Maintainability of arbitration petition filed under section 9, as per the provisions of Section 42 within the framework of the 1996 Act.

LIBERTY FOOTWEAR COMPANY Vs LIBERTY SHOES LIMITED

?[Delhi High Court O.M.P.(I)(COMM) 155/2023]

Date of Decision: 21st August 2023

This is an impressive ruling delivered by the Hon’ble Delhi High Court, which showcases the interplay between Arbitration, Trademarks, Specific Relief, Partnership, Contract and Commercial Courts Act.

This is a must-read judgement for law students, IP and Dispute Practitioners as this ruling discusses various nuances of commercial laws and its effect thereto. Facts of the case:

1.????? Petitioner is established as a partnership in 1954 and has been engaged in the business of marketing and manufacturing of footwear and fashion products and is the first user and proprietor of well-known trademark ‘LIBERTY’.?

2.????? On 1st April 2001, Petitioner and Respondent entered into Registered User Agreement in respect of ‘LIBERTY’ in Class 25 for 3 years. On 28th March 2003, Petitioner became the owner of the exclusive Trademark ‘LIBERTY’ and the formative marks.?

3.????? On 31st March 2003, Trademark License Agreement was executed between Petitioner and Respondent for a period of 7 years with autorenewal for 3 years. On 3rd April 2013, another license agreement was executed between the Parties for 5 years with automatic renewal for further two terms of 5 year each, if not terminated by either party.?

4.????? According to Petitioner, Respondent defaulted on several obligations under the License Agreement since 2018-19. On 4th November 2019, Petitioner issued demand notice to Respondent under Section 8 of Insolvency and Bankruptcy Code, 2016 (‘IBC’) demanding Rs 9 Crores and odd.?

5.????? On 27th September 2022, one of the partners of Petitioner issued notice to Respondent to terminate the License Agreement. Respondent in turn invoked Arbitration vide notice dated 20th October 2022 but refused to stop using the trademark ‘LIBERTY’ mark or make payments, as per the agreed terms.?

6.????? On 22nd November 2022, Petitioner replied to Respondent stating that the Arbitral Claims are not maintainable as the later was in breach of obligations qua payment of license fee. On 22nd December 2022, Respondent sent another response to Petitioner stating that it is in continuance of its obligations of the terms of the agreement. On 4th May 2022, Petitioner terminated the agreement and called upon Respondent to cease and desist from using Petitioner’s marks.?

7.????? As Respondent is continuing using Petitioner’s trademark, Petitioner filed Section 9 Arbitration Petition before the Delhi High Court. Respondent appeared before the court and stated that the Petitioner’s Section 9 Petition is not maintainable as it is in violation of Section 42 of the 1996 Act and has no territorial jurisdiction.?

8.????? Somewhere around February and March 2023, there were some disputes arising out of Petitioner’s partnership, so Respondent approached District Court Karnal by way of filing Section 9 Arbitration Petition seeking interim reliefs against Petitioner. District Judge vide order dated 16th March 2023 disposed Respondent’s Section 9 Petition, directed the parties to maintain status quo with respect to the License Agreement.?

9.????? Be it noted that the Petitioner had filed the present Section 9 petition before the Delhi High Court without disclosing Respondent’s Section 9 petition. The Respondent vehemently argued on non-maintainability of Petitioner’s Section 9 petition and the Petitioner argued that the onus to prove non maintainability rests with Respondent as the present dispute concerns/relates to licensing of the Trademark ‘LIBERTY’ and is commercial dispute u/s 2 (1)(c)(ix) and (xviii) of the Commercial Courts Act 2015 and that the Section 9 before the District Court Karnal does not invoke Jurisdiction of Commercial Courts as there were no pleadings that the dispute being commercial dispute. Moreover, Statement of Truth (Order VI- Rule 15 A and Order XI-Rule 3) was not filed in District Court Karnal which is mandatory under Commercial Courts Act and therefore the Petition is non-est petition and void in eyes of law. So, the question of maintainability of the Section 9 petition had to be decided before going into the merits of the case.?

10.?? Petitioner argued that the Section 9 petition filed before the District Court, Karnal is a collusive petition and is based on false statements and even otherwise is not maintainable and has been filed with the hidden agenda of ousting the jurisdiction of this Court i.e., Delhi High Court, which is impermissible in law.?

11.?? Territorial Jurisdiction was the heart of this petition as there was no venue or seat of arbitration mentioned in Clause 16 of the License Agreement, which is the Arbitration Clause, which does not provide for a seat of arbitration and instead Clause 19 stipulates that parties submit to the exclusive jurisdiction of Courts in India. It is a settled position of law that in the absence of a specified seat, an application under Section 9 of the 1996 Act may be preferred before a Court in which part of the cause of action arises.?

12.?? Respondent made the earliest application before the District Court Karnal having been made to a Court in which part of cause of action arose and that would be the exclusive Court under Section 42, controlling all arbitral proceedings.?

13.?? Courts from time to time have reiterated that Section 42 is meant to avoid conflicts in jurisdiction of Courts by placing the supervisory jurisdiction over all arbitral proceedings in connection with the arbitration in one Court exclusively and the legislative intent is reflected from the fact that the provision begins with a non obstante clause. Where a seat is designated in an Agreement, the Courts of the seat alone will have jurisdiction and all subsequent applications under Part-I will be made only in the said Court. So, Section 42 is not rendered ineffective or useless. Further, where it is found on the facts of a particular case that either no seat is designated in the Agreement or the so-called seat is only a convenient venue, then several Courts where cause of action arises may have jurisdiction and Section 9 application may be preferred before a Court in which part of the cause of action arises. In both situations, the earliest application having been made to a Court in which part of cause of action arises, would be the exclusive Court under Section 42, controlling all arbitral proceedings.?

In conclusion, Petitioner’s section 9 Petition was dismissed as non-maintainable as once an application has been filed under Part-I comprising of Sections 1 to 43 of the 1996 Act in a Court, that Court alone will have jurisdiction over the arbitral proceedings and all subsequent applications arising out of the Agreement and Section 42 will bar the parties from approaching any other Court in respect of disputes arising from the said Arbitration Agreement. However, no opinion /ruling was rendered on the merits of the case and/or the disputes between the parties.

The key takeaway from this ruling is that when including an Arbitration Clause in any agreement, it's crucial to specify both the seat and venue for arbitration to prevent jurisdictional issues. Additionally, when submitting any petition, it's essential to ensure compliance with the requirements of the commercial court or the act under which the petition is filed to prevent the question of maintainability or noncompliance. Moreover, agreements and especially licensing agreements containing automatic renewal clauses should be regularly reviewed and updated in line with evolving business practices to prevent potential disputes.

The judgement can be accessed here.