When There Are Two Interconnected Agreements With Conflicting Arbitration Clauses, The Clause Contained In The Main Agreement Should Be Given Primacy: Delhi High Court

The bench of Justice Jyoti Singh held that when disputes under two connected agreements had different Arbitration Clauses, the disputes should be resolved under the main or umbrella agreement and the seat of arbitration should be determined as per the clause contained in the main agreement.

The Court also reiterated that notice under Section 21 is a mandatory pre-requisite for invoking the jurisdiction of the Court under Section 11 of the Act.

Facts

Respondent No.1, L&T Housing Finance Ltd., is a finance company engaged in various loans. Respondent No.2, Raheja Developers Ltd., is a real estate company constructing a project called 'Raheja Vanya'.

Petitioners wanted to book a residential unit in 'Raheja Vanya' and approached Respondent No.2. They sought a loan of Rs. 67 lakhs from Respondent No.1 for the unit. A Tripartite Agreement dated 24.10.2018 was executed between Petitioners, Respondent No.1, and Respondent No.2. It provided for resolution of dispute through arbitration and designated New Delhi as the seat of arbitration.

Thereafter, the Petitioner and Respondent No. 1 entered into a ‘Loan Agreement’ dated 17.01.2019. The agreement had a separate arbitration clause which designated the Courts at Calcutta with exclusive jurisdiction.

The loan was granted, and pre-EMIs were to be paid by Respondent No.2 for 48 months, however, the Respondent No.1 increased the Basic Prime Lending Rate (BPLR) which caused a dispute between the parties.

Petitioners protested against the increase, but Respondent No.1 demanded payment and sent a legal notice. Petitioners complained to the Ombudsman and attempted reconciliation, but the dispute persisted. Respondent No.1 issued a notice classifying the loan as Non-Performing Asset and demanding outstanding amounts.

Aggrieved with the actions of the Respondent No.1, the petitioner invoked the arbitration clause and directly approached the Court for the appointment of the arbitrator.

Objections

The petitioner raised the following objections to the maintainability of the petition:

• Petitioners incorrectly used Clause 27 of the Tripartite Agreement (dated 24.10.2018). This clause is not relevant to the raised disputes and was fraudulently relied upon. It was used to establish territorial jurisdiction, but no relief was sought against Respondent No.2.
• Disputes about interest, instalment duration, etc., belong to the Loan Agreements and does not fall within the scope of the tripartite agreement.
• The dispute is independently covered by the Loan Agreement which has a separate arbitration clause that confers exclusive jurisdiction on the Courts at Calcutta, therefore, the Court does not have the jurisdiction.
• Petitioners didn't provide mandatory notice under Section 21 of the Act. They requested exemption due to Clause 27, citing unilateral appointment. Petition cannot proceed without proper notice invoking arbitration under Section 21.

The petitioner raised the following counter arguments:

• Subvention scheme obligated both Petitioners and Respondent No.2 to pay pre-EMIs and EMIs respectively to Respondent No.1. Unit booked by Petitioners was mortgaged to Respondent No.1 with specific conditions. Respondent No.2 couldn't create third-party rights without lender's permission.
• Several covenants in Tripartite Agreement tied Loan Agreement to it. Invoking Clause 27 under Tripartite Agreement justified due to interdependence. Dispute about BPLR impacts pre-EMIs payable by Respondent No.2.
• Respondent No.1's objection on Section 21 notice lacked merit. Arbitration Clause 27 allowed lender's unilateral arbitrator appointment. This was in violation of Section 12(5) of the Act and relevant judgments.
• Sending notice under Section 21 would be futile as authority for arbitration had a disability.
• Even if notice was required, Petitioners informed Respondent No.2 via email about the need for third-party assistance, therefore, substantial compliance was done by the petitioner.

Analysis by the Court

Firstly, the Court dealt with the objection regarding the invocation of arbitration clause under a wron agreement. The Court observed that the Tripartite Agreement is the central agreement, and it's closely connected to the Loan Agreement. Both agreements are interdependent, and the payment of pre-EMIs/EMIs and the liabilities of the Petitioners and Respondent No.2 are tied to the Tripartite Agreement.

The Court observed that core dispute in this case revolves around the increase in BPLR (from 17.75% to 18.10%). The Tripartite Agreement clearly links the loan interest rate to the lender's BPLR, and since Respondent No.2 had to pay pre-EMIs during the subvention period, these two issues are interconnected. Further, the Court observed that the scope of both the agreements was overlapping that they are interconnected and inextricably linked to each other with the tripartite agreement being the main agreement.

The Court held that when disputes under two connected agreements had 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 that contained in the connected agreement.

Next, the Court dealt with the objection regarding the absence of notice under Section 21. It held that Section 21 notice is a mandatory pre-requisite for invoking jurisdiction of the under Section 21 of the A&C Act,

The Court held that a petition under Section 11 of the Act can only be filed when the parties fail to appoint the arbitrator in terms of the procedure agreed upon by the parties and Section 21 is an important element of this procedure as it provides for the request to be made to the other party for reference of the dispute to Arbitration, therefore, without a request there cannot be a failure which a sine qua non for Section 11(6) to come into play.

The Court further clarified that even when the agreement provides for unilateral appointment of the arbitrator, it doesn't exempt a party from adhering to the notice requirement stated in Section 21.

The Court also rejected the petitioner’s argument that the email sent by it wherein it had stated about the need for third-party assistance to resolve the dispute would tantamount to a notice under Section 21. The Court held that for a communication to constitute a Section 21 notice, it must at the very least, refer to the clause in the contract which envisages reference of the dispute to arbitration.

Accordingly, the Court dismissed the petition.

Case Title: Amit Guglani v. L&T Housing Finance

Citation: 2023 LiveLaw (Del) 783

Date: 22.08.2023

Counsel for the Petitioner: Ms. Taru Saxena, for Respondent No. 1 and Ms. Manmeet Kaur, Mr. Gurtejpal Singh, Ms. Suditi Batra and Ms. Gaurangi Khanna, Advocates for R-2.

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