Booz, Allen and Hamilton Inc.  (Appellants)

vs

SBI Home Finance Ltd. & Ors.  (Respondents)

FACTS:

                   Capstone Investment Co. Pvt. Ltd (R2) and Real Value Appliances Pvt. Ltd (R3) are the owners of the suit property. Capstone and RV Appliances had borrowed loans from SBI Home Finance Ltd. under two loan agreements by securing the said property in favour of SBI. The Appellants and Capstone & RV appliances signed two leave and license agreements and the Respondents confirmed the same. Following which they entered a tripartite deposit agreement and paid refundable deposit as consideration. The transactions were made as indicated by the Respondents. By virtue of which said loan amount of Capstone was paid but the RV appliances debt remained outstanding as result of which the property was secured by SBI. Eventually the official liquidator retained the asset. The deposit agreement contained clause for arbitration. SBI filed mortgage suit in the High Court of Bombay on 28.10.1999 against Appellant, Capstone and RV Appliances in regard to the mortgaged property and also prayed for eviction of Appellant from the premises. Court issued an order allowing the Appellants to continue its occupation and ceased the other respondents from a third party interest.  The Appellant filed a detailed reply to the said notice of motion and contended that SBI had a contractual obligation towards the Appellant as it had agreed for the continuance of Appellant occupation till refund of the deposit. The High Court dismissed the plea for arbitration as the dispute which is the subject matter cannot be adjudicated by a private forum. 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 and due to excessive delay they were refused to grant relief. The Appellants contended that the parties to the agreement were aware of the arbitration clause hence the dispute is arbitrable, to which Respondents also agreed.

The case mentioned above gave rise to the following questions:

Whether the subject matter of the suit fell within the scope of the arbitration agreement contained in clause 16 of the deposit agreement?

           
                 The parties to the suit agreement affirmed themselves to resolve disputes which are mentioned below to be adjudicated 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 there from;

(c)               Application of the sale proceeds towards discharge of liability of Capstone and RV Appliances to the Appellant; and

(d)              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 realized by the Appellant.

The subject matter of the dispute falls within the scope of arbitration clause. So the suit can be mandated under sec 8 of the act.

Whether the Appellant had submitted his first statement on the substance of the dispute before filing the application under section 8 of the Act?

According to the act, filling any statement by defendants prior to the filing the application under section 8 of the Act 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 statement on the substance of the dispute, as that is done to avoid an interim order being made against him. Obviously in the present suit the Appellants filled counter affidavit against an interim injunction which is to be awarded by the court. By virtue of which the Appellant has not waived their right to seek reference through arbitration.

Whether the application under section 8 was liable to be rejected as it was filed nearly 20 months after entering appearance in the suit?

Since the sec 8 of the act does not mentions the time limit for filling an application under the same but it affirms that a party right to seek through arbitration can only be determined by its conduct. The party waives its right to seek arbitration only when it submits a written statement to the court or submits itself to the jurisdiction of the court as mentioned earlier. As per the current suit the plaintiff were seeking for an interim order by the court for which the defendants have to submit a counter statement to avoid ex parte order. As mentioned earlier filling an counter statement does not implies that the parties have waived their right to seek through arbitration and as for the excess time lapse concerned, the parties tried to settle the dispute outside the court on failing which the Appellants filled the said application. The unamended Rule 1 of Order VIII of the Code did not prescribe any time limit for filing written statement. Henceforth the High Court has faulted rejecting the application on the ground of delay.

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?

            Basically a suit seeking to refer arbitration can only be adjudicated by the court if the there was an arbitration agreement among the parties.  Though there is such a stipulation in the agreement it is up to the court to decide the dispute is arbitrable or not. However the court confers authority to arbitration on certain civil disputes which is mentioned in the act.

Russell on Arbitration [22nd Edition] observed thus: “Not all matters 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.

Courts grants authority to arbitration only to disputes which is of interests protected solely against specific individuals so called in personum and forfeits to affirm cases which is a right exercisable against the world at large so called in rem. Sections 34(2)(b) and 48(2) of the 1996 Act makes 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”. In the aforementioned case, 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 side the agreement to mortgage is a right in rem 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 some25 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 forum (Courts) and therefore, impliedly barred from being referred to or decided by private forum (Arbitral Tribunals). Consequently, it opines that the court where the mortgage suit is pending should not refer the parties to arbitration.

Conclusion

Having regard to our finding on questions as 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 the court upheld the dismissal of the application under section 8 of the Act.