MUMBAI: The Bombay High Court has held that a builder cannot seek a refund of the expenditure incurred on a partially constructed building if the housing society cancels the development agreement due to delays, a ruling that is likely to be significant for several redevelopment projects across the city.
A single-judge bench of justice Sandeep Marne said on April 30 that a developer can claim the cost of construction from a housing society only if the redeveloped building is complete in all physical aspects and usable by the society members.
The court was hearing a petition filed by developer SSD Escatics Pvt Ltd, challenging an arbitral award dated June 24, 2023, which upheld the cancellation of its development agreement by Goregaon Pearl Cooperative Housing Society (CHS) in Siddharth Nagar, Goregaon. The arbitrator had also ordered the builder to pay ₹7.17 crore to the housing society.
Goregaon Pearl CHS had appointed SSD Escatics in September 2007 to redevelop its three wings. However, after the work got delayed, the two parties underwent a round of litigation and negotiated consent terms, under which the developer agreed to complete the redevelopment by October 30, 2018.
However, on June 3, 2018, the society terminated the development agreement after the developer failed to abide by the consent terms. Based on a petition filed by Goregaon Pearl CHS, the matter was referred to a sole arbitrator, who ruled in favour of the society, prompting SSD Escatics to approach the high court.
The high court upheld the termination of the agreement, with justice Marne noting that SSD Escatics had failed to abide by the timeline for completing the redevelopment project and had also breached several terms of the agreement and subsequent consent terms.
The court also rejected SSD Escatics’ claim for a refund of ₹18.09 crore from the housing society. The developer had stated that the amount had been spent on constructing the RCC structure of one building up to 21 floors and the other up to the seventh floor. SSD Escatics had also claimed that the construction was a “benefit” it had passed on to the housing society, as contemplated under section 64 of the Contract Act, and therefore needs to be returned.
However, the high court held that for applying section 64, the benefit passed on must be complete in all respects, capable of being enjoyed by the opposite party. In this case, where the structure erected by the developer was not useful to society members, it could not be treated as a benefit to the society, the court said. Therefore, the developer was not entitled to a refund of the construction cost, it added.
Transit rent
The court also rejected the developer’s claim for a refund of ₹20.43 crore, which it had paid the society as transit rent, corpus and brokerage. The bench held that such a refund cannot be sought if the housing society terminates the contract mid-way. Transit rent is paid by the builder to society members for temporary accommodation during the redevelopment period.
Justice Marne said the “benefit” contemplated under section 64 of the Contract Act must be a real benefit that accrues to the injured party terminating the contract, which would constitute unjust enrichment. Transit rent cannot be termed as such a benefit and, therefore, cannot be sought to be refunded, he added.
“If the [transit] rent is directed to be refunded to the developer whose DA (development agreement) is terminated due to defaults committed by him, it would tantamount to rewarding the developer for the breaches while putting already troubled society members into further difficulties, which is not the objective behind section 64 of the Contract Act,” the court said.
