Madras High Court Imposes Exemplary Costs For Unwarranted Litigation

Madras High Court has imposed exemplary costs on a company for unwarranted litigation while simultaneously holding that the company was entitled to the counterclaim filed. The amount of counterclaim ordered in favour of the defendant company has been set off from the exorbitant costs imposed by the court on the company.

The bench reached the above conclusion by referring to the ambit of Section 35 of the Commercial Courts Act, 2015. One of the circumstances in which the courts may impose costs is based on the conduct of the parties. The provision makes it clear that no litigant in the commercial division can ordinarily escape a litigation loss without an accompanying order of costs. The costs imposed can include compensatory costs and actual costs. Omission of (2) from Section 35 A from the Code of Civil Procedure Code would mean that compensatory costs can be imposed.

Another concept under the Act would be 'partial success' wherein the party succeeds in some of the issues before the court and fails in other issues. Section 35(4) has also heads under which costs can be imposed for frivolous claims and vexatious proceedings.

In the case at hand, the court observed that the defendant should have terminated the agreement with the plaintiff when it came to the knowledge of the former that the plaintiff company was no longer interested in proceeding further. More importantly, the defendant failed to encash the security deposit cheque that was returned and readily available even when they were aware of the intent of the plaintiff regarding the agreement.

Facts

The plaintiff company, Ramaniyam Real Estates Private Ltd, was the owner of the property in dispute. There was an agreement between the plaintiff company and the defendant Specers Retail Private Limited in 2010. According to the agreement, the plaintiff was supposed to construct a commercial building and lease it out to Spencer's for running a hypermarket. The agreement further stipulated that the construction must be handed over to Spencer's by  March 2011 and that the plaintiff will obtain the requisite permission for construction within two months from the date of signing the agreement. Pursuant to the agreement, out of the five instalments of refundable security deposit of Rs. 1,46,31,408/-, Rs 36, 57,852/- was paid by the defendant.

Though CMDA granted the plaintiff permission for construction of an office building (commercial), the defendant company was not convinced that they could run a hypermarket unless there is permission for Departmental Store specifically from the competent authority. Therefore, the plaintiff was asked to get a revised approval from CMDMA under a new supplementary agreement with a time extension although the time stipulated in the original agreement for completion of the project elapsed.

The other terms of the original agreement remained unaltered and the plaintiff company sold the property in question to third parties under clause 21 notwithstanding the rights of Spencer's to get possession of the property and the lease agreement executed in their favour. Meanwhile, the time limit prescribed under the supplementary agreement also expired but the parties went ahead with the project. 

Afterwards, there was a delay in getting the revised approval from CMDA and this aspect irked Spencer's Retails. However, the defendant company actively cooperated with the new purchasers and the lease agreement was about to be executed in favour of Spencer's. Meanwhile, the plaintiff company lost interest in the completion of the project due to the inordinate delay and communicated to the defendant that they were free to encash the cheque for the returned security deposit. The said communication also indicated that the plaintiff company now could deal with the property in any manner, though it mentioned that the defendant may be re-engaged again in the future. It was only after these communications that the plaintiff obtained the approval for Departmental Store from CMDA on 18.09.2013.

In 2014, Spencer's Retails terminated the supplementary agreement as well as the original agreement with the real estate company and called upon the defendant to pay back the refundable security deposit.

The Real Estate Company filed the current suit seeking compensation towards construction cost, rental loss and loss of reputation due to the winding-up proceeding initiated against them by the defendant. The plaintiff also sought a direction to issue public notice of apology by the defendant for causing damage to the reputation of the Plaintiff's Company by instituting a false case. The defendant company made a counter claim for the repayment of the security deposit paid by them.

Arguments Raised

The plaintiff company alleged that the defendant was knowingly dragging the project on the pretext of CMDA approval to watch the development in the proposed flyover that was coming up near the subject property and take advantage of the special provision in the agreement. The CMDA approval for the commercial building was enough for the defendant's business. Though the security deposit was returned as early as 2012, it was deliberately not encashed by the defendant, hence keeping the agreement in limbo. In 2014, the defendant unilaterally terminated the agreement and initiated winding up proceedings against the Real Estate Company in the guise of recovering the refundable security deposit, thereby bringing bad repute, the counsel stated.

The defendant company submitted that the Real Estate Company did not stick to the timelines stipulated in both agreements or obtained the requisite approvals. When it was clear that the plaintiff is not interested in fulfilling the agreement terms, it was terminated by Spencer's Retails, the counsel added.

Court's Observations

Conduct Of Defendant, Counter Claim & Imposition Of Exemplary Cost

"In the present case, the defendant immediately after coming to know that the plaintiff is no more interested in proceeding further with the agreement, should have terminated the agreement and encashed the cheque that was available readily. This intention was expressed by the plaintiff through their letter dated 25.09.2012. Once again the plaintiff informed through their letter dated 17.07.2013 that they were no more interested in the agreement. The defendant was also aware of the fact that the property has been sold to third parties and they have to be brought into the picture if they want to proceed further in taking the property on lease", the court observed while examining the issue of who is entitled to the cost and compensatory cost under Section 35 A of the amended Civil Procedure Code.

The bench went on to note that it was the plaintiff company that incurred costs for construction, obtaining permits etc. Even while selling the property, they accounted for the refundable security deposit paid to them by the defendant. However, the defendant did not incur any tangible costs/ expenses except the payment of security deposit.

"Inspite of the same, it is the defendant who started an unnecessary litigation by initiating winding up proceedings. This is a clear case where the defendant ought to have avoided litigation. There was no reason for the defendant to push the plaintiff and get the property leased out to them. Any prudent person would have simply encashed the refundable security deposit cheque and walked away. The attitude of the defendant to initiate this unnecessary litigation is also apparent from some of the evasive and irresponsible answers given by DW-1in the course of the evidence", the court concluded in the order.

Hence, in effect, though the counterclaim made by the defendant was allowed, it was set off completely against the exemplary cost against the defendant. 

Running Departmental Store With Commercial Sanction

With regards to the issue of whether the agreement stipulates sanction for departmental store explicitly, the court observed that the agreement was for obtaining commercial sanction for running a departmental store after perusing the agreement. On the question of whether a departmental store can be run with a sanction for commercial office (building), the court answered that the only difference between the commercial sanction and departmental store sanction was that the latter would permit more parking space as required under Annexure XVI of the Development Control Rules.

"...there is no specific provision under the Development Control Rules which specifically deals with approving a sanction for a hypermarket. The first agreement dated 25.09.2010 only used the term "commercial sanction". The understanding of the plaintiff was that to run a departmental store/hypermarket, a commercial sanction is enough since the property in question falls under the commercial zone. In fact the defendant is carrying on with the departmental store in two more places at Besant Nagar and Thiruvanmiyur and the premises where the departmental store is being run has been accorded only a commercial sanction. There is, therefore, no bar under the relevant regulations...", the court inferred.

Party That Committed Breach Of Agreement

The next question before the court was with respect to who has committed the breach of both agreements and whether there was a delay from the plaintiff in obtaining the sanctions from CMDA and the completion certificate. The court observed that it is clear from the conduct of the defendant as well as the plaintiff that they only intended to complete the project and was not serious about the stipulated timelines in both agreements. the defendant always had the option to terminate the agreement and encash the security deposit cheque returned. However, the defendant opted to obtain further clarification from CMDA through the plaintiff about the operation of a departmental store with additional parking space in a building with commercial sanction.

"...It is therefore very clear that both the parties did not treat the time as the essence of the contract. Ultimately the contract got terminated for different reasons and not on the ground of non-adherence to the timelines fixed under the agreement", the court remarks in the order.

The court also noted that the plaintiff started losing interest in completing the project as per the agreement after the sale of the property to third parties, which is also evident from their email communications. By the time the revised CMDA approval was received, the business relationship between both parties had deteriorated according to the court. Pertinently, the plaintiff also renewed and issued the security deposit cheque atleast three times during this period which was not encashed by the defendant deliberately, 'for reasons best known to the defendant'.

Later, the 'clash of ego on both sides resulted in the exchange of legal notices and subsequent legal proceedings, the court noted.

"...strictly speaking in terms of the Clauses contained under the agreement, it was the plaintiff who did not comply with the timelines in getting the sanction and putting the defendant in possession of the property. Even though the defendant was willing to condone the delay and work with the plaintiff to get the tripartite agreement and take possession of the property to run the departmental store, the plaintiff lost interest and eventually it resulted in the termination of the agreement by the defendant", the court concluded

Relief For Plaintiff

On the remaining issue, i.e, about whether the plaintiff is entitled to any relief sought for in the commercial suit, the court opined that the payment of rent will start only from the time when the possession is actually handed over to the defendant after getting the completion certificate. On claiming compensation for 'defaming the plaintiff' through winding up proceedings, the court observed that the said petition was dismissed by the court on the ground of maintainability and on the ground that there is a genuine dispute with regard to the liability.

"If the Court had felt that the defendant had initiated frivolous proceedings for winding up the company without any basis, cost could have been imposed on the defendant. The fact that the Company Petition ultimately came to be dismissed, only reiterated the stand of the plaintiff that their company was not at the stage of being wound up. Hence there was no real loss of name for the plaintiff due to these proceedings. Not all frivolous litigations will end up claiming for compensation for defamation. The defendant worked out a remedy that was available in law and they failed  in the said attempt."

The court also pointed out that the plaintiff cannot combine the cause of action for defamation (civil wrong) along with the compensation arising out of the agreement unless the plaintiff has obtained a special leave for joinder of cause of action.

For claiming compensation specifically under the head of 'construction cost', the court added that the defendant has not committed any breach of the covenants in the agreement:

Therefore if the plaintiff had actually incurred any consequential damages while going through this project, the same cannot be recovered from the defendant and such recovery will not have statutory backing. That apart, the plaintiff has not specifically challenged the cancellation of agreement by the defendant by seeking for a declaration and hence it must be construed that the plaintiff has conceded to the termination of agreement and is only agitating for the consequences arising out of such termination.

Therefore, the civil suit filed by the plaintiff Real Estate Company was accordingly dismissed.

Case Title: M/s.Ramaniyam Real Estates Private Ltd v. M/s.Spencer's Retail Private Ltd.

Case No: C.S.No.849 of 2014

Citation: 2022 LiveLaw (Mad) 69

Appearance: For Plaintiff: Mr.S.Sundaresan

For Defendant: Mr.C.Manishankar, Senior Counsel for Mr Arun C.Mohan

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