Karnataka High Court Upholds Forfeiture Of Developer's Advance After 7-Year JDA Delay

The Karnataka High Court on 22 September upheld the forfeiture of a developer's advance under an arbitral award after the developer failed to implement a Joint Development Agreement (JDA) for seven years.

A Division Bench of Justices D.K. Singh and H. Shanthi Bhushan dismissed the developers' appeal and allowed the landowner's appeal concerning a Bengaluru-based multistoried housing project, restoring the forfeiture portion of the arbitral award which the Commercial Court had set aside. The judges observed:

“Forfeiture of the advance paid by the developer who failed to carry out the obligation under the JDA for 7 long years, cannot be said to be such a direction in the award which would be in conflict with the public policy of India or in contravention with the fundamental policy of Indian law nor in conflict with the basic notion of morality and justice. We also do not find that the award is vitiated by patent illegality as provided under Section 34 (2)(a) of the Arbitration Act.”

The dispute arose from a JDA dated 28 February 2014, under which D'Souza's one-acre property in Survey No. 157 at Bidaluru Village, Devanahalli Taluk, Bengaluru District was to be developed into a multistoried housing project.

The agreement required the property to be developed within two years, by 27 February 2016. However, the developers neither developed the property nor took effective steps towards implementing the JDA for seven years.

Thereafter, the landowner invoked the arbitration clause. Pursuant to a High Court order dated 3 March 2022, a sole arbitrator was appointed to adjudicate the dispute.

By an award dated 29 August 2024, the arbitrator cancelled the JDA and the General Power of Attorney dated 28 February 2014, directed execution of necessary cancellation deeds and held that the refundable deposit paid by the developers would stand forfeited and could be retained by the landowner.

The developers challenged the award under Section 34 of the Arbitration and Conciliation Act, 1996. By an order dated 19 March 2025, the Commercial Court upheld the award in part but set aside the direction forfeiting the advance and granted liberty to the developers to initiate appropriate proceedings for its recovery.

Both sides thereafter approached the High Court under Section 37 of the Arbitration Act.

The developers argued that the property could not be developed because there was no proper approach road. They further argued that once the Commercial Court held that the landowner was not entitled to forfeit the advance, it ought to have directed refund of the amount with interest.

The landowner submitted that the developers had taken no steps to develop the property for more than seven years despite entering into the JDA after verifying the landowner's title and rights. It was also argued that there was no promise by D'Souza to provide a 40-foot-wide road and that none of the grounds permitting interference with an arbitral award under Section 34 were made out.

The Court acknowledged that the JDA contained no express provision permitting forfeiture of the advance. It, however, emphasised that the Arbitration Act permits only limited judicial interference with an arbitral award.

It observed that arbitration is an outcome of party autonomy and courts should be “loath to interfere” with an award unless one of the statutory grounds under Section 34 is established.

Considering that the developers had failed to develop the property or take effective steps towards implementing the JDA for seven years, the Bench held that forfeiture of the advance could not be regarded as contrary to public policy, the fundamental policy of Indian law, or the basic notions of morality and justice. It also found no patent illegality in the award. It observed:

“It is true that there is no provision for forfeiture of the advance amount in case of failure to perform its obligations by the appellants. But the fact remains that for seven long years the developer did not develop the property and took no effective steps towards implementation of the JDA.”

Accordingly, the High Court held that the Commercial Court was not justified in interfering with the forfeiture direction. It dismissed the developers' appeal, allowed D'Souza's appeal and restored the arbitral award insofar as it permitted forfeiture of the advance.

Appearances for appellants/developers: Senior Advocate Ashok Haranahalli, assisted by Advocate Narasimharaju.

Appearances for respondent/landowner: Advocate S. Rajashekar.