Unilateral Option To Terminate Arbitration Agreement Does Not Render It Illegal: Bombay High Court

The Bombay High Court Bench of Justice Somasekhar Sundaresan while disposing an application for appointment of arbitrator has observed that an arbitration clause which gives option to only one party to opt out of the arbitration agreement is not invalid per se. Such arbitration agreement can be saved by eliminating the unilateral option or by making such right bilateral. Facts The present applications have been filed under Section 11 of the Arbitration and Conciliation Act, 1996 (“ACA”) seeking appointment of an arbitrator in connection with disputes and differences that arose between the parties under a Loan Agreement dated January 31, 2016 and another top-up Loan Agreement dated October 31, 2017 which contain an arbitration clause. The arbitration clause contains an agreement between the parties to resolve their disputes and differences by reference to arbitration in Mumbai. The second paragraph of the arbitration agreement is a non-obstante clause that enables the Applicant to opt out of the arbitration agreement in the event the Applicant becomes a beneficiary of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“SARFAESI Act”) and other special debt recovery legislation referred to therein. Thus, the Applicant would have a right to opt out of arbitration. However, no such provision to opt out is provided for the Respondents. Contentions The Respondents contended that a division bench of the Delhi High Court in Tata Capital Housing Finance Ltd. v. Shri Chand Construction & Apartments Pvt. Ltd. 2022 (1) ARB LR 213 (Delhi) (DB) (“Tata Capital”), while interpreting an identical clause has held the clause to be invalid since it destroyed the essential feature of mutuality that is fundamental for validity of an arbitration agreement. The Respondents further contended that since the Applicant had chosen to enforce through SARFAESI Act, the Applicant is deemed to have lost its right to pursue arbitration and that it has made an election in favour of SARFAESI Act. Lastly, the Respondent submitted that arbitration had already been initiated in the past and the Applicant had unilaterally appointed an arbitrator by a letter dated October 29, 2018. The Respondent contended that when the Applicant became a beneficiary of debt recovery legislation, the Applicant did not withdraw from the arbitration, reserving the right to initiate it afresh. Instead, the Applicant let the arbitration lapse. Vide order dated December 10, 2019, the Arbitrator so appointed had noted that the mandate had expired and left it to the parties to file an appropriate application in accordance with law, but no application seeking extension of the mandate was filed by the Applicant under Section 29-A of ACA. Therefore, it is submitted that the arbitration proceedings already stood terminated and could not be revived again. The Applicant, on the other hand contended that lenders have right to pursue arbitration even while being a beneficiary of enforcement measures under the SARFAESI Act. The Applicant submitted that since both processes can be pursued in parallel, the objection based on the Applicant's option to terminate the arbitration agreement is irrelevant and that in any case the Applicant has never terminated the arbitration agreement. Observations The Court noted that the main question for consideration was whether the absence of mutuality in the second part of the arbitration clause is destructive of the very existence of the arbitration agreement. The Court discussed the context in which the Tata Capital judgment was decided by the Delhi High Court. The context was of the borrower having filed a suit and the lender having asserted the right to file a written statement. On being denied that right, the lender appealed and secured its right to file the written statement. After securing such right, the lender argued that no civil suit would lie. It was in the context of such provocative and irreconcilable conduct that the court ruled that there was an absence of mutuality which was fatal to the agreement. The Court observed that the ruling on absence of mutuality rendering the arbitration agreement to be illegal should be read in this context and not in absolute terms. The Court observed that the illegality of unilateral appointment of an arbitrator does not render the entire arbitration agreement void ab initio. Such illegality is capable of being cured by ensuring that the appointment of an independent and impartial arbitrator is achieved by eliminating the element of one party alone appointing the arbitrator. Similarly, the second paragraph of the arbitration clause does not erode the substratum of the arbitration agreement. One party's option to terminate the arbitration agreement can be excised by eliminating such right or by making such right bilateral to save the...

Unilateral Option To Terminate Arbitration Agreement Does Not Render It Illegal: Bombay High Court

Arpita Pande

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