Intention To Arbitrate Must Be Assessed Holistically In Transactions Involving Interlinked Agreements, Even If Some Agreements Lack Explicit Arbitration Clauses: Delhi High Court

Brief Facts:

Nishesh Ranjan and Vandana Srivastava (“Petitioners”) entered into a builder-buyer agreement with Brick Risk Developers Pvt. Ltd. (“Developer”) for a flat in Noida, Uttar Pradesh. It contained an arbitration clause with jurisdiction in Mumbai. The Petitioners initially paid Rs. 7,68,832/- for the flat out of the total cost of Rs. 77,87,257.46/-.

Later, the Petitioners obtained a loan from Indiabulls Housing Finance Ltd. (“Indiabulls”) under a loan agreement. The loan agreement also contained an arbitration clause, specifying New Delhi as the jurisdiction. A tripartite agreement was also executed among the Petitioners, the Developer, and Indiabulls, containing another jurisdiction clause designating New Delhi courts for dispute resolution.

Subsequently, the Developer issued a demand notice for Rs. 25,95,460.48/-. Indiabulls refused to disburse it because of discrepancies in construction progress. Subsequent demands of payments were also refused by Indiabulls which led to further disputes. The Petitioners made several efforts to ensure prompt disbursement of the loan amount. However, Indiabulls continued to withhold the payments and issued a notice under the SARFAESI Act, 2002, demanding the outstanding amount of Rs. 29,02,671.21/- from the Petitioners. The Petitioners replied and sought to amicably resolve the issues but faced further demands from Indiabulls, including the pre-EMI interest.

The Petitioners invoked arbitration proceedings, but Indiabulls responded by seeking to cancel the loan facility and flat allotment. The Petitioners claimed that the flat's sale could cover the outstanding loan and sought an adjustment for pre-EMI and insurance payments. They also filed a Section 9 petition for interim relief but withdrew it due to issues with stamping.

Subsequently, the Petitioners filed an application under Section 11 of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”) before the Delhi High Court (“High Court”).

Contentions of Indiabulls:

Indiabulls argued that there was no arbitration clause in the tripartite agreement. The agreement explicitly stated that disputes should fall under the exclusive jurisdiction of the courts in New Delhi. Although the loan agreement between the Petitioners and Indiabulls contained an arbitration clause, the Developer who was not a party to the loan agreement, was implicated in the dispute. According to Indiabulls, the allegations primarily concerned the terms of the tripartite agreement, particularly clauses related to the cancellation of allotment. Therefore, the loan agreement could not be used to refer the dispute to arbitration.

Contentions of the Developer:

The Developer contended that there was no arbitration agreement specifically in the tripartite agreement. It argued that merely referencing a previous agreement did not automatically incorporate an arbitration clause into the tripartite agreement. Further, the dispute in question was not arbitrable as the subject matter related to a mortgage agreement.

Observations of the High Court:

The High Court observed that the builder-buyer agreement, the loan agreement, and the tripartite agreement contained conflicting clauses related to flat allotment, loan transactions, and payment terms. These agreements were standard form agreements, leaving the flat allottees with little room for negotiation. The builder-buyer agreement did not align with the tripartite agreement, nor did the loan agreement. Each agreement specified different jurisdictions: Uttar Pradesh, Delhi, and Mumbai. The tripartite agreement did not contain an arbitration clause but a jurisdiction clause vesting jurisdiction in courts in Delhi.

The High Court noted that this situation created confusion for the Petitioners and similarly situated individuals. The tripartite agreement referenced both the builder-buyer agreement and the loan agreement and incorporated them by reference. The tripartite agreement linked the three parties (the Petitioners, Indiabulls, and the Developer), while obligations were governed by their respective agreements. The absence of an arbitration clause in the tripartite agreement did not reflect any intention to avoid arbitration, as it was part of a series of agreements forming a single transaction related to the flat allotment.

The High Court held that the tripartite agreement was an inextricable link to the other agreements and that there was an intention to arbitrate under the tripartite agreement. The Petitioners were a common party in all three agreements. The tripartite agreement did not contain an arbitration clause or a clear clause incorporating the other two agreements. The High Court held that it was an intentional attempt on the part of Indiabulls and the Developer to leave the Petitioners without a proper remedy.

The High Court further held that there was no clear explanation as to why the parties should not be referred to arbitration, especially given the adverse effects on innocent flat allottees like the Petitioners. Indiabulls' argument that the tripartite agreement was an independent contract was rejected, as the agreement was dependent on the other two agreements. Reliance was placed on Cox and Kings Ltd. v. SAP India Pvt. Ltd. & Anr. [2023 INSC 1051], where the Supreme Court held that in a composite transaction involving multiple agreements, courts must assess whether the agreements are consequential or supplementary to the principal agreement. Disputes connected with the main agreement should be referred to arbitration. The High Court also referred to Ameet Lalchand Shah v. Rishabh Enterprises [(2016) 6 SCR 1001], where the Supreme Court held that even if a secondary agreement did not contain an arbitration clause if it was integrally connected to the main agreement, the arbitration clause in the main agreement would apply.

Therefore, the High Court held that (i) the builder buyer agreement, (ii)the loan agreement, and (iii) the tripartite agreement were interlinked, forming a single transaction. The clauses in the agreements lacked consistency, and a substantial cause of action arose in Delhi. Therefore, the High Court had the jurisdiction to appoint an arbitrator. Thus, the High Court allowed the Section 11 petition and appointed Mr Gautam Narayan as the sole arbitrator to adjudicate the disputes arising from the impugned agreements.

Case Title: Nishesh Ranjan and Anr. vs Indiabulls Housing Finance Ltd. and Anr.

Case No.: Arb. P. 1241/2023

Advocate for the Petitioners: Mr Rajnish Ranjan

Advocate for the Respondents: Ms Sangeeta Sondhi with Mr Shashwat Roy (for India Bulls); Mr Kapil Madan, Mr Vansh Bajaj and Ms Surabhi Kapur (for the Developer)

Date of Pronouncement: July 9th, 2024