S.16(2) Arbitration Act | Allahabad High Court Upholds Termination Of Arbitral Proceedings Against Decathlon For Premises In Lucknow

The Allahabad High Court has upheld the termination of arbitral proceedings under Section 16(2) of the Arbitration and Conciliation Act, 1996 by the Sole Arbitrator on grounds that there was no arbitration agreement between the petitioners, private persons who claimed to be owners of part premises in question, and M/s Decathlon Sports India Private Ltd.

Section 16 of the Arbitration and Conciliation Act, 1996 empowers the arbitral tribunal to rule on its jurisdiction and deal with issues regarding the existence of an arbitration agreement. Sub-section (2) of Section 16 provides that an application contesting the jurisdiction of the arbitral tribunal shall be raised at any stage prior to filing statement of defense. It further provides that participation in proceedings for appointment of arbitrator does not preclude a party for raising objections as to the jurisdiction of the arbitrator or the arbitral tribunal.

Justice Subhash Vidyarthi held that the transfer of property to the petitioners by M/s Rohtas Projects Limited was against the lease deed executed by Rohtas in favour of Decathlon. Accordingly, petitioners who are alleged subsequent purchasers did not step into the shoes of Rohtas to invoke the arbitration agreement between Rohtas and Decathlon.

Case Background

In 2017, M/s Rohtas Projects Limited had executed a lease deed in favour of M/s Decathlon Sports India Private Ltd for an area of 21,825 Square feet i.e. 2,028 square meters at Plot No. TC-G 4/4 in Rohtas Presidential Arcade situated in Vibhuti Khand, Gomti Nagar, Lucknow, for 20 years.

Petitioners, private persons, claimed to have purchased portions of the land in question from M/s Rohtas Projects after the execution of its lease deed with Decathlon. Petitioners filed an application under Section 11 before the Allahabad High Court alleging that once Rohtas had made allotment in their favour, they sought transfer of property from Decathlon after clearing it dues. Since Decathlon did not clear its rental dues, a notice regrading termination of tenancy was sent to Decathlon by the petitioners.

In the arbitral proceedings, Decathlon filed an application under Section 16(2) of the Arbitration Act seeking dismissal of arbitral proceedings for lack of jurisdiction. Further, prayer for stay on arbitral proceedings was made since moratorium had been imposed against Rohtas under Section 14 of the Insolvency and Bankruptcy Code, 2016 as by virtue of Section 238 of Code 2016, IBC had overriding effect over the Arbitration Act.

In its application under Section 16(2), Decathlon pleaded that there was no arbitration agreement between the private persons and Decathlon to enable them to invoke arbitration proceedings. It was pleaded that arbitration agreement between Rohtas and Decathlon could not have been invoked without making Rohtas a party to the arbitration.

Petitioners argued that application under Section 16(2) was to be dismissed as objections regrading moratorium had been dealt with by the High Court while appointing the arbitrator. It was argued that only questions regarding insolvency had to be dealt with by the NCLT, the issues between the petitioners and Decathlon regarding tenancy, possession and dues had to be dealt with by the arbitrator.

The Sole Arbitrator allowed the application under Section 16(2) on grounds of the moratorium imposed by NCLT, holding that it cannot decide upon the rights and liabilities of the parties, and therefore, had no jurisdiction to arbitrate. This order was affirmed by the Commercial Court under Section 13(1A) of the Commercial Court Act, 2015 read with Section 37 of the Act of 1996.

The Commercial Court held that even though the moratorium had ended, proceedings were still going on before NCLT where the lease in favour of Decathlon had already been cancelled and the rent due had been paid by Decathlon. Accordingly, no cause of action for the private persons survived.

Petitioners challenged the order of the Sole Arbitrator and the order of the Commercial Court on grounds that arbitration proceedings had commenced 2 years after the imposition of moratorium, and the moratorium period had ended prior to passing of the order under Section 16(2). It was argued that in the application only a prayer for stay on arbitral proceedings was made till the period of moratorium was in effect, however, the Sole Arbitrator wrongfully terminated his mandate.

Counsel for petitioners argued that by virtue of Section 109 of the Transfer of Property Act, petitioners had stepped into the shoes of the Rohtas as the property had been sold to them. To which counsel for respondents submitted that no sale deed had been executed in favour of the petitioners and no physical possession of the property had been transferred to them.

High Court Verdict

The Court observed that in the lease deed it was specifically recorded that sale deed for the plots of the petitioner had been executed at the time of execution of lease deed with Decathlon and that the sale of such property shall not disturb the peaceful possession of Decathlon.

Section 109 of the Transfer of Property Act provides that in absence of any contract to the contrary, if lessor transfers the property, the transferee shall step into the shoes of the transferor/lessor and possess all such rights.

The Court observed that there was a specific contract to the contrary between the lessor-Rohtas and lessee-Decathlon prohibiting transfer of any part of the leased property without prior permission of the lessee.

Accordingly, the Court held that since the transfer of property to the petitioners, private persons, was made in violation of the lease deed executed between Rohtas and Decathlon, the petitioners had not stepped into the shoes of Rohtas to be able to invoke the arbitration agreement in the lease deed.

The Court held that “Jurisdiction of this Court under Article 227 of the Constitution of India is supervisory jurisdiction which should be exercised to prevent injustice being caused to a party but where the order under challenge in the petition under Article 227 of the Constitution of India does not cause any injustice to any of the parties, this Court will not exercise its discretion in such a case.”

Accordingly, the petition challenging the order terminating arbitration proceedings and the subsequent order of the Commercial Court was dismissed.

Case Title: Chitra Misra And 13 Others v. M/S Decathlon Sports India Private Ltd. Thru. Managing Director And Another [MATTERS UNDER ARTICLE 227 No. - 2475 of 2024]

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