Implicitly Admitted Liability Does Not Prevent Reference Of Dispute To Arbitration If Arbitration Agreement Exists: Bombay High Court

"…if the liability is impliedly admitted, the Arbitrator can be said to be equally empowered to give effect to the consequences which emanate therefrom", the court observed.

Justice N. J. Jamadar was dealing with a commercial division summary suit filed by a lender to recover loan amount.

Plaintiff USP Studios Pvt. Ltd., had advanced a loan of Rs.2 crore to defendant Ganpati Enterprises. The loan was to be repaid in 12 months at an interest rate of 18% p.a. The defendant paid an amount of Rs. 30,00,000/- towards interest. Two cheques for repayment of the principal amount returned without being encashed. The plaintiff filed a complaint under the Negotiable Instruments Act and filed the present suit before the High Court.

Advocate Amit Patil of Parinam Associates for the defendants submitted that an arbitration clause exists in the loan agreement. Hence the dispute must be referred to arbitration mandatorily. Further, the loan agreement is inadmissible due to inadequate stamp-duty paid.

Advocate Kapadia for the plaintiff submitted that reference to arbitration is required when there is a dispute and not in case of admitted liability. The defence of inadequate stamp-duty clearly implies execution of the loan agreement. The defendants have only contested the plaintiff's claim for interest. This implies that the defendants have admitted liability for the principal amount, it was contended.

The court noted that the existence of arbitration agreement is undisputed and decided to proceed on the premise that the liability is impliedly admitted to the extent of principal amount but the interest claim is contested.

The court concluded that the facts of the case satisfy the requirements of Section 8 of the Arbitration and Conciliation Act, 1996 (A&C Act) for reference to arbitration.

The court relied on Bombay HC judgment in ION Exchange (India) Ltd. v. MSK Projects (India) Ltd. and changes brought about by Arbitration and Conciliation (Amendment) Act, 2015 and held that the legislative object of the Act is to make reference to arbitration unless no arbitration agreement exists.

The court observed that to determine whether liability is implicitly admitted, judicial authority has to make a preliminary inquiry on the facts of the case. The A&C Act has proscribed such inquiry "in its endeavour of giving autonomy to the parties to have the dispute resolved through preferred mode of arbitration".

The court held, "the submission that, "an admitted liability" renders reference of dispute to arbitration unwarranted is fraught with elements which have the propensity to undermine the legislative intent manifested in Section 8 of the Act, 1996, which is made more explicit by the 2016 Amendment".

The court noted that the defendants have specifically contested the plaintiff's interest claim and that gives rise to an arbitrable dispute. "If there is a semblance of dispute, which is covered by an arbitration agreement, the judicial authority is statutorily enjoined to refer the parties to arbitration", the court held.

The court referred the parties to arbitration in accordance with the arbitration clause in the loan agreement.

Case no. – Comm. Summary Suit No. 1420 of 2019

Case Title – USP Studios Pvt. Ltd. v. Ganpati Enterprises & Ors.

Citation : 2022 LiveLaw (Bom) 311

Coram – Justice N. J. Jamadar