Interim Measures Under Section 9 Of Arbitration Act Justified If Applicant's Rights Are Not Protected From Third Parties: Calcutta High Court

Brief Facts:

Bengal Shelter Housing Development Limited (Petitioner) entered into a development agreement with the Kolkata Municipal Corporation (KMC) to develop the College Street Market premises into a Book Mall primarily rehabilitating bookshops while also including other retail spaces. The development agreement was signed on February 24, 2006 with a supplementary agreement. The agreement stated that the development was to be completed within 54 months which would have concluded around December 26, 2010. Despite this, the Petitioner continued working on the project beyond this deadline. On January 17, 2022, KMC issued a termination letter to the Petitioner and took possession of the market on the same day.

The Petitioner, aggrieved by this termination and possession, sought to refer the dispute to arbitration under the arbitration clause in the agreement. The scope of the intended arbitration includes challenging the termination and possession and seeking allied reliefs. In an application under Section 9 of the Arbitration Act the Petitioner requested an injunction to prevent KMC from transferring, alienating, or dealing with the property and from entering into agreements with other parties for the completion of the Mall, along with other consequential reliefs.

The Petitioner argued that KMC allowed the Petitioner to work well beyond the initial 54-month period and only issued the termination notice after approximately 12 years. Thus, time was not intended to be of the essence of the contract.

Further, the Petitioner referred to Section 55 of the Contract Act, 1872 and argued that the contract does not become voidable for delays if time was not intended to be of the essence, and that the Respondent is not entitled to terminate or claim compensation given the long period of permitted delays. It also argued that there was no fault attributable to the petitioner for delays stating issues such as rehabilitation of occupants and infrastructural adjustments.

The Petitioner also addressed the alleged assignment of the project to Barnaparichay Book Mall Private Limited (Barnaparichay) and argued that Barnaparichay was a wholly owned subsidiary formed to carry out the project and not a third party. The formation and involvement of Barnaparichay were within the knowledge of KMC, as a Director of WBHB, part of the petitioner, was on the Board of KMC. The Petitioner contended that KMC's claim of assignment was baseless and that the sudden termination and possession notice were arbitrary and not in accordance with the law.

The Petitioner also challenged the termination in connection with Barnaparichay's Corporate Insolvency Resolution Process (CIRP), initially upheld by the NCLT but overturned by the NCLAT, which found an assignment to Barnaparichay.

Observations by the High Court:

The High Court referred to Section 55 of the Contract Act and noted the three possible courses of action available when a promisor fails to perform a promise within the stipulated time. These include: (i) termination of the contract if time is deemed to be of the essence; (ii) entitlement to compensation for loss caused by delay if time is not of the essence; and (iii) the possibility of claiming compensation if the promisee accepts performance beyond the agreed time, provided a notice of intention to claim compensation is given at the time of acceptance.

The Respondent, who was the promisee, did not provide any notice to the Petitioner about its intention to claim compensation when allowing the extension of the work completion time. The High Court held that this omission, along with the conduct of the parties, indicated that the original time frame for project completion was effectively abandoned.

The High Court observed that the Respondent's actions, including continued correspondence and allowing the Petitioner to extend the completion time, implied an acquiescence to the delay. This conduct suggested that the Respondent might have implicitly accepted the extended time frame making it arguable whether the Respondent was entitled to treat the contract as voidable or claim compensation for the delay.

Further, the High Court found that the Petitioner presented sufficient evidence to support its claim that the delays were due to unforeseen circumstances and not solely attributable to the Petitioner. Issues such as the relocation of occupants and other logistical challenges were highlighted as justifiable reasons for the delay.

The Petitioner also argued that its substantial investment and entitlement to a significant share of the developed property further justified its request for an injunction. The High Court noted that the petitioner had a vested interest in the project and had exercised authority under the development agreement.

Regarding the Respondent's claim about the project being public infrastructure, the High Court held that the project did not strictly fall under the category of an “infrastructure” project as per the amended Specific Relief Act. Consequently, the injunction sought by the Petitioner to prevent the Respondent from transferring property or creating third-party interests was found to be reasonable.

Given these considerations, the High Court found that the Petitioner made a prima facie case for the relief sought under Section 9 of the Arbitration Act. The balance of convenience was in favor of granting the interim injunction to prevent the Respondent from transferring or encumbering the property as this would protect the Petitioner's interests and ensure that the arbitration process was not undermined.

Thus, the High Court granted the Petitioner's application for an ad interim injunction restraining the Respondent and its agents from transferring, alienating, or creating any third-party interests in the property until the final disposal of the application under Section 9 of the Arbitration Act.

Case Title: Bengal Shelter Housing Development Limited Vs The Kolkata Municipal Corporation

Case Number: AP-COM/608/2024

Mr. Joy Saha, Sr. Adv. Mr. Reetobrata Mitra, Adv. Ms. Jayati Chowdhury, Adv. Ms. Rashhmi Singhee, Adv. Ms. Sucheta Mitra, Adv. Ms. Priya Malakar, Adv. …for the petitioner

Mr. Jaydip Kar, Sr. Adv. Mr. Biswajit Mukherjee, Adv. Mr. Altamash Alim, Adv. …for KMC

Date of Judgment: 13th August, 2024

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