Section 42 Bars Petitions In Different Courts, Fraud Or Collusion Allegations Can Only Be Examined By The First Court: Delhi HC

A bench of Justice Jyoti Singh noted that allegations involving fraud, collusion, or malafides in the filing of the first petition can only be addressed by the court where the initial petition was filed. The second court isn't authorized to investigate such matters.

The court also determined that if the first court concludes that the first proceedings were tainted by fraud or collusion or lacks jurisdiction over the case, Section 42 wouldn't apply. In such cases, parties can approach the appropriate court without being restricted by Section 42.

Further, the Court held that when the seat of arbitration is not defined in the agreement, it would be determined as per the place of the cause of action in terms of Section 2(1)(e) of the Act.

Facts

The petitioner, established in 1954 as a registered partnership firm, specialized in marketing and manufacturing footwear and fashion products. They were the first user and owner of the 'LIBERTY' trademark, coined in the same year. On 01.04.2001, a Registered User Agreement was entered with the respondent for the 'LIBERTY' trademark in Class 25 for three years. By 28.03.2003, the petitioner became the exclusive 'LIBERTY' trademark owner and formedative marks.

A Trademark License Agreement (License Agreement) was executed on 31.03.2003 for seven years, renewed automatically for three years if not terminated. The respondent was granted an exclusive license to use the trademarks globally in connection with their products, adhering to petitioner’s quality standards. Another License Agreement was executed on 03.04.2013, effective from 01.04.2013 for five years, renewing for two further terms.

Disputes arose when the respondent defaulted on obligations since 2018-19: license fee shortfall, payment delays, not providing audited accounts, outsourcing manufacturing without sublicensing, and lacking proper bookkeeping.

Starting in 2019, the petitioner issued notices to the respondent for these breaches. On 04.11.2019, a demand notice under Section 8 of the IBC was issued. On 20.02.2020, a petition under IBC was filed in NCLT, Chandigarh for a sum of Rs.9,51,15,334.

On 27.09.2022, Mr. Harish Gupta of the petitioner firm issued termination notice. Respondent invoked arbitration on 20.10.2022, yet continued using 'LIBERTY' marks without payments. Petitioner responded on 22.11.2022, citing no arbitrable claims and breach of obligations. Respondent responded on 22.12.2022, expressing intent to continue the License Agreement.

Due to alleged continuous breaches, petitioner terminated the Agreement on 04.05.2023, asking respondent to cease 'LIBERTY' marks use. Since respondent continued using these marks, violating petitioner’s rights, the present petition was filed.

Thereafter, the respondent filed a Section 9 application before the District Court in Karnal with a prayer to restrain the petitioner from acting on the termination notice. The ld. District Court, vide an order dated, 16.03.2023 directed the parties to maintain a status quo.

Contention of the Parties

The respondent objected to the maintainability of the petition on the following grounds:

• The petition is not maintainable by virtue of Section 42 of the Act as the respondent has already filed an application before the District Court in Karnal and all subsequent petitions can only be filed before that Court only as it has the exclusive jurisdiction over the arbitral proceedings.
• The petitioner has approached the Court without clean hands as it has not disclosed the fact regarding the order of the District Court, Karnal directing the parties to maintain status quo.
• Any allegation regarding fraud, collusion or malafides can only be examined by the Court before which the petition was filed and the High Court of Delhi is not the competent court to examine whether the petition filed before the District Court, Karnal was valid or vitiated by fraud.
• That principle of comity commands that the Court where the second petition is filed shall not comment on the issue whether the first petition filed under Section 9 of the Act before another Court is devoid of merit and/or had the hidden agenda of ousting jurisdiction that was inconvenient to the Petitioner in the first Court.
• Otherwise also, the High Court of Delhi does not have the territorial jurisdiction as no cause of action arose within its territorial boundaries.
• The letter of termination was issued by two partners who constitute mere 18% share in the petitioner firm and majority partners of Petitioner firm holding 61% share were however not aggregable to this unilateral action and proceeded to issue a consent letter dated 28.10.2022 in favour of Respondent, confirming that the License Agreement must continue and this was endorsed by three more partners. A second consent letter dated 05.06.2023 was also issued re-affirming that the License Agreement must continue. The License Agreement is thus valid and subsisting between the parties, with the consent of partners holding 61% share in the Petitioner firm.

The petitioner countered the objections by making the following counter-arguments:

• For the bar under Section 42 to apply, it must first be ascertained that the first petition was properly filed and the Court before which it has been filed has the jurisdiction to adjudicate the same.
• The petition filed by the respondent before the District Court, Karnal is non-est as the dispute between the parties is a commercial dispute in terms of Section 2(1)(c)(ix) and (xviii) of the Commercial Courts Act, 2015 and the petitioner therefore could only have been filed before a Commercial Court. Moreover, the Statement of Truth, a mandatory requirement under Commercial Courts Act, has not been fulfilled.
• The relief claimed by the respondent in its Section 9 petition before the District Court, Karnal is barred under Section 14(d) and 41(e) of the Specific Relief Act as the respondent has sought an injunction against the termination of a determinable contract.
• Mere filing of a petition would not oust the jurisdiction of the competent court and the the bar of Section 42 cannot be extended till the party raising the plea of lack of jurisdiction is able to establish that the Court which entertains the first application at the earliest point of time, has the jurisdiction to do so.
• Petition under Section 9 filed before the District Court, Karnal is a collusive petition and is based on false statements. There is collusion in filing the petition inasmuch as the Section 9 petition was filed on the basis of termination notice issued by Mr. Harish Gupta, one of the partners of the Petitioner firm, however, Petitioner was impleaded through its partner Mr. Raman Bansal, who is also the Chief Operating Officer of the Respondent company. The Counsel who represented the petitioner before the District Court, Karnal appeared under the Authority of Mr. Bansal and consented to an order maintaining status quo being passed. The order obtained by collusion was never communicated to the partners of the Petitioner or to Mr. Harish Gupta, against whom the main relief was sought. Pertinently, Mr. Raman Bansal was injuncted by this Court vide order dated 26.05.2020 passed in CS(COMM) 638/2019 from acting against the interest of the Petitioner.
• the License Agreement itself mentions the Delhi office address of the Petitioner. Notice of termination dated 04.05.2023 was issued from Delhi Branch office and further Respondent failed to cease the use of Petitioner’s ‘LIBERTY’ marks despite notice and continues to sell and market its impugned products bearing the ‘LIBERTY’ marks within the territorial limits of Delhi. Thus, part of cause of action has arisen in Delhi and jurisdiction of this Court cannot be ousted to entertain the present petition.

Analysis by the Court

The Court held that a petition under Section 9 filed before any court other than the Court where the first application was filed would be barred by virtue of Section 42 of the A&C Act which establishes exclusive jurisdiction of the first court over arbitration-related proceedings.

The Court relied on the judgment of a coordinate bench in Priya Hiranandani Vandervala v. Niranjan Hiranandani^[1] that the allegation regarding fraud, collusion or malafides can only be examined by the Court where the first petition was filed and it would not be for the second court to go into such issues.

The Court held that if the first court comes to a conclusion that the first proceedings were vitiated by fraud or collusion or that it does not have the jurisdiction to adjudicate such petition then Section 42 would have no application and the parties can approach the proper court without the application of bar of Section 42.

Further, the Court held that when the seat of arbitration is not defined in the agreement, it would be determined as per the place of the cause of action in terms of Section 2(1)(e) of the Act. Accordingly, the Court dismissed the petition as not maintainable.

Case Title: Liberty Footwear Company v. Liberty Shoes Limited

Citation: 2023 LiveLaw (Del) 782

Date: 21.08.2023

Counsel for the Petitioner: Mr. Rajshekhar Rao, Senior Advocate with Mr. Vipul Kumar, Mr. Areeb Amanullah and Ms. Meherunissa A.J., Advocates

Counsel for the Respondent: Mr. Arun Kumar Varma, Senior Advocate with Mr. Ravinder Singhania, Mr. Vikas Goel, Mr. Abhishek Kumar, Mr. Harmandir Singh Sandhu and Ms. Garima Kaul, Advocates.

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