Home » Between The Lines » Delhi HC: Transfer of liabilities from a previous loan agreement makes the arbitration clauses in subsequent agreements, binding

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The Division Bench of High Court of Delhi (“Delhi HC”), vide its judgment pronounced on September 13, 2023, in the matter of DD Global Capital Private Limited and Others v. S.E. Investments Limited [FAO (OS) (COMM) 33/2018 and CM APPL. 7434/2018], has dismissed an appeal assailing the impugned judgment dated September 20, 2017 passed by the Single Bench of Delhi HC and held that transfer of liabilities from a previous loan agreement makes the arbitration clauses in subsequent agreements binding.

Facts

DD Global Capital Private Limited (“DD Global/ Appellant No. 1”) approached S.E. Investments Limited (“Respondent”) to avail a loan facility to the tune of INR 4 crores. Pursuant thereto, loan amount of INR 3.20 crores was sanctioned and disbursed in favour of DD Global in July, 2008, which was supposed to be repaid by July 7, 2009 along with interest thereon at the rate of 25% per annum. The aforesaid loan was secured by Appellant Nos. 2 and 3. Also, a piece of land admeasuring around 5.92 acres and situated at Zirakpur, Punjab owned by Renaissance Buildcon Company Private Limited (“RBCL”) was mortgaged in favour of the Respondent to secure the loan disbursed to DD Global. Additionally, RBCL also extended a corporate guarantee in favour of the Respondent towards securing the loan.

However, DD Global failed to repay the loan amount of INR 3.20 crores together with interest. In view thereof, the Respondent agreed to restructure the previous loan. Accordingly, as on July 31, 2010, entire loan amount inclusive of applicable interest was amounting to INR 6.37 crores. There was re-financing of loan on July 31, 2010 by the Respondent to the tune of INR 9.10 crores by way of executing 5 new loan agreements for 1 year duration each at the rate of interest thereon being 30% per annum.

The afore-mentioned re-financed loan agreement was to be repaid within a year and the same was secured by personal guarantees extended by Appellant Nos. 2 and 3, corporate guarantee extended by RBCL and collateral of the mortgaged land belonging to RBCL situated at Zirakpur, Punjab. In addition to the afore-mentioned, the Appellants also executed undertakings/ declaration dated July 31, 2010 and 5 debit vouchers dated July 31, 2010 aggregating to INR 9.10 crores. Also, the Appellants issued post-dated cheques amounting to INR 9.10 crores.

However, in view of default on part of DD Global in repayment of the loan facilities, the Respondent invoked arbitration proceeding as stipulated under Clause 20 of the 5 loan agreements by issuing a common invocation letter dated September 25, 2012. Considering that the aforesaid 5 loan agreements formed part of the same transaction, common arbitration proceeding was initiated by the learned Arbitrator.

Thereafter, the learned Arbitrator passed an award dated June 22, 2016 and held that the Respondent herein is entitled to recover INR 9.10 crores as on July 31, 2010 jointly and severally from Appellants, along with interest for pre-award period and future interest at the rate of 18% per annum.

Pursuant thereto, the Appellants herein approached the Single Bench of Delhi HC seeking to set aside the aforesaid arbitral award under Section 34 of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”). However, the same was dismissed by the learned Single Judge of Delhi HC vide the impugned order, leading to filing of the present appeal before the Division Bench of Delhi HC by the Appellants.

Issue

Whether an arbitration clause stipulated in the subsequent agreement wherein liabilities stand transferred from the original agreement to a subsequent agreement, will be binding to invoke arbitration proceeding in respect of the original agreement even if the original agreement had no stipulation of arbitration clause.

Arguments

Contentions of the Appellants:

It was submitted that no amounts were disbursed by the Respondent pursuant to loan agreements executed in 2010 and that the Respondent has failed to produce any document to prove the same.

It was further contended that the loan agreements executed in 2008 and 2010 are totally separate and independent from one another. Further, the loan agreement executed in 2008 did not have an arbitration clause and the loan agreements executed in 2010 did not have any reference of the loan agreement executed in 2008. In view thereof, the learned Arbitrator could not have assumed jurisdiction on the matter arising out of loan agreement executed in 2008. Further, arbitration proceedings were invoked only under the aforesaid 5 loan agreements executed on July 31, 2010.

It was further submitted that Appellant had signed blank debit vouchers along with loan agreements executed in 2010. However, as the loan agreements executed in 2010 under which debit vouchers were signed by the Appellants do not make any reference to the loan agreement executed in 2008, as such, debit vouchers could not have been used to repay the monies outstanding under the loan agreement executed in 2008.

Further, the Appellants raised the issue of limitation and contended that claims under the loan agreement executed in 2008 is barred by limitation. The Appellants submitted that the aforesaid contention was raised before the learned Arbitrator as well, however, it was rejected.

Furthermore, the Appellant submitted that in the present case, Respondent had unilaterally appointed the learned Arbitrator. Pursuant to the Arbitration and Conciliation (Amendment) Act, 2015, a party interested in the outcome of arbitration proceeding has no unilateral right to appoint an arbitrator. Notably, the arbitral award in the present case was passed on June 22, 2016, at which point in time, the aforesaid amendment was already introduced. As such, the arbitral award ought to be set aside on this ground alone.

Contentions of the Respondent:

It was submitted on behalf of the Respondent that the arbitral award passed by the learned Arbitrator and the impugned judgment pronounced by the Single Bench of Delhi HC were good in law and need not be set aside.

Observations of the Delhi HC

Delhi HC refused to accept the contention raised by the Appellants that the 5 debit vouchers signed by them were blank and that the 5 loan agreements dated July 31, 2010 are null and void as no amounts were disbursed under the 2010 loan. Delhi HC observed that there is a clear finding by the learned Arbitrator, which has been upheld by the learned Single Judge that the 5 loans agreements dated July 31, 2010 were executed along with other documents as part of re-structuring of the previous loan extended to DD Global on July 3, 2008, which DD Global failed to repay. Consequently, parties had to enter into the aforesaid 5 loan agreements so as to grant a further period up to July 31, 2011. Therefore, such contention raised by the Appellants cannot be accepted.

Delhi HC further observed that the Appellants had admitted to execution of the 5 debit vouchers. In so far as the contention of the Appellants that the debit notes were blank at the time of their execution and were filled up at a subsequent point in time, it was observed that the Appellants have failed to prove the same and there is a clear finding by learned Arbitrator that except for bald statement made by the Appellants, no oral or documentary evidence has been placed on record.

It was further observed that the Appellants did not dispute or challenge the execution and validity of the 5 loan agreements dated July 31, 2010 at any point in time. Further, Delhi HC observed that the learned Arbitrator had rightly held that the 5 debit vouchers dated July 31, 2010 bears reference to adjustment of the original loan availed by DD Global in 2008 and its link to the subsequent loan availed in 2010. Further, it was observed that from the aforesaid debit vouchers, it is clear that the consideration against the 5 loans availed in 2010 was passed on to DD Global by way of adjustment of outstanding dues of the year 2008. The outstanding dues arising out of original loan availed in 2008 were converted into 5 new loans in 2010 and since the aforesaid 5 loan agreements contain an arbitration clause, the present arbitration proceeding was rightly initiated and is maintainable in law.

Further, Delhi HC observed that the learned Single Judge of Delhi HC has arrived at a finding that the conclusion made by the learned Arbitrator, both in terms of facts and law, is a plausible conclusion and there is no reason to disturb the conclusion recorded by the learned Arbitrator. It is a settled law that if the interpretation and conclusion arrived at by the learned Arbitrator is a plausible one, judiciary ought to refrain from disturbing such findings. In this regard, Delhi HC relied upon the judicial pronouncement rendered by the Supreme Court in the matter of MMTC Limited v. Vedanta Limited [(2019) 4 SCC 163], whereby it was held that the court hearing an appeal under Section 37 of the Arbitration Act must be very cautious in disturbing concurrent findings given by the learned Arbitrator and confirmed by the appropriate court in view of challenge under Section 34 of the Arbitration Act.

Further, Delhi HC observed that the contention raised by the Appellants and reliance placed by them on various judgments is highly misplaced in so far as the submission that Respondent had unilaterally appointed the learned Arbitrator. In this regard, Delhi HC observed that the present arbitration proceeding was invoked by letter dated September 25, 2012 whereas the amendment in Arbitration Act was introduced in 2015, whereby a party interested in the outcome of arbitration proceeding has no unilateral right to appoint an Arbitrator. Therefore, the Appellants cannot raise such contention.

Decision of the Delhi HC

Delhi HC held that transfer of liabilities from a previous loan agreement makes the arbitration clauses in subsequent agreements binding. In view of the aforesaid ratio laid down, the Division Bench of Delhi HC was pleased to dismiss the appeal.

VA View:

The present judicial pronouncement rendered by the Division Bench of Delhi HC provides clarity on multiple issues.

The present judgment had laid down the ratio that if liabilities stand transferred from the original agreement to a subsequent agreement, in that case an arbitration clause stipulated in the subsequent agreement will be binding to invoke arbitration proceeding in respect of the original agreement even if the original agreement had no stipulation of arbitration clause.

Further, this judgment clarifies the position on unilateral appointment of learned Arbitrator in view of amendment to the Arbitration Act in the factual context of those cases wherein the arbitration proceeding was invoked prior to the aforesaid amendment in the year 2015.

Lastly, this judgment reiterates the well settled legal position that when the findings arrived at by the learned Arbitrator and if such findings have been confirmed by an appropriate court pursuant to challenge to arbitral award in terms of Section 34 of the Arbitration Act, then the higher judiciary ought to be cautious in disturbing such findings recorded by the learned Arbitrator.

For any query, please write to Mr. Bomi Daruwala at [email protected]

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