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

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 between the parties to the agreement. Therefore, the scope of examination under Section 11(6-A) should be confined to the existence of an arbitration agreement on the basis of Section 7.

The court further observed that the word examine is restricted to the determination of a valid arbitration agreement whereas a more detailed enquiry will be conducted by the tribunal while ruling on its jurisdiction. The court distinguished its limited powers from the tribunal's power to make a roving inquiry into substantive issues with respect to the agreement. it ensures that the interference of the court is minimal and the arbitration remains an effective process to resolve the disputes.

The Supreme Court judgment in SBI General Insurance Co.Ltd. vs. Krish Spinning (2024) was referred to wherein it was held that the scope of examination under Section 11(6-A) is confined to the existence of an arbitration agreement on the basis of Section 7. The examination of validity of the arbitration agreement is also limited to the requirement of formal validity such as the requirement that the agreement should be in writing.

The court held that objections raised by the respondents with respect to waiver of arbitration due to initiation of proceedings under SARFAESI Act and filing of a summary suit, cannot be examined under section 11 of the arbitration act. The tribunal is competent to hear and decide these objections while exercising its power under section 16 of the arbitration act. Furthermore, the court noted that the objections were not directly related to the existence of a formal arbitration agreement therefore they could be addressed by the tribunal effectively during the proceedings. The court observed that these objections were not enough to deny the appointment of an arbitrator at the referral stage.

The court held that in the present case, there exists an Arbitration Agreement between the parties as contained in clause (k) of the Sanction Letter dated 19th August 2019. The correspondence between the parties shows that disputes and differences have arisen between the parties. The Applicant has invoked the arbitration agreement contained in the said Sanction Letter dated 19th August 2019 by its Advocate's letter dated 6 April 2021. In these circumstances, I hold that an arbitration agreement exists between the parties and an Arbitrator would have to be appointed in order to arbitrate upon all disputes.

Conclusion

The court concluded that since in the present case, a valid arbitration agreement existed therefore other objections cannot be gone into at section 11 stage. Accordingly, the present application under section 11 was allowed and an arbitrator was appointed.

Case Title: Tata Capital Limited Versus Priyanka Communications (India) Pvt. Ltd. And Ors.

Court: Bombay High Court

Case Reference: 2024:BHC-OS:16394

Judgment Date: 15/10/2024