This article has been written by Vaibhvee Jangid pursuing the Certificate Course in Arbitration: Strategy, Procedure and Drafting from LawSikho.
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In the case decided by the Hon’ble Supreme Court titled “UNITECH Limited & Ors. v. Telangana State Industrial Infrastructure Corporation (TSIIC) & Ors.”, on February 17 2021, Justice D.Y.Chandrachud and Justice M.R.Shah deliberated and delivered an important decision that the presence of an arbitration clause in a contract with a State, or its Instrumentalities does not oust the jurisdiction of the High Court completely under Article 226 of the Constitution of India. Let us understand this through analyzing the above-mentioned case law:
There were three appeals that were filed before the Supreme court by Unitech Ltd. (“Unitech”); Telangana State Industrial Infrastructure Corporation (“TSIIC”); and the State of Telangana. The appeals were filed in response to a judgment dated April 1, 2019 of a division bench of the High court of Telangana.
The Andhra Pradesh Industrial Infrastructure Corporation Ltd. (“APIIC”) in September 2007 invited bids to “develop, design and construct” a multi-services township project in the area of 350 acres of land in Nadergul Village, Saroornagar Mandal, Ranga Reddy District.
Unitech Ltd. was the successful bidder. Accordingly, Unitech had to make the payment of Rs. 165 crores:
- Payment of earnest money- Rs. 20 crores,
- Project land cost- Rs. 140 crores, and
- Project development expenses- Rs. 5 crores.
The whole contract was dependent upon the pending litigation concerning the project land as the matter was sub judice and thus APIIC cannot allot the land until then. This was even stated in the Letter of Award (“LoA”) issued by APIIC.
Unitech Ltd. paid the purchase price of the land in four installments of Rs. 35 crores in each installment. It started to pay from December 3 2007, when it accepted the LoA and thereby paid a total of Rs. 165 crores till January 25, 2008. Consequently, they executed a development agreement in August 2008 to execute the project.
The case of Pratap Karan vs. Govt. Of Andhra Pradesh
However, on December 19 2011, the Government of Andhra Pradesh lost the case in “Pratap Karan vs. Govt. Of Andhra Pradesh”, and thereby lost the title over the project land. Following the decision, Unitech made several communications to APIIC to clarify the position and to jointly explore possible solutions to the problem.
Subsequently, the state of Andhra Pradesh was re-organized into two states ie. State of Andhra Pradesh and the State of Telangana in June 2014 according to the Andhra Pradesh Reorganization Act, 2014. Following which Unitech addressed a letter to the newly-formed TSIIC- as a successor of APIIC and as the land was now a part of the State of Telangana- seeking its intervention in clarifying the actual status of the extent of the land awarded to them, the cases against the erstwhile APIIC, physical handover of possession with a clear title and compensation for loss of time and opportunity.
Appeal made in the Supreme Court
On October 9, 2015, the appeal made in the Supreme court by the State of Andhra Pradesh through Principal Secretary v. Pratap Karan also did not bear fruit as the Supreme Court upheld the judgment of the High court of Andhra Pradesh that it does not have the title over the project land. After this decision, Unitech made a request to APIIC and TSIIC on October 14 2015, to refund the entire amount given to them for the said project plus the interest and damages that have accrued because of the non-completion of the contract.
Legal Tussle of Unitech, State of Telangana and TSIIC
Initially, Unitech had filed a writ under Art. 32 before the Supreme court but was disposed of, while it granted liberty to move the High Court under Art. 226. A Writ Petition under Article 226 was instituted before the High Court of Telangana seeking a refund of Rs.165 crores together with interest at the SBI Prime Lending Rate (“SBI-PLR”) from the date the payments were made.
Consequently, Unitech filed a writ petition in the High court of Telangana and a single judge bench gave its judgment on October 23, 2018, it held that Unitech is entitled to Rs. 165 crores (the payments it made) with interest from the date it started making these payments ie. from 2007 onwards but, thereafter the State of Telangana and TSIIC filed an appeal against the aforementioned judgment, thereby a division bench of the High Court heard the matter. It also held that Unitech is entitled to Rs. 165 crores plus the interest but the division bench differed in the calculation of the interest. It said that “the interest would not be calculated from the date of payments but would be calculated from the day Unitech asked for the refund for the first time ie. October 14, 2015.”
Thus Unitech, TSIIC and the State of Telangana filed an appeal under Article 136 of the Constitution in the Supreme court to unwind the confusion caused by the two judgments of the High court and to settle the dispute.
- Whether the writ petition under Article 226 is maintainable in a contractual matter between State or its Instrumentalities and a private party having an arbitration clause in the agreement?
- Whether interest on the total purchase price be calculated from the date when Unitech asked for the refund or from the date payments were made?
- How should the liability be apportioned between the Instrumentalities of the State of Andhra Pradesh and Telangana?
With respect to issue no. 1, the Supreme Court cited precedents to make the ground clear that it is not barred to approach a High Court under Art. 226 in a contractual matter having an arbitration clause in it. However, the court remarked that when there are other remedies available with the parties to settle their dispute, then they should first avail themselves. This is because the High courts are already engrossed in a lot of matters and everybody is aware of the pendency of the cases in India, because of which there is the development of alternative methods to settle the disputes eg. Arbitration, mediation, negotiation etc. These methods are in vogue today because they are easier, less time-consuming and less formal.
That’s why the court thinks it apt to first avail those remedies and if even after those alternative methods are unable to settle the dispute, then the High court is there to take the matter. Also, it must be noted whether they should avail remedies under Art. 226 or not depends upon the facts and the circumstances of each case as every case is different. The court said that the public law remedy is available for enforcing legal rights subject to well-settled parameters.
Cases referred to
- The Supreme court referred to its judgment in ABL International Ltd. v. Export Credit Guarantee Corporation of India. They referred to, analyzed it and thereby concluded, “Writs under Art. 226 are maintainable for asserting contractual rights against the State, or its Instrumentalities, as defined under Art. 12 of the Indian Constitution.”
- The interpretation given in the above case was followed by a three-judge bench decision of the Supreme court in State of U.P. v. Sudhir Kumar and Popatrao Vynkatrao Patil v. The State of Maharashtra. The decision in ABL International held that “the plenary powers under Art. 226 must be used with caution when other remedies have been provided in the contract. This plenary power under Art.226 cannot be exercised by the court on the exclusion of other available remedies unless such actions of the State, or its Instrumentalities are arbitrary and unreasonable as to violate the constitutional mandate of Article 14 or for other valid and legitimate reasons, for which the court thinks it necessary to exercise the said jurisdiction.” Through this interpretation of the court, the arbitration clause between the parties did not act as a bar to file a writ under Article 226 and the action of TSIIC was found to be unconstitutional as they did not act in an equitable and just manner. Thus the writ was maintainable.
3. As to issue no. 2, the Supreme court referred to the terms in article 17.6 of the agreement which talks about what would happen to the contract when a ‘political force majeure event’ takes place, it says that, “the developer ie. Unitech Ltd. can issue a notice of termination if the event materially alters or affects the project continually for more than nine (9) months.” According to the facts discussed above, a lot of time had passed since the parties entered into the contract but as the affected party (Unitech) suffered huge financial loss, it made sense that the payments made by them need to be refunded with duly calculated interest.
Additionally, Article 14.3.1 of the agreement stipulates that “in the event that APIIC/Government of Andhra Pradesh is not able to execute the sale deed in favor of the developer in respect of the land within the time specified, APIIC shall, if so required for the developer, make compensatory payment subject to the court orders.” Compensatory payment accordingly is defined as the amount comprising the total payment made plus the interest calculated at the SBI-PLR on the total purchase price “from the date the first payment was made towards the project land.” Accordingly, the court held that since the former State of Andhra Pradesh and subsequently the State of Telangana did not have the title over the land because of the case decided by the Supreme court, this acted as a political force majeure event and as it continued for more than nine months, it entitled Unitech to claim the refund with compensatory payment as contractually agreed between the parties. Accordingly, the issue is answered that the interest will be calculated from the date of the first payment was made ie. December 3, 2007, and not from October 14 2015, when the refund was first asked for.
4. As to issue no. 3, the Supreme court did not adjudicate this issue and elucidated that TSIIC is liable to pay the amount to Unitech but subsequent action regarding how to apportion the amount between the two States depends upon it and is at liberty to take whatever action to get a remedy but this bench of the Supreme court did not express any final opinion on this issue. Though it advised that it can be apportioned according to Section 53(1) of the Reorganization Act, 2014.
Through this case, we understand that the presence of an arbitration clause in a contract between State entities and private entities does not bar the jurisdiction of the High court under Art. 226. This judgment tells that the plenary powers of the High court under Art. 226 should be used with absolute caution as when a State or any of its Instrumentality enters into a contractual relationship with a private body it must not violate its constitutional mandate under Art. 14 of the Indian Constitution to act equitably. It may happen that private parties may straight away invoke the writ jurisdiction and bypass the arbitration clause but then the High courts have to use their sagacity to determine on a case-to-case basis whether a writ is maintainable or not when other remedies are provided in the contract. Also, a State is more powerful than a private entity and the latter comes into an agreement with the State because of its goodwill and reputation. Thus it is not right for the State entities to enter into commercial contracts which may be detrimental to the interests of the other party. Therefore, this judgment promotes healthy public-private partnerships in the future.
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