Prima Facie Case Alone Does Not Entitle A Party To Relief Under Section 17 Of The A&C Act: Delhi High Court

The Single Bench of Justice Sanjeev Narula observed that there were highly disputed questions of fact involved in the dispute relating to the interpretation of the agreement between the parties. Holding that the possible extent of the claim likely to be awarded to the claimant vide the arbitral award cannot be a foregone conclusion, the Court set aside the order passed by the Arbitral Tribunal directing the counter-claimant to secure a certain amount in an application filed under Section 17 of the A&C Act by the claimant for interim measures.

The respondent/ claimant Rajesh Kumar Pasricha entered into two agreements with the appellant Splendor Buildwell Pvt. Ltd., i.e., a Space Buyer's Agreement and a Memorandum of Understanding (MoU), for purchase of certain property.

As per the MoU, the appellant was required to complete the construction of the building within a specified period, failing which, the appellant was bound to pay a certain sum of money, labelled as 'assured return', to the respondent till the time the said property was leased out to a prospective lessee, as provided under the MoU.

When the appellant failed to make the said payment or lease out the said property as per the MoU, the respondent invoked the arbitration clause and the Arbitral Tribunal was appointed.

In an application filed under Section 17 of the A&C Act for interim measures before the Arbitral Tribunal, the respondent sought to restraint the appellant from creating third-party interest in respect of the said property, and also sought to secure its claim of payment as provided under the MoU. The Arbitral Tribunal allowed the application and directed the appellant to secure a certain amount by way of fixed deposit receipts (FDR) or by an irrevocable bank guarantee. Against the order of the Arbitral Tribunal directing the appellant to secure the said amount, the appellant filed an appeal before the Delhi High Court.

The appellant Splendor Buildwell Pvt. Ltd. submitted before the High Court that the amount claimed by the respondent was highly disputed and that the said aspect could only be adjudicated after the parties were afforded an opportunity to lead evidence. The appellant added that an order under an application filed under Section 17 cannot be passed mechanically, merely on the ground that 25 cases were pending against the appellant with respect to the same project, or on the ground that there was a likelihood that the appellant might go into liquidation.

The appellant averred that merely finding a just and valid claim or a prima facie case would not entitle an applicant to an order of attachment before the judgment, unless it was also established that the opposite party was attempting to remove or dispose of its assets with the intention of defeating the decree that may be passed.

The respondent Rajesh Kumar Pasricha contended that a strong prima facie case existed in favour of him, and that there was sufficient material available on record which indicated that in case the said amount was not secured, the award that would be passed in favour of the respondent would be a mere paper award.

The Court noted that as per the relevant clause of the MoU, the appellant had assured a return to the respondent in case the building was not completed within 12 months from the date of the execution of the MoU.

The Court observed that the appellant had contended that the building was completed within the specified time and that the same was evident from the Completion Certificate issued by the concerned persons supervising the construction of the building. Hence, the appellant had averred that it was not liable to pay the assured returns as provided under the MoU. The Court observed that the respondent had disputed the contention of the appellant and had argued that the building was not completed within the time stipulated in the MoU.

The Court noted that the Arbitrator had granted relief to the respondent in the application filed by him under Section 17, on the ground that the appellant had applied for an Occupation Certificate with respect to the said property one year after the stipulated time, as provided under the MoU.

The Court held that in its prima facie opinion, under the MoU there was no linkage between the payment of assured return with the procurement of an Occupation Certificate.

The Court ruled that there were highly disputed questions of fact involved in the case relating to the interpretation of the event which triggered the liability of the appellant to pay the assured return under the MoU. Hence, the Court held that the liability of the appellant to pay the assured return could not be assumed with absolute certainty.

The Court added that the possible extent of the claim that is likely to be awarded to the respondent vide the arbitral award cannot be a foregone conclusion. Hence, the Court ruled that the Arbitrator fell in error by exercising its jurisdiction under Section 17 of the A&C Act for securing the said amount.

The Court ruled that even if the respondent had a prima facie case in its favour, it would not mean that securing the said amount in question in favour of the respondent was imperative. The Court held that it is a well recognised principle in law that a prima facie case alone does not entitle a party to relief under Section 17 of the A&C Act.

The Court observed that apart from finding a strong prima facie case in favour of the respondent, the only factor which prevailed upon the Arbitral Tribunal to pass an order directing the appellant to furnish security for the said amount, was the pendency of 25 cases against the appellant with respect to the same project undertaken by it.

The Court noted that the Arbitral Tribunal had assumed that there was a likelihood that the appellant would go into liquidation, as a consequence of the financial liabilities assumed by it from losing such cases. Thus, the Court observed that the Arbitral Tribunal had opined that in the interest of justice, the appellant must secure the said amount. The Court ruled that the said assumptions made by the Arbitral Tribunal were not based on any cogent material.

"It was imperative for the Tribunal to examine if the Respondent had made the pleadings and proved that it had a prima facie case in its favour, and also that the Appellant was in the process of dissipating or removing its assets/funds so as to render the Award nugatory.", the Court ruled.

The Court observed that the Delhi High Court in the case of BMW India Private Ltd. versus Libra Automotives (P) Ltd. (2019), had held that an order securing the amount claimed in arbitration, prior to the passing of the final award, has to be passed keeping in mind the well-known principles provided under Order XXXVIII Rule 5 of the Code of Civil Procedure, 1908 (CPC).

The Court further noted that in Dinesh Gupta and Ors. versus Anand Gupta and Ors. (2020), the Delhi High Court had ruled that while exercising jurisdiction under Section 17(1)(ii)(b) of the A&C Act, the Arbitrator is not strictly bound by the confines of Order XXXVIII Rule 5 of CPC, however, he is prohibited from acting in a manner completely opposite to it.

The Court ruled that the said aspects were not considered by the Arbitral Tribunal and that there was no material on record to suggest that the appellant was disposing of any part of the property. The Court added that there was no sufficient ground to apprehend that the arbitral award, if made against the appellant, would be rendered infructuous.

"No emergent apprehension was made out from the mere pendency of numerous cases against the Appellant, and it does not constitute a sufficient basis to apprehend that the award, if made against it, would be rendered infructuous. No other material has been placed on record to demonstrate that the Appellant would go into liquidation. No material was placed to suggest that the Appellant is disposing of any part of the Property, much less removing itself or its assets out of India so as to create a possibility of frustrating the monetary award that may be passed in favour of Respondents in the future upon the conclusion of arbitral proceedings."

The Court added that there was no convincing possibility that any irreparable harm would be caused to the respondent, if the amount in dispute was not secured by the appellant.

The Court thus set aside the order passed by the Arbitral Tribunal directing the respondent to secure the said amount.

Hence, the Court allowed the appeal.

Case Title: Splendor Buildwell Pvt. Ltd. & Anr. versus Rajesh Kumar Pasricha

Citation: Citation: 2022 LiveLaw (Del) 659

Dated: 19.04.2022 (Delhi High Court)

Counsel for the Appellants: Mr. Sudhir Nandrajog, Mr. N. S. Bajwa, Mr. Sarthak Gupta and Mr. Shashank Shekhar Mishra, Advocates

Counsel for the Respondent: Mr. Siddhant Asthana, Mr. Siddhant Nath and Mr. Chhetarpal Singh, Advocates.

Click Here To Read/Download Order