Bombay High Court: The present interim application was filed by Defendants 1 to 4 (collectively ‘appellants’), in a commercial suit relating to money recovery and the enforcement of mortgage, for reference to arbitration, but the plaintiff contended that since the enforcement of a mortgage could be tried only by a Civil Court, the said application should be rejected. A Single Judge Bench of Sandeep V. Marne, J., while rejecting the application, observed that the Court had the power under Section 8 of the Arbitration and Conciliation Act, 1996 (‘Arbitration Act’), to decide whether the subject-matter of the suit was arbitrable or not. The Court held that since the matter pertained to redemption of mortgage, which was not arbitrable, the said matter could not be referred to arbitration in absence of an arbitration agreement.
Background:
A Development Agreement was executed between the appellants and Defendant 5 (‘Society’) for redevelopment of a property, on 28-02-2014. The Society issued a No Objection Certificate to mortgage the project property to the plaintiff. A loan agreement of Rs 15 crore was executed between the plaintiff and the appellants which was secured by an Indenture of Mortgage executed by the appellants in plaintiff’s favour. Thereafter, a Supplementary Development Agreement was executed on 16-03-2021. An additional loan was extended by the plaintiff to the appellants by executing a loan agreement for Rs 25 crore along with Indenture of Mortgage, Demand Promissory Notes, Letter of Continuity, etc., to cover additional loan facility. Again, the plaintiff sanctioned a loan of Rs 3.46 crore to the appellants.
The plaintiff alleged that the repayment cheques from the appellants were dishonoured. The plaintiff issued notice to the Society calling upon it not to issue a consent letter for the sale of units in the building without the plaintiff’s approval. The loan accounts for Rs 25 crore and Rs 3.46 crore were identified as Non-Performing Assets (‘NPA’). The plaintiff filed a commercial suit seeking recovery of the outstanding amount of Rs 17.31 crore from the appellants as well as the enforcement of mortgage rights over unsold flats of the project. It also sought a declaration that the right, title, and interest created in its favour by the appellants in the mortgaged properties were legal, valid, subsisting, and binding, along with a declaration that its claim was secured by legal and valid charge on mortgaged properties.
The appellants contended that Clause 34 of the Loan Agreement and Clause 24 of the Indenture of Mortgage provided for the resolution of disputes through arbitration. Accordingly, they filed the present application under Section 8 of the Arbitration Act for reference of the dispute to an Arbitrator as the suit was not maintainable in view of the existence of an express agreement between the parties for resolution of disputes through arbitration. They contended that the plaintiff deliberately impleaded the Society, which had no role in the dispute, to the present suit for avoiding resolution of disputes through arbitration.
However, the plaintiff’s counsel argued that no arbitration would lie in respect of a suit for enforcement of a mortgage as it could be tried only by a Civil Court. He submitted that while deciding upon an application under Section 8 of the Arbitration Act, the Court could also conduct an enquiry into the arbitrability of the dispute. He also stated that the Society’s presence in the suit was necessary as specific prayers were sought against it.
Further, the Society’s counsel submitted that the subject matter of the suit, and the subject matter of arbitration agreement, was distinct and even had distinct parties. The reliefs prayed in the suit did not emanate solely from the mortgage deed, and the prayers made against the Society, which was not a legal stranger to the action, could not be the subject matter of arbitration. It was impermissible to bifurcate the claims and make a part-reference to arbitration.
Issue:
Whether the dispute involved between the parties in the present suit needed to be referred to arbitration in exercise of the power under Section 8 of the Arbitration Act.
Analysis and Decision:
The Court clarified that a reference under Section 8 of the Arbitration Act could only be made if the matter in an action was also subject of an arbitration agreement. Therefore, it was to be ascertained whether the action in the present suit was also a subject matter of arbitration.
The Court observed that so far as the plaintiff’s prayer in the suit for recovery of the amount of Rs 17.31 crore was concerned, it was not disputed that the said action would be arbitrable. However, the plaintiff also sought redemption of mortgages executed in its favour and this was where the plaintiff claimed that the said claim was not arbitrable.
The Court referred to Booz Allen & Hamilton Inc. v. SBI Home Finance Ltd., (2011) 5 SCC 532, wherein the Supreme Court held that while conducting enquiry under Section 8 of the Arbitration Act, the Court could decide the issue of arbitrability. The scope of enquiry under Section 11 and Section 8 was distinguished by the Court, holding that the enquiry under Section 11 was far narrower than the one under Section 8 of the Arbitration Act. So far as the issue of arbitrability of a suit for enforcement of mortgage was concerned, it would be decided by the Courts and not by the Arbitral Tribunal.
The Court relied on Vidya Drolia v. Durga Trading Corpn., (2021) 2 SCC 1, wherein the Supreme Court clarified that though a right in rem was not arbitrable, the subordinate rights flowing in right in rem would be arbitrable. A four-fold test was propounded for determining when the subject matter of dispute in arbitration agreement was not arbitrable and it was held that a suit for foreclosure or redemption of mortgage property could only be dealt with by a public forum and not by a private forum. It was further held that the claims of banks and financial institutions were covered under the DRT and were not arbitrable.
The Court relied on Interplay Between Arbitration Agreements under Arbitration Act, 1996 & Stamp Act, 1899, In re, (2024) 6 SCC 1, and rejected the contention of the appellant’s counsel that the Court could not make an enquiry into the issue of arbitrability of the subject matter of dispute while deciding on an application under Section 8 of the Arbitration Act.
The Court referred to Emaar MGF Land Ltd. v. Aftab Singh, (2019) 12 SCC 751, and M. Hemalatha Devi v. B. Udayasri, (2024) 4 SCC 255, and concluded that the rationale of Booz Allen & Hamilton Inc. (supra) would continue to apply despite the amendment of Section 8 of the Arbitration Act in 2015.
Regarding the presence of the Society in the suit, the Court referred to Vidya Drolia (supra), where it was observed that when the cause of action in subject matter of the dispute affected third party rights and required centralized adjudication, such dispute would be non-arbitrable. The Court held that the plaintiff was seeking a restraint order against the Society from issuing any consent letters in respect of the flats in the building, which could not be sought in an arbitration proceeding between the plaintiff and the appellant.
The Court opined that the exact dispute between the Society and the appellants was not known, and it was difficult to hold that there was any inter-connection between the plaintiff and the Society and the dispute between the Society and the appellants. The Court noted that the Society had filed an application under Section 9 of the Arbitration Act seeking interim measures during the pendency of the arbitral proceedings, and another arbitration petition was filed seeking appointment of the Arbitral Tribunal, and both the arbitration petitions were disposed off recording consent of the rival parties. The appellants, while referring to invocation of arbitration clause by the Society, did not disclose the above disposal order. Thus, the Court concluded that there was no arbitration between the Society and the appellants and rejected the contention of inter-connectivity between the two disputes and conciliation of arbitration proceedings.
Thus, the Court, while rejecting the application, held that the disputes involved in the suit could not be referred to arbitration as disputes relating to redemption of mortgage, being right in rem, were incapable of being resolved through arbitration in absence of an arbitration clause.
[Divya Enterprise v. Capri Global Capital Ltd., Interim Application (L) No. 25700 of 2025, decided on 09-10-2025]
Advocates who appeared in this case:
For the Plaintiff: Advocates Nausher Kohli, Shikha Ginodia, Gaurav Suryawanshi and Simran K. i/b M/s ANM Global.
For the Defendants: Advocates Savita Nangare, Vinod Nagula and Disha Shah i/b Law Focus, and Shanay Shah Riya Thakkar i/b Tushar Goradia.
Buy Arbitration and Conciliation Act, 1996 HERE
