Scope Of Examination By Referral Court U/S 11 Of Arbitration Act Is Limited, Substantive Issues To Be Dealt With By Tribunal: Bombay High Court

The Bombay High Court Bench of Justice Firdosh P. Pooniwalla held that the scope of examination under section 11 (6A) of the Arbitration and Conciliation Act should be confined to the existence of an arbitration agreement on the basis of Section 7 of the Act. Similarly, the validity of an arbitration agreement, in view of Section 7 of the Act, should be restricted to the requirement of formal validity such as the requirement that the agreement be in writing. Brief Facts An application under section 11 of the Arbitration Act was filed seeking the appointment of an arbitrator based on an arbitration agreement in a Sanction Letter executed on August 19, 2019. A series of financial agreements were entered into between Tata Capital Limited (applicant) and Priyanka Communications (India) Pvt. Ltd. (Respondent No.1) and its guarantors (Respondent Nos.2 and 3) on May 17, 2017. Working Capital Demand Loan Facility (WCDL) was provided in the financial arrangements which were modified several times which led to renewed WCDL agreement on August 2, 2018. One-time ad-hoc loan facility of Rs. 5.6 crores was also provided under a new sanction letter in 2019 that contained an arbitration clause. When the respondent failed to make the payment, several recovery actions were taken including a notice sent under the SARFAESI Act and filing of a summary suit in court. However, the respondent continued to default which compelled the applicant to invoke the arbitration clause on April 6, 2021. Despite this, the respondent refused to appoint the arbitrator. Thereafter, the applicant filed an application under section 11 of the Arbitration Act. Contentions The applicant submitted that there was an arbitration clause in the letter sanctioned on August 19, 2019, which governed all the disputes between the parties. It was further argued that the court has a limited scope of enquiry under section 11 of the arbitration act just to check whether a valid arbitration agreement exists or not. It was further submitted that arbitration rights are not waived just because proceedings under the SARFAESI Act were initiated. Sections 35 and 37 of the SARFAESI Act were referred which provide that provisions of the SARFAESI Act are in addition to and not in derogation of any other law for the time being in force. Based on this, it was argued that the applicant could pursue proceedings under both acts simultaneously. It was further submitted that just because the proceedings under the SARFAESI Act were pursued, the right of the applicant to institute arbitration proceedings is not waived as the claims under both proceedings were distinct. Per contra, the respondent submitted that since the applicant had already initiated proceedings under the SARFAESI Act, the disputes became non-arbitrable. It was further argued that statutory remedies provided for the secured creditors under the SARFAESI Act prohibited arbitration proceedings therefore any attempt to divide the loan amount would constitute forum shopping. It was further argued that the Debt Recovery Tribunal (DRT) is an appropriate forum to recover any debt by financial institutions under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (RDDB Act). Since the applicant was part of a lending consortium, remedies under the RDDB Act should have been pursued and the jurisdiction of the DRT should have been invoked. It was further argued that since a summary suit with respect to the same loan agreement had already been filed, the applicant waived its right to institute arbitration proceedings. It was further argued that multiple proceedings could not be initiated at the same as it would lead to conflicting judgments, violating the principle of judicial propriety. Court's Analysis The court analysed section 11 of the Arbitration Act. The court observed that the referral court has limited jurisdiction to see whether an arbitration agreement exists or not. Once it is satisfied that such an agreement exists, its role ends and the parties should be relegated to the arbitral tribunal. The arbitral tribunal will decide all other substantive issues arising in the case under section 16 of the arbitration act. The court referred to the Supreme Court judgment in Interplay between Arbitration Agreements under Arbitration and Conciliation Act, 1996 and Stamp Act, 1899, In Re (2024) wherein it was held that the legislature confined the scope of reference under Section 11(6-A) to the examination of the existence of an arbitration agreement. The use of the term “examination” in itself connotes that the scope of the power is limited to a prima facie determination. the Referral Courts only need to consider one aspect to determine the existence of an arbitration agreement — whether the underlying contract contains an arbitration agreement which provides for arbitration pertaining to the disputes which have arisen...

Scope Of Examination By Referral Court U/S 11 Of Arbitration Act Is Limited, Substantive Issues To Be Dealt With By Tribunal: Bombay High Court

Mohd Malik Chauhan

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