The Calcutta High Court has ruled that a subsequent settlement agreement that expressly resolves decretal dues arising from a sale of goods transaction falls within Section 2(1)(c)(xviii) of the Commercial Courts Act, 2015, even when the settling party was not a party to the original commercial transaction. The Court clarified that the commercial character of a controversy is determined by examining the real nature of the dispute and the subject matter of the obligation, not merely the form of the relief or the business status of the parties.
The Court went on to explain that where a settlement agreement expressly records payment towards full and final discharge of decretal liability arising from an earlier sale-of-goods transaction, the resulting controversy bears a direct and sufficient juridical connection with the original commercial dispute, and novation or the monetary form of relief does not sever that connection.
Further, the High Court said that the doctrine of novation under Section 62 of the Indian Contract Act, 1872 does not apply where the original commercial controversy has already culminated in a decree and is under execution, since there is no subsisting executory contract awaiting substitution. Hence, the protective prayers such as appointment of a Receiver, injunction, attachment before judgment, and preservation of assets do not convert a commercial suit into a title dispute, and the Explanation to Section 2(1)(c) recognises that involvement of immovable property does not strip a controversy of its commercial character.
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Briefly, M. Walter and Company had filed a suit against Mrs. Gloria E. Mehra for unpaid dues arising from a transaction involving sale of goods, and obtained a decree dated 12th August 2008 in its favour. For enforcement of that decree, execution was instituted, and by an order dated 13th July 2012, alienation of the properties at 59A, 59B, 59C and 59D Park Street, Kolkata, was restrained without leave of the Court. While the execution proceeding was pending and the property was under restraint, Mehra’s intending purchaser nominated Rajashi Developers Private Limited as the purchaser.
Thereafter, on 1st November 2022, M. Walter and Company and Rajashi executed a Settlement Agreement under which Rajashi agreed to pay Rs. 55 lakhs towards full and final settlement of the decretal dues, with Rs. 5 lakhs already paid, and the balance, after TDS deduction, to be paid by cheque retained in escrow. The plaintiff, in return, undertook to take steps for withdrawal of execution case.
The plaintiff acted upon this reciprocal arrangement, and the execution proceeding was dismissed as withdrawn by order dated 25th January 2023. Rajashi allegedly failed to complete the agreed payment, leading to the filing of suit, in which the principal question was whether the controversy constitutes a ‘commercial dispute’ within the meaning of Section 2(1)(c)(xviii) of the Commercial Courts Act, 2015.
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A Single Judge Bench of Justice Ananya Bandyopadhyay observed that the answer to the question of commercial character cannot be obtained merely by examining the Settlement Agreement as the immediate source of the monetary claim; the decree, the execution proceeding, the circumstances in which Rajashi entered the arrangement, the obligations undertaken, and the purpose of the Settlement Agreement must all be considered in proper sequence.
The Settlement Agreement expressly identified the stipulated amount as payable towards full and final settlement of the decretal dues, and withdrawal of the execution proceeding was the corresponding act contemplated from the plaintiff, making the agreement directed towards resolution of an already adjudicated liability being enforced through execution, added the Court.
The Court noted that although Rajashi assumed a fresh contractual obligation, its character cannot be determined by severing the obligation from its purpose, since the immediate source of the claim is the contractual undertaking while the subject matter and purpose are disclosed by the decree, the execution proceeding, and the express terms of the Settlement Agreement.
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On the plaintiffs’ reliance on Section 62 of the Indian Contract Act, 1872 (novation), the Court held that novation contemplates substitution of an existing contract by a new contract, and the chronology here disclosed no such substitution because the original commercial controversy had already culminated in a decree and was under execution, with no executory contract between the original parties awaiting substitution.
The Court further observed that the prayers for Receiver, injunction, attachment before judgment, and preservation of assets are merely protective measures directed towards securing the monetary claim and do not convert the suit into an action for adjudication of title to the Park Street property. The statutory Explanation to Section 2(1)(c) recognises that a commercial dispute does not cease to possess that character merely because the action additionally involves recovery of immovable property or realisation of monies secured by immovable property.
Rajashi’s status as a party to the Settlement Agreement but not to the original commercial transaction required no finding that Rajashi acted as the formal agent of Mrs. Mehra. Rajashi entered an existing controversy for the purpose of resolving the liability which was then the subject of execution, with its contractual obligation newly assumed but the subject already identified by the decree and execution proceeding, added the Court.
