Arbitration Clause In Loan Restructuring Agreement, Liability Is Transferred To New Agreements, Binding On Parties: Delhi High Court

The bench of Justices Manmohan and Mini Pushkarna reiterated that Section 12(5) inserted through the 2015 Amendment to the Act would not apply to an arbitration that had commenced before the amendment came into force. It held that an arbitration commences on the date when the notice of arbitration is issued.

The Court further reiterated that interpretation of an agreement falls squarely within the domain of the arbitrator and the Court would not disturb a plausible conclusion arrived at by the arbitral tribunal.

Facts

The parties entered into a Loan Agreement dated 01.07.2008. Pursuant to this agreement, an amount of Rs. 3.20 Crores was disbursed in favour of the appellant no. 1 by the respondent. The appellant no. 2 and 3 stood as personal guarantors. The loan was to be repaid within a period of 12 months.

However, the appellant no.1 failed to repay the loan amount within the agreed period. Consequently, based upon mutual discussions, the respondent agreed to re-structure the loan and the parties entered into 5 separate loan agreements dated 31.07.2010. The effect of this agreement was that the appellants were granted another period of 12 months to repay the loan and the due amount was increased to Rs. 9.10 Crores. The subsequent agreements also contained an arbitration clause.

On failure of the appellant to discharge their liabilities under the agreements, the respondent invoked the arbitration clause and the arbitrator was appointed. Since all the five agreements formed part of the same transaction, the arbitrator decided them via a common arbitration award. The arbitrator allowed the claims of the respondent and directed the appellants to pay to the respondent a sum of Rs. 9.10 crores along with interest.

The appellants challenged the impugned award under Section 34 of the A&C Act, however, the ld. Single Judge upheld the arbitral award and dismissed the petition. Aggrieved thereby, the appellants filed an appeal under Section 37 of the Act.

Grounds of Appeal

The appellants challenged the impugned award on the following grounds:

• No amount was due under the 2010 agreements as no loan amount was disbursed by the respondent to the appellants.
• The loan agreements of 2008 and 2010 are distinct and independent of each other, therefore, the arbitration clause contained in the 2010 agreements cannot be invoked for the recovery of loan amount due under the 2008 agreements. Consequently, the arbitrator had wrongly assumed the jurisdiction.
• Moreover, the 2010 agreements do not make any reference to the 2008 loan agreement or to the debt due thereunder.
• The 2008 agreement did not have any arbitration clause, therefore, the arbitrator could not decide on the quantum due thereunder.

Analysis by the Court

The Court observed that based upon mutual discussions, the respondent agreed to re-structure the loan and the parties entered into 5 separate loan agreements dated 31.07.2010. The effect of this agreement was that the appellants were granted another period of 12 months to repay the loan and the due amount was increased to Rs. 9.10 Crores. The subsequent agreements also contained an arbitration clause.

The Court held that when earlier loan agreement liabilities are transferred through an agreement, the subsequent loan agreements' arbitration clauses become binding on the parties. The Court noted that the respondent did not have to disburse any amount under the 2010 agreements as those agreements were executed merely to re-structure the existing debt. Moreover, the appellant no.1 had tendered 5 debit vouchers which ex-facie show that the consideration against the five loans of the year 2010 was passed on to the appellant by way of adjustment of outstanding dues of the year 2008.

The Court held that since outstanding dues of earlier loan of the year 2008 were converted into five new loans of the year 2010 by way of adjustment, and the five Loan Agreements of the year 2010 contain arbitration clause, the present arbitration proceedings were rightly initiated pursuant to the said arbitration clause.

The Court reiterated that Section 12(5) inserted through the 2015 Amendment to the Act would not apply to an arbitration that had commenced before the amendment came into force. It held that an arbitration commences on the date when the notice of arbitration is issued.

The Court further reiterated that interpretation of an agreement falls squarely within the domain of the arbitrator and the Court would not disturb a plausible conclusion arrived at by the arbitral tribunal.

Case Title: DD Global Capital v. S E Investment Ltd

Citation: 2023 LiveLaw (Del) 842

Date: 13.09.2023

Counsel for the Appellant: Mr. Akshay Ringe and Ms. Megha Mukherjee

Counsel for the Respondent: Mr. Sharad, Proxy Counsel

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