Supreme Court Upholds Compensation Ratio in Housing Dispute: Chandigarh Housing Board vs. Parasvanath Developers (2019)

Date of the Judgment: 17 December 2019
Citation: 2019 INSC 1281
Judges: Mohan M. Shantanagoudar, J. and R. Subhash Reddy, J.

When a housing project fails, who bears the responsibility for compensating the affected buyers? The Supreme Court of India addressed this question in a case involving the Chandigarh Housing Board (CHB) and a private developer, M/s. Parasvanath Developers Pvt. Ltd. The court examined the liabilities of both parties towards a flat buyer when the project was stalled. The judgment was delivered by a two-judge bench comprising Justice Mohan M. Shantanagoudar and Justice R. Subhash Reddy.

Case Background

The Chandigarh Housing Board (CHB) invited bids for a large-scale project at the Rajiv Gandhi Chandigarh Technological Park. M/s. Parasvanath Developers Ltd. (the Developer) won the bid, and a Development Agreement was signed on 06 October 2006, granting the Developer rights to develop 123 acres of land. The Developer then advertised the project as “Parsvanath Pride Asia,” offering flats and penthouses. The Complainant applied for a five-bedroom apartment and paid ₹1,03,31,250 out of the total tentative price of ₹3,93,25,000. A Tripartite Agreement was signed on 23 April 2008 between the Developer, CHB, and the Complainant, stipulating that the construction was likely to be completed within 36 months from the date of the Development Agreement.

By September-October 2009, the Complainant found that no construction had started. The Complainant sought a refund with 20% interest. After not receiving a refund, the Complainant approached the National Consumer Disputes Redressal Commission on 24 February 2011. The Developer claimed that CHB failed to provide unencumbered land, while CHB argued that the land for residential units was free of disputes. The dispute between CHB and the Developer was referred to arbitration.

Timeline

Course of Proceedings

The National Commission initially directed the Developer to pay compensation as per Clause 9(c) of the Tripartite Agreement, subject to the arbitration outcome. The arbitration award found both the Developer and CHB responsible for the project’s failure and stipulated that any refund, interest, or compensation would be borne in a 70:30 ratio. The Supreme Court, in an earlier order, noted that Clause 9(c) would only apply if the Developer failed to offer a flat after 36 months. The National Commission, in its final order, directed both CHB and the Developer to pay the principal sum with 10% interest, along with compensation for mental harassment and litigation costs in the 70:30 ratio. CHB appealed this order, contesting its liability for compensation and the enhanced interest rate.

Legal Framework

The case revolves around the interpretation of the Tripartite Agreement, specifically Clause 9, which outlines the obligations of the Developer and CHB. Clause 9(a) states that construction was likely to be completed within 36 months from the signing of the Development Agreement. Clause 9(c) specifies that if possession is not offered within 36 months, the buyer is entitled to compensation from the Developer at a rate of ₹107.60 per sq. meter per month. Clause 9(d) stipulates that if the Developer cannot deliver the unit due to government rules or force majeure, both the Developer and CHB are liable to refund the amount with interest. The relevant clauses are:

• “9. (a) Construction of the residential units is likely to be completed within a period of thirty six (36 months) of the signing of the Development Agreement on 06.10.2006 between the Developer and CHB…”
• “9. (c) In case possession of the built up area is not offered to the buyer within a period of 36 months… the buyer shall be entitled to receive from the developer compensation @ Rs.107.60 per Sq. Mtrs… per month and to no other compensation of any kind.”
• “9. (d) If as a result of any Rules or directions of the Government… the developer is unable to deliver the unit to the buyer, the developer and CHB shall be liable to refund to the buyer the amounts received from the buyer with interest at the SBI term deposit rate as applicable on the date of refund.”

Arguments

Appellant (CHB) Arguments:

• CHB contended that the National Commission wrongly held it liable for 30% of the compensation for mental harassment and litigation costs, as this should be borne solely by the Developer under Clause 9(c) of the Tripartite Agreement.
• CHB argued that a revocation deed dated 04 February 2015 transferred all third-party liabilities to the Developer.
• CHB stated that it had already paid 30% of the principal sum as per Clause 9(d) and challenged the increase in interest rate from 9% to 10% without any reasons.

Respondent No. 1 (Developer) Arguments:

• The Developer emphasized the arbitrator’s finding that both CHB and the Developer were at fault and were liable to refund the price, interest, and compensation in the 70:30 ratio.
• The Developer argued that the National Commission’s order was subject to the outcome of the arbitration and that the Supreme Court had also affirmed the arbitration award in its interim order.
• The Developer contended that Clause 9(c) was not applicable to the instant case as it deals with a fixed compensation for non-performance, different from the compensation awarded in the impugned order.

Respondent No. 2 (Complainant) Arguments:

• The Complainant argued that the amount awarded was a general lump sum and not the compensation under Clause 9(c).
• The Complainant submitted that the dispute between CHB and the Developer should not affect the Complainant’s right to receive compensation.

Issues Framed by the Supreme Court

The Supreme Court framed the following issues for consideration:

1. Whether the National Commission was right in directing the payment of the amount towards mental harassment and litigation costs in the ratio of 70:30, or whether such amount falls within the purview of compensation under Clause 9(c) of the Tripartite Agreement so as to be paid solely by the Developer.
2. Whether the interest rate awarded on the principal sum was rightly increased from 9% p.a. to 10% p.a.

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

Judgment

The Supreme Court upheld the National Commission’s order, directing the Developer and CHB to pay the principal sum of ₹1,03,31,250 with 10% interest to the Complainant. The Court also affirmed the 70:30 ratio for the ₹2 lakh compensation for mental harassment and litigation costs. The Court noted that Clause 9(c) of the Tripartite Agreement was not applicable in this case because the Developer never commenced construction due to disputes with CHB. The Court also stated that the compensation awarded was a general lump sum and not the fixed compensation under Clause 9(c). The Court found no reason to interfere with the enhanced interest rate of 10% p.a.

How each authority was viewed by the Court:

• The arbitration award dated 09.01.2015 was followed and given effect to by the Court.
• The order of the National Commission dated 05.03.2013 was considered and noted to be subject to the arbitration outcome.
• The order of the Supreme Court dated 21.04.2015 was followed, affirming the findings in the arbitration award.
• Clauses 9(a), 9(c), and 9(d) of the Tripartite Agreement were interpreted to determine the liabilities of the parties.
• The Escrow Agreement dated 01.06.2007 was considered to show the apportionment of sale proceeds in the 70:30 ratio.

What weighed in the mind of the Court?

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

• The arbitration award, which clearly stipulated the 70:30 ratio for liabilities between the Developer and CHB, was a significant factor. The Court emphasized that this award had attained finality and should be given effect.
• The Court noted that Clause 9(c) of the Tripartite Agreement, which dealt with a fixed compensation, was not applicable in this case as the Developer had not commenced construction.
• The Court observed that the compensation awarded by the National Commission was a general lump sum for mental harassment and litigation costs and not the specific compensation under Clause 9(c).
• The Court considered the fact that the sale proceeds from the flat buyers were apportioned between the Developer and CHB in the same 70:30 ratio, as per the Escrow Agreement.
• The Court upheld the National Commission’s discretionary power to increase the interest rate on the principal sum, noting that it might have been to compensate for the lesser compensation awarded.

The Court’s reasoning was based on a combination of contractual interpretation, adherence to arbitration awards, and the specific circumstances of the case. The Court emphasized the importance of upholding the arbitration award and ensuring that the Complainant’s right to compensation was protected.

“…the arbitrator has also arrived at a finding to this effect in his award dated 09.01.2015… the failure to hand over possession of the flat to the buyer cannot be said to be on account of the non-performance of the obligation of the Developer alone.”

“…the amount awarded by the National Commission in the impugned order, i.e. Rs. 1 lakh each towards mental harassment and litigation costs, cannot be read as compensation contemplated under Clause 9(c) of the Tripartite Agreement.”

“…we do not find any reason to interfere with the same, as the increase was made by the National Commission in exercise of its discretionary power.”

Key Takeaways

• When a real estate project fails due to the fault of both the developer and the housing board, both parties may be held liable for compensation.
• Arbitration awards regarding the apportionment of liability are given significant weight by the courts.
• Compensation for mental harassment and litigation costs may be awarded separately from specific contractual compensation clauses.
• Consumer courts have the discretion to enhance interest rates on refunds to compensate for the delay and hardship faced by consumers.
• Revocation deeds between parties cannot be used to escape liability towards third parties under existing agreements.

Directions

The Supreme Court directed CHB to pay the remaining 30% of the ₹2 lakh compensation towards mental harassment and litigation charges, as well as an additional 1% interest on its share of the principal sum. This amount was to be paid within eight weeks from the date of the order.

Development of Law

The ratio decidendi of this case is that in cases of failed real estate projects, where both the developer and the housing board are at fault, the liability for refund and compensation should be apportioned based on the arbitration award. The case also clarifies that compensation for mental harassment and litigation costs is distinct from fixed compensation clauses in agreements. This judgment reinforces the principle that consumer rights must be protected, and inter-party disputes should not hinder the consumer’s right to receive compensation.

Conclusion

The Supreme Court’s judgment in Chandigarh Housing Board vs. M/s. Parasvanath Developers Pvt. Ltd. & Anr. reinforces the principle that both developers and housing authorities can be held liable for project failures. The Court upheld the 70:30 ratio for compensation as per the arbitration award and clarified that general compensation for mental harassment and litigation costs is distinct from specific contractual compensation. This judgment provides clarity on the liabilities of developers and housing boards in failed real estate projects and underscores the importance of protecting consumer rights.

Category

✓ Consumer Law
    ✓ Real Estate Disputes
        ✓ Tripartite Agreement
        ✓ Compensation
        ✓ Refund
        ✓ Interest
✓ Arbitration Law
    ✓ Enforcement of Arbitral Awards
✓ Contract Law
    ✓ Interpretation of Contracts
        ✓ Clause 9, Tripartite Agreement
✓ Consumer Protection Act, 1986
    ✓ Consumer Rights

FAQ

Q: What happens if a housing project is delayed or fails?
A: If a housing project is delayed or fails due to the fault of both the developer and the housing board, both parties can be held liable to compensate the affected buyers. The liability is often determined based on the terms of the agreement and any arbitration awards.

Q: What is the significance of an arbitration award in such disputes?
A: Arbitration awards are given significant weight by the courts. If an arbitrator has determined the liability of each party, the courts are likely to uphold that decision.

Q: What is the difference between specific and general compensation in real estate disputes?
A: Specific compensation is usually tied to a clause in the agreement, like a fixed rate for delayed possession. General compensation covers mental harassment and litigation costs, and is awarded separately by the consumer court.

Q: Can consumer courts increase the interest rate on refunds?
A: Yes, consumer courts have the discretion to increase the interest rate on refunds to compensate for the delay and hardship faced by consumers.

Q: Can a revocation deed between a developer and a housing board affect the rights of third-party buyers?
A: No, a revocation deed between a developer and a housing board cannot be used to escape liability towards third-party buyers who are part of existing agreements.