The Bombay High Court recently addressed applications under Section 11 of the Arbitration and Conciliation Act, 1996, in Tata Capital Limited v/s Vijay Devij Aiya & Another., seeking the appointment of an arbitrator in disputes arising from loan agreements. Despite the presence of a clause granting the lender a unilateral option to opt out of arbitration under specific circumstances, Justice Somasekhar Sundaresan proceeded to appoint a sole arbitrator. The Court emphasized its limited scope of review under Section 11 and directed the newly appointed tribunal to adjudicate on its own jurisdiction, including the validity and effect of the contentious clause.

The loan agreements in question contained an arbitration clause (Clause 12.18) providing for arbitration in Chennai, Delhi, or Mumbai, with the arbitrator to be appointed by the lender, TCSFL. This unilateral appointment aspect was conceded by the applicant to be untenable under prevailing legal principles.

However, the primary contention against the applications stemmed from the subsequent paragraph in the arbitration clause. This non-obstante provision allowed TCSFL to unilaterally cease the arbitration agreement if it came under the purview of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) or the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (DRT Act), enabling it to pursue enforcement under those special legislations. No reciprocal right to opt out was granted to the borrowers (Respondents).

Borrowers' Objections:

The Respondents raised several objections to the appointment of an arbitrator:

• Lack of Mutuality: They relied on a Delhi High Court Division Bench judgment in Tata Capital Housing Finance Ltd. Vs. Shri Chand Construction & Apartments Pvt. Ltd., which held an identical clause invalid for destroying the essential mutuality of an arbitration agreement.

• Election of Remedy: The Respondents argued that the Applicant, having chosen to enforce through the SARFAESI Act, had elected its remedy and lost the right to pursue arbitration.

• Lapsed Prior Arbitration: They contended that the Applicant had previously initiated arbitration with a unilaterally appointed arbitrator, which had lapsed without the Applicant seeking an extension of the mandate under Section 29-A of the Act.

Court's Analysis and Findings:

Justice [Name of Judge, if available] addressed each of these objections. Regarding the Tata Capital precedent, the Court, while expressing respect for the Delhi High Court's view, distinguished the context. The Tata Capital case involved a borrower seeking to protect a civil suit against the lender's assertion of arbitration after actively participating in the suit proceedings. In the present case, the Respondents were not seeking to litigate outside arbitration, and the Applicant was seeking to invoke it. The Court opined that the ruling on the absence of mutuality in Tata Capital should be read within its specific factual matrix and under the purview of Section 8 of the Act (dealing with the referral of suits to arbitration).

The Court drew a parallel with the now-established treatment of unilateral arbitrator appointment clauses. While such clauses are deemed illegal, they do not necessarily invalidate the entire arbitration agreement. Instead, the illegality is cured by the court appointing an independent arbitrator. Applying this analogy, the Court suggested that the unilateral option to terminate could potentially be excised or made bilateral to save the underlying agreement to arbitrate. However, it deemed this academic in the present context as the Applicant was not seeking to terminate the agreement.

Crucially, the Court emphasized the limited scope of review under Section 11 of the Act, as clarified by recent Supreme Court pronouncements, including the seven-judge bench in the Interplay Judgement. The Section 11 court's role is primarily confined to examining the existence of a formally executed arbitration agreement. Questions of the agreement's substantive validity or arbitrability are matters for the arbitral tribunal to decide under Section 16 of the Act.

On the second objection, the Court cited M.D. Frozen Foods vs. Hero Fincorp Ltd., which unequivocally held that pursuing enforcement remedies under the SARFAESI Act is an additional remedy to arbitration and does not preclude the latter.

Regarding the lapsed prior arbitration, the Court reasoned that since the initial arbitrator was unilaterally appointed (and thus non est in law), the lapsing of that mandate did not preclude a fresh initiation of arbitration through a valid appointment process.

Decision and Directions:

Ultimately, being satisfied that an arbitration agreement existed or was at least subsisting, the Bombay High Court appointed Mr. Sandeep H. Parikh as the sole arbitrator to adjudicate the disputes. The Court explicitly left it open for the Respondents to raise all jurisdictional objections, including the validity and effect of the unilateral opt-out clause, before the arbitral tribunal under Section 16 of the Act.

The Court directed the Applicant to communicate the order to the arbitrator and provide the parties' details. The arbitrator was requested to issue a statement of disclosure, and the parties were directed to appear before the tribunal for procedural directions. Arbitral costs were to be borne equally by the parties initially, subject to the tribunal's final award on costs.

The Court rejected the Respondents' request for a stay of the order, finding no grounds to impede the appointment of the arbitrator, as the Respondents' interests were adequately protected by their right to challenge jurisdiction before the tribunal.

Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002  

Arbitration and Conciliation Act, 1996  

RECOVERY OF DEBTS DUE TO BANKS AND FINANCIAL INSTITUTIONS ACT, 1993