The Delhi High Court (“Delhi HC”) has, in its judgement dated August 22, 2023, in the matter of Amit Guglani and Another v. L and T Housing Finance Limited and Another [ARB.P. 1317/2022 and I.A. No. 19286/2022], held that when there are two interconnected agreements with conflicting arbitration clauses, the clause contained in the main agreement should be given primacy over the other clause.

Facts

L and T Housing Finance Limited (“Respondent No. 1”), a company engaged in the business of advancing finance in different categories such as home loans, auto loans, and micro loans, under a scheme of amalgamation, merged with L and T Finance Limited with effect from April 12, 2021. Raheja Developers (“Respondent No. 2”), a company engaged in the business of real estate, constructed a residential real estate project namely ‘Raheja Vanya’ in Gurgaon and had started inviting applications for allotment by sale of residential units/ flats in the said project on a construction linked option.

Mr. Amit Guglani and another (“Petitioners”) wanted to book a residential unit in the ‘Raheja Vanya’ project and approached Respondent No. 1 for a home loan of INR 67 lakhs towards the payment of the purchase consideration of the said residential unit/ flat. The terms and conditions of the home loan were recorded in the tripartite agreement dated October 24, 2018, executed between the Petitioners, Respondent No. 1, and Respondent No. 2 (“Tripartite Agreement”), whereunder the Petitioners agreed to secure Respondent No. 1 by mortgaging all rights, title and benefits accruing from the residential unit in favour of Respondent No.1. In turn, Respondent No. 2 undertook not to create third party rights or security interest in the mortgaged unit, without prior written consent of Respondent No. 1. The Petitioners and Respondent No. 2 had also agreed that the pre-equated monthly instalments (“EMIs”) shall be subvented by Respondent No. 2 for a maximum period of 48 months or from October 7, 2017 to June 6, 2022, whichever was earlier, and Respondent No. 1 was to deduct the pre-EMIs for the term of subvention, upfront from the first disbursement.

Based on the aforementioned Tripartite Agreement, the Petitioners and Respondent No. 1 entered into a separate home loan agreement on January 17, 2019 (“Loan Agreement”). Consequently, Respondent No. 1 sanctioned and disbursed the home loan to the Petitioners vide a letter dated January 17, 2019, as per the terms of the Loan Agreement. While the Tripartite Agreement provided for resolution of disputes through arbitration and designated New Delhi as the seat of arbitration, the Loan Agreement contained an arbitration clause designating exclusive jurisdiction to the courts at Calcutta.

As per the terms of the Tripartite Agreement, the interest rate applicable to the home loan was linked to Respondent No. 1’s basic prime lending rate (“BPLR”) and any increase in the rate was to be borne by Respondent No. 2 (during the pendency of the scheme) and was to be paid upfront on the date of change of interest for the balance subvention period of the said loan. However, on September 6, 2019, the Petitioners received a letter from Respondent No. 1 stating that the BPLR of the home loan was erroneously mentioned in the sanction letter as 17.75%, while the actual BPLR was in fact 18.10%. The Petitioners protested against the increase of the BPLR by way of several e-mails addressed to Respondent No. 1 stating that the unilateral modification of the BPLR was impermissible and contrary to the terms of the Tripartite Agreement.

Thereafter, Respondent No. 1 served a legal notice dated July 15, 2022, on the Petitioners demanding the payment of INR 23,084/- towards the EMI within a period of 15 days from the receipt of the said notice. The Petitioners filed a complaint with the ombudsman seeking a compensation of INR 10 lakhs for the mental agony suffered by them. The Petitioners also wrote to the grievance redressal officer, however, there was no reconciliation of the dispute.

The Petitioners also received a notice under Section 13(2) (Enforcement of security interest) of the Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002, from Respondent No. 1 stating that the loan account of the Petitioners had been classified as a non-performing asset on September 4, 2022, owing to Petitioners’ defaults in the payment of home loan instalments. Further, the entire liability of INR 30,01,820.45p along with interest thereon and other charges were fixed on the Petitioners. A sixty days’ time period was granted to the Petitioners to pay these outstanding amounts. Additionally, the Petitioners received summons dated September 16, 2022, under Section 25 (Dishonour of Electronic Funds Transfer for insufficiency, etc., of funds in the account) of the Payment and Settlement Systems Act, 2007, from a court in Calcutta.

Owing to the non-resolution of the above-mentioned dispute, the Petitioners invoked arbitration under clause 27 of the Tripartite Agreement and approached the Delhi HC for appointment of a sole arbitrator under Section 11(6) (Appointment of arbitrators) of the Arbitration and Conciliation Act, 1996 (“Act”).

Issues

• Whether the dispute arising under the Loan Agreement was integrally connected with the Tripartite Agreement.
• Where there are two interlinked agreements containing different arbitration clauses, which of the two arbitration clauses should be invoked?
• Whether a notice invoking arbitration under Section 21 (Commencement of arbitral proceedings) of the Act is a pre-requisite while invoking jurisdiction of the court under Section 11(6) of the Act.

Arguments

Contentions of the Petitioners:

The Petitioners submitted that from the terms of the Tripartite Agreement it was evident that pre-EMIs were to be subvented by Respondent No. 2 and Respondent No. 1 was to deduct the pre-EMIs for the term of the subvention, upfront from first disbursement. Furthermore, the rate of interest applicable to the home loan would be linked to Respondent No. 1’s BPLR and any increase in the rate was to be borne by Respondent No. 2 during pendency of the scheme and paid upfront on the date of change of the interest for the balance subvention period of the home loan. Therefore, the Loan Agreement was inseparable from the Tripartite Agreement and the Petitioners had rightly invoked clause 27 of the Tripartite Agreement.

The Petitioners further submitted that they had filed an application seeking exemption from serving a mandatory notice invoking arbitration under Section 21 of the Act, on the ground that clause 27 of the Tripartite Agreement provided for the unilateral appointment of a sole arbitrator by Respondent No. 1, which was in violation of Section 12(5) (Grounds for challenge) of the Act. In the Petitioners’ view, no purpose would have been achieved by sending a mandatory notice under Section 21 of the Act, as clause 27 of the Tripartite Agreement suffered from a disability to appoint an arbitrator. Besides, even if the notice invoking arbitration under Section 21 of the Act was mandatory, the Petitioners had vide its e-mail dated September 13, 2022, intimated Respondent No. 2 that a third party was required to help address the concerns between the Petitioners and Respondent No. 1.

In order to support its arguments, the Petitioners relied on the judgement of the Delhi HC in Haldiram Manufacturing Company Limited v. SRF International [(2007) SCC OnLine Del 457] (“Haldiram Case”), wherein it was held that while the mandatory notice invoking arbitration was a pre-requisite in order to invoke the jurisdiction of a court under Section 11 of the Act, it could not have been said that there was a violation of this pre-requisite where there was no specific procedure prescribed under the arbitration clause. Reliance was also placed by the Petitioners on the judgment of Brilltech Engineers Private Limited v. Shapoorji Pallonji and Company Private Limited, [(2022) SCC OnLine Del 4422], where the Delhi HC reiterated the view taken in the Haldiram Case and held that the notice of the petition under Section 11 of the Act, when served upon the respondent, itself constitutes a notice invoking arbitration.

Contentions of Respondent No. 1:

Respondent No. 1 contended that the dispute between the Petitioners and Respondent No. 1, that is, the rectification of the BPLR from 17.75% to 18.10%, was with respect to the Loan Agreement and not the Tripartite Agreement. Moreover, the home loan was sanctioned and disbursed to the Petitioners under the Loan Agreement. This Loan Agreement contained a separate clause on arbitration, which conferred exclusive jurisdiction on the courts at Calcutta, and therefore, the Delhi HC had no territorial jurisdiction to entertain the petition filed by the Petitioners.

Respondent No. 1 submitted that the Petitioners had wrongfully invoked clause 27 of the Tripartite Agreement which was absolutely irrelevant to the present dispute. Besides, while the Tripartite Agreement had been invoked by the Petitioners, no relief had been sought against Respondent No. 2, which shows that no dispute had arisen under the Tripartite Agreement. Respondent No. 1 submitted that the disputes relating to the rate of interest, tenure of installments and the BPLR were only concerned and related to the Loan Agreement.

Further, Respondent No. 1 submitted that the petition filed by the Petitioners was not maintainable given that the Petitioners had failed to serve the mandatory notice of invocation arbitration under Section 21 of the Act. The Respondent No. 1 placed reliance on the judgments passed by the Delhi HC in the cases of Alupro Building Systems Private Limited v. Ozone Overseas Private Limited [(2017) SCC OnLine Del 7228], Shriram Transport Finance Company Limited v. Narender Singh [(2022) SCC OnLine Del 3412] and the Haldiram Case, wherein the Delhi HC had held that a petition cannot be entertained in the absence of issuance of the notice invoking arbitration under Section 21 of the Act.

The Respondents submitted that the Petitioners had no cause of action as the act of Respondent No. 1 was neither illegal nor arbitrary. At the time of sanctioning the home loan, the BPLR for the said home loan was erroneously mentioned in the sanction letter as 17.75% (instead of the correct BPLR of 18.10%), owing to a technical error. The Respondent No. 1 had sought to correct this error by way of its letter dated September 6, 2019, addressed to the Petitioners. Therefore, it was wrong for the Petitioners to contend that there was a unilateral modification of the contract.

Contentions of Respondent No. 2:

Respondent No. 2 argued to the limited extent of submitting that it had nothing to do with the dispute relating to the Loan Agreement as it was not a party to the said agreement and that the arbitration clause in the Tripartite Agreement could not have been invoked for reference of disputes arising out of the home loan advanced to the Petitioners.

Observations of the Delhi HC

While determining on the issue on whether the dispute arising under the Loan Agreement was integrally connected to the Tripartite Agreement, the Delhi HC observed that a substantial part of the Tripartite Agreement dealt with the terms of repayment of the home loan, albeit there was a separate Loan Agreement. Hence, the Delhi HC observed that the Tripartite Agreement was the main/ umbrella agreement between the Petitioners, Respondent No. 1 and Respondent No. 2 and that the Loan Agreement was inextricably connected with the Tripartite Agreement. Both agreements were interdependent and the payment of pre-EMIs/ EMIs and the liabilities of the Petitioners and Respondent No. 2 under the Tripartite Agreement were referable to the Loan Agreement. In Delhi HC’s view, the non-payment of increased BPLR could possibly amount to breach of the Tripartite Agreement where under the unit of the Petitioners had been mortgaged in favour of Respondent No. 1 and thus both the agreements were inseparable and interconnected.

With respect to the issue on which of the two arbitration clauses were to be invoked, the Delhi HC referred to the judgement in the case of Olympus Superstructures Private Limited v. Meena Vijay Khetan and Others [(1999) 5 SCC 651], wherein the Hon’ble Supreme Court had come to a finding that when the disputes arising under the main agreement pertaining to the sale of flats were connected with the disputes arising from an interior design agreement, the arbitration clause in the main agreement would govern the parties. Hence, the Delhi HC observed that where there were two interlinked agreements, both of which contain different arbitration clauses, the two agreements should be read in harmony in order to determine the nature of the arbitral proceedings and the disputes should be resolved under the main or umbrella agreement.

With respect to the contention of Respondent No. 1 that the petition filed by the Petitioners was not maintainable as the Petitioners had failed to serve the mandatory notice invoking arbitration under Section 21 of the Act, the Delhi HC observed that the argument of the Petitioners that since the arbitration clause in the Tripartite Agreement envisaged unilateral appointment of the arbitrator, the exercise of sending an invocation notice was futile; was unsustainable in law. The Delhi HC observed that even when the agreement provides for unilateral appointment of the arbitrator, it does not exempt a party from adhering to the notice requirement stipulated under Section 21 of the Act.

The Delhi HC further observed that the plain reading of Section 11(6) of the Act suggests that only when the agreed procedure does not lead to appointment of an arbitrator, on account of failure on the part of either party, the jurisdiction of a court can be invoked under Section 11(6) of the Act. Moreover, a reading of Section 21 of the Act makes it clear that for commencement of arbitral proceedings, either party must make a request to the other party for reference of the dispute to arbitration.

The Delhi HC observed that the Haldiram Case relied upon by the Petitioners did not support the Petitioners’ argument as the said case in no way suggested that the mandatory notice under Section 21 of the Act can be dispensed with. In view of the same, the Delhi HC observed that the notice under Section 21 of the Act could not have been dispensed with as a pre-requisite while invoking jurisdiction of the court under Section 11(6) of the Act. The Delhi HC also rejected the argument of the Petitioners that the e-mail sent by it wherein it had stated about the need for third-party assistance to resolve the dispute would tantamount to a notice invoking arbitration under Section 21 of the Act. The Delhi HC observed that a notice invoking arbitration must invoke arbitration clearly and at the very least, refer to the clause in the contract which envisages reference of the dispute to arbitration. Thus, in the absence of a notice invoking arbitration under Section 21 of the Act, the Delhi HC could not exercise jurisdiction under Section 11(6) of the Act.

Decision of the Delhi HC

In view of the entirety of the above, the Delhi HC rejected Respondent No. 1’s contention that the Delhi HC lacked jurisdiction over the matter and held that the Petitioners could invoke the arbitration clause in the Tripartite Agreement for reference of disputes to arbitration.

However, the Delhi HC found merit in the objection raised by Respondent No. 1 that in the absence of a notice invoking arbitration under Section 21 of the Act, the Delhi HC could not exercise jurisdiction under Section 11(6) of the Act. Therefore, while the petition filed by the Petitioners was dismissed, the Delhi HC clarified that such dismissal would not preclude the Petitioners from invoking the arbitration clause under the Tripartite Agreement for reference of disputes to arbitration, in accordance with law.

VA View:

Through this judgement, the Delhi HC has clarified that when disputes under two connected agreements have different arbitration clauses, the disputes should be resolved under the main or umbrella agreement and the arbitration clause contained therein should be given primacy over the arbitration clause contained in the other agreement.

The Delhi HC has also reiterated that for commencement of arbitral proceedings, either party must make a request to the other party for reference of the dispute to arbitration by sending a notice under Section 21 of the Act. The Delhi HC has rightly observed that only when the agreed upon procedure of an agreement does not lead to appointment of an arbitrator, on account of failure on the part of either party, the jurisdiction of a court can be invoked under Section 11(6) of the Act. Therefore, invocation of court’s jurisdiction under Section 11(6) of the Act presupposes initiation of procedure agreed upon by the parties under the arbitration clause. Moreover, even when the agreement provides for unilateral appointment of the arbitrator, it does not exempt a party from adhering to the notice requirement mandated under Section 21 of the Act.

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

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