Supreme Court Upholds Setting Aside Of Shreeram Builders Award, Says Terms Determine Agreement's Nature

On 29 October, the Supreme Court disposed of appeals filed by Shreeram Builders and upheld the Bombay High Court's decision to set aside an arbitral award directing the execution of a sale deed in favour of the builder, holding that the arbitrators had disregarded the parties' contractual terms.

A Division Bench comprising Justices Sanjay Kumar and Sanjeev Sachdeva reiterated that the nature of an agreement must be determined by the rights and obligations it creates, rather than its title or the stamp duty paid on it. Relying on Sasan Power Limited v. North American Coal Corporation (India) Limited, the judges observed:

“Thus, it is the contents of the agreement that would determine its actual nature. Hence, the stamp duty did not conclude the issue and the agreement had to be examined, not only for its import but also what it entailed in the context of the arbitration proceedings.”

The dispute arose from an Agreement for Development executed on 6 August 2003 between Shreeram Builders and five members of a landowning family, including Upendra Kantilal Thanawala and Pankaj Kantilal Thanawala. The agreement concerned the family's undivided 2/9th share in three adjoining land parcels at Panchpakhadi, Thane, Maharashtra.

Under Clause 3, the consideration was provisionally fixed at Rs. 2.28 crore, calculated at Rs. 915 per square foot of the estimated Floor Space Index (FSI), subject to adjustment after municipal sanction. Shreeram Builders paid Rs. 55 lakh upfront, with the balance payable in ten instalments under Clause 6. Clause 7 required 15 days' written notice to remedy payment defaults.

On 9 April 2008, the landowners terminated the agreement, citing delayed payments. Shreeram Builders invoked arbitration, seeking specific performance or, alternatively, damages of Rs. 41.46 crore.

On 10 December 2011, a three-member arbitral tribunal, by a 2:1 majority, ruled in favour of the builder. Treating the agreement as one for sale, the majority declared the termination illegal and directed the execution of a sale deed upon the builder depositing Rs. 10.91 crore.

Both sides challenged the award under Section 34 of the Arbitration and Conciliation Act, 1996, before the Principal District Judge, Thane. On 29 March 2017, the District Court ruled in favour of the builder. The landowners appealed, following which the Bombay High Court remanded the matter on 26 June 2019.

On 25 January 2020, the District Court again upheld the award. Both sides subsequently appealed under Section 37 of the Arbitration Act. On 5 March 2024, the Bombay High Court set aside the award, finding that the arbitrators had disregarded the contractual terms. It also classified the agreement as a development agreement rather than an agreement to sell.

Before the Supreme Court, Shreeram Builders contended that it had paid approximately 82% of the consideration, deposited the remaining Rs. 41.11 lakh before the District Court on 15 July 2017, and was willing to accept the enhanced consideration of Rs. 13.72 crore fixed by the arbitrators.

The Court disagreed with the High Court's reliance on the stamp duty paid to classify the agreement. The agreement attracted stamp duty at 1%, whereas a sale agreement would have attracted 5%. The Bench held that this difference was insufficient to determine the agreement's legal nature. It observed:

“However, we are not persuaded to agree that this fact was sufficient to categorise the agreement as a development agreement.”

Further, the Bench noted that Shreeram Builders was initially described as the “Purchaser” in the agreement, but the term was manually changed to “Developers” without initials. Subsequent provisions, however, continued to refer to the builder as the “Purchaser”.

Nevertheless, it held that the arbitral award could not stand because the arbitrators had disregarded the sequence of obligations agreed upon by the parties. Clause 37 permitted conveyance only after full payment, while Clause 3 linked the final consideration to the FSI available after municipal sanction. In the absence of a sanctioned plan, the final consideration remained undetermined.

Moreover, the judges found that the arbitrators had unjustifiably increased the agreed rate sixfold, from Rs. 915 to Rs. 5,490 per square foot. They had also adjusted payments made under earlier agreements despite their supersession under Clause 51 and improperly included the remaining 7/9th share of property expressly excluded from the agreement in the proposed conveyance.

Finding that the arbitrators had effectively rewritten the contract, they observed:

“Thus, the two learned arbitrators not only construed the express terms of the agreement contrarily but completely supplanted them with new terms, as per their own fancies.”

The Division Bench also held that the award violated Section 28(3) of the Arbitration Act, which requires an arbitral tribunal to decide disputes in accordance with the terms of the contract. It therefore upheld the Bombay High Court's decision to set aside the award and declined to grant specific performance.

However, it noted that the landowners had retained the payments received from the builder despite terminating the agreement. Clause 54 required a refund without interest where no construction had been undertaken.

Accordingly, exercising its inherent powers under Article 142 of the Constitution, the Supreme Court directed the landowners to refund the amounts received, together with simple interest at 9% per annum from the respective payment dates until the actual refund. It also directed the return of the builder's court deposits, along with any accrued interest.

Appearances for appellant (Shreeram Builders): Advocate Kunal Mimani.

Appearances for respondents (Upendra Kantilal Thanawala and Others): Advocate Samrat Krishnarao Shinde (Caveator).