Doctrine Of Separability; Arbitration Agreement Survives Termination Of Main Contract: Bombay High Court

Therefore, the bench dismissed a writ petition noting that the dispute was arbitral and fell within the ambit of the arbitration clause.

Brief Facts:

The matter pertained to termination notice which terminated the contract for the E-ticketing system for city buses in Aurangabad which was allotted to EBIX Cash Pvt. Ltd (Petitioner).The Petitioner argued that the contract was awarded to it following a tender process conducted. The Petitioner implemented the contract according to the tender document, and a 'Go Live Certificate' was issued by Respondent No.2, Aurangabad Smart City Development Corporation Limited (ASCDCL). The Petitioner successfully managed the contract for over four years. However, ASCDCL issued a new tender for the procurement of Electronic Ticket Issuing Machines (ETIM). The Petitioner objected to this new tender and argued that its scope of work overlapped with the Petitioner's existing contract.

The Petitioner contended that the scope of work in tender process overlapped with the work the Petitioner Company was already performing. The new tender was not a replacement for the Petitioner's contract and the Petitioner Company would suffer losses due to this new tender process. The Petitioner alledged that ASCDCL's actions were mala fide and fell under the 'doctrine of malice in law' as they were conducted without any lawful excuse. ASCDCL issued a show cause notice to the Petitioner stating two grounds for terminating the contract: penalties levied on the Petitioner for software downtime and other issues and the ETIM's ability to print a 'Zero Value Ticket' which caused revenue losses to ASCDCL.

The Petitioner responded to the show cause notice stating that any software delays were resolved within 30 minutes and there was no violation of contract conditions. The Petitioner also clarified that the 'Zero Value Ticket' functionality was as per the specifications in the tender document. Despite this, ASCDCL terminated the contract without any consideration or reasoned decision. The Petitioner argued that the reasons cited by ASCDCL for the termination lack merit and application of mind since the 'Zero Value Ticket' functionality was included in the tender specifications and no complaints were raised from 2020 to 2024.

The Petitioner approached the High Court under Article 226 of the Constitution of India.

Observations by the High Court:

The High Court noted that the termination notice issued by ASCDCL outlined several breaches such as technical and significant issues with the functioning of the EBIX system. The preliminary termination notice referred to clause 15.4.1 of Volume II of the Request For Proposal (RFP) indicating the contractual basis for the termination. The RFP also provided a mechanism for dispute resolution through arbitration under clause 16.2 in Volume II.

The High Court referred to the observations of the Supreme Court in SBI General Insurance Co. Ltd. vs. Krish Spinning 2024 LiveLaw (SC) 489 which reiterated the legal principle that an arbitration clause survives the termination of the main contract. The doctrine of separability, enshrined in Section 16(1) of the Arbitration Act, establishes that an arbitration clause is independent of the other contract terms. The High Court noted that this doctrine ensures that even if the principal contract is declared null and void, the arbitration clause remains effective for resolving disputes.

The Supreme Court in National Agricultural Coop. Marketing Federation India Ltd. vs. Gains Trading Ltd. (2007) SCC OnLine SC 800 held that an arbitration agreement survives the termination of the main contract facilitating the resolution of disputes arising under or in connection with the contract.

The High Court thus held that the dispute between ASCDCL and the Petitioner Company is arbitrable thus falling within the ambit of the arbitration clause in the RFP.

Therefore, the High Court held that there was no basis to entertain the writ petition filed by the Petitioner Company. Consequently, the petition was dismissed.

Case Title: EBIX Cash Pvt. Ltd vs State of Maharashtra and ors

Case Number: WRIT PETITION NO.6707 OF 2024

Advocate for the Petitioner: Mr. Shrirang B. Varma a/w. Mr. Viraj Parekh & Mr. Gautam Swaroop

Advocate for the Respondent: Mr. A. R. Kale, Add. G. P.

Date of Judgment: July 22, 2024

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