Supreme Court Holds Chandigarh Authorities Liable For Delay In Film City Project, Directs Refund Of 47.75 Crores To Successful Bidder

In a recent judgment, the Supreme Court largely upheld an arbitral award passed in favor of a company engaged by the Chandigarh Administration to establish a Multimedia-cum-Film City in the Union Territory, holding the authorities liable to refund a forfeited bid amount of Rs.47.75 crores.

A bench of Justices BV Nagarathna and Satish Chandra Sharma delivered the verdict, being of the view that the Punjab and Haryana High Court wrongly set aside the arbitral award.

It opined that though time was of the essence to the project sought to be developed, there was a clear and unreasonable delay (of over 16 months) attributable to the authorities in handing over encumbrance-free land to the appellant-Company.

"each day's delay in executing the project after signing of the Development Agreement had commercial consequences and struck at the heart of the Development Agreement", the Court said.

Factual Background

The Chandigarh administration invited bids in 2006 for the development of a Multimedia-cum-Film City in Sarangpur, Chandigarh. The appellant-Company was the successful bidder and the administration issued it a letter of acceptance in 2007. Subsequently, the appellant-Company agreed to sign the Development Agreement, but requested that the project site be demarcated, as without the same, it could not carry out the work. It also furnished Rs.47.75 crores as 25% of the bid amount ie Rs.191 crores.

After the development agreement was signed, there was correspondence between the parties with regard to the demarcation plan and on issues including the removal of 2 HT lines passing through the project site. The demarcation plan was provided to it after 16.5 months. Due to the delay, the appellant claimed that the project cost was escalated and its arrangements with associate-agencies for implementing the project frustrated.

In a High-Level Committee meeting of the administration, it was decided that a proposal for rescheduling payments by the appellant-Company would be worked out. However, when no action was taken following this meeting, the appellant declared the development agreement as frustrated and sought refund of the deposited bid amount. In response, the administration terminated the agreement and forfeited the sum of Rs.47.75 crores deposited by the appellant.

Proceedings before Arbitral Tribunal

The disputes between the parties were first considered by an Arbitral Tribunal, which held in favor of the appellant. The Award directed the authorities to pay : (i) the forfeited sum of Rs.47.75 crores alongwith 12% p.a. interest with effect from 01.03.2007; (ii) Rs.47.75 lakhs as compensation for losses/damage suffered by the appellant; (iii) Rs.46,20,715 for works carried out/commissioned for the project; (iv) 12% p.a. interest with effect from 16.12.2009 till date of payment on awards (ii) and (iii); and (v) Rs.50 lakhs towards litigation costs.

The Tribunal observed inter-alia that: (i) on the date of signing of the development agreement, the final demarcation plan was not ready, and without it, the appellant could not have finalized the layout plan for the project; (ii) there was a delay of 16.5 months in the issuance of demarcation plan by the authorities and the appellant could not be held responsible for the delay; (iii) the authorities were not in a position to handover encumbrance-free land to the appellant and even they acknowledged that development could not commence without the removal of HT lines; (iv) termination of the contract by the authorities was illegal and de hors the provisions of the contract.

Proceedings before District Court and High Court

Against the Tribunal's Award, the authorities filed an application under Section 34 of the Arbitration Act before the District Court, but the same was dismissed. Per contra, in an appeal under Section 37 of the Act, the High Court upheld the administration's forfeiture of the earnest money. It stated inter-alia that the appellant had shown unwillingness to carry on with the work and the frustration of the contract fell under Section 39 of the Indian Contract Act (effect of refusal of party to perform promise wholly).

The High Court further noted that the appellant frustrated the agreement within just a month of a meeting where both parties resolved to work out a proposal with regard to the rescheduling of payments. It also opined that the appellant should have raised the issue of HT lines before submitting the bid or ought to not have participated in the bidding process. Calling the issues "trivial", the High Court observed that the Award put onerous obligations on the administration.

Observations of the Supreme Court

Setting aside the High Court decision, the Supreme Court party modified the Award to hold that the appellant was not entitled to Rs.47.75 lakhs as compensation for loss. It also found that the awarded rate of interest of 12% p.a. was on the higher side and reduced it to 8% p.a. The rest of the Award was maintained.

"we find that the appellant herein is entitled to the sum of Rs.47.75 crores, being the initial deposit and Rs.46,20,715/- being the actual expenses incurred...Having regard to payment of interest, we find that having regard to the fact that payment of interest has been ordered both with regard to initial deposit as well as on the actual expenses, the award of compensation for loss of Rs.47,75,000/- was not in order."

As the Award was passed way back in 2012, the Court directed the administration to deposit the amount by 30.06.2025. If the amount is not so paid to the appellant, interest shall accrue @ 12% p.a. instead of 8% p.a., it added.

In taking the view, the Supreme Court considered that on the date of signing of the development agreement (when the development period of 36 months was to begin), the authorities agreed to the appellant's request that the date of start of the development period be the date when the final demarcation plan is issued to them. However, the demarcation plan was issued only on 17.07.2008 i.e. after an "unreasonable delay" of 16.5 months.

"the demarcation plan was issued just before half the period of 36 months was complete. The appellant could not have anticipated that there would be a delay of such duration in the mere issuance of a demarcation plan."

So far as the issue of removal of HT lines, the Court noted that the administration was obligated to provide the appellant leasehold land free from all encumbrances and occupations. In one of the meetings, the authorities acknowledged that the HT lines had to be removed to provide encumbrance free land. Further, there was delay in granting even the zoning plan and non-action in terms of what was decided in the High-Level Committee meeting.

As such, the Court opined, there was a clear, unreasonable delay attributable to the authorities. "about 22 months had passed since the development agreement was signed between the parties, and the development period would have completed in another 14 months, had the respondents completed their obligations on time. In such a scenario, the appellant cannot be held to have shown unwillingness to carry on with the work, as held in the impugned judgment."

So far as the High Court's observation that the appellant frustrated the contract within just a month of its meeting with the administration, where the parties resolved to work out the issues, the Court noted that towards development of the project, the appellant would have engaged services of different professional agencies beforehand. But due to the authorities' delay, such contracts would have been frustrated and the appellant would have had to engage fresh services of agencies, the cost of which would escalate with time. It was opined that the appellant's action had to be viewed in the context of the commercial nature of the project.

"It was only when no progress took place despite a month having passed since the meeting that the appellant declared the development agreement to have been frustrated."

The Court also said that the issues between the parties could not be termed "trivial", as time was of essence in the project and the delay of 16.5 months had commercial consequences.

Appearance: Senior Advocate V Giri (for appellant); Advocate Krishna Kant Dubey [for respondent(s)]

Case Title: M/s. PARSVNATH FILM CITY LTD. VERSUS CHANDIGARH ADMINISTRATION & OTHERS, CIVIL APPEAL NO.6162 OF 2016 (and connected case)

Citation : 2025 LiveLaw (SC) 422

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