Contract Law | A Party That Fails to Fulfill Its Own Obligations Cannot Enforce a Forfeiture Clause Against the Other: Supreme Court

In a major ruling Supreme Court of India held that Housing and Urban Development Corporation Limited (HUDCO) was in breach of its contractual obligations and, therefore, had no legal right to forfeit ₹28.11 crores paid by M/s Tomorrowland Limited for a 5-star hotel project in Delhi. While ordering HUDCO to refund the entire forfeited amount within three months, the Court refused to award any interest to Tomorrowland, citing its abuse of judicial process, forum shopping, and strategic litigation tactics.

Calling out HUDCO for its failure to obtain necessary approvals and execute the required sub-lease agreement, the Court declared, “HUDCO’s demand for further payments was unjustified when it had itself failed to perform its reciprocal contractual obligations.” At the same time, the Court criticized the appellant for manipulating legal forums and abandoning claims to avoid paying court fees, ruling that “a party engaging in inequitable conduct cannot expect the Court to exercise its discretion in its favor.”

“Forfeiture Cannot Stand When the Party Enforcing It Is Itself in Breach” – Supreme Court Strikes Down HUDCO’s Actions

The dispute arose from a land allotment agreement between M/s Tomorrowland Limited and HUDCO, under which HUDCO allotted land at Andrews Ganj, New Delhi, for the development of a 5-star hotel on a 99-year lease. The allotment letter dated October 31, 1994, required Tomorrowland to make staged payments totaling ₹64.10 crores. The company paid ₹28.11 crores as the first installment, but subsequent payments became the subject of litigation.

Tomorrowland refused to make further payments, arguing that HUDCO had failed to obtain statutory approvals under the Income Tax Act and the Urban Land (Ceiling and Regulation) Act and had also failed to execute the sub-lease agreement. Despite this, HUDCO insisted on payment and, upon non-compliance, canceled the allotment and forfeited the ₹28.11 crores already deposited.

The Supreme Court found HUDCO’s actions legally unsustainable, ruling that: “HUDCO was contractually obligated to execute the necessary approvals and sub-lease agreement. Its failure to do so made its demand for payments entirely unjustified. A party that itself stands in breach cannot enforce a forfeiture clause against the other.”

The Court further observed that HUDCO’s conduct was inconsistent and discriminatory, particularly in comparison to how it treated another allottee, Ansal Properties & Industries Limited, stating: “The Ansals were granted an interest-free extension for their payments, while the appellant was threatened with cancellation and forfeiture. Such arbitrary conduct cannot be condoned.”

Emphasizing that contractual obligations must be enforced in a fair and equitable manner, the Court invalidated HUDCO’s forfeiture of ₹28.11 crores and directed a full refund.

“Strategic Litigation Tactics and Forum Shopping Are a Bar to Equitable Relief” – Supreme Court Refuses Interest to Appellant

Although the Supreme Court ruled in favor of Tomorrowland on the refund issue, it refused to grant any interest on the refunded amount, citing the company’s manipulation of legal forums and attempts to evade court fees.

The Court took particular note of how Tomorrowland first filed a suit in the Delhi High Court, then withdrew it unconditionally without seeking liberty to refile, only to initiate a fresh suit in a lower court. Criticizing this deliberate change of forums, the Court declared: “The appellant deliberately withdrew its first suit from the High Court after failing to comply with a judicial direction to deposit ₹15 crores. It then refiled the suit in a lower court in a calculated move to avoid adverse consequences. This amounts to forum shopping and an abuse of process.”

The Court also condemned Tomorrowland’s decision to abandon its claim for possession in order to evade the requirement of paying ad-valorem court fees, stating: “When faced with the obligation to pay court fees based on the market value of the land, the appellant strategically dropped its claim for possession. Such conduct undermines the fairness of judicial proceedings.”

Citing S.P. Chengalvaraya Naidu v. Jagannath (1994) 1 SCC 1, the Court reaffirmed the principle that “he who seeks equity must do equity”, observing: “A litigant that engages in procedural manipulation and judicial deception cannot expect the Court to exercise its discretionary powers in its favor. Interest is an equitable relief, and a party acting unfairly cannot claim it as a right.”

Thus, while the Court ordered the refund of ₹28.11 crores, it denied any additional interest, except in the event of non-payment within three months, in which case a 6% per annum interest would apply.

“Refund Ordered, But Interest Denied Due to Litigation Misconduct” – Supreme Court’s Final Directions

Court Balances Contractual Justice with Judicial Discipline

Striking a balance between enforcing contractual obligations and discouraging procedural abuse, the Supreme Court issued the following key rulings:

• HUDCO’s cancellation of allotment and forfeiture of ₹28.11 crores was legally invalid due to its failure to fulfill reciprocal contractual obligations.

• HUDCO must refund the entire amount within three months, without interest.

• No interest is payable to Tomorrowland, as its forum shopping and strategic litigation misconduct disentitle it from any equitable relief.

• If HUDCO fails to refund the amount within three months, interest at 6% per annum will apply until full payment is made.

Clarifying that its ruling applied only to the hotel project at Andrews Ganj, the Court concluded: “This judgment pertains exclusively to the subject property in question. Any other disputes between the parties regarding different properties shall be adjudicated independently on their own merits.”

The Supreme Court’s decision ensures that HUDCO cannot enforce forfeiture while being in breach of contract, while also making it clear that parties engaging in procedural manipulation will not be rewarded with equitable relief.

The Supreme Court’s ruling in M/s Tomorrowland Limited v. HUDCO establishes two crucial principles:

• A party that fails to fulfill its contractual obligations cannot enforce a forfeiture clause against the other party.

• Litigants engaging in forum shopping and procedural manipulation will be denied discretionary relief, such as interest on refunds.

By ensuring that HUDCO does not unjustly enrich itself, while also discouraging abusive litigation practices, the judgment strikes an important balance between contractual fairness and judicial discipline.

Date of decision: 13/02/2025