Dismissed

S.Kasthuri v. State Bank of Travancore

Kerala HC3 Feb 2022Arb.A/29/2008

Case brief

AI extract

What is this about?

High Court of Kerala, through a Division Bench, dismissed an arbitration appeal against an award returning funds to a bank. The Court upheld the Arbitrator's findings that the builder failed to construct flats and fabricated stories regarding reconstruction, affirming the rejection of the novation claim and counterclaim.

What did the court decide?

Arbitration appeal dismissed with costs.

S.Kasthuri Vs State Bank of Travancore — Arbitration | Kerala HC (2022)

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IN THE HIGH COURT OF KERALA AT ERNAKULAM

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PRESENT

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THE HONOURABLE MR. JUSTICE P.B.SURESH KUMAR

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THE HONOURABLE MRS. JUSTICE C.S. SUDHA

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THURSDAY, THE 3^RD DAY OF FEBRUARY 2022 / 14TH MAGHA, 1943

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ARB.A NO. 29 OF 2008

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AGAINST THE ORDER DATED 13.04.2007 IN O.P.(ARB) 280/2002 OF DISTRICT COURT,

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ERNAKULAM

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APPELLANT/PETITIONER:

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S.KASTHURI PROPRIETOR, M/S SAI HOMES AND RESORTS, FLAT NO.5G, SARASWATHI NILAYAM, JAWAHAR NAGAR, THIRUVANANTHAPURAM, NOW RESIDING AT SAI CLESTE, OTTLEY ROAD, OOTTY. BY ADVS.SRI.K.S.BHARATHAN SRI.C.P.KUNJHIKANNAN SRI.S.K.MADHU

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RESPONDENT/RESPONDENT:

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STATE BANK OF TRAVANCORE REPRESENTED BY ITS CHIEF MANAGER (PREMISES) HEAD OFFICE, THIRUVANANTHAPURAM.12

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BY ADVS.SRI.SANTHOSH MATHEW SRI.GEORGE THOMAS(MEVADA)(SR.), SC, SBI SRI.AMAL GEORGE, SC, SBI

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THIS ARBITRATION APPEALS HAVING COME UP FOR ADMISSION ON 25.01.2022, THE COURT ON 03.02.2022 DELIVERED THE FOLLOWING:

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Arb.Appeal No.29 of 2008

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P.B. SURESH KUMAR & C.S. SUDHA, JJ.

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Arb.Appeal No.29 of 2008

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Dated this the 3^rd day of February, 2022

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J U D G M E N T

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C.S.Sudha, J.

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This appeal filed under Section 37 of the Arbitration and Conciliation Act, 1996 (the Act) is against the order in OP (Arbitration) No.280/2002 dated 13.04.2007 on the file of the District Court, Ernakulam. The appellant herein is the petitioner in the aforesaid OP and the respondent in the Arbitral proceedings. The respondent herein is the claimant in the arbitral proceedings and the respondent before the court below. The parties in this appeal will be referred to as described in the arbitral proceedings.

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A brief reference to the facts of the case -

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Arb.Appeal No.29 of 2008

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The claimant, State Bank of Travancore, (the Bank) on 03.08.1994 entered into Ext.A1 agreement with the respondent, the proprietrix

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of M/s.Sai Homes & Resorts, Jawahar Nagar, Thiruvananthapuram, the Builder, for construction and purchase of eight flats for its employees in Udagamandalam Town, Tamilnadu at a cost of ₹ 840/- per sq.ft.. The eight flats comprised of, two - three bedroom flats each with a built-up area of 1050 sq.ft. and sixtwo bedroom flats, each with a built up area of 280 sq.ft. On 03.08.1994, 50% of the cost of construction and price of the undivided land amounting to ₹ 30,99,000/-, was paid to the respondent. While dividing the first and second floors into the agreed number of flats, it was found that there were some unutilised odd shaped areas which were also agreed to be put to proper use, for which the Bank would pay the necessary charges. Due to this, the total area agreed to be purchased increased to

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Arb.Appeal No.29 of 2008

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4273.17 sq.ft. in the second floor and 4007 sq.ft. in the first floor. The total area thus roughly came to 8280 sq.ft. and the number of flats increased to ten, including the two odd shaped portions, one on each floor, which the Bank intended to use as dormitories. In terms of the agreement, construction started and the claimant Bank was informed by way of Ext.A2 dated 18.11.1994 that the construction of all partition walls including plastering of the total 4723.17 sq.ft. on the second floor has been completed. On 14.12.1994, as requested, the claimant Bank paid an amount of ₹10,76,040/- which was 30% of the cost of construction and cost of undivided interest in the land. Thereafter the final lay out of the plan was given to the respondent and on 21.03.1995 a further payment of ₹ 15,09,190/- made to the respondent. Thus, a total sum of 56,84,160/- was paid. The respondent by way of Ext.A7₹ letter dated 29.04.1995 claimed that the common area came to

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Arb.Appeal No.29 of 2008

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2216.565 sq.ft. for which she demanded an amount of ₹18,61,910/in addition to the total cost agreed to in the contract. The respondent claimed that since the claimant Bank had revised the original plan, extra expenditure had been incurred and hence the reason for demanding the aforesaid sum. As contended by the respondent, the claimant Bank had never asked the former to demolish the flats already constructed and to re-build it as per the revised plan as there was never any revised plan(s). The only suggestion made by the Bank was relating to the re-designing of one of the two-bedroom flats by converting the kitchen into a bedroom. The respondent refused to go ahead with the construction. The claimant Bank was always ready and willing to pay the balance amount, if any due, as soon as the apartments were constructed and possession handed over. Several communications were sent requesting the respondent to complete the construction.

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However, she never co-operated. The respondent then by way of Ext.A16 letter dated 12.12.1995 raised several false allegations

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and claimed an amount of ₹ 2,64,34,342/- as the amount outstanding from the Bank. The claim made was preposterous. Thereafter the claimant received Ext.A17 letter dated 03/02/1996 from the respondent terminating the contract under the pretext that former has committed breach of the contract. Realising that the respondent would not abide by the terms of the contract, the claimant Bank caused notices to be published in leading dailies warning the public of the existence of a subsisting contract between the parties relating to the building. Alleging breach and fault on the part of the respondent to perform her part of the contract, the claim statement was filed by the Bank before the learned Arbitrator raising claims under various heads.

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The respondent Builder denied the allegations of the

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Arb.Appeal No.29 of 2008 claimant Bank. According to her, Ext.A1 agreement contained

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only an approximate area of the apartments agreed to be constructed. After the execution of Ext.A1, the claimant Bank had given Ext.R3 letter and Exts.R4 and R5 approved plans for the first and second floors wherein it is specifically stated that the area referred to in the plans is exclusive of the common area. The respondent denied the allegation that 50% of the cost had been paid at the time of execution of Ext.A1. According to her a sum of ₹45,60,411.22/- was due in the place of ₹ 30,99,000/- that had been paid by the Bank. In addition, the Bank owed an amount of ₹14,61,411.22/- towards interest @ 18%. As on 15.06.2000 an

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amount of ₹ 38,36,332.46/- was due. Actually, the total built up area was 10858.122 sq.ft. and not 8280 sq.ft. as claimed by the claimant. In the original agreement and plan, construction of a dormitories was never contemplated. An amount of ₹ 10,76,040/-

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Arb.Appeal No.29 of 2008 was paid by the claimant Bank on 14.12.1994 after being

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convinced of the fact that work had been completed as stated by the respondent. But this payment was also inadequate as an amount of ₹41,04,370.10/- was then due. After the construction was completed, the claimant Bank on 02.03.1995 gave a revised plan to re-construct after demolishing what had already been constructed, for which the Bank had agreed to pay demolition charges and the cost for reconstruction. There was gross under payment by the Bank. As on 21.03.1995, ₹ 31,74,659.02/- was due towards 45% of the amount agreed. However, the Bank had paid only ₹15,09,120/-. As directed by the Bank, 30% of the re construction work had been done. This according to the respondent was done without any payment. Failure to complete the construction was due to the fault of the claimant Bank and not her fault. The Bank failed to abide by the terms of the contract. Due to

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Arb.Appeal No.29 of 2008

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this, the respondent suffered considerable loss and hence by way of counter claim raised a claim for an amount of ₹1,63,34,769.65/with interest @ 18% from 16.06.2000 till recovery.

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The learned Arbitrator after affording an opportunity to either side to adduce evidence and after hearing them, passed the Award dated 20.06.2002, by which the respondent was directed to return the amount of 56,84,160/- paid by the claimant along₹ with interest. The respondent was also directed to pay as compensation an amount of ₹ 5 lakhs with interest. The counter claim of the respondent was rejected. Aggrieved by the Award, the respondent Builder took up the matter under Section 34 of the Act before the District Court, Ernakulam. The court below by order dated 13.04.2007 dismissed the OP and hence the respondent Builder is before us with this appeal.

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In the appeal memorandum it is alleged that the court

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Arb.Appeal No.29 of 2008

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below failed to properly exercise its jurisdiction under Section 34 of the Act. None of the documents produced by the respondent Builder has been appreciated in the proper perspective. The findings of the learned Arbitrator, which are based on no evidence and on an incorrect appreciation of evidence, has been wrongly confirmed by the court below, leading to gross injustice.

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Heard Sri.K.S.Bharathan, the learned counsel for the

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appellant and Sri.George Thomas (Mevada) the learned Senior counsel appearing for the respondent.

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The main points challenged in the Award are - (i)

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failure to consider the fact that revised p lan had been given by the claimant Bank, on the basis of which reconstruction had been done even without any payments being received; (ii) when revised plan was given, a novation of the contract had taken place. However, the Arbitrator incorrectly held otherwise; (iii) gross under-

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payment by the Bank and (iv) the counter claim of the respondent was never considered by the Arbitrator and the same has been dismissed even without a discussion.

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Admittedly, Ext.A1 is the agreement executed

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between the parties relating to the construction of the apartments. According to the respondent pursuant to Ext.A1, she had completed the construction. However as requested by the claimant Bank, the constructions made were demolished and reconstruction was done even without receiving any payments for the same. In order to substantiate this case, the respondent relied on Exts.R3 to R7, R10 and R14. The learned Arbitrator after examining the various communications that took place between the parties found that it was improbable for the Bank to have issued such a direction and that the said documents are concocted and fabricated. The learned Arbitrator has given quite a detailed discussion on this

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aspect in the Award. The Arbitrator also took note of the inconsistent stand taken by the respondent before the High Court of Madras and before the Arbitral Tribunal. In Ext.A22 affidavit filed in the original petition moved by the respondent before the High Court of Madras in January 1995, she contended that the constructions made were strictly in accordance with the approved plan and that the first respondent in the said original petition, was threatening demolition alleging violation of the Building Rules. On the other hand, in the arbitral proceedings, the respondent Builder took up a case that the original constructions had been demolished at the instance of the claimant Bank and further reconstructions were made. The proceedings before the High Court of Madras seems to have been initiated by the respondent herein when she was threatened with demolition of the structures by the local authority concerned, on the premise that they have been made in

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violation of the Building Rules. The case of the respondent Builder that the Bank had given directions to demolish the constructions already made, pursuant to which she had demolished the same and reconstructed the apartments and that too without receiving any payments, was found to be improbable in the facts and circumstances of the case and evidence let in. The documents relied on by the respondent were found to be concocted and fabricated documents. Hence the said case was disbelieved and rejected. The learned Arbitrator found that the story of the Bank giving direction for reconstruction was just a concocted story to get over the probable/possible violation in the constructions made. It was found that in all probability what must have actually transpired is – the respondent expecting some drastic action from the local authority, must have demolished the constructions and then quite cunningly put the blame on the Bank. This conclusion was arrived at not only

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on the basis of the documentary evidence adduced, but also after a site inspection by the learned Arbitrator, who found the construction area to be in a total mess. According to the Arbitrator, the building presented a sorry picture; there was no evidence of reconstruction to the extent of 30% claimed by the respondent; there was only the shell of the building in the form of columns and some unfinished walls in certain portions and the entire place seemed to have been vandalised for no apparent reason(s). The state of affairs seen at the site, according to the Arbitrator, did not indicate that it was done with any intention or view to reconstruct. Heaps of rubble in and outside the premises with twisted wires, steel bars, broken floors, etc. were seen. Based on all these aspects, the learned Arbitrator rejected the case put forward by the respondent Builder. Individual reference is seen made to the various documents produced by either side to substantiate their

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Arb.Appeal No.29 of 2008 respective case. After making such a reference, a detailed discussion follows on the basis of which the conclusions/findings have been arrived at by the Arbitrator. The findings arrived at by

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the Arbitrator are based on cogent reasons.

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Admittedly, it is the un-amended provisions of Section 34(2) of the Act that is applicable in this case and hence

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for the respondent to succeed, she must show that the findings of the learned Arbitrator violate the public policy of India. It is now well settled that to succeed on this ground, the party will have to show not mere illegality or perversity, but illegality or perversity that goes to the root of the matter and something which shocks the conscience of the court. In the case on hand, we do not find anything shocking or any finding so perverse that no reasonable man would arrive at. In a proceeding under Section 34 or in an appeal under Section 37, it is not possible for the court to re-

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appreciate the evidence let in before the Arbitrator as the court is not sitting in appeal and its supervisory jurisdiction is very limited.

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The learned counsel for the respondent also took exception to the finding of the learned Arbitrator that no novation of the contract had taken place. It was pointed out that the initial agreement was to construct eight flats having a total built up area of around 3780 sq.ft. Thereafter when the Bank directed the respondent to make additions and alterations based on the revised plan, the total area to be constructed increased to a bout 10,858.122 sq.ft., which is inclusive of the common areas. Th e cost of construction thus increased due to this change of plan. The total number of apartments increased from eight to ten. Therefore, the argument advanced is that there was a complete change in the terms of the agreement and in fact a novation of Ext.A1 agreement

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had taken place.

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Section 62 of the Indian Contract Act says that if the parties to a contract agree to substitute a new contract for it, or to rescind or alter it, the original contract need not be performed. Here we refer to the decision in Chrisomar Corporation vs. MJR Steels Pvt. Ltd. [2017 KHC 6655] , wherein the Hon'ble Supreme Court held that when the parties to a contract agree to substitute a completely different contract for the first, or to rescind a contract, the performance under the original contract and/or rescinded contract comes to an end. When parties to a contract 'alter' a contract, the question that has to be answered is whether the original contract is altered in such a manner that performance under it is at an end. In order that a contract that is altered in material particulars fall under Section 62 of the Contract Act, it must be clear that the alteration must go to the very root of the

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original contract and change its essential character, so that the modified contract must be read as doing away with the original contract. If the modified contract has no independent contractual force, in that it has no meaning and content separately from and independently of the original contract, then no new contract comes into being. The original terms continue to be part of the original contract except to the extent that they are inconsistent to the modifications made.

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In H. R. Basavaraj v. Canara Bank and Others, 2010 KHC 2022: [2010 (12) SCC 458] referring to Lata Construction Ltd. v. Dr. Rameshchandra, 2000 KHC 916: AIR 2000 SC 380, it has been held that if the rights under the original contract were kept alive even after the second agreement is entered into, and the rights under the original agreement had not been rescinded, then there is no substitution of

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contracts and hence no novation. It was held that the basic principle behind the concept of novation is substitution of a contract by a new one. When there is alteration as to a term of the contract, it falls for determination as to whether the parties are relieved of the obligations under the original contract. What is to be looked into is as to whether the original contract is altered in such a manner that performance under the same is at an end. The alterations or the modifications, unless it goes to the root of the original contract, does not take away the obligations under the original contract.

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Here the claimant Bank denies the contention of

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the respondent Builder and says that it had never asked for demolition and reconstruction. On the other hand, minor changes inside the constructed areas were the only suggestion found to have been made. Some odd shaped unutilised areas were directed

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to be put to proper use and in one apartment, the kitchen area was directed to be converted to a bedroom. Apart from these minor changes, which did not require any structural changes, alterations, demolition or reconstruction, no other deviations/additions were ever sought by the Bank. The case of the respondent regarding revised plan, demolition and reconstruction was disbelieved and rejected by the learned Arbitrator after a detailed discussion giving cogent reasons, regarding which we find no infirmity. By the suggestions made by the claimant, the parties were not relieved of their obligations under the original contract. The original contract was not altered in such a manner that performance under the same came to an end. The alterations or the modifications, made did not go to the root of the original contract, and did not take away the obligations under the original contract. Therefore, it can be seen that there was no novation as such of the contract as alleged by the

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respondent Builder. Hence the learned Arbitrator was right in rejecting the case of novation set up by the respondent.

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The case of gross under-payment by the Bank was

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also found to be incorrect and false. The respondent had raised a contention that due to the default on the part of the Bank, she had suffered huge loss and hence claimed ₹1,63,34,769.65/- with compound interest towards damages for breach of contract and towards the balance amount due to her under the contract along with interest. Admittedly the construction of the apartments was neither completed nor possession handed over. When the learned Arbitrator had found that the case put forward by the respondent Builder regarding revised plan, demolition and reconstruction was improbable, unbelievable and false, then there was no further need for considering the counter claim of the respondent Builder. When

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the foundation of the case put forward by the respondent itself fell,

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then it is quite unnecessary for the learned Arbitrator to again repeat the discussion and then reject the counter claim. Therefore, the learned Arbitrator was fully justified in rejecting the counter claim moved by the respondent Builder.

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The claimant Bank had admittedly paid an amount ₹56,84,160/- to the respondent. The learned Arbitrator noticed that pursuant to Ext.A17 termination letter being issued by the respondent to the claimant, the former had sold/leased out the entire property covered by Ext.A1 agreement for long periods to third parties, which was evident from Ext.A24 encumbrance certificate. Way back during the period 1994-95, the respondent had received a sum of ₹ 56,84,160/- and then failed to construct and hand over possession of the apartments. This failure or breach of contract, was found by the Arbitrator, to be solely due to the fault of the respondent builder. Till date, the respondent has not

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returned the money received from the Bank. So, she is retaining the substantial amount received from the Bank and has also made profit by leasing and selling the apartments to third parties, which is a clear case of unjust enrichment. From the materials produced before the Arbitrator it is quite apparent that the respondent builder kept the bank in the dark regarding the proceedings initiated by the local authorities against violations in the Building Rules alleged to have been committed by the builder. In these circumstances, the learned senior counsel for the claimant Bank was fully justified in his submission that the learned Arbitrator had actually given a kid glove treatment to the respondent Builder in spite of the fact that blatant lies had been stated by the respondent in the affidavit filed by her before the High Court of Madras and in the arbitral proceedings. The learned Arbitrator was fully justified in directing the return of the amount of ₹ 56,84,160/- (the payment and receipt

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not disputed) paid by the Bank along with interest and also awarding 5 Lakhs with interest as compensation, which certainly₹ appears to be a reasonable amount.

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The appeal is found to be without any merits and hence the same is dismissed with costs.

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Interlocutory applications if any pending, shall stand

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disposed of.

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Sd/-

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P.B.SURESH KUMAR JUDGE

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Sd/-