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Bombay HC: Termination of Contract Result in Unenforceability of Specific Performance in Arbitration

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The arbitration appeal under Section 37 of Arbitration and Conciliation Act, 1996 was instituted in the present case, Channel Motors v. Skoda Auto Volkswagen India Private Limited against the order passed by Principal District Judge, Aurangabad while rejecting the appellant application under Section 9 of Arbitration Act for an interim measure of stay for termination of notice dated on 10.06.2019 and a mandatory injunction for continuing dealership agreement.

Brief Facts

The respondent is the owner of an Automobile company incorporated under the Companies Act, 1956 having its registered office at Aurangabad. The Company engaged in the business of manufacturing cars with the brand name “Skoda”. The appellant was appointed as a dealer of the respondent company in 2008 in Uttarakhand Region. For the purpose of promoting the brand name of the respondent company, the appellant set up a showroom at Dehradun in 2018. Thereafter, both parties entered into an agreement named “Support for New CICD Implementation” or the “CICD Agreement” dated 11.05.2018. The respondent provided financial assistance to the appellant of Rs. 50 Lakh for upgrading and rebranding but to put on effect caused heavy loss of Rs.5 Crores.

Furthermore, it was alleged that the appellant failed to perform the agreement which caused the respondent to issue a notice of termination of the contract dated 10.06.2020 from effect 10.12.2020. Therefore, the court under section 37 of the Arbitration Act undertook an appeal on an urgent hearing as such an order would commence from 10.12.2020.

Petitioner’s Arguments

The counsel submits before this court that such a long-standing business dealership has been put to an end with an ulterior motive of director and officer of the respondent for making a deliberate attempt to terminate the agreement and confer the entire burden upon the appellant. Furthermore, he stated that under Article 20 of the terms and condition of the agreement provided that only in case of ordinary termination, the contract could be terminated without submitting any reason. However, the respondent terminated under Article 21 provides termination from immediate effect and enforced upon the ground of dealer’s performance.

Therefore, grounds stated for termination of the contract stand irrelevant and incorrect and the contract cannot be terminated with reasons mentioned by the respondent.

In the CICD Agreement, the appellant also incurred a heavy loss worth of Rs.5 Crore for the rebranded showroom further, it was agreed that the agreement would last for 5 years. Subsequently terminating the principle agreement would also render the CICD agreement unstainable. Such immediate and unreasonable termination would result in huge loss to the appellant alongside a pandemic situation that has caused a miserable situation for the appellant which was ignored by the Principal District Judge but instead invoked Section 14 of Specific Relief Act. Therefore, there is a prima facie case in favor of the appellant and the Judge must have granted interim relief with respect to Section 9 of the Arbitration Act.  

Respondent’s Arguments

The counsel pleads before the court that the contract between parties under the provision of clause 20 to 21 of the agreement is tenable and considerable by virtue of Section 14 of the Specific Relief Act, no interim measures can be granted under Section 9 of Arbitration Act.

Moreover, if appellant succeeds in proving illegal termination of the agreement, it could be compensated the same in monetary terms but appellant misconduct towards business caused detrimental to the reputation of Multinational company and therefore allowing the functioning of the contractual agreement between the parties would cause irreparable loss to the respondent company and disreputation to the company which is immeasurable in monetary terms.

The reasons for termination of agreement could be traced back to disputed relationships between the parties in relation to the dealership business. The appellant could not reach the target set for the sale of the unit during six months prior lockdown, customers dissatisfaction to the services rendered by the appellant and even spreading media propaganda which all make hindrances in performing their contractual obligation towards each other.

The delay in filing arbitration proceedings was the fault of the appellant as termination notice was served on 10.06.2020 but the appellant on the verge of October thought to initiate the proceeding and therefore he is not entitled to claiming interim relief under Section 9 of Arbitration Act.

Court’s Observations

The court took the reference of the case Arvind Constructions Co.(P) Ltd. Vs. Kalinga Mining Corporation and others; (2007) 6 Supreme Court Cases 798 held that for the purpose of interim relief under section 9 of Arbitration Act, provision of Specific Relief Act, as well as Order XXXIX of the Code of Civil Procedure, would be guiding provisions. In the present case, the learned Judge has rightly upheld both these provisions while pronouncing the order.

The agreement entered by the parties is governed under Article 19 to 22 along with the manner of termination of the contract, it is a contract which is determinable and considerable as provided under section 14(d) of Specific Relief Act, 1963, subsequently, specific performance cannot be enforceable and thereafter relief under section 9 of Arbitration Act is unsustainable.

It would be difficult for the Judiciary or even Arbitrator to monitor every step undertaken by both parties for fulfilling their obligation under a contractual agreement, thus if this is not possible then add ground under Section 14(b) of the Specific Relief Act for refusing enforcement of the contract. Therefore, based on such stated ground, the Principal District Judge refused the grant of interim relief under Section 9 of the Arbitration Act.

The contention raised by the appellant in the sense that respondent terminated the contract by invoking Article 21 provided for termination on immediate effect due to contingencies of the event and not invoking Article 20 providing ordinary termination without any cause is unsustainable because respondent resorted to both Article 21 and 20 for termination without reason. Prima Facie the respondent termination of the contract with the support of Article 20 in ordinary circumstances without reason irrespective of immediate cause and on other hand, Article 21 also entitle him for termination the contract stands valid and legal.

Court’s Decision

The court examined the nature of the agreement with the exchange of copies to the party being presented before the court showed underperformance of the appellant along with customer dissatisfaction and publicizing the dispute in Media, thus holding respondent at fault is unjustified and inconsiderate.

The Principal District Judge has rightly dismissed the application of the appellant under section 9 of the Arbitration Act. Moreover, On the initial level, there is no case in favor of the appellant and he is unlikely to suffer any loss which cannot be compensated in monetary terms. The court granted interim measure under section 9 of the Arbitration Act to enforcing a contract which is determinable and specific performance cannot be invoked under sEction 14 (b) and (d) of the Specific Relief Act.

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