Supreme Court Orders Refund with Interest in Unitech Land Dispute: Unitech vs. TSIIC (2021)

Introduction

Date of the Judgment: 17 February 2021

Citation: (2021) INSC 74

Judges: Dr Dhananjaya Y Chandrachud, J and MR Shah, J

Can a state entity avoid its obligations to refund payments with interest when a land development agreement fails due to a lack of clear title? The Supreme Court of India recently addressed this critical question in a case involving Unitech Limited and the Telangana State Industrial Infrastructure Corporation (TSIIC). The core issue revolved around a failed land development project where Unitech had paid a substantial amount to TSIIC, but the project could not proceed due to title issues. The Supreme Court, in this judgment, clarified the obligations of state entities in such contractual disputes. The judgment was authored by Dr. Justice Dhananjaya Y Chandrachud, with Justice MR Shah concurring.

Case Background

In September 2007, the Andhra Pradesh Industrial Infrastructure Corporation Ltd. (APIIC) invited bids for an integrated township project. Unitech’s bid was accepted on 28 November 2007, requiring an initial payment of ₹20 crores as earnest money. Unitech was further obligated to pay ₹140 crores as project land cost and ₹5 crores towards project development expenses. However, the land allotment was subject to the outcome of pending litigation.

Between December 2007 and January 2008, Unitech paid ₹165 crores in installments. A Development Agreement was signed on 19 August 2008, between APIIC, Unitech, and Nacre Gardens Hyderabad Limited, a special purpose vehicle (SPV).

In April 2011, APIIC issued a show cause notice to Unitech to commence work. Unitech responded by stating that APIIC must first establish its title to the land and remove encumbrances. Unitech also claimed a “political force majeure event” had occurred. In December 2011, the High Court of Andhra Pradesh ruled that the government did not have title to the project land. Following this, Unitech requested APIIC to clarify the situation and explore solutions.

In 2014, the State of Andhra Pradesh was reorganized into Andhra Pradesh and Telangana. Unitech then sought intervention from the newly formed Telangana State Industrial Infrastructure Corporation (TSIIC) in March 2015, seeking clarification on land status, handover of possession, and compensation. After the Supreme Court upheld the High Court’s decision on 9 October 2015, Unitech requested a refund of all amounts with interest and damages.

Unitech initially filed proceedings before the Supreme Court under Article 32, which were later disposed of, allowing them to approach the High Court. A writ petition was then filed in the High Court seeking a refund of ₹165 crores with interest. The Single Judge allowed the writ petition, ordering a refund with interest. This order was partially modified by the Division Bench, which directed interest to be calculated from 14 October 2015, instead of the date of the initial payment.

Timeline:

Legal Framework

The judgment refers to several legal provisions and contractual clauses, which are pivotal to the case:

• Article 226 of the Constitution of India: This article grants High Courts the power to issue writs for the enforcement of fundamental rights and for any other purpose. The Supreme Court clarified that this power extends to contractual matters, especially when state entities act arbitrarily.
• Section 68 of the Andhra Pradesh Reorganisation Act 2014: This section deals with the continuation of companies and corporations constituted for the existing State of Andhra Pradesh and their functioning in the successor states. It states that the assets, rights, and liabilities of these entities shall be apportioned between the successor States.
• Section 71 of the Andhra Pradesh Reorganisation Act 2014: This section empowers the Central Government to issue directions regarding the division of interests and shares of the existing State of Andhra Pradesh in the companies listed in the Ninth Schedule between the successor States.
• Development Agreement Clauses:
  • Article 1(h): Defines “Applicable Rate” as the prime lending rate of the State Bank of India, compounded annually.
  • Article 1(l): Defines “Compensatory Payment” as the sum of the total purchase price and interest calculated at the SBI PLR from the date of the first payment.
  • Article 3.1: Obligates APIIC to transfer the land free from encumbrances upon payment of the last installment of the total purchase price.
  • Article 13.3: Specifies APIIC’s obligations, including handing over land without encumbrances.
  • Article 14.3.1: States that if APIIC cannot execute the sale deed, it must pay compensatory payment to the developer.
  • Article 14.3.4: Protects the developer from liability for failure to meet obligations due to APIIC’s default or title issues.
  • Article 17.2(a): Defines “political force majeure events” to include litigation related to APIIC’s title to the project site.
  • Article 17.6: Allows the developer to terminate the agreement if a political force majeure event materially impacts the project for over nine months, and entitles them to compensatory payment.

Arguments

The arguments presented by the parties can be summarized as follows:

Unitech’s Submissions:

• Main Submission: Unitech argued that it was entitled to a full refund with interest from the date of initial payment due to the failure of APIIC to provide clear title to the land.
  • Sub-argument 1: APIIC failed to convey title to the land, which was a fundamental condition of the agreement.
  • Sub-argument 2: The Supreme Court’s judgment on 9 October 2015, conclusively established that the Government of Andhra Pradesh did not have title to the land.
  • Sub-argument 3: Unitech had deposited ₹165 crores with the Government of Andhra Pradesh since September 2007.
  • Sub-argument 4: The project cannot proceed without clear title to the land.
  • Sub-argument 5: The Development Agreement stipulated that in the event of a political force majeure event, which included litigation over title, Unitech was entitled to compensatory payment.
  • Sub-argument 6: The Single Judge of the High Court had correctly awarded interest from the date of the first payment, and the Division Bench erred in restricting it to 14 October 2015.

TSIIC and State of Telangana’s Submissions:

• Main Submission: TSIIC and the State of Telangana did not dispute the maintainability of the writ petition or Unitech’s entitlement to a refund but contested the date from which interest should be awarded and the apportionment of liability.
  • Sub-argument 1: The Letter of Award (LoA) dated 28 November 2007, put Unitech on notice of the pending litigation.
  • Sub-argument 2: Unitech was aware of the pending appeal and continued to pursue the project.
  • Sub-argument 3: The High Court had balanced the equities by granting interest from 14 October 2015.
  • Sub-argument 4: The liability should be apportioned between TSIIC and APIIC based on the Andhra Pradesh Reorganisation Act 2014.
  • Sub-argument 5: TSIIC had already deposited 42% of the principal sum and interest, and the remaining liability should be shared by APIIC.

APIIC’s Submissions:

• Main Submission: APIIC opposed the apportionment of liability, arguing that the liability to refund was solely on TSIIC based on the demerger scheme.
  • Sub-argument 1: A final audit was completed on 1 June 2014, and a joint certificate was issued by the Managing Directors of TSIIC and APIIC stating that all assets and liabilities were duly apportioned.
  • Sub-argument 2: The demerger scheme stipulated that the liability in respect of dues payable to Unitech had to be borne by TSIIC, as the project site fell within the jurisdiction of TSIIC.

Submissions Table

Issues Framed by the Supreme Court

The Supreme Court framed the following key issues for consideration:

1. Whether the writ petition under Article 226 of the Constitution was maintainable in a contractual dispute.
2. Whether Unitech was entitled to a refund of the amounts paid, and if so, from what date should interest be calculated.
3. Whether the liability to refund the principal amount together with interest should be imposed on TSIIC alone or apportioned between TSIIC and APIIC.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues:

Authorities

The Supreme Court considered the following authorities:

Cases

Legal Provisions

Judgment

The Supreme Court’s judgment addressed the submissions and authorities as follows:

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

How each authority was viewed by the Court?

• The Court relied on ABL International Ltd. v. Export Credit Guarantee Corporation of India [(2004) 3 SCC 553] to establish the maintainability of writ petitions in contractual disputes involving state entities.
• The Court followed the principles laid down in State of UP v. Sudhir Kumar [2020 Scconline SC 847] and Popatrao Vynkatrao Patil v. State of Maharashtra [Civil Appeal 1600 of 2000], which reiterated the ABL International principles.
• The Court cited Harbanslal Sahnia v. Indian Oil Corporation Ltd. [(2003) 2 SCC 107] and Ram Barai Singh & Co. v. State of Bihar & Ors. [(2015) 13 SCC 592] to emphasize that the presence of an arbitration clause does not bar the jurisdiction of the High Court under Article 226.
• The Court referred to State of Andhra Pradesh through Principal Secretary v. Pratap Karan [(2016) 2 SCC 82], which upheld the High Court’s decision on the lack of title, confirming the failure of the foundational representation in the contract.
• The Court cited Indsil Hydropower v. State of Kerala [Civil Appeal Nos. 5943- 5945 of 2019] and Central Bank of India v. Devi Ispat Ltd. [(2010) 11 SCC 186] to highlight the duty of state entities to act fairly under Article 14 of the Constitution, even in contractual matters.
• The Court considered Central Bank of India v. Ravindra [(2002) 1 SCC 367] regarding penal interest rates, observing that the court can reduce the rate if it is excessive or unfair.
• The Court referred to Oriental Kuries Ltd. v. Lissa [(2019) 19 SCC 732] and Bhubaneshwar Development Authority v. Susanta Kumar Mishra [(2009) 4 SCC 684] to emphasize that contractually-stipulated interest rates can be reduced if found to be penal or excessive.
• The Court considered K P Subbarama Sastri v. K S Raghavan [(1987) 2 SCC 424] regarding the determination of penalty clauses in contracts.
• The Court cited Hindustan Steel Limited v. Dilip Construction Company [(1969) 1 SCC 597] to clarify that the Stamp Act is a fiscal measure and not a tool to arm an opponent with technicalities.

What weighed in the mind of the Court?

The Supreme Court’s decision was heavily influenced by several factors, which can be analyzed as follows:

• Failure of Title: The most significant factor was the failure of APIIC to provide clear title to the land, which was a fundamental condition of the contract. This failure undermined the entire basis of the agreement and justified Unitech’s claim for a refund.
• Contractual Obligations: The Court emphasized that APIIC, as a state instrumentality, was bound by the terms of the Development Agreement. The agreement stipulated that Unitech was entitled to a compensatory payment, including interest, from the date of the first payment, in the event of a failure of title.
• Fairness and Reasonableness: The Court highlighted that state entities must act fairly and reasonably, even in contractual matters. APIIC’s failure to provide clear title and its subsequent attempt to delay the refund were viewed as arbitrary and unreasonable.
• Protection of Investors: The Court underscored the need to protect investors who rely on the representations of state entities. Investors are entitled to assert that these representations must be fulfilled and to enforce compliance with contractual duties.
• Interpretation of Contract: The Court prioritized the terms of the Development Agreement over the Letter of Award, emphasizing that the agreement was the primary document governing the obligations of the parties.
• Equity and Justice: The Court found that it would be unjust for APIIC/TSIIC to retain the amounts paid by Unitech, especially when the project could not proceed due to the failure of title.
• Precedent: The Court relied on several precedents, including ABL International, to establish the maintainability of writ petitions in contractual disputes and to underscore the duty of state entities to act fairly.

Ranking of Sentiment Analysis of Reasons

Fact:Law Ratio

The Court’s reasoning was based on a combination of factual analysis and legal principles. The factual aspects of the case, such as the failure of title and the payments made by Unitech, were critical. However, the Court also relied heavily on legal principles related to contractual obligations, fairness, and the power of the High Court under Article 226.

Logical Reasoning

The following flowchart explains the Court’s reasoning for each issue:

Conclusion

The Supreme Court’s judgment in the case of Unitech vs. TSIIC (2021) is a significant ruling that clarifies several key aspects of contractual disputes involving state entities. The Court’s findings can be summarized as follows:

• Maintainability of Writ Petitions: The judgment confirms that writ petitions under Article 226 are maintainable in contractual disputes where state entities act arbitrarily or in violation of fundamental rights. The presence of an arbitration clause is not an absolute bar to this jurisdiction.
• Obligations of State Entities: State entities are bound by the terms of their contracts and must act fairly and reasonably. They cannot avoid their obligations by relying on technicalities or by acting arbitrarily.
• Protection of Investors: The judgment underscores the need to protect investors who rely on the representations of state entities. Investors are entitled to a refund with interest when the state entity fails to fulfill its contractual obligations, particularly concerning the transfer of clear title to land.
• Interest Calculation: The Court clarified that interest should be calculated from the date of the first payment, as specified in the contract. The Division Bench’s decision to limit interest from 14 October 2015, was overturned.
• Apportionment of Liability: The Court ruled that TSIIC was primarily liable to refund the amount to Unitech. However, the Court did not rule on the inter se liability between TSIIC and APIIC, leaving TSIIC to pursue remedies for apportionment separately.

The implications of this judgment are far-reaching. It establishes a precedent for holding state entities accountable for their contractual obligations and protects the rights of investors in land development projects. The judgment also reinforces the importance of clear title and the need for state entities to ensure that they can fulfill their contractual commitments.

In conclusion, the Supreme Court’s decision in Unitech vs. TSIIC is a landmark ruling that promotes fairness, accountability, and the protection of investor rights in contractual disputes involving state entities.