Notice under Section 21 of the Arbitration & Conciliation Act, 1996: A Sine Qua Non for Invoking Jurisdiction

Recently, in the case of Amit Guglani and Another vs. L&T Housing Finance Limited and Another1, the Delhi High Court adjudicated upon a petition filed under Section 11 (6) of the Arbitration and Conciliation Act, 1996 (the “A&C Act“) for appointment of a sole arbitrator (“Petition“) under a tripartite agreement dated October 24, 2018, executed between the parties (“Tripartite Agreement“).

L&T Housing Finance Limited (Respondent No. 1 / Lender) is engaged in the business of advancing finance such as home loans, micro loans etc. Raheja Developers Limited (Respondent No. 2/Developer) is engaged in the business of real estate / construction and is constructing a residential real estate project, ‘Raheja Vanya’ in Gurgaon. The Petitioners approached Respondent No. 2 for booking of a unit after which the Petitioners approached Respondent No. 1 for a loan of Rs. 67 Lakhs towards payment of purchase consideration in respect of the same. The terms and conditions of the loan were recorded in the Tripartite Agreement, which provided for resolution of dispute through arbitration and designated New Delhi as the seat of arbitration.

Subsequently, a separate home loan agreement (“Loan Agreement“) was executed between the Petitioners and Respondent No. 1. The Loan Agreement contained a separate arbitration clause and designated the Courts at Kolkata with exclusive jurisdiction.

It was agreed between the Petitioners and Respondent No. 2 that pre-EMIs would be paid by Respondent No. 2 for a maximum period of 48 months and that the pre-EMIs for the term of this subvention would be deducted by Respondent No. 1, upfront from first disbursement. However, subsequently, the Petitioners received a letter dated 06.09.2019 from Respondent No. 1 stating that the basic prime lending rate (BPLR) of the home loan was erroneously mentioned in the sanction letter as 17.75% and the current BPLR is 18.10%. Later, the Petitioners received a notice under Section 13(2) of the SARFAESI Act stating that owing to defaults in the payment of loan instalments, the loan account of the Petitioners had been classified as a non-performing asset on 04.09.2022 and the entire liability of Rs. 30,01,820.45/- as on 10.10.2022 with interest and other charges were fixed on the Petitioners.

Owing to non-resolution of the abovementioned dispute, the Petitioners invoked arbitration under Clause 27 of the Tripartite Agreement and approached the Delhi High Court for appointment of an arbitrator under Section 11 (6) of the A&C Act.

The Respondents objected to maintainability of the Petition and argued that the dispute with respect to which reference was sought to arbitration, was with respect to the Loan Agreement i.e. rectifying the BPLR from 17.75% to 18.10%. Loan was sanctioned and disbursed under the Loan Agreement and not under the Tripartite Agreement and the Loan Agreement contains a separate clause on arbitration, where the exclusive jurisdiction is with the Courts at Kolkata. Thus, the Delhi High Court had no territorial jurisdiction to entertain the Petition, contended the Respondents.

Maintainability of the Petition was also challenged by Respondent No. 1 basis the grounds that mandatory notice of invocation under Section 21 of the A&C Act was not given by the Petitioners. It was further argued by the Respondents that an application seeking exemption from serving an invocation notice under Section 21 of the A&C Act on the ground that the arbitration clause of the Tripartite Agreement envisaged unilateral appointment of the arbitrator, was not maintainable.

It was submitted by the Petitioners that it was evident from the Tripartite Agreement that pre-EMIs were to be subvented by Respondent No. 2. It was made clear under the Tripartite Agreement that rate of interest applicable to the loan would be linked to the Lender’s BPLR and any increase in the rate would be borne by Respondent No. 2 during pendency of the scheme and would be paid upfront on the date of change of the interest for the balance subvention period of the loan.

It was also submitted by the Petitioners that there was no merit in the objection of Respondent No. 1 that in the absence of mandatory notice under Section 21 of the A&C Act, the petition deserved to be dismissed. Clause 27 of the Tripartite Agreement provided for unilateral appointment of a sole arbitrator by Respondent No. 1 and being in violation of Section 12(5) of the A&C Act and judicial precedents in this regard, no purpose would have been achieved by sending a notice under Section 21 of the A&C Act.

The Court dealt with the objection regarding invocation of arbitration clause under a wrong agreement. It was noted by the Court that the Tripartite Agreement was the central agreement and that it is closely connected to the Loan Agreement. Both agreements are interdependent and the payment of pre-EMIs/EMIs and liability of the Petitioners and Respondent No. 2 are tied to the Tripartite Agreement. The Court also noted that the scope of both the agreements was overlapping and that they were interconnected and inextricably linked to each other. The Court held that the Tripartite Agreement is the main or umbrella agreement between the parties and the Loan Agreement is connected with the Tripartite Agreement inextricably. It was also clear that the two agreements do not operate independent of each other and the payment of pre-EMIs/EMIs and the liabilities of the Petitioners and Respondent No. 2 stipulated under the Tripartite Agreement are referrable to in the Loan Agreement.

The Court held that when disputes under two connected agreements had different arbitration clauses, the disputes should be resolved under the main or umbrella agreement and the arbitration clause contained therein should be given primacy over that contained in the connected agreement.

Regarding the second objection raised by the Respondents, the Court, while rejecting the Petitioners’ arguments opined that invocation of the Court’s jurisdiction under Section 11(6) presupposes initiation of procedure agreed upon by the parties under the arbitration clause. Section 21 comes into play as part of this procedure. A reading of the Section makes it clear that the crucial words in the provision are “the date on which a request for that dispute to be referred to arbitration” and thus, there is little room for doubt that for commencement of arbitral proceedings, either party has to make a request to the other party for reference of the dispute to arbitration.

It was also held by the Court that even assuming that the clause permits one of the parties to choose the arbitrator, even then, it is necessary for the party making such appointment to let the other party know in advance the name of the person it proposes to appoint. Under Section 11(6) of the A&C Act, without the notice under Section 21, a party seeking reference of disputes to arbitration will be unable to demonstrate that there was a failure by one party to adhere to the procedure and accede to the request for the appointment of an arbitrator. The trigger for the Court’s jurisdiction under Section 11 of the Act is such failure by one party to respond. Parties may agree to waive the requirement of such notice under Section 21. However, in the absence of such express waiver, the provision must be given full effect to. Therefore, upon a proper interpretation of Section 21 of the Act, it was concluded that in the absence of an agreement to the contrary, the notice under Section 21 of the A&C Act by the claimant invoking the arbitration clause, preceding the reference of disputes to arbitration, is mandatory. Without such notice, the arbitration proceedings that are commenced would be unsustainable in law.

Therefore, the Court found merit in the objections of the Respondents that in absence of a notice invoking arbitration under Section 21 of the A&C Act, the Court refused to exercise jurisdiction under 11(6) of the A&C Act.

1 2003 SCC Online Del 5206.