Whether Doctrine of lis pendens applicable on in-service contracts? Delhi High Court answers

delhi high court

Delhi High Court: In an appeal under Section 37(2)(b) of the Arbitration and Conciliation Act, 1996 (‘Arbitration Act’), Chandra Dhari Singh, J. contemplated the scope of Section 37 of Arbitration Actalong with applicability of lis pendens and upheld the impugned order of the Arbitrator in favour of State, while opining that all the relevant material was taken into consideration.

Factual matrix

The appellant’s company(‘Ghosh Catering’) was awarded a contract by State of Maharashtra upon fulfilment of conditions of tender so invited, however, upon a representation of a third party, the State terminated the contract on the ground that one of the Directors of Ghosh Catering was convicted in a criminal case, which fact, according to the State, was not disclosed at the time of the declaration.

Eventually Ghosh Catering approached the Arbitrator by way of filing an application under Section 17 of the Act praying for setting aside of the termination order. The application came to be dismissed and thereafter, the State acted upon the termination order and even awarded the contract to a third party. Ghosh catering filed an appeal under Section 37 of the Arbitration Act.

Termination of Contract

It was the case of appellant that immediately after passing the impugned order, the State issued a vacation order which had to be implemented within 24 hours. Hence, according to Ghosh Catering said order was erroneous, cryptic, and arbitrary. Appellant further contended that no opportunity of hearing was provided to them. Further, it was contended that appellant made the correct declaration, since it did not have any criminal antecedents in its name. It was submitted that appellant was the proprietor of the firm, and the company took over the assets and liabilities of the proprietorship firm, therefore he was not a shareholder in Ghosh Catering and had no say in the affairs of the company.

On the contrary, the State argued that appellant submitted a false declaration, and in terms of Clause 13 of the General Conditions of Contract and Clause 9 of Special Conditions of Contract, the respondent had the right to terminate the contract.

The Court observed that the Arbitrator had considered material submissions as well as the record for determining the conviction of appellant,as he had a direct and substantial effect on the eligibility of the company. The Court opined that it cannot be said that the material aspects of the severability and separability of the Director and appellant company was not considered by the Arbitrator.

It was further opined that, “contract between the parties was determinable and hence, could be terminated in terms of and in accordance with the provisions of the contract.”

Interference by the Court

The Court examined the scope of powers while adjudicating upon a challenge under Section 37 to an impugned interim order. The issue for contemplation was whether limited grounds available with the Court for intervention in an impugned award, interim or final.

The Court opined that it is settled that the scope of interference in an appeal under Section37 is narrow. The Courts shall neither enter into the merits of the facts and case of the parties nor enter into the merits of the findings made by the arbitrator.

It was further opined that, the vacation notice or even the notice awarding the contract to a third party were no extension of interpretation under consideration before this Court.

Principle of lis pendens

The main issue before the Court was whether a Court exercising its jurisdiction under Section 37 of the Act can adjudicate and pass an order regarding a contract which already stands terminated and awarded to someone else.

The Appellant contended that Section 52 of Transfer of Property Act, 1882 will apply to the said case which provides that a conclusive and final order on the subject matter may not been passed when the lis is pending for consideration. It was vehemently argued, that until the final conclusion of the lis, the State could not have awarded a contract to a third party. The State argued that Principle of lis pendens does not apply to a service contract.

The Court while agreeing with the State held that applicability of the doctrine/principle, stemming from Section 52 of the Transfer of Property Act, 1882, the subject matter of the lis must be one in which a right to an immovable property is in question, directly and substantially. Moreover, the transfer that is alleged to have been taken place must also be regarding the said immovable property. It was concluded that appellant had failed to show that the principle/doctrine of lis pendens, which in itself is a discretionary remedy, will apply in the instant case.

[Jayant Kumar Ghosh Outdoor Catering (P) Ltd v. State of Maharashtra, 2023 SCC OnLine Del 2420, decided on 24-04-2023]

Advocates who appeared in this case :

For the Appellant: Senior Advocate. Sandeep Sethi;

For the State/Respondent: Additional Solicitor General of India Balbir Singh.

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