Bombay HC – No Damages for Defaulting Developer, But FSI Cost Must Be Returned under Section 64 of the Contract Act
Arbitration & Termination Development Agreement by the housing society
By the arbitral award dated 24.6.2023, the termination of the redevelopment agreement and the Power of Attorney by the society was upheld. The Arbitrator also awarded monetary claim of Rs.5.13 crores. The Arbitrator rejected the counter claims of the petitioner – develop for return of the amount spent on the project and damages / compensation for loss of profit.
Petitioner developer has raised a counterclaim for losses and damages against the Society. The damages were sought both by way of reimbursement of expenses incurred as well as claim for loss of profits. Under Clause 22 of the DA, parties agreed specifically that the developer will have no right to claim damages or compensation from the society.
Thus, clause 22 seeks to deny damages or compensation to the developer in the event developer committing breach of the DA. In the present case, the Arbitral Tribunal has upheld termination of DA by the Society by holding that Petitioner-developer has committed breaches, both of DA as well as of the Consent Terms. Therefore, the Petitioner-developer is held not entitled to damages or compensation by the Arbitral Tribunal as per clause 22 of the DA.
In the present case, the Petitioner-developer has specifically agreed not to claim damages or compensation as well as to forego its right to sell units in sale component upon termination of contract due to breaches committed by it. Therefore the tribunal could not have awarded claim for damages/compensation in ignorance of clause 22. However it is Petitioner’s case that clause 22 is unenforceable as it puts unreasonable.
In my view, a clause in the redevelopment agreement for denial of damages or compensation to the developer can be enforced in law because of the peculiarity of the contract. In a redevelopment agreement, the developer undertakes the responsibility of rehousing the society members by demolishing the old building and by constructing a new one. In return, the developer secures right to sell the additional constructed units to recoup the expenditure and to earn profits. He has the responsibility of praying transit rent to the society members in the interregnum. Developer in an agreement for redevelopment does not secure ownership in the land and the Society continues to remain the owner. He has the primary responsibility of providing new houses to the members. His right to earn profits in the project crystallizes only after he fulfills the obligations of paying transit rent and putting back the society members in possession of reconstructed flats.
If the developer fails to perform the primary obligations, his right to earn profits by selling the f lats remains imperfect. Therefore once the developer commits breach of obligation to provide constructed flats/units to the society members and once the DA is terminated on that count, the right of the developer to earn profits from the project continues to remain imperfect. In absence of right to make profits in the project, the developer cannot seek damages/compensation from the society. This is a reason why if the developer agrees not to claim compensation or damages in the event of termination of contract by the Society due to his defaults, such contractual clause would be enforceable in law.
The petitioner – developer had purchased FSI in the name of the society for performance of the Development Agreement. It has become property of the Society. The question is whether the same can be treated as “benefit” under Section 64 of the Contract Act. It was held that the counter claim of the developer for return of all the three amounts would be clearly covered by the term “benefit” under Section 64 of the Contract Act. The respondent society has undoubtedly utilized the FSI purchased by the developer.
In my view therefore, the entire FSI purchased by the Petitioner-developer for carrying out redevelopment work of society’s building would clearly be a ‘benefit’ within the meaning of Section 64 of the Contract Act. Since the Society has decided to rescind the contract and even though rescission of contract by the Petitioner is found to be valid, the Society cannot retain the benefit of purchased FSI received under the rescinded contract and must return the same. Clause 9(h) ensures that the Society does not have to actually or physically return the FSI and can consume the same since the same is purchased in the name of the society. The clause also ensures that the construction already put up is not rendered illegal on account of termination of the DA.
However the concept of ‘non-return of FSI’ is different and distinct from the concept of ‘return of purchase price of FSI’. While the former would be protected under clause 9(h) of the DA, the latter is liable to be returned under Section 64 of the Contract Act.
Judgment dated 30.3.2026 of the High Court of Bombay in Commercial Arbitration Petition No.354 of 2024 of SSD Escatics Private Limited Vs. Goregaon Pearl Cooperative Housing Society Limited
