Payment alone by a non-signatory does not confer derivative rights to invoke arbitration.

The Respondent obtained a loan of ₹36 crores from Blacksoil Capital and Allnet Financial Services under a Loan Agreement dated 27 August 2020.

The Applicant provided its properties as security and executed a Mortgage Deed and Escrow Agreement in connection with the financing transaction.

Following the Respondent’s default, the Lenders instituted proceedings for enforcement of the mortgage.

The parties thereafter entered into consent terms under which the Applicant and Respondent agreed to discharge the outstanding liability jointly and severally.

When the Respondent failed to comply and was admitted into insolvency proceedings, the Applicant entered into modified consent terms with the Lenders and paid the amounts allegedly due by the Respondent.

The Lenders subsequently acknowledged receipt of the repayment.

The Applicant therefore filed the present application under Section 11 of the Arbitration and Conciliation Act, 1996, seeking appointment of a sole arbitrator.

1. Whether the Applicant, although not described as a “Lender” or “Obligor” under the Loan Agreement, could invoke the arbitration clause contained in Clause 36 against the Respondent.

2. Whether the Applicant had established, at least prima facie, a derivative right—through assignment, subrogation, novation, or otherwise—to exercise the Lenders’ arbitration rights after paying the Respondent’s dues.

3. Whether the Applicant’s payment of the Lenders’ dues and the security created under the Mortgage Deed made it a party to, or entitled it to invoke, the arbitration agreement in the Loan Agreement.

Section 11(6-A) of the Arbitration and Conciliation Act, 1996 requires the referral court to examine, prima facie, the existence of an arbitration agreement, while avoiding a mini-trial on disputed facts.

However, the court is not required to mechanically refer a matter where the applicant has not shown any prima facie basis for being a party or derivative claimant under the arbitration agreement.

Applying Duro Felguera, S.A. v. Gangavaram Port Ltd., Interplay between Arbitration Agreements under the Arbitration Act, 1996 and the Stamp Act, 1899, and A.P. Power Generation Corporation Ltd. v. Tecpro Systems Ltd., the Court held that questions concerning whether a non-signatory is bound may ordinarily be left to the arbitral tribunal, but only where a prima facie legal relationship exists.

Under Cox & Kings Ltd. v. SAP India Pvt. Ltd., persons claiming “through or under” a signatory may rely on an arbitration agreement in cases of assignment, subrogation, or novation, but must succeed to the signatory’s interest; mere legal or commercial connection is insufficient.

Economic Transport Organisation v. Charan Spinning Mills Pvt. Ltd. establishes that payment alone does not automatically transfer all rights of the original claimant.

S.N. Prasad v. Monnet Finance Ltd. confirms that an arbitration agreement operates only between the persons and relationships for which it was made and cannot automatically extend to an unrelated guarantor or non-party.

Clause 36.1 expressly covered “claims, disputes or rights, of the Lenders against the Obligors.”

The Applicant was admittedly neither a Lender nor an Obligor, and the Mortgage Deed—which was the instrument directly involving the Applicant—contained no arbitration clause.

Although the Applicant had provided security and paid the Respondent’s outstanding dues, those facts established only a connection with the underlying transaction; they did not, without more, establish that the Applicant had succeeded to the Lenders’ contractual arbitration rights.

The Applicant produced no assignment, subrogation instrument, or other document demonstrating transfer or derivation of the right to invoke Clause 36.

The Court accepted that subrogation may, in an appropriate case, permit a non-signatory to rely on an arbitration agreement, but held that the necessary derivative legal relationship had not been shown even prima facie.

The characterization of the Mortgage Deed as analogous to a guarantee or surety did not alter the result, since security for a debt does not automatically make the security provider a party to every term of the principal loan agreement.

It was neither a signatory party falling within Clause 36.1 nor a person shown, through assignment, subrogation, novation, or another derivative legal basis, to have succeeded to the Lenders’ arbitration rights.

The Section 11 application seeking appointment of a sole arbitrator was therefore dismissed.

The Court expressly left open the Applicant’s substantive rights, claims, and remedies, if any, and made no order as to costs.