"I realise that some of my criticisms may be mistaken; but to refuse to criticize judgements for fear of being mistaken is to abandon criticism altogether... If any of my criticisms are found to be correct, the cause is served; and if any are found to be incorrect the very process of finding out my mistakes must lead to the discovery of the right reasons, or better reasons than I have been able to give, and the cause is served just as well." -Mr. HM Seervai, Preface to the 1st ed., Constitutional Law of India.

Friday, June 24, 2011

Arbitrability in India: Booz Allen & Hamilton v SBI Home Finance

We had, in a previous post, commented on the observations of the Supreme Court in Booz Allen & Hamilton v SBI Home Finance as regards the power of the Chief Justice to determine questions pertaining to Arbitrability in an application under Section 11 of the Arbitration and Conciliation Act, 1996 (Act). In this post, we will do a descriptive comment on the case. In subsequent posts, we would deal with the arbitrability issue in detail.

Court: Supreme Court of India
Civil Appeal: No. 5440/ 2002
Date of Judgement: 15 April 2011
Bench: RV Raveendran & JM Panchal, JJ.

Facts:

03.12.94       Capstone Investments Pvt Ltd (Capstone) and Real Value Appliances Pvt Ltd (Real) were owners of two flats (9A & 9B). Capstone and Real borrowed loans from SBI Home Finance Ltd (SBI) under two loan agreements with 9A and 9B as security.

05.04.96        Capstone and Real entered into separate Leave and Licence Agreements (LLA) with Booz Allen & Hamilton (Booz), the term being from 01.09.96 to 31.08.99. SBI also signed on each of the two such agreements as aa confirming party. Also, each of the Capstone and Real Value signed the other’s Leave and Licence Agreement.

                   Also, a Tripartite Deposit Agreement (TDA) was entered into between Real and Capstone jointly as the first party with Booz and SBI being the other two parties. According to the TDA, Booz paid Rs. 6.5 crores as deposit to Real and Capstone (jointly) in furtherance of conditions in the TDA and the LLA. Further, the TDA provided that the the two LLA and the TDA formed a single transaction.

Further, according to Para 5A of the TDA, notwithstanding repayment of dues by Sapstone, 9A (owned by Capstone) would be available as security for the remaining dues of Real and for that purpose, Capstone would be the guarantor for the dues of Real. The clause also stated that SBI had no objection to Booz occupying the flat as long as Capstone and Real (if they fail, Booz) paid its dues.

[I am still yet to find out the reason why people still use the expression “party of the First Part” or “party of the First Part” in agreements. This practice seems to be more prevalent in the immovable property sector than anywhere else. The usage is definitely confusing and it is better to call the parties by their names. The only possible use of these expressions is to denote two entities that form a single party, as was the case in this case. However, in such a case, it would be better practice to use terms like “Seller”, “Lessor” etc than to use such confusing expressions.]

July 97           Real made a reference to Board of Industrial and Financial Reconstruction (BIFR) under the Sick Industrial Companies (Special Provisions) Act, 1985. Pursuant to the reference, the Liquidator took over flat 9B (owned by Real.

04.08.99         Booz informed Capstone and Real that it was not interested in exercising the option to renew the licences on the expiry of the original term. [There  was such an option in the LLAs] and asked the Licensors to return the rs. 6.5 crore deposit.

26.08.99        A further letter was written to Capstone and Real stating that unless the Deposit was made, Booz would continue to occupy the flats.

28.10.99          SBI filed a suit in the Bombay High Court against Capstone, Real and Booz in regard to 9A since the loan amount due by Real was not repaid. Against Booz, SBI asked for an order to vacate 9A and hand over the possession to SBI.

25.11.99          The High Court (Bom HC), through an interim order pursuant to a notice of motion taken out by SBI, let Booz continue to occupy the flat.

15.12.99       In a reply filed by Booz to the notice of motion, it contended that SBI had a contractual obligation towards Booz as SBI had agreed for the continuance of Booz’s occupation till refund of the deposit.

10.10.01      Pursuant to a notice of motion, Booz prayed for the matter to be referred to arbitration agreement as per Clause 16 of the DA and for the suit to be dismissed. SBi resisted the application.

Order of the Single Judge of the Bom HC:
The High Court dismissed the application on the following grounds:

a) Reference of the dispute between the parties was not contemplated by the said arbitration clause.

b) The detailed reply filed by Booz (dated 15.12.99) in regard to the notice of motion for interim relief amounted to the first statement on the substance of the dispute. As per Section 8 of the Act, a party is deemed to have waived its right to ask for reference of the matter to arbitration under Section 8 if an application for reference is made after the submission of first statement on the substance of the dispute

c) Application for reference under Section 8 was filed only after 20 months from filing of the reply dated 15.12.99.

An appeal by special leave was filed to the Supreme Court. The Supreme Court granted leave on 28.08.02 (why did it take almost a decade for the court to decide the dispute!).

Four issues arose according to the Supreme Court:

(i) Whether the subject matter of the suit fell within the scope of the arbitration agreement contained in Clause 16 of the deposit agreement?
(ii) Whether the Appellant had submitted his first statement on the substance of the dispute before filing the application under Section 8 of the Act?
(iii) Whether the application under Section 8 was liable to be rejected as it was filed nearly 20 months after entering appearance in the suit?
(iv) Whether the subject matter of the suit is 'arbitrable', that is capable of being adjudicated by a private forum (arbitral tribunal); and whether the High Court ought to have referred the parties to the suit to arbitration under Section 8 of the Act?
Decision of the Supreme Court:

Issue 1: Whether the subject matter was within the scope of the arbitration ageement?

Clause 16 of the Deposit Agreement read:
In case of any dispute with respect to creation and enforcement of charge over the said shares and the said Flats and realization of sales proceeds there from, application of sales proceeds towards discharge of liability of the Parties of the First Part to the parties of the Second Part and exercise of the right of the Party of the Second Part to continue to occupy the said Flats until entire dues as recorded in Clause 9 and 10 hereinabove are realized by the party of the Second Part, shall be referred to an Arbitrator who shall be retired Judge of Mumbai High Court and if no such Judge is ready and willing to enter upon the reference, any Senior Counsel practicing in Mumbai High Court shall be appointed as the Sole Arbitrator. The Arbitrator will be required to cite reasons for giving the award. The arbitration proceedings shall be governed by the Arbitration and Conciliation Ordinance 1996 or the enactment, re-enactment or amendment thereof. The arbitration proceedings shall be held at Mumbai.”
The Supreme Court held that the nature of the suit filed by SBI against the others was for the enforcement of mortgage/ charge and for ordering Booz to vacate the mortgaged property (9A). These issues were, for the court, covered by the arbitration clause (dispute pertaining to “creation and enforcement of charge over the said shares and the said Flats”, “exercise of the right of the Party of the Second Part [Booz] to continue to occupy the said Flats until entire dues as recorded”) These were therefore within the purview of the arbitration clause.

Issue 2: Whether Booz had submitted its first statement on the substance of the dispute before filing the application under Section 8 of the Act?

This issue arose in the first place because Section 8 grants a party to the arbitration agreement the right to have the dispute referred to arbitration by the court. However, such right is available only before filing the applicant’s first statement on the substance of the dispute. In this case, it was contended by SBI that by filing the detailed counter to the application for temporary injunction, Booz lost the right to apply to have the dispute arbitrated.

The test is even a statement, application or affidavit, filed by a defendant prior the written statement could be construed as a statement on the substance of the dispute “if by filing such statement/application/affidavit, the Defendant shows his intention to submit himself to the jurisdiction of the court and waive his right to seek reference to arbitration”. The court, relying on Rashtriya Ispat Nigam Ltd. v Verma Transport Company (pdf) (2006) 7 SCC 275  held that merely filing an application for temporary injunction or a reply to the same would not amount to submission on the substance of the issue. Further, the reply affidavit stated that it was being filed for the limited purpose of opposing the interim relief.

[The court cited the Rashtriya Ispat case as 2006 (7) SCC 275 instead of (2006) 6 SCC 275. I am not sure if the court's method of citing SCC reporter is correct.]

Issue 3: Whether the application for referring the dispute to arbitration could be rejected as it was filed nearly 20 months?

The court held that a lapse of 20 months for filing the application to refer the dispute to arbitration under Section 8 after entering into appearance did not amount to a waiver of the right to arbitrate. The court offered the following reasons:

  • Section 8 does not prescribe a time limit for filing the application
  • When applications for temporary relief are filed, it takes time to be decided by the court, and can involve appeal against the court’s order as well.
  • In this case, there were attempts to settle the disputes and when these attempts ended in failure, Booz had filed an application under Section 8.
Therefore, the court held that a delay of 20 months did not amount to waiver of the right to have the matter arbitrated.

The court’s decision on the fourth issue is important and will be taken up in detail in another post.

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