The Delhi High Court in Shri Chand Construction and Apartments and others v. Tata Capital Housing Finance (decided on March 04, 2020), held that the use of words “all or certain disputes” in Section 7 (arbitration agreement) of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”) permits classification of disputes but does not permit classification of claims. It was further held that once the time for filing written statement has been extended then the time for filing the application under Section 8 (power to refer parties to arbitration where there is an arbitration agreement) of the Arbitration Act also stands extended.

Facts

A suit was filed by Shri Chand Construction and Apartments (“Plaintiff”) against Tata Capital Housing Finance (“Defendant”). The Plaintiff had sued the Defendant for recovery of damages for loss by the Defendant of the title deeds of the immovable property of the Plaintiff deposited with the Defendant by way of equitable mortgage. The Plaintiff took a loan from the Defendant and deposited as security the title deeds of its immovable property. The agreement specified that the security (title deeds) provided must be returned by the Defendant once the loan was repaid. When the said loan was repaid, the security was not returned. Further, the loan agreement had an arbitration clause, which provided that if at any point in time the Defendant comes under the purview of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“SARFAESI Act”) or Recovery of Debts due to Banks and Financial Institutions Act, 1993 (“DRT Act”) the arbitration clause shall “at the option of the Defendant, cease to have any effect”.

After the suit was filed and the summons was issued, the Defendant, through an advocate, appeared before the Registrar and informed the Registrar that the Defendant would make an application to refer the dispute to arbitration. The Registrar granted time to the Defendant to make this application and also to file the written statement. As the written statement was not filed by the Defendant, pursuant thereto, the single judge of the Delhi High Court, by an order, closed the Defendant’s right to file its written statement. This order, closing the Defendant’s right to file the written statement was challenged by the Defendant in an appeal.

The court of appeal extended the time for the Defendant to file its written statement to October 11, 2019. Prior to October 11, 2019, the Defendant filed an application under Section 8 of the Arbitration Act (“Section 8 Application”). The Section 8 Application was for the first time listed before the single judge of the Delhi High Court on August 28, 2019, when notice was issued and directions passed to the Plaintiff and Defendant to complete the pleading relating to the Section 8 Application. The Plaintiff, argued that the Defendant was not entitled to seek a reference to the arbitration because of its conduct and on account of the fact that the Defendant preferred an appeal against the order closing the Defendant’s right to file its written statement.

Issues

The following issues were examined by the Delhi High Court:

• Whether the Defendant had, through its own conduct, waived its right to make an application under Section 8 of the Arbitration Act; and
• Whether the arbitration clause was still valid.

Arguments

The counsel for the Defendant argued that since the agreement in question provided for a dispute resolution clause, the dispute should simply be referred to arbitration.

The Plaintiff’s counsel opposed this argument contending that the Defendant, by its conduct, that is, by preferring the appeal, has disentitled itself from applying under Section 8 of the Arbitration Act. The Plaintiff further contended that the Defendant, by filing an appeal against the order closing the Defendant’s right to file written statement has opted to proceed with the suit and cannot by means of the Section 8 Application seek to refer the dispute between the Plaintiff and the Defendant to arbitration.

The Plaintiff’s counsel further contended that the arguments made by the Defendant’s counsel in the appeal proceedings before the division bench unequivocally indicated that the intention of the Defendant was to file its written statement and to proceed with the trial of suit, thereby indicating that the Defendant did not have any intention to refer the dispute between the Plaintiff and the Defendant to arbitration. The Plaintiff’s counsel further informed the single judge who was adjudicating the Section 8 Application that the court of appeal (the division bench) had taken note of the Section 8 Application which was pending adjudication and despite taking note of the Section 8 Application, only directed the Defendant to file its written statement by October 11, 2019.

Observations of the Delhi High Court

While deciding the Section 8 Application the learned single judge, observed that Section 8 of the Arbitration Act requires the courts to recognise and give effect to the arbitration agreement. Section 8 of the Arbitration Act mandates a judicial authority to refer the parties to arbitration provided that, a party to the arbitration agreement makes an application to the court, no later than the date of submitting that party’s first statement of defence on the substance of the dispute. In simple words, prior to the date of filing the written statement to a suit, the party requesting for the dispute to be referred to arbitration has to make the application under Section 8 of the Arbitration Act.

The Defendant had filed the Section 8 Application before the date of submitting its ‘first statement’ on the substance of the disputes referred to in the Suit. The single judge further observed that post the 2015 amendment to the Arbitration Act, the only test which the legislature requires is that the application under Section 8 of the Arbitration Act is to be made or a plea under Section 8 of the Arbitration Act is to be taken, prior to the date of submitting one’s written statement. The Delhi High Court also inferred that once the division bench (the court of appeal) extended the time period for the Defendant to file its written statement then, the time period for filing the Section 8 Application under the Arbitration Act is also extended. In view thereof, the Delhi High Court did not find any merit in the opposition to the Section 8 Application by the Plaintiff.

With regard to the second issue, as to that is, whether, as on date when the dispute arose between the parties, was there a valid arbitration clause subsisting between the parties? While deciding this issue, the Delhi High Court, sought a confirmation from the Defendant’s counsel as to whether the Defendant comes under the purview of SARFAESI Act or DRT Act. The Defendant’s counsel informed the Court that at the time of executing the agreement, the Defendant did not come under the purview of the SARFAESI Act and DRT Act but subsequently it did.

The Defendant’s counsel argued that, the arbitration clause will cease to have effect only in so far as the claim of the Defendant against the Plaintiff is concerned but will continue to have effect as far as the claims of the Plaintiff against the Defendant is concerned. While deciding the Section 8 Application, the Delhi High Court had to decide as to whether there can there be a valid arbitration clause providing for arbitration of claims of one of the parties and providing for the remedy of the court or any other fora for claims of the other party.

In deciding this issue, the Delhi High Court referred to Section 7 of the Arbitration Act and particular emphasis was laid on the words “all or certain disputes”. The single judge was of the view that the words, “all or certain disputes” mean that the Arbitration Act permit classification of disputes but does not permit classification of claims. Hence, these words, did not allow claims of one of the parties arising in respect of a defined legal relationship to be adjudicated by arbitration and claims of the other party arising in respect of the same legal relationship to be adjudicated by any other mode. The issue of spitting up of claims and causes of action as enshrined in the provisions of the Code of Civil Procedure, 1908 would be contrary to the public policy and if it would be allowed then it would result in multiplicity of proceedings and possibility of conflicting findings.

The single judge further observed that the dispute resolution clause is contained in a Loan Agreement dated April 18, 2017 between the Plaintiff and the Defendant, wherein, the Defendant loaned monies to the Plaintiff and the Plaintiff agreed to repay. Clause 2.4 of the Loan Agreement required the Plaintiff to furnish security and further provided that upon full and final payment by the Plaintiff to the Defendant of all amounts, the Defendant shall release the security in favour of the Plaintiff. It is not in dispute that the Plaintiff have repaid all the dues of the Defendant but the Defendant has been unable to return the security deposited by the Plaintiff with the Defendant and the claim of the Plaintiff in the present suit is only for damages for not so returning the security in the form of title deeds of immovable property of the Plaintiff.

Decision of the Delhi High Court

The Delhi High Court held that the arbitration agreement was not valid due to the Defendant coming under the purview of SARFAESI Act and that the Section 8 application was not maintainable and therefore the Delhi High Court dismissed the Section 8 Application.

Vaish Associates Advocates View

This is an important decision that lays down the law on a procedural issue, especially, if the time is extended for a party to file its written statement then the time to file the Section 8 application under the Arbitration Act is also simultaneously extended. However, pursuant to the 2015 amendment to the Arbitration Act, a plea can also be raised with regards to refer the parties to arbitration.

Further, the words “all or certain disputes” as referred to in Section 7 of the Arbitration Act, mean that the Arbitration Act permit classification of disputes but does not permit classification of claims. Furthermore, the issue of spitting up of claims and causes of action as enshrined in the provisions of the Code of Civil Procedure, 1908 would be contrary to the public policy of India.

For more information please write to Mr. Bomi Daruwala at [email protected]

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