State & Instrumentalities Do No Not Shed Character Or Obligation To Act Fairly With Private Parties In Realm Of Contract: Supreme Court

  • Sakshi Shukla
  • 02:05 AM, 19 Feb 2021

The Top while allowing the appeal in part, made significant observations on compensatory payment, liability of State instrumentality in cases of contract with private entities and power of Court under Article 226 to intervene contractual arrangement having arbitration clause.

A Division Bench of Justice D.Y. Chandrachud and Justice M.R. Shah, setting aside the direction of High Court confining liability to pay interest on the part of the State, said, “… the date from which compensatory payment has to be made is specifically provided; the Development Agreement provides that it will be ‘from the date on which the first payment of project price’ is made. The Division Bench was in error in curtailing the right of Unitech to claim a refund with effect from the dates on which the respective payments were made.”

Moreover, the Bench observed that presence of an arbitration clause does not, per se, oust the jurisdiction under Article 226. However, the same still needs to be decided from case to case basis.

Factual Matrix

  • In September 2007, Andhra Pradesh Industrial Infrastructure Corporation Ltd. (APIIC) invited bids to develop, design and construct an integrated township in Nadergul Village, Ranga Reddy District, AP. In pursuance of its press release, APIIC floated a bid document.
  • On 28 November 2007, the bid submitted by Unitech was accepted upon payment of an earnest money deposit of 20 crores. A litigation in regard to the land was pending. While issuing a Letter of Award, APIIC made the allotment of the land subject to the outcome of the pending litigation.
  • On April 29, 2011, APIIC issued a notice to Unitech to commence work on the project land.
  • On May 11, 2011, Unitech requested APIIC to intimate, within seven days, the steps being taken to handover the land with reference to the provisions of Article 13.3(b) of the Development Agreement which mandated an encumbrance-free handover.
  • On December 19, 2011, High Court of Andhra Pradesh in a proceeding titled Pratap Karan v. Government of Andhra Pradesh, held that the Government of Andhra Pradesh did not have title to the project land.
  • Through a letter dated March 27, 2012, Unitech requested APIIC to clarify its position and to jointly explore possible solutions to the title dispute over the project site.
  • On October 9, 2015, A Division bench of the Top Court upheld the aforementioned decision of the Andhra Pradesh High Court.
  • On October 14, 2015 Unitech demanded refund of payment from APIIC, received in relation to the land together with interest and damages for the loss suffered by them, including cost of borrowings and expenses of planning and designing. This was followed by a further request on December 24, 2015, reminders on May 31, 2016 and June 7, 2016. A legal notice was also issued on June 13, 2016.
  • Invoking writ jurisdiction under Article 32 of the Constitution, Unitech filed proceedings before the Top Court which were disposed on May 1, 2017, granting liberty to move the concerned High Court under Article 226 seeking a refund of Rupees 165 crores together with interest at the SBI Prime Lending Rate.
  •  On October 23, 2018, A Single Judge Bench of the High Court allowed Unitech’s petition. This was confirmed in an appeal by the Division Bench, modifying the amount of payment.

The present batch of appeals before the Apex Court arose from the impugned judgment dated April 1, 2019 of the Division Bench, instituted by Unitech limited, Telangana State Industrial Infrastructure Corporation (TSIIC) and State of Telangana.

Issue

Scope and extent of Court’s intervention under Article 226, in a purely contractual dispute having an Arbitration Agreement.

Observation & Analysis

(a) Maintainability of thee writ petition under Article 226

“… Writs under Article 226 are maintainable for asserting contractual rights against the state, or its instrumentalities, as defined under Article 12 of the Indian Constitution.”

 Reliance was placed in this regard on ABL International Ltd. v. Export Credit Guarantee Corporation of India, (2003) 3 SCC 553, State of UP v. Sudhir Kumar, 2020 SCC OnLine SC 847, Popatrao Vynkatrao Patil v. State of Maharashtra, CIVIL APPEAL 1600 of 2000.

The bench conclusively said, “…it is well-settled that the jurisdiction under Article 226 cannot be ousted only on the basis that the dispute pertains to the contractual arena. This is for the simple reason that the State and its instrumentalities are not exempt from the duty to act fairly merely because in their business dealings they have entered into the realm of contract. Similarly, the presence of an arbitration clause does oust the jurisdiction under Article 226 in all cases though, it still needs to be decided from case to case as to whether recourse to a public law remedy can justifiably be invoked. The jurisdiction under Article 226 was rightly invoked by the Single Judge and the Division Bench of the Andhra Pradesh in this case, when the foundational representation of the contract has failed. TSIIC, a state instrumentality, has not just reneged on its contractual obligation, but hoarded the refund of the principal and interest on the consideration that was paid by Unitech over a decade ago.”

(b) Contractual Right to compensatory payment

The Court noted that the terms of the Contract entitles Unitech to claim a full refund together with compensatory payment, upon any failure on the part of the State.

“APIIC, as an instrumentality of the erstwhile Government of Andhra Pradesh, invited bids for a public project. Having invited private entrepreneurs to submit bids on stipulated terms and conditions, it must be held down to make good its representations. The State and its instrumentalities are duty bound to act fairly under Article 14 of the Constitution. They cannot, even in the domain of contract, claim an exemption from the public law duty to act fairly. The State and its instrumentalities do not shed either their character or their obligation to act fairly in their dealings with private parties in the realm of contract. Investors who respond to the representations held out by the State while investing in public projects are legitimately entitled to assert that the representations must be fulfilled and to enforce compliance with duties which have been contractually assumed.”, was further added.

With respect to the quantum of compensation to be paid, it was said, “considering the position of Unitech which knowingly entered into the Development Agreement with full knowledge of the pending litigation and with an intention to continue with the project after a delay of over seven years, up until a decision by this Court, we find that the interest rate is payable to Unitech, without compounding.”

Reliance in this regard was placed on, Canara Bank v. Ravindra, (2002) 1 SCC 367 and KP Subbarama Sastri v. KS Raghavan, (1987) 2 SCC 424.

(c) Apportionment of the liabilities between the instrumentalities of the State of Andhra Pradesh and Telangana

A combined reading of Section 65, Section 68 and Section 71(a) of the Reorganization Act was relied, adjudicating no finality in terms of rights inter se between TSIIC and APIIC.

 

Case Title: Unitech Limited v. Telangana State Industrial Infrastructure | CIVIL APPEAL No. 317 of 2021

 

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