Booz Allen and
Hamilton Inc. Vs. SBI Home Finance Ltd. & Ors.
J U D G M E N T
R.V.RAVEENDRAN, J.
1.
The
scope of section 8 of the Arbitration and Conciliation Act, 1996 (Act, for
short) arises for consideration in this appeal by special leave.
2.
Capstone
Investment Co. Pvt. Ltd. (second respondent herein, for short "Capstone")
and Real Value Appliances Pvt. Ltd. (respondent No.3 herein, for short "RV
Appliances") are the owners of flat No.9A and 9B respectively situated at "Brighton",
Napien Sea Road, Mumbai. Capstone and RV Appliances had borrowed loans from SBI
Home Finance Ltd., (the first respondent herein, for short "SBI") under
two loan agreements dated 3.12.1994 by securing the said two flats in favour of
SBI.
3.
Under
two leave and licence agreements dated 5.4.1996, Capstone and RV Appliances
permitted the appellant to use their respective flats, for the term 1.9.1996 to
31.8.1999. Each licence agreement was signed, in addition to the licensor and licensee,
by the other flat owner (that is RV Appliances in respect of agreement relating
to 9A and Capstone in respect of agreement relating to 9B) and SBI as
confirming parties 1 and 2.
4.
On
the same day (5.4.1996) a tripartite deposit agreement was entered among RV Appliances
and Capstone as the first party, appellant as the second party and SBI as the third
party. Under the said agreement, the appellant paid a refundable security
deposit of Rs.6.5 crores to Capstone and RV Appliances (at the rate of Rs.3.25
crores for each flat). Clause (E) of the said agreement confirmed that the appellant
made the said deposit and Capstone and RV Appliances received the said deposit
on the basis of the terms and conditions recorded in the two leave and licence
agreements and the deposit agreement; and that the three agreements together formed
a single integral transaction, inseparable, co-extensive and co-terminus in character.
Out of the said deposit of Rs.6.5 crores, a sum of Rs.5.5 crores was directly
paid to SBI on the instructions of Capstone and RV Appliances towards repayment
of the loan taken by Capstone and Real Value and the balance of Rs.1 crore accounted
in the manner indicated therein. As a consequence, the loan due by Capstone to
SBI in regard to flat No.9A was cleared, but the loan taken by RV Appliances
remained due and outstanding. Capstone however became a guarantor for repayment
of the amount due by RV Appliances and flat No.9A was secured in favour of SBI
and a charge was created in the shares relating to flat No.9A belonging to Capstone
in favour of SBI, as security for repayment of the loan by R V Appliances. We extract
below the relevant portion of para 5A of the agreement :
"However, notwithstanding
the repayment of the dues of Capstone Investment Co.Pvt.Ltd., the share Nos.4001
to 4250 of the Society and Flat No.9A shall continue to be available to the
Party of the Third Part as security of the remaining dues of Real Value
Appliances Ltd., and in this connection it is agreed that upon liquidating the dues
of Capstone Investment Co.Pvt.Ltd., and in order to make available the said shares
Nos.4001 to 4250 and Flat No.9A as security, Capstone Investment Co.Pvt.Ltd.
shall become a Guarantor for repayment of dues of Real Value Appliances
Pvt.Ltd.
The Parties of the
Third Part are confirming that it has no objection to the Party of the Second Part,
its employee or officer occupying the Flats and that as long as the balance of
the principal amount and interest due thereon is paid by the Parties of the
First Part (or as per arrangement hereafter recorded) by the Party of the
Second Part to Party of the Third Part, the Parties of the Third Part shall not
enforce the mortgage and will permit the Party of the Second Part, its employee
or officer to occupy the said Flats." Clause (3) of the Deposit agreement gave
an option to the appellant who opted to continue the licence in respect of the
two flats for a further period of two years beyond 31.8.1999, by paying an
additional deposit of Rs.2 crores (at the rate of Rs.1 crore for each flat).
Clause (11) enabled the appellant to continue to use and occupy the flats so long
as the amounts paid by it as security deposit remained unpaid. Clause (8) gave
the option to the appellant to pay the amount due to the SBI on behalf of the borrowers
to safeguard its interest. Relevant portion of para 8 is extracted below:
"If any default is
made by the Parties of the First Part in paying any sum(s) due from time to time
by them to the Parties of the Third Part under the loan facility, the Party of
the Second Part shall, to safeguard its interest in retaining the right to use and
occupy the said Flats, have an option to pay the Parties of the Third Part the
sum(s) so becoming due and remaining unpaid by the Parties of the First Part,
on their behalf." Clauses (9) and (10) provide that at the end of the
licence period, Capstone and R V Appliances shall jointly and severally be
liable to refund the deposit amount along with interest thereon from the date
of expiry of the licence to date of actual payment Clause (16) of the deposit agreement
provided for arbitration and is extracted below:
"In case of any
dispute with respect to creation and enforcement of charge over the said shares
and the said Flats and realization of sales proceeds therefrom, application of
sales proceeds towards discharge of liability of the Parties of the First Part
to the parties of the Second Part and exercise of the right of the Party of the
Second Part to continue to occupy the said Flats until entire dues as recorded in
Clause 9 and 10 hereinabove are realized by the party of the Second Part, shall
be referred to an Arbitrator who shall be retired Judge of Mumbai High Court
and if no such Judge is ready and willing to enter upon the reference, any Senior
Counsel practicing in Mumbai High Court shall be appointed as the Sole Arbitrator.
The Arbitrator will be required to cite reasons for giving the award. The arbitration
proceedings shall be governed by the Arbitration and Conciliation Ordinance 1996
or the enactment, re-enactment or amendment thereof. The arbitration
proceedings shall be held at Mumbai."
5.
In
or about July 1997 a reference was made by RV Appliances to the Board of
Industrial and Financial Reconstruction (BIFR for short) under the Sick
Industrial Companies (Special Provisions) Act, 1985 and in pursuance of it,
flat 9B was taken over by the official liquidator.
6.
By
letter dated 4.8.1999, appellant informed Capstone and RV Appliances that it
was not interested in exercising the option to renew the licences on expiry of the
leave and licence agreements on 31.8.1999 and called upon the licensors to refund
the security deposit of Rs.6.5 crores, assuring that it would vacate and
deliver up the licensed flats on receipt of the deposit amount. The appellant informed
SBI and BIFR about it by endorsing copies of the said letters to them. As there
was no confirmation from Capstone and RV Appliances that they would refund the
sum of Rs.6.5 crores, the appellant wrote a further letter dated 26.8.1999 stating
that it would continue to occupy the flats if the security deposit was not
refunded.
7.
As
the loan amount due by RV Appliances was not repaid, SBI filed a mortgage suit (Suit
No.6397/1999) in the High Court of Bombay on 28.10.1999 against Capstone (first
defendant), appellant (second defendant), and RV Appliances (defendant No.3) in
regard to the mortgaged property (flat No.9A) for the following reliefs: (a) for
a declaration that the 1st defendant as mortgagor was due in a sum of Rs.8,46,10,731/-
with further interest on the principal sum at the rate of Rs.16.5% per annum and
additional interest for delayed payment at the rate of 2% per month from 1st
September, 1999 till payment or realization; (b) for a declaration that the
amount and interest mentioned in prayer (a) above is secured in favour of the
plaintiffs by a valid and subsisting mortgage of flat No.9A and three garages
(suit premises); (c) for a direction to the first defendant to pay to the
plaintiff the amount and interest in prayer (a) by such date as may be fixed by
the Court for redemption of the mortgage and in the event of the first defendant
failing to make payment by that date, the suit premises be sold by and under
the orders and directions of the Court in enforcement and realization of the mortgage
thereon and the net realization thereof be paid over to the plaintiff in or
towards satisfaction of its claim herein; (d) for a personal decree against the
first defendant to the extent of any deficiency in sale realization; (e) that the
second defendant be ordered to vacate the suit premises and hand over
possession thereof to the plaintiff to enable the plaintiff effectively to enforce
and realize its security thereon."
8.
On
a notice of motion taken out by SBI seeking interim relief, the High Court
issued the following order on 25.11.1999 : "The Defendant No.2 shall continue
to occupy Flat No.9A and garages Nos. 45 to 47 situate at Brighton, 68D, Napean
Sea Road, Mumbai but shall not create any third party right or interest of any
nature whatsoever in the said flat nor shall hand over possession of the said
flat to defendant No.1 or 3 till further order. Mr. Dharmadhikari, learned counsel
for first defendant makes a statement that till further orders, the first
defendant shall not create any third party interest in the said flat No.9A and
garages Nos.45 to 47 nor shall alienate, dispose of or transfer the said
property till further orders. Statement of Mr. Dharmadhikari is accepted."
On 15.12.1999 the appellant filed a detailed reply to the said notice of motion.
It inter alia contended that SBI had a contractual obligation towards the
appellant as it had agreed for the continuance of appellants' occupation till
refund of the deposit. Capstone also contested the application, denying the
existence of any mortgage or charge over flat No.9A.
9.
The
appellant however did not file its written statement in the suit. The appellant
claims that settlement talks were being held for some time but did not fructify
into any settlement. Therefore, on 10.10.2001, the appellant took out a notice
of motion praying that the parties to the suit be referred to arbitration as
provided in clause 16 of the deposit agreement dated 5.4.1996 8 and
consequently the suit be dismissed. The said application was resisted by the
SBI.
10.
A
learned single Judge of the High Court by impugned order dated 7.3.2002
dismissed the application holding as follows: (a) Clause 16 of the deposit agreement
(arbitration agreement) did not cover the dispute which is the subject matter
of the claim by SBI against its borrowers (Capstone and RV Appliances) and
therefore, it was not open to the appellant to request the court to refer the
parties to arbitration. (b) The detailed counter affidavit dated 15.12.1999
filed by the appellant, in regard to the notice of motion for temporary injunction,
amounted to submission of the first statement on the substance of the dispute, before
filing the application under section 8 of the Act and therefore the appellant lost
the right to seek reference to arbitration. (c) The suit was filed on 28.10.1999.
The appellant filed the counter affidavit opposing the application for temporary
injunction on 15.12.1999. The application under section 8 of the Act was filed
on 10.10.2001 nearly 20 months thereafter, during which period the appellant
had subjected itself to the jurisdiction of the High Court. In view of the inordinate
delay, the appellant was not entitled to the relief under section 8 of the Act.
The said order is challenged in this appeal by special leave. This court while granting
leave on 28.8.2002 stayed the further proceedings in the suit.
11.
The
appellant contends that the parties to the suit were all parties to the deposit
agreement containing the arbitration agreement. The claim of the SBI was for enforcement
of the charge/mortgage over flat No.9A and realization of the sale proceeds
therefrom, which was specifically mentioned as a dispute which was arbitrable.
Having regard to the clear mandate under section 8 of the Act, the court ought to
have referred the parties to arbitration. SBI supported the order
12.
In
S.B.P & Co. vs. Patel Engineering Ltd - 2005 (8) SCC 618, this Court held
thus : "When the defendant to an action before a judicial authority raises
the plea that there is an arbitration agreement and the subject matter of the
claim is covered by the agreement and the plaintiff or the person who has approached
the judicial authority for relief disputes the same, the judicial authority, in
the absence of any restriction in the Act, has necessarily to decide whether,
in fact, there is in existence a valid arbitration agreement and whether the
dispute that is sought to be raised before it is covered by the arbitration clause.
It is difficult to contemplate that the judicial authority has also to act mechanically
or has merely to see the original arbitration agreement produced before it and
mechanically refer the parties to an arbitration." (emphasis supplied) 10 Where
a suit is filed by one of the parties to an arbitration agreement against the
other parties to the arbitration agreement, and if the defendants file an application
under section 8 stating that the parties should be referred to arbitration, the
court (judicial authority) will have to decide
i.
whether
there is an arbitration agreement among the parties;
ii.
whether
all parties to the suit are parties to the arbitration agreement;
iii.
whether
the disputes which are the subject matter of the suit fall within the scope of
arbitration agreement;
iv.
whether
the defendant had applied under section 8 of the Act before submitting his
first statement on the substance of the dispute; and
v.
whether
the reliefs sought in the suit are those that can be adjudicated and granted in
an arbitration.
13.
On
the contentions urged the following questions arise for our consideration :
i.
Whether
the subject matter of the suit fell within the scope of the arbitration agreement
contained in clause 16 of the deposit agreement?
ii.
Whether
the appellant had submitted his first statement on the substance of the dispute
before filing the application under section 8 of the Act?
iii.
Whether
the application under section 8 was liable to be rejected as it was filed nearly
20 months after entering appearance in the suit?
iv.
Whether
the subject matter of the suit is `arbitrable', that is capable of being
adjudicated by a private forum (arbitral tribunal); and whether the High Court ought
to have referred the parties to the suit to arbitration under section 8 of the
Act? Re : Question No.(i)
14.
In
this case, there is no dispute that all the parties to the suit are parties to
an agreement which contains the provision for settlement of disputes by arbitration.
Clause (16) which provides for arbitration provides for settlement of the
following disputes by arbitration : (a) disputes with respect to creation of
charge over the shares and flats; (b) disputes with respect to enforcement of
the charge over the shares and flats and realization of sale proceeds
therefrom; (c) application of the sale proceeds towards discharge of liability
of Capstone and RV Appliances to the appellant; and (e) disputes relating to
exercise of right of the appellant to continue to occupy the flats until the
entire dues as stated in clauses 9 and 10 of the deposit agreement are realised
by the appellant.
15.
The
suit has been filed by SBI to enforce the mortgage to recover the amounts due to
it. In that context, SBI has also sought delivery of vacant possession. The
enforcement of the charge/mortgage over the flat, realisation of sale proceeds
therefrom and the right of the appellant to stay in possession till the entire deposit
is repaid, are all matters which are specifically mentioned in clause 16 as
matters to be settled by arbitration. Therefore, the subject matter of the suit
falls within the scope of the arbitration agreement. Re : Question No.(ii)
16.
The
appellant filed a detailed affidavit opposing the application for interim injunction
on 15.12.1999. Thereafter the appellant filed the application under section 8
of the Act on 12.10.2001. On the date of filing of the application under section
8, the appellant had not filed the written statement. Section 8 of the Act provides
that a judicial authority before which an action is brought in a matter which
is the subject of an arbitration agreement shall, if a party so applies not
later than when submitting his first statement on the substance of the dispute,
refer the parties to arbitration. The High Court has held that filing a
detailed counter affidavit by a defendant setting out its case, in reply to an application
for temporary injunction, should be considered to be the submission of the first
statement on the substance of the dispute; and that the application under
section 8 of the Act having been filed subsequent to filing of such first statement
on the substance of the dispute, the appellant's prayer for referring the parties
to arbitration cannot be accepted. The question therefore is whether filing a counter
to an application for temporary injunction can be considered as submitting the
first statement on the substance of the dispute.
17.
Not
only filing of the written statement in a suit, but filing of any statement,
application, affidavit filed by a defendant prior to the filing of the written statement
will be construed as `submission of a statement on the substance of the dispute',
if by filing such statement/application/affidavit, the defendant shows his
intention to submit himself to the jurisdiction of the court and waive his
right to seek reference to arbitration. But filing of a reply by a defendant,
to an application for temporary injunction/attachment before judgment/appointment
of Receiver, cannot be considered as submission of a statement on the substance
of the dispute, as that is done to avoid an interim order being made against him.
In Rashtriya Ispat Nigam Ltd vs. Verma Transport Company - 2006 (7) SCC 275,
this Court held that the expression 'first statement on the substance of the
dispute' contained in Section 8(1) of the Act is different from the expression
'written statement', and refers to a submission of the party making the
application under section 8 of the Act, to the jurisdiction of the judicial
authority; and what should be decided by the court is whether the party seeking
reference to arbitration has waived his right to invoke the arbitration clause.
This Court then
proceeded to consider whether contesting an application for temporary injunction
by filing a counter, would amount to subjecting oneself to the jurisdiction of
the court. This Court observed : "By opposing the prayer for interim
injunction, the restriction contained in Sub-section (1) of Section 8 was not
attracted. Disclosure of a defence for the purpose of opposing a prayer for injunction
would not necessarily mean that substance of the dispute has already been
disclosed in the main proceeding. Supplemental and incidental proceeding are not
part of the main proceeding. They are dealt with separately in the Code of Civil
Procedure itself. Section 94 of the Code of Civil Procedure deals with supplemental
proceedings. Incidental proceedings are those which arise out of the main
proceeding. In view of the decision of this Court in Food Corporation of India vs.
Yadav Engineer & Contractor - 1982 (2) SCC 499, the distinction between the
main proceeding and supplemental proceeding must be borne in mind. ........
Waiver of a right on the part of a defendant to the lis must be gathered from
the fact situation obtaining in each case. In the instant case, the court had
already passed an ad interim ex pare injunction. The Appellants were bound to respond
to the notice issued by the Court."
18.
In
this case, the counter affidavit dated 15.12.1999, filed by the appellant in
reply to the notice of motion (seeking appointment of a receiver and grant of a
temporary injunction) clearly stated that the reply affidavit was being filed
for the limited purpose of opposing the interim relief. Even in the absence of such
a disclaimer, filing a detailed objection to an application for interim relief cannot
be considered to be submission of a statement on the substance of the dispute
resulting in submitting oneself to the jurisdiction of the court. Re : Question
No.(iii)
19.
Though
section 8 does not prescribe any time limit for filing an application under that
section, and only states that the application under section 8 of the Act should
be filed before submission of the first statement on the substance of the
dispute, the scheme of the Act and the provisions of the section clearly
indicate that the application thereunder should be made at the earliest.
Obviously, a party who willingly participates in the proceedings in the suit and
subjects himself to the jurisdiction of the court cannot subsequently turn round
and say that the parties should be referred to arbitration in view of the
existence of an arbitration agreement.
Whether a party has waived
his right to seek arbitration and subjected himself to the jurisdiction of the
court, depends upon the conduct of such party in the suit. When plaintiffs file
applications for interim relief like appointment of a receiver or grant of a
temporary injunction, the defendants have to contest the application. Such
contest may even lead to appeals and revisions where there may be even stay of further
proceedings in the suit. If supplemental proceedings like applications for temporary
injunction on appointment of Receiver, have been pending for a considerable time
and a defendant has been contesting such supplemental proceedings, it cannot be
said that the defendant has lost the right to seek reference to arbitration.
At the relevant 16 time,
the unamended Rule 1 of Order VIII of the Code was governing the filing of written
statements and the said rule did not prescribe any time limit for filing written
statement. In such a situation, mere passage of time between the date of entering
appearance and date of filing the application under section 8 of the Act, can not
lead to an inference that a defendant subjected himself to the jurisdiction of
the court for adjudication of the main dispute. The facts in this case show
that the plaintiff in the suit had filed an application for temporary
injunction and appointment of Receiver and that was pending for some time.
Thereafter, talks were in progress for arriving at a settlement out of court. When
such talks failed, the appellant filed an application under section 8 of the
Act before filing the written statement or filing any other statement which
could be considered to be a submission of a statement on the substance of the
dispute. The High Court was not therefore justified in rejecting the
application on the ground of delay. Re : Question (iv)
20.
The
nature and scope of issues arising for consideration in an application under
section 11 of the Act for appointment of arbitrators, are far narrower than those
arising in an application under section 8 of the Act, seeking reference of the
parties to a suit to arbitration. While considering an application under
section 11 of the Act, the Chief Justice or his designate would not embark upon
an examination of the issue of `arbitrability' or appropriateness of
adjudication by a private forum, once he finds that there was an arbitration
agreement between or among the parties, and would leave the issue of arbitrability
for the decision of the arbitral Tribunal.
If the arbitrator wrongly
holds that the dispute is arbitrable, the aggrieved party will have to
challenge the award by filing an application under section 34 of the Act,
relying upon sub-section 2(b)(i) of that section. But where the issue of
`arbitrability' arises in the context of an application under section 8 of the Act
in a pending suit, all aspects of arbitrability have to be decided by the court
seized of the suit, and cannot be left to the decision of the Arbitrator. Even
if there is an arbitration agreement between the parties, and even if the dispute
is covered by the arbitration agreement, the court where the civil suit is
pending, will refuse an application under Section 8 of the Act, to refer the parties
to arbitration, if the subject matter of the suit is capable of adjudication
only by a public forum or the relief claimed can only be granted by a special
court or Tribunal.
21.
The
term `arbitrability' has different meanings in different contexts. The three facets
of arbitrability, relating to the jurisdiction of the arbitral tribunal, are as
under :
i.
whether
the disputes are capable of adjudication and settlement by arbitration? That
is, whether the disputes, having regard to their nature, could be resolved by a
private forum chosen by the parties (the arbitral tribunal) or whether they would
exclusively fall within the domain of public fora (courts).
ii.
Whether
the disputes are covered by the arbitration agreement? That is, whether the disputes
are enumerated or described in the arbitration agreement as matters to be
decided by arbitration or whether the disputes fall under the `excepted
matters' excluded from the purview of the arbitration agreement.
iii.
Whether
the parties have referred the disputes to arbitration? That is, whether the disputes
fall under the scope of the submission to the arbitral tribunal, or whether
they do not arise out of the statement of claim and the counter claim filed
before the arbitral tribunal. A dispute, even if it is capable of being decided
by arbitration and falling within the scope of arbitration agreement, will not
be `arbitrable' if it is not enumerated in the joint list of disputes referred
to arbitration, or in the absence of such joint list of disputes, does not form
part of the disputes raised in the pleadings before the arbitral tribunal.
22.
Arbitral
tribunals are private fora chosen voluntarily by the parties to the dispute, to
adjudicate their disputes in place of courts and tribunals which are public
fora constituted under the laws of the country. Every civil or commercial
dispute, either contractual or non-contractual, which can be decided by a
court, is in principle capable of being adjudicated and resolved by arbitration
unless the jurisdiction of arbitral tribunals is excluded either expressly or
by necessary implication. Adjudication of certain categories of proceedings are
reserved by the Legislature exclusively for public fora as a matter of public policy.
Certain other categories of cases, though not expressly reserved for
adjudication by a public fora (courts and Tribunals), may by necessary implication
stand excluded from the purview of private fora.
Consequently, where
the cause/dispute is inarbitrable, the court where a suit is pending, will
refuse to refer the parties to arbitration, under section 8 of the Act, even if
the parties might have agreed upon arbitration as the forum for settlement of such
disputes. The well recognized examples of non-arbitrable disputes are : (i) disputes
relating to rights and liabilities which give rise to or arise out of criminal
offences; (ii) matrimonial disputes relating to divorce, judicial separation, restitution
of conjugal rights, child custody; (iii) guardianship matters; (iv) insolvency
and winding up matters; (v) testamentary matters (grant of probate, letters of administration
and succession certificate); and (vi) eviction or tenancy matters governed by special
statutes where the tenant enjoys statutory protection against eviction and only
the specified courts are conferred jurisdiction to grant eviction or decide the
disputes.
23.
It
may be noticed that the cases referred to above relate to actions in rem. A right
in rem is a right exercisable against the world at large, as contrasted from a right
in personam which is an interest protected solely against specific individuals.
Actions in personam refer to actions determining the rights and interests of
the parties themselves in the subject matter of the case, whereas actions in
rem refer to actions determining the title to property and the rights of the
parties, not merely among themselves but also against all persons at any time
claiming an interest in that property. Correspondingly, judgment in personam refers
to a judgment against a person as distinguished from a judgment against a
thing, right or status and Judgment in rem refers to a judgment that determines
the status or condition of property which operates directly on the property itself.
(Vide : Black's Law Dictionary). Generally and traditionally all disputes
relating to rights in personam are considered to be amenable to arbitration; and
all disputes relating to rights in rem are required to be adjudicated by courts
and public tribunals, being unsuited for private arbitration. This is not
however a rigid or inflexible rule. Disputes relating to sub-ordinate rights in
personam arising from rights in rem have always been considered to be
arbitrable.
24.
The
Act does not specifically exclude any category of disputes as being not
arbitrable. Sections 34(2)(b) and 48(2) of the Act however make it clear that an
arbitral award will be set aside if the court finds that "the subject-matter
of the dispute is not capable of settlement by arbitration under the law for
the time being in force."
25.
Russell
on Arbitration [22nd Edition] observed thus [page 28, para 2.007] : "Not
all matter are capable of being referred to arbitration. As a matter of English
law certain matters are reserved for the court alone and if a tribunal purports
to deal with them the resulting award will be unenforceable. These include
matters where the type of remedy required is not one which an arbitral tribunal
is empowered to give." The subsequent edition of Russell [23rd Edition, page
470, para 8.043] ] merely observes that English law does recognize that there
are matters which cannot be decided by means of arbitration. Mustill and Boyd in
their Law and Practice of Commercial Arbitration in England [2nd - 1989 Edition],
have observed thus :
"In practice therefore,
the question has not been whether a particular dispute is capable of settlement
by arbitration, but whether it ought to be referred to arbitration or whether it
has given rise to an enforceable award. No doubt for this reason, English law
has never arrived at a general theory for distinguishing those disputes which may
be settled by arbitration from those which may not. ....... Second, the types
of remedies which the arbitrator can award are limited by considerations of
public policy and by the fact that he is appointed by the parties and not by
the state. For example, he cannot impose a fine or a term of imprisonment, commit
a person for contempt or issue a writ of subpoena; nor can he make an award
which is binding on third parties or affects the public at large, such as a
judgment in rem against a ship, an assessment of the rateable value of land, a
divorce decree, a winding-up order...." [emphasis supplied] Mustill and Boyd
in their 2001 Companion Volume to the 2nd Edition of commercial Arbitration,
observe thus (page 73) :
"Many
commentaries treat it as axiomatic that `real' rights, that is rights which are
valid as against the whole world, cannot be the subject of private arbitration,
although some acknowledge that subordinate rights in personam derived from the
real rights may be ruled upon by arbitrators. The conventional view is thus that,
for example, rights under a patent licence may be arbitrated, but the validity of
the underlying patent may not.....An arbitrator whose powers are derived from a
private agreement between A and B plainly has no jurisdiction to bind anyone else
by a decision on whether a patent is valid, for no-one else has mandated him to
make such a decision, and a decision which attempted to do so would be useless."
(Emphasis supplied)
26.
The
distinction between disputes which are capable of being decided by arbitration,
and those which are not, is brought out in three decisions of this Court.
26.1.
In
Haryana Telecom Limited vs. Sterlite Industries India Ltd - 1999 (5) SCC 688,
this Court held : "Sub-section (1) of Section 8 provides that the judicial
authority before whom an action is brought in a matter, will refer the parties
to arbitration the said matter in accordance with the arbitration agreement. This,
however, postulates, in our opinion, that what can be referred to the arbitrator
is only that dispute or matter which the arbitrator is competent or empowered
to decide. The claim in a petition for winding up is not for money. The
petition filed under the Companies Act would be to the effect, in a matter like
this that the company has become commercially insolvent and, therefore, should
be wound up. The power to order winding up of a company is contained under the Companies
Act and is conferred on the court. An arbitrator, notwithstanding any agreement
between the parties, would have no jurisdiction to order winding up of a company.
The matter which is pending before the High Court in which the application was
filed by the petition herein was relating to winding up of the Company. That could
obviously not be referred to arbitration and, therefore, the High Court, in our
opinion was right in rejecting the application." (Emphasis supplied)
26.2.
A
different perspective on the issue is found in Olympus Superstructures Pvt Ltd
vs. Meena Vijay Khetan and others - 1999 (5) SCC 651, where this Court considered
whether an arbitrator has the power and jurisdiction to grant specific
performance of contracts relating to immovable property. This Court held : "We
are of the view that the right to specific performance of an agreement of sale
deals with contractual rights and it is certainly open to the parties to agree -
with a view to shorten litigation in regular courts - to refer the issues relating
to specific performance to arbitration. There is no prohibition in the Specific
Relief Act, 1963 that issues relating to specific performance of contract
relating to immovable property cannot be referred to arbitration. Nor is there
such a prohibition contained in the Arbitration and Conciliation Act, 1996 as
contrasted with Section 15 of the English Arbitration Act, 1950 or Section
48(5)(b) of the English Arbitration Act, 1996 which contained a prohibition relating
to specific performance of contracts concerning immoveable property." Approving
the decision of the Calcutta High Court in Keventer Agro Ltd vs. Seegram Comp. Ltd
- (Apo 498 of 1997 etc. dated 27.1.1998), this Court held that disputes relating
to specific performance of a contract can be referred to arbitration and Section
34(2)(b)(i) will not be attracted. This Court held :
"Further, as
pointed in the Calcutta case, merely because there is need for exercise of discretion
in case of specific performance, it cannot be said that only the civil court
can exercise such a discretion. In the above case, Ms. Ruma Pal, J. observed: ...merely
because the sections of the Specific Relief Act confer discretion on courts to
grant specific performance of a contract does not means that parties cannot
agree that the discretion will be exercised by a forum of their choice. If the
converse were true, then whenever a relief is dependent upon the exercise of
discretion of a court by statute e.g. the grant of interest or costs, parties
should be precluded from referring the dispute to arbitration."
This Court further clarified
that while matters like criminal offences and matrimonial disputes may not be
subject matter of resolution by arbitration, matters incidental thereto may be
referred to arbitration : "Reference is made there to certain disputes like
criminal offences of a public nature, disputes arising out of illegal agreements
and disputes relating to status, such as divorce, which cannot be referred to
arbitration. It has, however, been held that if in respect of facts relating to
a criminal matter, (say) physical injury, if there is a right to damages for personal
injury, then such a dispute can be referred to arbitration (Keir v. Leeman) (1846)
9 Q.B, 371. Similarly, it has been held that a husband and wife may, refer to
arbitration the terms on which they shall separate, because they can make a
valid agreement between themselves on that matter ...... ...."
26.3.
In
Chiranjilal Shrilal Goenka vs. Jasjit Singh and Ors.- 1993 (2) SCC 507 this court
held that grant of probate is a judgment in rem and is conclusive and binding not
only the parties but also the entire world; and therefore, courts alone will
have exclusive jurisdiction to grant probate and an arbitral tribunal will not
have jurisdiction even if consented concluded to by the parties to adjudicate
upon the proof or validity of the will.
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.
An
agreement to sell or an agreement to mortgage does not involve any transfer of
right in rem but create only a personal obligation. Therefore if specific
performance is sought either in regard to an agreement to sell or an agreement to
mortgage, the claim for specific performance will be arbitrable. On the other
hand, a mortgage is a transfer of a right in rem. A mortgage suit for sale of the
mortgaged property is an action in rem, for enforcement of a right in rem. A suit
on mortgage is not a mere suit for money. A suit for enforcement of a mortgage being
the enforcement of a right in rem, will have to be decided by courts of law and
not by arbitral tribunals. The scheme relating to adjudication of mortgage
suits contained in Order 34 of the Code of Civil Procedure, replaces some of the
repealed provisions of Transfer of Property Act, 1882 relating to suits on
mortgages (section 85 to 90, 97 and 99) and also provides for implementation of
some of the other provisions of that Act (section 92 to 94 and 96).
Order 34 of the Code
does not relate to execution of decrees, but provides for preliminary and final
decrees to satisfy the substantive rights of mortgagees with reference to their
mortgage security. The provisions of Transfer of Property Act read with Order
34 of the Code, relating to the procedure prescribed for adjudication of the
mortgage suits, the rights of mortgagees and mortgagors, the parties to a mortgage
suit, and the powers of a court adjudicating a mortgage suit, make it clear that
such suits are intended to be decided by public fora (Courts) and therefore,
impliedly barred from being referred to or decided by private fora (Arbitral
Tribunals). We may briefly refer to some of the provisions which lead us to
such a conclusion. (i) Rule (1) of Order 34 provides that subject to the provisions
of the Code, all persons having an interest either in the mortgage security or
in the right of redemption shall have to be joined as parties to any suit
relating to mortgage, whether they are parties to the mortgage or not. The
object of this rule is to avoid multiplicity of suits and enable all interested
persons, to raise their defences or claims, so that they could also be taken note
of, while dealing with the claim in the mortgage suit and passing a preliminary
decree.
A person who has an
interest in the mortgage security or right or redemption can therefore make an
application for being impleaded in a mortgage suit, and is entitled to be made a
party. But if a mortgage suit is referred to arbitration, a person who is not a
party to the arbitration agreement, but having an interest in the mortgaged
property or right of redemption, can not get himself impleaded as a party to
the arbitration proceedings, nor get his claim dealt with in the arbitration
proceedings relating to a dispute between the parties to the arbitration, thereby
defeating the scheme relating to mortgages in the Transfer of Property Act and
the Code. It will also lead to multiplicity of proceedings with likelihood of
divergent results. (ii) In passing a preliminary decree and final decree, the
court adjudicates, adjusts and safeguards the interests not only of the
mortgagor and mortgagee but also puisne/mesne mortgagees, persons entitled to
equity of redemption, persons having an interest in the mortgaged property, auction
purchasers, persons in possession. An arbitral tribunal will not be able to do
so.
The court can direct that
an account be taken of what is due to the mortgagee and declare the amounts due
and direct that if the mortgagor pays into court, the amount so found due, on
or before such date as the court may fix (within six months from the date on
which the court confirms the account taken or from the date on which the court declares
the amount due), the petitioner shall deliver the documents and if necessary re-transfer
the property to the defendant; and further direct that if the mortgagor
defaults in payment of such dues, then the mortgagee will be entitled to final
decree for sale of the property or part thereof and pay into court the sale
proceeds, and to adjudge the subsequent costs, charges, expenses and interest and
direct that the balance be paid to mortgagor/defendant or other persons
entitled to receive the same.
An arbitral tribunal
will not be able to do so. (iv) Where in a suit for sale (or in a suit for
foreclosure in which sale is ordered), subsequent mortgagees or persons deriving
title from, or subrogated to the rights of any such mortgagees are joined as parties,
the court while making the preliminary decree for sale under Rule 4(1), could provide
for adjudication of the respective rights and liabilities of the parties to the
suit in a manner and form set forth in Form Nos. 9, 10, and 11 of appendix `D'
to the Code with such variations as the circumstances of the case may require. In
a suit for foreclosure in the case of an anomalous mortgage, if the plaintiff succeeds,
the court may, at the instance of any party to the suit or any other party interested
in the mortgage security or the right of redemption, pass a like decree in lieu
of a decree for foreclosure, on such terms as it thinks fit. But an arbitral
tribunal will not be able to do. (v) The court has the power under Rule 4(2),
on good cause being shown and upon terms to be fixed by it, from time to time,
at any time before a final decree is passed, extend the time fixed for payment
of the amount found or declared due or the amount adjudged due in respect of subsequent
costs, changes, expenses and interest, upon such terms as it deems fit. The
Arbitral Tribunal will have no such power.
28.
A
decree for sale of a mortgaged property as in the case of a decree for order of
winding up, requires the court to protect the interests of persons other than
the parties to the suit/petition and empowers the court to entertain and adjudicate
upon rights and liabilities of third parties (other than those who are parties to
the arbitration agreement). Therefore, a suit for sale, foreclosure or
redemption of a mortgaged property, should only be tried by a public forum, and
not by an arbitral tribunal. Consequently, it follows that the court where the
mortgage suit is pending, should not refer the parties to arbitration.
29.
The
appellant contended that the suit ultimately raises the following core issues,
which can be decided by a private forum: (i) Whether there is a valid mortgage
or charge in favour of SBI? (ii) What is the amount due to SBI? and (iii) Whether
SBI could seek eviction of appellant from the flat, even if it is entitled to
enforce the mortgage/charge? It was submitted that merely because mortgage suits
involve passing of preliminary decrees and final decrees, they do not get excluded
from arbitrable disputes. It is pointed out that the arbitral tribunals can
also make interim awards deciding certain aspects of the disputes finally which
can be equated to preliminary decrees granted by courts, and the final award
made by the arbitrator, after detailed accounting etc. could be compared to the
final decree by courts.
It is therefore
contended that there is no impediment for the parties to mortgage suits being referred
to arbitration under section 8 of the Act. If the three issues referred by the
appellant are the only disputes, it may be possible to refer them to
arbitration. But a mortgage suit is not only about determination of the
existence of the mortgage or determination of the amount due. It is about
enforcement of the mortgage with reference to an immovable property and adjudicating
upon the rights and obligations of several classes of persons (referred to in
para 27 (ii) above), who have the right to participate in the proceedings
relating to the enforcement of the mortgage, vis-`-vis the mortgagor and mortgagee.
Even if some of the issues or questions in a mortgage suit (as pointed out by the
appellant) are arbitrable or could be decided by a private forum, the issues in
a mortgage suit cannot be divided.
The following
observations of this court in a somewhat different context, in Sukanya Holdings
(P) Ltd. v. Jayesh H.Pandya - 2003 (5) SCC 531 are relevant: "The next question
which requires consideration is--even if there is no provision for partly referring
the dispute to arbitration, whether such a course is possible under Section 8
of the Act? In our view, it would be difficult to give an interpretation to
Section 8 under which bifurcation of the cause of action that is to say the
subject matter of the suit or in some cases bifurcation of the suit between parties
who are parties to the arbitration agreement and others is possible. This would
be laying down a totally new procedure not contemplated under the Act. If
bifurcation of the subject matter of a suit was contemplated, the legislature would
have used appropriate language to permit such a course. Since there is no such indication
in the language, it follows that bifurcation of the subject matter of an action
brought before a judicial authority is not allowed." Conclusion
30.
Having
regard to our finding on question (iv) it has to be held that the suit being
one for enforcement of a mortgage by sale, it should be tried by the court and
not by an arbitral tribunal. Therefore we uphold the dismissal of the
application under section 8 of the Act, though for different reasons. The appeal
is accordingly dismissed. We however make it clear that we have not recorded
any finding, nor expressed any opinion, on the merits of the claims and
disputes in the suit.
..............................J.
(R V Raveendran)
..............................J.
(J M Panchal)
April
15, 2011
New
Delhi;
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