parasvanath Developers Pvt. Ltd., which had observed that clause 9(c) was not applicable and that the 70:30 split under the arbitration award must be given effect.
• The fact that the sale proceeds from the flat buyers were also apportioned in the same 70:30 ratio between the developer and CHB, as supported by the Escrow Agreement.

The Court emphasized that the liability for compensation should be shared between the developer and CHB in the ratio of 70:30, as determined by the arbitrator and affirmed in previous court orders. The Court’s reasoning was based on the principle that the arbitration award, having attained finality, should be given effect.

Sentiment Analysis of Reasoning

Fact:Law Ratio

Logical Reasoning

Reasoning

The court’s reasoning was primarily based on the principle of giving effect to the arbitration award, which had attained finality. The court observed that the arbitrator had determined that the liability for compensation should be shared between the developer and CHB in a 70:30 ratio. The Supreme Court had also previously observed in Chandigarh Housing Board v. M/s Parasvanath Developers Pvt. Ltd. that this ratio should be followed. The court noted that the sale proceeds from the flat buyers were also apportioned in the same ratio, which further supported the decision to share the liability. The court rejected the argument that the developer was solely liable under clause 9(c) of the Flat Buyer Agreement, holding that the arbitration award and the previous Supreme Court order should prevail.

The court stated: “The compensation in terms of clause 9(c) of the Flat Buyer Agreement is to be shared between the developer and the CHB in the ratio of 70:30 as apportioned/determined by the learned sole arbitrator in the award dated 09.01.2015 and thereafter as observed by this Court while disposing of/dismissing Civil Appeal No. 10748/2016.” The court also noted, “In any case, we find that such division is well-founded as the sale proceeds from the flat buyers were apportioned in the 16 same ratio of 70:30 between the Developer and CHB.” The court further clarified, “The impugned orders passed by the National Commission and that of the State Commission are required to be modified to the extent holding the appellant – developer liable to pay compensation under clause 9(c) of the Flat Buyer Agreement to the extent of 70% and 30% liability would be upon the Chandigarh Housing Board.”

Key Takeaways

• Apportionment of Liability: In cases where both the developer and a housing board are involved in a project, the liability for compensation to homebuyers may be shared based on arbitration awards and contractual agreements.
• Finality of Arbitration Awards: Arbitration awards that have attained finality will be given effect by the courts, and the parties will be bound by the terms of the award.
• Importance of Contractual Agreements: The specific clauses in agreements, such as the Flat Buyer Agreement, will be interpreted in light of the circumstances and other relevant factors, such as arbitration awards.
• Precedence of Previous Supreme Court Orders: Previous orders of the Supreme Court, especially those addressing the same issue, will be considered and followed.

Directions

The Supreme Court modified the orders of the National Commission and the State Commission to the extent that the developer was held liable to pay 70% of the compensation, and the Chandigarh Housing Board was held liable to pay the remaining 30%.

Specific Amendments Analysis

There was no specific amendment discussed in the judgment.

Development of Law

The ratio decidendi of this case is that when an arbitration award has determined the apportionment of liability between a developer and a housing board, that award must be given effect, especially when it has attained finality. This case clarifies that the liability for compensation in real estate disputes may not always fall solely on the developer but can be shared with the housing board based on the terms of the arbitration award and contractual agreements. This represents a clarification of the law, ensuring that all parties involved in a real estate project are held accountable based on their respective responsibilities as determined by arbitration and contract.

Conclusion

In conclusion, the Supreme Court’s judgment in Parsvnath Developers Ltd. vs. Gagandeep Brar and Another clarified that the liability for compensation in real estate disputes should be shared between the developer and the Chandigarh Housing Board in a 70:30 ratio, as per the arbitration award. The court emphasized the finality of the arbitration award and the importance of giving effect to its terms. This decision provides clarity on the apportionment of liability in similar cases and highlights the significance of arbitration awards in resolving such disputes.

Category

Parent Category: Consumer Law
Child Category: Real Estate Disputes
Child Category: Compensation
Parent Category: Arbitration Law
Child Category: Enforcement of Award
Parent Category: Contract Law
Child Category: Interpretation of Clauses
Parent Category: Consumer Law
Child Category: Clause 9(c) of Flat Buyer Agreement

FAQ

Q: What was the main issue in this case?
A: The main issue was whether the compensation for delay in construction should be paid solely by the developer or shared between the developer and the Chandigarh Housing Board (CHB).

Q: What did the Supreme Court decide?
A: The Supreme Court decided that the compensation should be shared between the developer and CHB in a 70:30 ratio, as per the arbitration award.

Q: Why did the Supreme Court decide to share the liability?
A: The Supreme Court based its decision on the finality of the arbitration award, which had determined the 70:30 split. It also noted that the sale proceeds were apportioned in the same ratio.

Q: What is the significance of the arbitration award in this case?
A: The arbitration award was crucial in determining the liability. The Supreme Court emphasized that the award, having attained finality, should be given effect.

Q: What does this judgment mean for homebuyers?
A: This judgment clarifies that in cases involving both developers and housing boards, the liability for compensation may be shared. Homebuyers should be aware of the contractual agreements and any arbitration awards that may affect their claims.

Q: What is clause 9(c) of the Flat Buyer Agreement?
A: Clause 9(c) of the Flat Buyer Agreement is a clause that stipulates compensation for delays in construction. In this case, it was the basis for the homebuyers’ claims for compensation.