Arbitrator's Award Validates Termination of Development Agreement and Addresses Third-Party Rights in Goregaon Pearl Case

The Sole Arbitrator’s award in the case of Goregaon Pearl CHS Vs. SSD Escatics Pvt. Ltd. has granted relief to the society and upheld the termination of the Development Agreement of the year 2008. The dispute arose out of a development agreement executed between the Society and the Developer in the year 2007, and later terminated by the Society in the year 2018 due to non-completion of the project in the agreed timeline and continuous breaches (including non-payment of monthly rent).

The issue concerning the third-party-rights had its own interesting aspect. The Developer amid all the breaches committed under the aforesaid Development Agreement created the third-party rights by selling the Free sale component. 

The counsel for the Developer argued that the third-party rights created by the Developer by selling free sale component to new flat purchasers are binding to the Society in pursuance of Development agreement read with power of Attorney.

The counsel for the Society argued that the DA clearly permitted the Developer to sell its share of Free Sale Component, after first providing 60 flats to the existing members and that if the agreement is terminated due to breaches committed by the Developer, the Society cannot be foisted with the obligation to accommodate the flat purchasers who had no privity of contract with the Society nor had the society accepted any funds from the flat purchasers.

The Sole Arbitrator after considering the arguments made by both Counsels, highlighted the ‘doctrine of harmonious construction’. 

The Arbitrator further stated that “the power of attorney has to be read harmoniously with the clauses of the Development Agreement,” and further concluded that the contract between the parties is on a principle-to-principal basis, and not that of a principle-to-agent basis. The Reliance was also put on the judgment in the matter HDIL Vs. MIAL of the Bombay High Court by the learned arbitrator to the proposition that the Respondent Developer would get rights in his free sale component only after completion of the obligations under the contract in the first place.

The Sole Arbitrator interpreted the binding nature of the Third-party-rights by putting reliance on the landmark judgement Vaidehi Akash Housing Pvt. Ltd Vs. New D.N. Nagar Co-op. Housing Society Union Ltd & Ors. and stated that “the sale of the free sale component of the project by the Respondent is on its own account and as an independent contracting party and not as an agent of the Claimant Society.” 

The Sole Arbitrator further held that “The third-party flat purchasers whose contracts were contingent upon the successful performance by the Respondent Developer of the contract between the Claimant and the Respondent, have now become void in my opinion, in view of the fact that the contract between the Claimant Society and the Respondent Developer has been found to be rightfully terminated’.

The Sole Arbitrator also relied upon the Judgment of the Bombay High Court in the matter of Goregaon Pearl CHSL vs Dr. Seema Mahadev Paryekar & ors as passed in Appeal from Order (Stmp) No. 22143 of 2019, who held that the Society cannot be included within the ambit of a ‘promoter’ under RERA as well as MOFA and also upheld the view that :

“This court held that there was no privity of contract in such a case as between the society and third party purchasers claiming though the developer. If, for any justifiable reason, the development agreement is terminated by the Society and the developer is unable to obtain specific performance of the development agreement as against the society, no third party purchaser claiming under the developer can likewise seek specific performance against the Society”

The Sole Arbitrator in the award held that the third-party rights created by the Respondent Developer in not binding to the Claimant society, but the Sole Arbitrator also considered the adverse position of the Third-party-purchasers and stated-

“Nothing precludes the third-party flat purchasers from agitating their rights against the Respondent Developer and making an appropriate claim for damages against the Respondent Developer before the appropriate forum. The third-party flat purchasers have no privity of contract with the Claimant Society so as to make the Claimant Society liable to them.”

In the final Award, the Society was inter-alia granted monetary claims and the Developer was restrained by an order of permanent injunction from interfering in the possession of the Society. The counter claim of the Respondent Developer was rejected in view of the breaches and defaults committed. The Award passed on 24^th June, 2023 (corrected on 26^th June 2023) in the matter of Goregaon Pearl CHS Vs. SSD Escatics Pvt. Ltd. addressed one of the most contested questions in the disputes between the Developer and Co-operative Societies.

The judgement is of immense importance as it has set a precedent for other similar cases. It has established that the contract between the Claimant Society and the Respondent Developer was on a principal-to-principal basis, and the Claimant Society is not liable to the third-party flat purchasers claiming under the Respondent Developer. This judgement is a major step forward in protecting the rights of the Co-operative Societies in Mumbai and will help them in resolving any disputes with Developers in a fair and just manner.(alert-success)