Karnataka High Court Refers To Larger Bench Whether Residential JDAs Fall Under Commercial Courts Act

The Karnataka High Court has referred to a larger bench the question of whether Joint Development Agreements (JDAs) for residential projects can be treated as "construction and infrastructure contracts" under the Commercial Courts Act.

The referral came after the court held that a dispute arising from a Bengaluru residential apartment project was not a commercial dispute and could not be entertained by a Commercial Court.

Justice Tara Vitasta Ganju held that the dispute arising from a Joint Development Agreement for the development of the residential apartment project "R.C. Sai Nikethan" did not fall within the definition of a commercial dispute under Section 2(1)(c) of the Commercial Courts Act, 2015.

The court observed, “the property in dispute, which was developed pursuant to the JDA, cannot be said to be immovable property used exclusively in trade or commerce within the meaning of Section 2(1)(c)(vii) of the CC Act.

The dispute pertains to development and allocation of residential apartments. Both parties are individuals and share the redeveloped flats and area as re-constructed. There is no material to indicate that the property was actually used for trade or commerce. Consequently, Section 2(1)(c)(vii) of the CC Act would not be attracted to the facts of the present case.”

The dispute arose from a Memorandum of Understanding executed on July 25, 2010 and a Joint Development Agreement executed on March 24, 2011. The agreements were entered into between landowners led by the late Muni Reddy and developer D. Arun Reddy for the development of a residential apartment project at Devarabisanahalli in Bengaluru.

Under the arrangement, the landowners were entitled to 40 per cent of the super built-up area in the project. The developer was entitled to the remaining 60 per cent. Supplementary agreements executed in 2011 and 2014 allocated flats, penthouse portions and parking spaces between the parties.

According to the landowners, the developer failed to deliver certain portions of the project that fell to their share. These included a penthouse and built-up area allegedly due to them under the agreements. The dispute was eventually referred to arbitration. By an award dated July 12, 2019, the sole arbitrator dismissed the landowners' claims.

The landowners subsequently challenged the award before the Commercial Court in Bengaluru. The developer objected to the court's jurisdiction, contending that the dispute did not qualify as a commercial dispute under the Commercial Courts Act.

The Commercial Court rejected the objection. It held that the matter arose from a construction contract falling within Section 2(1)(c)(vi) of the Act. Aggrieved by that finding, the developer approached the High Court.

Before the High Court, the landowners argued that the dispute arose from a construction and development agreement. They contended that it was, therefore, maintainable before the Commercial Court. The developer, on the other hand, relied on decisions holding that not every construction-related agreement constitutes a commercial dispute. He argued that the JDA concerned a residential development between private parties.

Examining the terms of the JDA, Justice Ganju noted that the arrangement was not a mere construction contract. The agreement created rights in favour of the developer in the underlying land. It also entitled him to specified portions of the developed project.

“In the present case, the agreement between the parties was not a pure construction contract. It was a construction contract with an emphasis on collaboration. Interest in the land was created in favour of the promotor / builder,” the court held.

At the same time, the court rejected the argument that the arrangement amounted to a joint venture. It found no material indicating joint control, shared management, joint decision-making or active participation by both parties in the development activity.

The court further held that the project consisted of residential apartments. There was no evidence that the property was used exclusively in trade or commerce. Consequently, the dispute could not be brought within Section 2(1)(c)(vii) of the Commercial Courts Act, which deals with agreements concerning immovable property used exclusively in trade or commerce.

Referring to the Supreme Court's decision in *Ambalal Sarabhai Enterprises Ltd. v. K.S. Infraspace LLP*, the court emphasised that the provisions of the Commercial Courts Act must be construed narrowly. It held that only disputes clearly falling within one of the categories enumerated in Section 2(1)(c) can be treated as commercial disputes.

Justice Ganju also examined conflicting decisions of coordinate benches of the Karnataka High Court. While an earlier decision in Indraprastha Shelters Pvt. Ltd. had held that disputes arising from certain JDAs did not qualify as commercial disputes, subsequent decisions in Kiran Builders and R.J. Dayananda had taken the view that JDAs would fall within the category of construction and infrastructure contracts under Section 2(1)(c)(vi) of the Act.

Observing that these conflicting decisions required authoritative resolution, the court framed two questions for consideration by a larger bench.

The first was whether Joint Development Agreements for construction of residential flats or floors involving individuals can be treated as "construction and infrastructure contracts" under Section 2(1)(c)(vi).

The second was whether the expression "construction and infrastructure contracts" should be interpreted as a single phrase or as separate categories of contracts.

The court accordingly directed the Registry to place the matter before the Chief Justice for reference to a larger bench.

The writ petition was disposed of in those terms. The Commercial Court's order dated January 3, 2023 was also set aside.

For Petitioners (D. Arun Reddy & Anr.): Advocate Chintan Chinnappa M.

For Respondents (Muni Reddy & Ors.): Advocates C.V. Manjunath and V Shivakumar.