Ms Ashapura Developers Through Partner Ajeet Udhan vs Ashapura Options Private Limited

CNR No : HCBM020211722026

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AGK
IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
IN ITS COMMERCIAL DIVISION
COMM ARBITRATION APPLICATION (L) NO.21172 OF 2026
Ashapura Developers
… Applicant
Vs.
ATUL
GANESH
KULKARNI
Ashapura Options Private Limited
… Respondent
Digitally signed by
ATUL GANESH
KULKARNI
Date: 2026.09.07
12:00:02 +0530
Mr. Kevic Setalvad, Senior Advocate with Mr. Bhushan
Shah, Mr. Akash Jain, Ms. Reshaya Malhotra, Mr.
Gaurav Edekar, and Ms. Ananya Sakpal i/by
Mansukhlal Hiralal & Co., for the Applicant.
Mr. Mayur Khandeparkar, with Mr. Yash Momaya, Mr.
Rishabh Dhanuka, Ms. Mahima Shah, Mr. Zaki Ansari,
Ms. Khushi Nandu, Mr. Shivanshu Choudhary, and Mr.
Yash Natasia i/by Dhanuka Law Offices for the
Respondent.
CORAM : AMIT BORKAR, J.
RESERVED ON : SEPTEMBER 3, 2026.
PRONOUNCED ON : SEPTEMBER 7, 2026
JUDGMENT:
1. The present Application is filed under Section 11 of the
Arbitration & Conciliation Act, 1996 (“Act”). By this Application,
the Applicant seeks appointment of a sole arbitrator for deciding
the disputes and differences which have arisen between the
Applicant and the Respondent out of the Loan Agreement dated 27
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August 2020 (“Loan Agreement”).
2. The facts which have led to filing of the present Application,
as stated by the Applicant, are as follows. The Applicant and the
Respondent entered into a loan agreement dated 27 August 2000,
under which the Respondent obtained a loan of Rs. 36,00,00,000/-
from Blacksoil Capital and Allnet Financial Services (“Lenders”).
The Applicant gave its properties as security for the loan taken by
the Respondent. Accordingly, a deed of mortgage was executed.
Thereafter, an escrow agreement was executed on 20 October
2020 for depositing the receivables from the mortgaged properties.
On 15 December 2022, disputes arose between the parties because
of failure to repay the loan. The Lenders filed a suit for
enforcement of the mortgage. The suit was thereafter settled by
consent terms and an order was passed by this Court in terms
thereof. On 30 March 2023, the Respondent was admitted to the
corporate insolvency resolution process. Subsequently, on 16 May
2024, the corporate insolvency resolution process was settled by
way of a one-time settlement, and pursuant thereto the order
admitting the Respondent to the insolvency process was set aside.
During the intervening period, the Respondent failed to comply
with the consent terms and did not repay the loan. The Lenders
filed an execution petition against the Respondent and the
Applicant and sought attachment of properties. On 31 October
2023, since the Respondent had been admitted to the corporate
insolvency resolution process, the liability for repayment came
upon the Applicant. In these circumstances, the Applicant was
required to take the liability on behalf of the Respondent so that
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attachment proceedings against its properties could be avoided.
The Applicant entered into modified consent terms with the
Lenders and agreed to the changed repayment terms. On 15
February 2024 and 16 February 2024, the Applicant made a one-
time settlement offer to the Lenders. The said offer was accepted
by the Lenders.
3. On 30 April 2024, Blacksoil issued a letter acknowledging
the repayment. On 20 June 2024, Allnet issued a conditional NOC
in respect of repayment of the settlement amount. On 29
September 2025, this Court recorded the settlement between the
parties. On 14 April 2024, the Applicant issued a demand notice to
the Respondent calling upon it to repay the amounts which had
been paid by the Applicant on behalf of the Respondent. On 13
May 2026, the Applicant, through its Advocates, addressed an
invocation notice to the Respondent. On 10 June 2026, the
Respondent, through its Advocates, replied to the invocation notice
and disputed the claim made by the Applicant. It is in these
circumstances that the Applicant has filed the present Arbitration
Application.
4. Mr. Setalvad, learned Senior Advocate appearing for the
Applicant, submitted that the present Commercial Arbitration
Application (L) No. 21172 of 2026 ("Application") has been filed
under Section 11(6) of the Arbitration and Conciliation Act, 1996
("Arbitration Act"). The Applicant seeks appointment of a sole
arbitrator. Before considering the merits of the matter, it would be
useful to briefly set out the facts which have resulted in filing of
the present Application. Loan availed by the Respondent: In or
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about 2020, the Respondent approached Blacksoil Capital Private
Limited and Allnet Financial Services Private Limited, collectively
referred to as the "Lenders", for obtaining a loan of Rs.
36,00,00,000/- (Rupees Thirty-Six Crores Only) for general
corporate purposes. Thereafter, the Respondent approached the
Applicant for providing security for the said loan. Accordingly, the
Applicant entered into a Loan Agreement dated 27 August 2020, a
Mortgage Deed dated 27 August 2020 and an Escrow Agreement
dated 20 October 2020. These documents are collectively referred
to as "Finance Documents" in the Loan Agreement.
5. Sometime in 2021, the Respondent failed to make
repayment as required under the loan documents. The Lenders
filed Commercial Suit No. 102 of 2022 ("Suit") before this Court.
In the said Suit, the Lenders sought, amongst other reliefs,
enforcement of the mortgage and recovery of the outstanding
amount. The parties thereafter settled the matter and entered into
consent terms dated 15 December 2022 ("First Consent Terms").
Under the First Consent Terms, the Applicant and the Respondent
agreed to jointly and severally pay the outstanding amount. It was
submitted that the Applicant and Respondent had a long-standing
business and commercial understanding. This was relied upon
from the fact that the Applicant had provided security for the loan
taken by the Respondent. The Respondent again failed to make
payment as agreed. The Lenders filed Commercial Execution
Application No. 24828 of 2023 ("Execution Application") against
the Applicant and the Respondent. At that time, the Respondent
had already been admitted to the corporate insolvency resolution
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process. Therefore, the moratorium under Section 14 of the
Insolvency and Bankruptcy Code, 2016 ("IBC") was applicable. The
Lenders consequently proceeded against the Applicant for
attachment and execution of the security which had been provided
under the Finance Documents. In these circumstances, since the
Applicant's properties given as security were exposed to
attachment and execution, the Applicant entered into modified
consent terms with the Lenders and agreed to repay the liability on
behalf of the Respondent. According to the Applicant, it thereafter
paid the entire loan liability on behalf of the Respondent. The
Lenders have acknowledged such payment. In particular, reliance
is placed on paragraph 5 of the letter dated 16 February 2024
addressed by the Lenders, which reads as follows:
“5. We agree to provide necessary support at your cost and
expenses by providing the necessary and available
documents and information that could be required by
Ashapura Developer to initiate legal proceedings against
AOPL”
6. In view of the above, the Applicant initiated pre-institution
mediation for the purpose of filing a commercial suit before this
Court. It is submitted that the Applicant did not file any suit and
the said proceedings were abandoned. The Applicant has instead
chosen to pursue its claim by invoking the arbitration mechanism
contained in Clause 36 of the Loan Agreement. In view of the facts
and circumstances stated above, it is submitted on behalf of the
Applicant that the disputes between the parties are required to be
referred to arbitration. The Applicant has relied upon the following
grounds, amongst others. These grounds are stated without
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prejudice to one another and are urged in the alternative.
7. In support of the submission regarding subrogation, reliance
is placed upon the following decisions: M/s Rahul Cargo Pvt. Ltd v.
M/s National Insurance Company Ltd. & Anr , 2014 SCC OnLine
Del 2229, Cox and Kings Limited v. SAP India Private Limited ,
(2024) 4 SCC 1, Economic Transport Organisation, Delhi v. Charan
Spinning Mills Private Limited , (2010) 4 SCC 114.
8. According to the Applicant, a plain reading of the arbitration
clause extracted above shows that claims arising out of the Finance
Documents are required to be referred to arbitration. Therefore,
according to the Applicant, the objection of the Respondent that
the Mortgage Deed does not contain an arbitration clause has no
substance. It is submitted that the Applicant has, in any event,
acquired the rights of the Lenders by virtue of subrogation.
According to the Applicant, it is not in dispute that it has
discharged the entire repayment liability on behalf of the
Respondent. It is submitted that the Applicant has been subrogated
into the position of the Lenders and is entitled to recover from the
Respondent the amount which it has paid on the Respondent's
behalf. Mortgage deed of the Applicant operates as a guarantee:
The Respondent has contended that the right of subrogation, and
consequently the right to recover the amount paid, can arise only
under a guarantee agreement under Section 141 of the Indian
Contract Act, 1872. According to the Respondent, such right
cannot arise under the principles of subrogation contained in
Section 91 of the Transfer of Property Act, 1882. The Applicant
submits that this contention of the Respondent is not correct. In
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support of its submission, reliance is placed upon the following
decisions: State Bank of India versus Smt. Kusum Vallabhdas
Thakkar , 1991 SCC OnLine Guj 14, Anuj Jain, IRP for Jaypee
Infratech versus Axis Bank Limited & Ors , (2020) 8 SCC 401,
Rajagopala Iyer and Ors. versus S. Ramachandra Iyer , (1942) SCC
OnLine MAD 41.
9. According to the Applicant, a plain reading of the Finance
Documents, namely the Loan Agreement and the Mortgage Deed,
shows that the security given by the Applicant was for securing
performance of the obligations of the "Obligors" under the Finance
Documents. Reliance is placed upon Clause E and Clause F Clause
N of the Mortgage Deed.
10. It is submitted that after the amendment made in 2015, the
scope of the Court while considering an application under Section
11 of the Arbitration Act is limited to examining whether an
arbitration agreement exists. In the present case, it is admitted that
the Applicant is a party to the Loan Agreement dated 27 August
2020. The said Loan Agreement contains an arbitration mechanism
under Clause 36. It is submitted that the Applicant has acquired
the rights of the Lenders by way of subrogation, as stated above.
On this basis, it is submitted that the Applicant is entitled to refer
the disputes and differences between the parties to arbitration
before a sole arbitrator. It is submitted that once the Court finds
that an arbitration agreement exists, the dispute should be referred
to an arbitral tribunal without entering into a detailed examination
of disputed questions of fact. According to the Applicant, after the
2015 amendment, the legislature has deliberately kept the scope of
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judicial examination under Section 11 limited and has held the
principle of kompetenz-kompetenz. Reliance is placed on the
following decisions in support of this submission: Andhra Pradesh
Power Generation Corporation Limited versus Tecpro Systems
Limited & Ors . (2026) 3 SCC 491, Duro Felguera, S.A. versus
Gangavaram Port Limited , (2017) 9 SCC 729. In view of the facts
and submissions stated above, the Applicant has prayed that this
Court be pleased to refer the disputes and differences between the
parties to a sole arbitrator.
11. Mr. Khandeparkar, learned Advocate appearing for the
Respondent, submits that the present Application has been filed by
the Applicant under Section 11(6) of the Arbitration and
Conciliation Act, 1996 ("said Act") against the Respondent. The
Applicant seeks appointment of a sole arbitrator to decide the
disputes and differences which, according to the Applicant, have
arisen out of the Loan Agreement dated 27 August 2020 ("Loan
Agreement") and the Mortgage Deed dated 27 August 2020
("Mortgage Deed"). For this purpose, the Applicant relies upon the
arbitration clause contained in Clause 36 of the Loan Agreement. It
is submitted that the Application is liable to be rejected for the
reasons set out hereinafter. The Applicant's capacity under the
Loan Agreement and the Finance Documents is only that of a
mortgagor. Therefore, there is no arbitration agreement between
the Applicant and the Respondent. According to Mr. Khandeparkar,
a plain reading of Clause 36 shows that it is not an agreement to
refer all disputes between all persons connected with the Loan
Agreement to arbitration. Clause 36.1 specifically refers to "claims,
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disputes or rights, of the Lenders against the Obligors" arising out
of the Loan Agreement and/or the Finance Documents. Clause
36.2 provides that "Such claims shall be referred by Lenders to
arbitration". Thus, according to the Respondent, the clause permits
the Lenders alone to invoke arbitration. There is no arbitration
agreement between the Applicant, who is the Mortgagor, and the
Respondent, who is the Borrower and an Obligor. It is submitted
that even according to the Applicant's own case, its role under the
documents is only that of a mortgagor. This is stated in the
Invocation Notice dated 13 May 2026 issued by the Applicant. The
same position is clear from the description of the parties in the
Loan Agreement and the Mortgage Deed. The Applicant is
described as the "Mortgagor" of the Second Part. Blacksoil Capital
Private Limited and Allnet Financial Services Private Limited alone
are described as "Lender 1" and "Lender 2" and are collectively
referred to as the "Lenders". The definition of "Obligors" in the
Loan Agreement includes only the Borrower and the Guarantors.
The Mortgagor is separately described as a party. Therefore, the
Applicant is neither a "Lender", who alone can refer claims to
arbitration under Clause 36.2, nor an "Obligor", against whom the
claims referred to in Clause 36.1 can be made. A similar question
was considered by this Court in Ketan Champaklal Divecha vs.
DGS Township Pvt. Ltd. & Anr. (Bom HC, Arbitration Petition (L)
No. 20483 of 2023 with Arbitration Application (L) No. 21860 of
2023, Judgment dated 2 January 2024). This Court held that "the
arbitration clause in the present case has to be interpreted on the
basis of the aforesaid definition of 'party' and 'arbitration
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agreement" under Sections 2(1)(h) and 7 of the said Act, and that
where the clause designates who may invoke arbitration,
invocation by any other party "is rendered defective", such that
"neither the petition under Section 9 nor the application under
Section 11 of the Arbitration Act, can be entertained".
12. Applying the same principle, it is submitted that the
arbitration agreement contained in Clause 36 is only between the
Lenders and the Obligors. The Applicant is described in both the
Loan Agreement and the Mortgage Deed only as the "Mortgagor".
It is not a party to the arbitration agreement contained in Clause
36. Further, the Mortgage Deed, under which the Applicant created
the mortgage over its property, does not contain any arbitration
clause at all. Therefore, even on this ground, there is no arbitration
agreement between the Applicant and the Respondent. The
Applicant has no right of subrogation and, therefore, the very basis
of the present Application is absent. The Applicant's case is that
because it claims to have made repayment on behalf of the
Respondent, it has stepped into the rights and remedies of the
Lenders under the Loan Agreement. According to the Respondent,
the Applicant has failed to establish any such subrogation under
the Loan Agreement, the Finance Documents, any statutory
provision or otherwise. The Lenders have not assigned or
transferred their rights under the Loan Agreement in favour of the
Applicant. The Applicant has not produced any document showing
that the rights of the Lenders have been subrogated in its favour.
The right of subrogation under Section 141 of the Indian Contract
Act, 1872 is available to a guarantor or surety whose guarantee
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has been invoked. According to the Respondent, such right is not
available to a mortgagor or pledgor. The right of subrogation
under Sections 91 and 92 of the Transfer of Property Act, 1882
does not apply to the present case. Such right is available to a
person who redeems a mortgage of property belonging to another
person, and not to the mortgagor who redeems the mortgage of his
own property. In the present case, according to the Applicant's own
case, it has paid the liability and redeemed the mortgage over its
own property. Section 91 excludes the mortgagor from claiming
such a right of subrogation. Therefore, according to the
Respondent, there is no statutory subrogation, no contractual
subrogation and no assignment of rights in favour of the Applicant.
Consequently, there is no basis on which the Applicant can claim
the benefit of the arbitration agreement.
13. It is submitted that the conduct of the parties shows that
they understood the position in the same manner. The Lenders,
namely Blacksoil and Allnet, did not invoke arbitration against the
Applicant. Instead, they filed a Commercial Suit before this Court,
which was thereafter compromised by Consent Terms dated 15
December 2022. Under those Consent Terms, the parties, including
the Applicant and the Respondent, settled the disputes. The
Applicant agreed to a joint and several liability to pay amounts to
the Lenders under Clauses 6 and 7 and thereby subjected to a joint
and several personal decree. Even at that stage, no arbitration
agreement between the Applicant and the Lenders was asserted
and no application under Section 8 of the Arbitration Act was filed
by any party. Clause 17 of the Consent Terms records that the
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parties had no claims against one another. According to the
Respondent, this shows the parties' own understanding that there
was no arbitration agreement between the Mortgagor and the
Lenders. Thereafter, while the Respondent was undergoing the
corporate insolvency resolution process, the Applicant and the
Lenders modified the Consent Terms between themselves. The
Applicant, who was Defendant No. 2 in the Suit, undertook
responsibility to discharge the debt. The decree was thereafter
satisfied. Consequently, according to the Respondent, the Loan
Agreement stood discharged and there can be no surviving
arbitration agreement on this basis.
14. Reliance is placed upon S.N. Prasad, Hitek Industries (Bihar)
Limited vs. Monnet Finance Ltd. & Ors. , (2011) 1 SCC 320, where
the Supreme Court held that "an arbitration agreement between
the lender on the one hand and the borrower and one of the
guarantors on the other, cannot be deemed or construed to be an
arbitration agreement in respect of another guarantor who was not
a party to the arbitration agreement". It is submitted that a
mortgagor who is outside the class of persons covered by Clause
36 cannot invoke the clause as though it were a Lender.
15. Without prejudice to the above, the Applicant cannot be
treated as a veritable party to Clause 36 and cannot invoke
arbitration in the capacity of a Lender. It is submitted that the
Applicant has not pleaded that it is a veritable party to the
arbitration agreement. Its claim is based only on the alleged right
of subrogation. This is clear from paragraph 45 of the Application.
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16. Without prejudice to the above submission, in view of the
position regarding subrogation stated earlier, the Applicant cannot
be treated as a veritable party to the arbitration agreement. In
Hindustan Petroleum Corporation Limited vs. BCL Secure Premises
Private Limited , 2025 INSC 1401, the Supreme Court, while
referring to Cox and Kings Ltd. vs. SAP India Pvt. Ltd. , (2024) 4
SCC 1 (5J), held that the circumstances in which a person can
claim through or under a party include "assignment, subrogation,
and novation". It was held that "mere legal or commercial
connection is not sufficient for a non-signatory to claim through or
under a signatory party". The Supreme Court held that even a
settlement or assignment arrangement between two other parties
"does not mean that there is an arbitration agreement" between
the claimant and a non-party. In the present case, as submitted
above, there is no right of subrogation in favour of the Applicant.
Therefore, the Applicant cannot claim to be a veritable party to the
arbitration agreement.
17. On a combined consideration of the above grounds, namely,
(i) the Applicant's position as a mortgagor; (ii) absence of any
right of subrogation; (iii) complete discharge of the Loan
Agreement and the Finance Documents, as stated hereinafter; and
(iv) the fact that the Applicant's present claim arises outside the
scope of the Loan Agreement, as stated hereinafter, it is submitted
that the Applicant cannot claim to be a veritable party to Clause
36.
18. In Hindustan Petroleum (supra), the Supreme Court, on facts
which are submitted to be similar to the present case, refused to
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refer the matter to arbitration. The Supreme Court held that "even
prima facie the respondent has not been able to establish that it
was a veritable party to the contract". The Court observed that
there was "no privity at all" between the parties, who were
"operating on separate orbits".
19. It is submitted that in Interplay between Arbitration
Agreements under Arbitration Act, 1996 & Stamp Act, 1899, In re ,
[(2024) 6 SCC 1 (7J), Prs. 164-167], the Supreme Court has
explained that the scope of Section 11(6-A) is confined to
examining the existence of an arbitration agreement. According to
the Respondent, the only arbitration agreement existing in the
present case is between the Lenders and the Obligors. The said
clause can be invoked by the Lenders alone. There is no arbitration
agreement governing the Obligors and the Mortgagor inter se.
20. Any submission that the question regarding the Applicant's
status should be left for decision by the Arbitral Tribunal is
answered by the decision in Hindustan Petroleum (supra). The
Supreme Court held that where the Referral Court finds, even
prima facie, that a person is not a veritable party, the matter need
not be referred to arbitration. The Supreme Court observed that to
hold otherwise "would relegate the Referral Court to the status of a
monotonous automation". It observed that this could allow
"absolute strangers" to "walk into the Referral Court" and claim
that the matter must necessarily be sent to the Arbitral Tribunal.
The Supreme Court stated that it was "not prepared to accept such
an extreme proposition". According to the Respondent, the
Applicant is seeking precisely such a course in the present
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Application. The Supreme Court has referred to paragraph 117 of
Cox and Kings and held that a mere commercial relationship is not
enough to establish a legal relationship. Otherwise, every related
entity or person could seek to be brought within the arbitration
agreement. It is submitted that where a person who is admittedly a
non-signatory seeks to contend that it is a veritable party to the
arbitration agreement, the Section 11 Court ought to examine such
claim with greater care. This position is different from a case
where a person who is admittedly a party to an arbitration
agreement seeks to bring a non-signatory within the arbitration
proceedings. In the first situation, there is no arbitration
agreement, on the admitted position, between the Applicant and
the Respondent. Therefore, the burden on the Applicant is to
establish the existence of an arbitration agreement and its claimed
status as a veritable party. According to the Respondent, this
burden has clearly not been discharged in the present case. In the
second situation, there is already an admitted arbitration
agreement to which the applicant is a party. The question there is
whether another non-signatory can be brought within that
agreement. This submission is supported by the decision of the
Supreme Court in Hindustan Petroleum (supra).
21. According to the Respondent, the above decision explains the
scope of the decisions in Cox and Kings and Ajay Madhusan Patel
v. Jyotindra S. Patel , 2024 SCC Online SC 2597. It is pointed out
that the Bench in Hindustan Petroleum (supra) included two of the
learned Judges who were members of the Bench which decided
Ajay Madhusan Patel (supra). Therefore, according to the
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Respondent, where the Referral Court finds prima facie that a
person is not a veritable party to the arbitration agreement, as is
submitted to be the position in the present case, the matter ought
not to be referred to arbitration. It is submitted that the Loan
Agreement and the Finance Documents, including the Mortgage
Deed, have already been completely discharged. This position,
according to the Respondent, is borne out from the documents
produced by the Applicant.
22. Reliance is placed upon the no-dues letter dated 30 April
2024 issued by Blacksoil Capital Private Limited, the no-dues letter
dated 20 June 2024 issued by Allnet Financial Services Pvt. Ltd.,
and the Order dated 29 September 2025 passed by this Court in
Comm. Exe. App. (L) No. 24828 of 2023 ("said Order"). According
to the Respondent, these documents show that no amount remains
outstanding under the Loan Agreement and that the Loan
Agreement has been completely discharged. It is submitted that
nothing remains to be performed under the Loan Agreement,
including Clause 36. According to the Respondent, the arbitration
clause can operate only in respect of a surviving claim concerning
the 'Outstanding Amounts' under the Loan Agreement and/or the
Finance Documents. Since the entire liability has been discharged,
there is no surviving claim under the Loan Agreement which can
be referred to arbitration.
23. The Applicant has approached this Court with unclean hands
and has suppressed material facts. According to the Respondent,
the conduct of the Applicant shows that the Applicant understood
that there was no arbitration agreement governing the present
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claim. The Applicant has not disclosed that it had initiated a pre-
institution mediation application under Section 12A of the
Commercial Courts Act, 2015, being Commercial Dispute No. 01 of
2026, before the Main Mediation Centre of this Court. The claims
raised in the said mediation proceedings are the same claims
which have now been raised in the present Application. Reliance is
placed upon the decision of the Supreme Court in Rajiv Gaddh vs.
Subodh Parkash , 2026 SCC OnLine SC 507, where the Supreme
Court held that “the subsequent application filed under Section
11(6) was based on the same cause of action and was barred on
the principles contained in Order 23 Rule 1 of the Code”. The
Supreme Court held that “a litigant cannot be permitted to abuse
the process of Court to file a fresh proceeding again on the same
cause of action".
24. According to the Respondent, the Applicant, having already
pursued the same claim through pre-institution mediation and
thereafter not pursuing the claim in the manner contemplated by
those proceedings, cannot now seek appointment of an arbitrator
on the very same cause of action.
REASONS AND FINDINGS:
25. I have considered the submissions made by the learned
Advocates for the Applicant and the Respondent. I have considered
the subsequent consent terms and the documents under which the
Applicant says that the amounts payable to the lenders were paid
and discharged by it. I have considered the judgments relied upon
by both sides . The question before this Court is not only whether
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there is some arbitration clause in the contractual documents. The
question is whether the Applicant can invoke that arbitration
clause against the present Respondent.
26. The first submission of the Applicant is that Clause 36 of the
Loan Agreement contains a valid arbitration agreement and that
the disputes raised by the Applicant arise from the Finance
Documents. Clause 36.1 reads:
“36. Arbitration- 36.1 The Parties agree and acknowledge
that claims, disputes or rights, of the Lenders against the
Obligors, arising out of and in connection with this
Agreement and/or the Finance Documents with respect to
the Loan, shall be adjudicated in arbitration as provided
hereinafter.”
27. There is no dispute that the above clause contains an
arbitration agreement. The difficulty is about who can invoke this
clause. The clause refers to “claims, disputes or rights, of the
Lenders against the Obligors”. Therefore, it is necessary to see
whether the present Applicant, who admittedly is not a Lender and
is not an Obligor under the Loan Agreement, can still take benefit
of this arbitration clause. The Applicant submits that this question
should not be examined in detail by this Court at the Section 11
stage. For this submission, reliance is placed upon Duro Felguera
and the Constitution Bench judgment in Interplay . To this extent,
there is substance in the submission of the Applicant because the
jurisdiction of the Court at this stage is limited. In Duro Felguera ,
the Supreme Court has stated in paragraph 59:
“After the amendment, all that the courts need to see is
whether an arbitration agreement exists—nothing more,
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nothing less. The legislative policy and purpose is essentially
to minimise the Court's intervention at the stage of
appointing the arbitrator and this intention as incorporated
in Section 11(6-A) ought to be respected.”
28. Similarly, paragraph 165 of Interplay says that under Section
11(6-A), the Court has to examine only the existence of an
arbitration agreement and this examination is only a prima facie
determination. Paragraph 166 makes clear that the Referral Court
is not the proper forum for conducting a mini trial regarding the
existence or validity of the arbitration agreement.
29. The Applicant is right in relying upon A.P. Power Generation .
The Supreme Court has considered the effect of Section 11(6-A)
and has made a distinction between what the Referral Court has to
examine and what has to be finally decided by the Arbitral
Tribunal. Paragraph 15 of that judgment shows that when the
question is whether a person is a party to the arbitration
agreement, the Referral Court has to reach only a prima facie
satisfaction. Thereafter, the detailed enquiry can be made by the
Arbitral Tribunal as stated in paragraph 16. The Court has quoted
paragraph 170.12 of Cox & Kings :
“ 170.12. At the referral stage, the referral court should leave
it for the Arbitral Tribunal to decide whether the non-
signatory is bound by the arbitration agreement .”
30. Thus, while considering the present Section 11 application,
this Court should not conduct a full trial on disputed questions of
fact. But this limited jurisdiction does not mean that every person
having some connection with the transaction has to be sent to
arbitration and the question whether such person is a party to the
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arbitration agreement must always be left to the Arbitral Tribunal.
The Supreme Court has explained this limit in HPCL v. BCL Secure
Premises . In paragraph 34, the Supreme Court observed:
“This does not mean that where the Referral Court finds
prima facie a party is not a veritable party still the matter is
left to the Arbitral Tribunal. To hold so, would relegate the
Referral Court to the status of a monotonous automation.
Further, to countenance such an extreme proposition would
lead to disastrous consequences, where absolute strangers
could walk into the Referral Court and contend that the
matter has to perforce go to the Arbitral Tribunal for a
decision on the veritable nature of the party. We are not
prepared to accept such an extreme proposition."
31. Therefore, this Court has to make a real prima facie
examination. The Court should not conduct a mini trial, but at the
same time it cannot refer every matter to arbitration without
seeing whether there is some basis for doing so. The present case
has to be considered within this limited scope. The Applicant
admittedly is not one of the “Lenders” mentioned in Clause 36.1. It
is not disputed that the Applicant is not described as an “Obligor”
under the Loan Agreement. Therefore, from the wording of the
arbitration clause, the Applicant is not a contracting party to that
arbitration agreement. The Applicant seeks to overcome this
difficulty mainly by saying that after making payment of the
lenders' dues, it stepped into the shoes of the lenders by way of
subrogation and obtained the right of the lenders to invoke
arbitration.
32. The law does recognise that in an appropriate case a person
claiming through or under a signatory can take benefit of an
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arbitration agreement. Cox & Kings , in paragraph 140, explains the
usual situations where such right can arise:
“ 140 . An analysis of the cases cited above establishes the
following propositions of law: first, the typical scenarios
where a person or entity can claim through or under a party
are assignment, subrogation, and novation; second, a person
“claiming through or under” can assert a right in a derivative
capacity, that is through the party to the arbitration
agreement, to participate in the agreement; third, the
persons claiming through or under do not possess an
independent right to stand as parties to an arbitration
agreement, but as successors to the signatory parties'
interest; and fourth, mere legal or commercial connection is
not sufficient for a non-signatory to claim through or under a
signatory party.”
33. Thus, the Applicant is correct to the limited extent that a
non-signatory is not in every case prevented from invoking an
arbitration agreement. In a proper case, subrogation may place a
non-signatory in the position of the signatory. But this alone is not
sufficient. The Applicant has to show, at least prima facie , that
such derivative right has come to it.
34. The judgment in Economic Transport Organization explains
the position regarding subrogation. Where an insurer fully pays the
claim of the insured, equitable subrogation may arise by operation
of law and the insurer may enforce the rights of the insured. But
the important thing is that the person claiming subrogation must
succeed to the rights of the original party. Merely because one
person has made payment which is connected with the liability of
another person, it does not mean that all the rights of that other
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person have come to the person making the payment. There has to
be some legal basis for the derivative right which is being claimed.
35. In the present case, the Applicant relies upon the fact that it
paid the amounts due to the lenders and thereby discharged the
liability. The payment is a relevant fact. But payment by cannot be
treated as proof that the Applicant became an assignee or subrogee
of all the contractual rights of the lenders, including their right to
invoke arbitration. No separate assignment of the arbitration right
has been shown before this Court. The Applicant has not pointed
out any document by which the lenders expressly transferred their
rights under Clause 36 to the Applicant.
36. The Applicant has relied upon the Mortgage Deed and
submits that the Mortgage Deed was in substance a guarantee and
that after making the payment it acquired the rights of the lenders.
Reliance is placed upon Kusum Vallabhdas Thakkar and Jaypee
Infratech Ltd. There is no difficulty in accepting the general
proposition that when a third person gives security for the debt of
another person, depending upon the terms of the document, such
obligation may have the nature of a surety or guarantee. Kusum
Vallabhdas Thakkar considered a case where a third party had
agreed to create mortgage as collateral security and the provisions
of Sections 126, 127 and 128 of the Contract Act were considered.
But this general principle by does not decide the issue before this
Court. It is necessary to see what the Applicant agreed to under
the Mortgage Deed and what right, if any, came to the Applicant
after making payment. A mortgage given as security and an
arbitration agreement are two different things. Even if the
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Mortgage Deed is treated as creating an obligation similar to that
of a surety, it does not follow that the arbitration clause contained
in a separate agreement between the Lenders and the Obligors
became an arbitration agreement between the Applicant and the
Respondent.
37. The decision in Jaypee Infratech does not help the
Applicant's case. That judgment shows that in an appropriate case
mortgage security given by a third party may have the character of
a guarantee or surety obligation. But merely giving such security
does not make that third party a party to each and every term of
the principal loan agreement. The question before this Court is
narrower. It is whether Clause 36, on reading its wording and the
documents placed before the Court, can be invoked by this
Applicant against this Respondent.
38. The Applicant has relied upon Rajagopala Iyer . It is
submitted that equity can protect a person who discharges a debt
which in substance belongs to another person and may give such
person the benefit of the mortgage security. This principle may
have relevance while deciding the substantive rights between the
person who makes the payment and the person whose debt has
been discharged. But such right cannot by create an arbitration
agreement when the contract containing the arbitration clause
does not extend to that person. Arbitration is based upon consent,
whether express or arising in a manner held by law. Such
agreement cannot be enlarged only because one person may have
an equitable claim against another.
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39. The Respondent has relied upon S.N. Prasad. In that case,
the Supreme Court made it clear that an arbitration agreement
between the lender, borrower and one guarantor cannot be treated
as an arbitration agreement with another guarantor who was not a
party to it. This principle has relevance here. The Applicant's case
is that because it was connected with the loan transaction and
thereafter discharged the debt, the arbitration agreement should
be treated as available to it or binding upon it. Such conclusion
cannot follow merely from the Applicant's connection with the
transaction. The principle in S.N. Prasad is that an arbitration
agreement operates between the persons and in the relationship
for which it was made. A person who was outside that agreement
does not become a party merely because he has some connection
with the transaction.
40. The same difficulty can be seen from the actual wording of
Clause 36.1. It refers to “claims, disputes or rights, of the Lenders
against the Obligors”. Therefore, the clause identifies not only the
nature of the claims but the persons between whom arbitration is
contemplated. The Applicant is neither a Lender nor an Obligor.
Therefore, if the Applicant wants to invoke this clause, it has to do
so not as an original party, but by showing that it is claiming
through or under one of the Lenders.
41. For this purpose, Cox & Kings requires a derivative
relationship. The non-signatory has to succeed to the interest of
the signatory. It does not get an independent right to become a
party to the arbitration agreement. Mere relationship or
commercial connection is not enough. The same position is
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reflected in HPCL , where the Supreme Court held that a legal or
commercial relationship between a signatory and non-signatory by
is not sufficient to make the non-signatory a veritable party.
42. In the present case, the documents relied upon by the
Applicant do show that the Applicant had given its properties as
security for the loan and thereafter made payment towards the
outstanding dues. Thus, there is a connection between the
Applicant and the loan transaction. But this is not the only
question. The question is whether the Applicant acquired the
arbitration right of the Lenders. On the material placed before this
Court, that particular right has not been shown to have been
assigned to the Applicant.
43. The Applicant may submit that assignment is not necessary
in every case because equitable subrogation can arise by operation
of law. The law can recognise derivative rights in an appropriate
case even without a separate assignment document. But even in
such a case, the Applicant has to show the legal basis by which it
has succeeded to the rights of the Lenders. Mere repayment cannot
be treated as creating every right of the Lenders in favour of the
person who makes such payment.
44. The rights now claimed by the Applicant arose after the
original loan transaction was acted upon and after arrangements
were made between the lenders and the concerned parties. The
Respondent relies upon the consent terms, the no-dues
communications and the subsequent proceedings and submits that
the original obligations stood discharged. It is not necessary for
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this Court at this stage to finally decide all the effects of those
subsequent transactions. But these documents are relevant for
considering whether there is an arbitration right which can be
invoked by the Applicant. The Applicant has not shown any
document by which the lenders retained and transferred to the
Applicant the right to invoke Clause 36 after the original
obligations were discharged.
45. The Respondent has submitted that the Applicant's case of
subrogation is not consistent with the legal position relating to a
mortgagor. It is submitted that subrogation under Section 91 of the
Transfer of Property Act does not assist a mortgagor who redeems
its own property. For deciding this Section 11 application, it is not
necessary to finally decide every question relating to the exact
nature of the Applicant's substantive rights. Even if it is assumed in
favour of the Applicant that some right arose after payment, the
Applicant still has to show a corresponding right to invoke the
arbitration agreement. That requirement has not been shown.
46. I have considered the submission of the Applicant that
difficult questions concerning a non-signatory should be left to the
Arbitral Tribunal. This proposition is correct, but it does not mean
that every matter has to be referred where the documents, even on
a prima facie reading, do not show that the Applicant is a party or
a person claiming through or under a party to the arbitration
agreement. The distinction can be seen from HPCL . Where there is
material showing a possible legal relationship and the status of the
non-signatory requires detailed examination of facts, such question
may be left to the Arbitral Tribunal. But where the person
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approaching the Court has not shown even a sufficient basis for
treating himself as a veritable party or derivative claimant, the
Referral Court cannot be required to refer the matter only as a
mechanical exercise.
47. In the present case, the difficulty of the Applicant is not such
a disputed question which can only be decided after a detailed
trial. The important documents themselves show that the Loan
Agreement was between the Lenders and the Obligors. The
arbitration clause is contained in that agreement. The Applicant
was not a Lender and was not an Obligor. The Mortgage Deed did
not contain the arbitration clause which is now sought to be
invoked. The Applicant relies upon its later payment of the lenders'
dues and from that payment seeks to derive the arbitration right.
On the material placed before this Court, the Applicant has not
shown a sufficient prima facie basis to say that it succeeded to the
arbitration rights of the Lenders.
48. I am unable to accept the submission that because the
Applicant had given collateral security and discharged the debt, it
stepped into the shoes of the Lenders for all purposes. Where
subrogation is legally established, it may permit a person to
enforce the rights of another. But the extent of such right depends
upon the source and nature of the subrogation. It cannot be
presumed that all rights of the Lenders, including the particular
arbitration agreement, became available to the Applicant without
showing that the Applicant is entitled to enforce those rights
against the Respondent.
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49. The judgment in Rahul Cargo does not lead to a different
result. That case held that an insurer, after valid subrogation, can
enforce the rights of the insured and can rely upon an arbitration
clause contained in the underlying contract. The important basis of
that decision was that the insurer had acquired the position of a
subrogee of the rights of the insured. In the present case, the
Applicant has not established a similar position in relation to the
rights of the Lenders under Clause 36. Therefore, the principle in
Rahul Cargo cannot be applied in the manner suggested by the
Applicant.
50. The judgment in Ketan Champaklal Divecha dealt with an
arbitration clause which treated the Society and its members as
one side and the Developer as the other side, and the Court did not
permit an individual member to invoke arbitration separately. The
facts of that case are not the same as the present case. But the
principle which is relevant is that the arbitration clause has to be
read in the manner in which the parties have drafted it. The Court
cannot take one expression from the clause and create an
arbitration right which is not found from the clause as a whole. In
the present case, Clause 36.1 cannot be read as if it permits every
person having a claim connected with the Finance Documents to
invoke arbitration. It specifically refers to the claims or rights “of
the Lenders against the Obligors”. This contractual arrangement
has to be respected.
51. At the same time, I do not accept the Respondent's
submission in its widest form that a non-signatory can never
invoke Clause 36 merely because his name is not shown as a
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signatory. Such a broad proposition would not be consistent with
Cox & Kings , Rahul Cargo and the held principle concerning
persons claiming through or under a signatory. In an appropriate
case, a non-signatory may derive a right to arbitrate. Therefore,
the Respondent succeeds not because every non-signatory is
excluded from arbitration, but because this particular Applicant
has not shown the required derivative legal relationship.
52. The Respondent has relied upon the subsequent consent
terms and the alleged discharge of the Loan Agreement. In my
view, it is not necessary for deciding this application to finally
decide every consequence of the settlement between the lenders
and the parties. Such matters may involve rights and may require
determination in another properly constituted proceeding. For the
present application, the question is whether the Applicant has an
arbitration right which can be enforced against the Respondent.
Since that foundation has not been established, it is not necessary
to decide every other objection arising from the subsequent
transactions.
53. The objection regarding the earlier proceedings and the
alleged proceedings under Section 12A of the Commercial Courts
Act has been considered. The Respondent relies upon Rajiv Gaddh
and submits that a fresh proceeding based on the same cause is not
maintainable and amounts to abuse of process. This submission
may have relevance depending upon what exactly was the earlier
proceeding, what reliefs were claimed there and what orders were
passed in that proceeding. However, as the present application fails
on the question that the Applicant has not shown a prima facie
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arbitration right in its favour, it is not necessary to finally decide
the issue of abuse of process for disposing of this application.
54. I find that the Applicant has not been able to show even at
the prima facie level that it is a signatory party to the arbitration
agreement contained in Clause 36.1. I find that the Applicant has
not placed sufficient material to show that by assignment,
subrogation, novation or any other held derivative legal basis, it
has succeeded to the arbitration rights of the Lenders against the
Respondent. The fact that the Applicant paid or discharged the
dues of the lenders, by, is not sufficient to establish such right.
55. In view of the above discussion and findings, I hold that the
Applicant has not established the existence of an arbitration
agreement which can be invoked by the Applicant against the
Respondent. Therefore, the Applicant cannot seek appointment of
a sole arbitrator on the basis of Clause 36 of the Loan Agreement.
The Application is liable to be dismissed.
56. In view of the foregoing discussion and for the reasons
recorded hereinabove, the following order is passed:
i) The Application under Section 11 of the Arbitration
and Conciliation Act, 1996, seeking appointment of a Sole
Arbitrator is dismissed;
ii) It is clarified that this Court has not expressed any
opinion on the substantive rights, claims or remedies, if any,
available to the Applicant. All contentions of the parties in
respect of such rights are kept open.
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iii) There shall be no order as to costs.
iv) The Application is disposed of accordingly.
(AMIT BORKAR, J.)
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