Irregularity in Section 14(3)(c) of Specific Relief Act

Courts normally do not order “specific performance” of a Contract to build or repair a building. This rule is however, subject to certain exceptions enumerated in Specific Relief Act. Before granting a Decree of Specific Performance to built a building, the Courts consider many aspects like clauses of the Contract, whether the work is sufficiently defined by the parties in Contract, whether the person suing has substantial interest in the project which cannot be compensated in money, etc.

Section 14(3)(c) of Specific Relief Act acts as an exception to Contracts which cannot be specifically enforced and where the Suit is filed for enforcement of a Contract for construction of a building or execution of any work.

The fine threads of Section 14(3)(c) of the Act were considered in a recent Judgement SITAC Pvt Ltd Vs Banwari Lal Sons Pvt Ltd, 2019 SCC Online Del 9044. In this case, the dispute arose with regard to a Collaboration/ Construction Agreement entered between a builder (Petitioner), owner (Respondent No.1), tenant (Respondent No.2) and occupier (Respondent No.3).

The builder had, side by side, entered into an Agreement with the Tenant and Occupier that they will vacate the property in exchange of certain terms mentioned in the Agreement, which included giving an alternate accommodation in any decent locality.

However, the owner cancelled the Collaboration Agreement which prompted the builder to invoke Arbitration under the Arbitration Act, 1940. The Arbitrator passed its Award and directed Specific Performance of the Agreement. The Arbitrator did not grant the alternate prayer of damages, as the main prayer of Specific Performance was allowed.

The owner and tenant challenged the Award before the Hon’ble Delhi High Court on many grounds. The tenant submitted that the builder did not provide alternate accommodation in any decent locality as per the Agreement. The Hon’ble Court negated this submission by affirming the observation of the Arbitrator that the Tenant did not revert to the letters of the builders by which various properties were offered. The tenant submitted that the builder was in breach of the Agreement as it did not appoint an architect as per the provisions of Agreement. The Hon’ble Court did not find merit this submission also. The tenant stated that the authorised representative of the builder did not have the requisite Board Resolution. This was also negated by Hon’ble Court by referring to Panchanan Dhera Vs Monmatha Nath Maithy (2006) 5 SCC 340 which stated that a Company would not be liable until the Company states that the acts of the person were ultra vires.

The Respondents then argued that the builder did not have funds to perform the Contract and was never ready or willing to perform its obligations and therefore, the agreement would be hit by Section 16 (c) of Specific performance Act. The Arbitrator however took note of various correspondences to hold that the builder was infact eager to go ahead with the project and showed readiness and willingness to perform the contract. The Hon’ble Court agreed with the Arbitrator.

The Owner argued that the Arbitrator should have exercised its Discretion under the Act and not granted Specific Performance specially when the builder made a prayer for damages as an alternate relief. The reason to decline specific performance because of this prayer was also negated by the Court.

The Hon’ble Court relied upon Section 14(1)(a) of Specific Relief Act to establish that when non performance of a Contract can be compensated in terms of money, then such contracts cannot be specifically enforced. However, Section 14 (3)(c) of the Act is an exception which talks of specific performance in a suit for enforcement of contract for construction of any building. The Court referred to the recent Judgement Sushil Kumar Agarwal Vs Meenakshi Sadhu, 2018 SCC Online SC 1840, to consider the fine threads of Section 14 (3) (c) of the Specific Relief Act and its impact. The Supreme Court held:

a.      In a pure construction Contract, the contractor has no interest in either the land or the construction which is carried out. The terms of the agreement are crucial in determining whether any interest or right has been created in favour of the developers and if so, the nature and extent of the rights. An essential incident of ownership of land is the right to exploit the development, potential to construct and to deal with the constructed area. For example, under development agreement, an owner may part with such rights to a developer. There could be a situation where it is the developer who by his efforts has rendered a property developable by taking steps in law.

b.      In development agreements where an interest is created in the land or in favour of the developer, it may be difficult to hold that the agreement is not capable of being specifically performed. For example, a developer may have evicted or settled with the occupants, got land which was agricultural converted into non-agricultural use. In such a situation, if for no fault of the developer, the owner seeks to resile from the agreement and terminates the agreement, it may be difficult to hold that the developer is not entitled to enforce his rights.

c.      As per Section 14 (3)(c)(i) of the Act, the exact nature of work under the Contract should be sufficiently precise and well defined which the Court can determine by referring to the clauses of the Agreement. Vague terms like “first class Material” “similar conditions” cannot be determined by the Court to assess the exact nature of the Work.

d.      As per Section 14 (3)(c)(ii) of the Act, if breach of an Agreement can be remedied by means of compensation, then specific performance should not be granted.

e.      Application of literal rule of interpretation of Section 14 (3)(c)(iii) of the Act would lead to absurdity as the developer who may have interest in the property will be debarred from filing a suit for specific performance as he may not be in possession of the property upon entering the Agreement.

The Hon’ble Delhi High Court felt the need to distinguish a Development Agreement from a Construction Agreement so as to consider the provisions of Section 14 (3)(c) of the Act. It held that in a Construction Agreement, the contractor has no interest in either the land or the construction to be carried out.

Coming back to the facts of the case, the Court noted that the builder and owner were entitled to a part of the built up area and that clearly showed that a right was created in favour of the builder and therefore, the Agreement in question was not a Construction Contract. With this, the question which came to be considered was whether such Agreement could be specifically enforced, and for this, the agreement and the clauses therein had to be read. The Court noted that the building plans had not been agreed between the parties and the same were not sanctioned till date. There was no certainty to the quality of construction and the material to be used. The specific performance therefore, failed under Section 14 (3)(c)(i) of Specific Relief Act. Further, though the Agreement defined the ownership share of the parties, however, since the plans were yet to be agreed upon between the parties, the exact shares would be a matter of conjectures and the Agreement was hit by Section 14 (3)(c)(ii). The Hon’ble Court therefore found that the Agreement in question cannot be specifically performed as the agreement was hit by various provisions of Specific Relief Act including Section 14 (1)(d) and Section 14 (3)(c) of Specific Relief Act.

The Hon’ble Delhi High Court considered Section 14(3)(c) (i) and (ii) of the Act, but did not have to go to the next clause, and therefore, the Court did not test the legal validity of subclause (iii) as the first two clause were not met in the Agreement.

The Hon’ble Supreme Court of India held in Sushil Kumar Agarwal (Supra) that if the rule of literal interpretation is adopted to Section 14(3)(c)(iii) of the Specific Relief Act, it would lead to a situation where a suit for specific performance can only be instituted at the behest of the owner against the developer because of the words “the defendant has, by virtue of the agreement, obtained possession of the whole or any part of the land” in Section 14 (3)(c)(iii) of the Act.

If the developer is the Plaintiff and the Suit is against the owner, then strictly, clause (iii) would require that the Defendant (owner) should have obtained possession under the Agreement which leads to a very anomalous situation as that would not be possible in most of the case. Section 14(3)(c)(iii) of Specific Relief Act therefore, defeats the intent of the Act and therefore, an Amendment to delete this clause is needed.